SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

____________

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2007

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
_________________________ to ____________________

Commission File Number 1-8366

POLYDEX PHARMACEUTICALS LIMITED(Exact Name of Registrant as
      Specified in Its Charter)Commonwealth of the Bahamas
      None(State or Other Jurisdiction of
      Incorporation or Organization)
      (I.R.S.
      EmployerIdentification No.)421 Comstock Road, Toronto, Ontario,
      Canada
      M1L 2H5(Address of Principal Executive
      Offices)
      (Zip
      Code)Registrants Telephone Number,
      Including Area Code      (416) 755-2231Former Name, Former Address and Former Fiscal Year, if Changed Since Last
      Report


Indicate by check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X     No ____



Large Accelerated Filer ___       
Accelerated Filer ___        Non-Accelerated
Filer X

Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __         No X

Indicate the number of shares
outstanding of each of the issuers classes of common shares, as of the latest
practicable date.

|Common Shares, $.0167 Par Value |  | 3,072,846                       
|------------------------------- |  | --------------------------------
|(Title
    of Class)            |  | (Outstanding at August 31, 2007)



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|                                   
|-----------------------------------
|POLYDEX
    PHARMACEUTICALS LIMITED
|                                   
|TABLE OF
    CONTENTS              
|                                   
|PART I                             
|                                   
|Item 1                             
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|Item 2                             
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|Item 3                             
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|Item 4                             
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|PART II                            
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|Item 1                             
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|Item 1A                            
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|Item 2                             
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|Item 3                             
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|Item 4                             
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|Item 5                             
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|Item 6                             
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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains various
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the expectations or beliefs
of Polydex Pharmaceuticals Limited (the
Company)concerning future events, including, but not limited to,
statements regarding the Companys future growth, results of operations,
liquidity and capital resources, expectations of regulatory approvals and the
commencement of sales of products. The Company has tried to identify such
forward-looking statements by use of words such as "believes," "anticipates,"
"intends," "plans," "will," "should," "expects" and similar expressions, but
these words are not the exclusive means of identifying such statements. The
Company cautions that these and similar statements in this Quarterly Report on
Form 10-Q and in previously filed periodic reports including reports filed on
Forms 10-K and 10-Q are further qualified by various risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed in, or implied by, the forward-looking statements. These factors
include, without limitation, changing market conditions, the progress of
clinical trials and the results obtained, the establishment of new corporate
alliances, the impact of competitive products and pricing, and the timely
development, regulatory approval and market acceptance of the Companys
products, as well as the other risks discussed herein, none of which can be
assured. The forward-looking statements contained herein speak only as to the
date of this report. Except as otherwise required by federal securities laws,
the Company undertakes no obligation to publicly update or revise any
forward-looking statements or the risk factors described in this Quarterly
Report on Form 10-Q, whether as a result of new information, future events,
changed circumstances or any other reason after the date of this report.

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with United States generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normally recurring accruals)
considered necessary for a fair presentation have been included.

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PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited).

POLYDEX PHARMACEUTICALS LIMITED

Consolidated Balance Sheets
(Expressed in United States dollars)

|                                              |   |             |   |           
|--------------------------------------------- | - | ----------- | - | ----------
|                                              |   | July 31     |   | January 31
|                                              |   | 2007        |   | 2007      
|                                              |   | (Unaudited) |   | (Audited) 
|                                              |   |             |   |           
|Assets                                        |   |             |   |           
|                                              |   |             |   |           
|Current assets:                               |   |             |   |           
|Cash and cash equivalents (note
    3)        | $ | 794,745     | $ | 1,384,995 
|Trade accounts receivable                     |   | 859,308     |   | 1,139,186 
|Inventories                                   |   |             |   |           
|Finished goods                                |   | 905,997     |   | 792,128   
|Work in process                               |   | 403,211     |   | 364,338   
|Raw materials                                 |   | 220,903     |   | 182,391   
|                                              |   |             |   |           
|                                              |   | 1,530,111   |   | 1,338,857 
|Prepaid expenses and other
    current assets |   | 106,748     |   | 100,780   
|                                              |   |             |   |           
|Total current assets                          |   | 3,290,912   |   | 3,963,818 
|                                              |   |             |   |           
|Property, plant and equipment,
    net        |   | 5,615,216   |   | 4,308,337 
|Patents and intangible assets,
    net        |   | 49,531      |   | 53,551    
|Investments available for sale
    (note 4)   |   | 781,738     |   | 1,437,636 
|Due from shareholder                          |   | 355,564     |   | 363,956   
|                                              |   |             |   |           
|                                              | $ | 10,092,961  | $ | 10,127,298

F-1

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|                                                           |   |              |   |             
|---------------------------------------------------------- | - | ------------ | - | ------------
|                                                           |   | July 31      |   | January 31  
|                                                           |   | 2007         |   | 2007        
|                                                           |   | (Unaudited)  |   | (Audited)   
|Liabilities and Shareholders
    Equity                   |   |              |   |             
|                                                           |   |              |   |             
|Current liabilities:                                       |   |              |   |             
|Accounts payable                                           | $ | 721,298      | $ | 1,213,518   
|Accrued liabilities                                        |   | 231,799      |   | 188,869     
|Payroll and related taxes
    payable                      |   | 64,917       |   | 49,624      
|Customer deposits                                          |   | 92,932       |   | 92,757      
|Current portion of long-term
    debt                      |   | 37,340       |   | 32,957      
|Current portion of capital
    lease obligations           |   | 5,423        |   | 4,657       
|Current portion of due to
    shareholder                  |   | 7,000        |   | 6,000       
|                                                           |   |              |   |             
|Total current liabilities                                  |   | 1,160,709    |   | 1,588,382   
|                                                           |   |              |   |             
|Long-term debt                                             |   | 395,359      |   | 374,624     
|Capital lease obligations                                  |   | 9,268        |   | 10,902      
|Due to shareholder                                         |   | 667,926      |   | 673,309     
|Deferred income taxes                                      |   | 134,754      |   | 121,767     
|                                                           |   |              |   |             
|                                                           |   | 1,207,307    |   | 1,180,602   
|                                                           |   |              |   |             
|Total liabilities                                          |   | 2,368,016    |   | 2,768,984   
|                                                           |   |              |   |             
|Shareholders equity:                                      |   |              |   |             
|Capital stock                                              |   |              |   |             
|Authorized:                                                |   |              |   |             
|100,000 Class A preferred
    shares of $0.10 each         |   |              |   |             
|899,400 Class B preferred
    shares of $0.0167 each       |   |              |   |             
|10,000,000 common shares of
    $0.0167 each               |   |              |   |             
|Issued and outstanding:                                    |   |              |   |             
|899,400 Class B preferred
    shares                       |   | 15,010       |   | 15,010      
|3,072,846 common shares
    (January 31, 2007 - 3,072,846) |   | 51,185       |   | 51,185      
|Contributed surplus                                        |   | 23,483,659   |   | 23,483,659  
|Deficit                                                    |   | (17,256,624) |   | (16,894,033)
|Accumulated other comprehensive
    income                 |   | 1,431,715    |   | 702,493     
|                                                           |   |              |   |             
|                                                           |   | 7,724,945    |   | 7,358,314   
|                                                           |   |              |   |             
|                                                           | $ | 10,092,961   | $ | 10,127,298  
|                                                           |   |              |   |             
|See accompanying
    notes.                                |   |              |   |             

F-2

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POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Operations
and Comprehensive Income(Loss) (Unaudited)
(Expressed in United States dollars)

|                                                                                                      |   | Three       |   | Three       |   | Six         |   | Six        
|----------------------------------------------------------------------------------------------------- | - | ----------- | - | ----------- | - | ----------- | - | -----------
|                                                                                                      |   | Months      |   | Months      |   | Months      |   | Months     
|                                                                                                      |   | Ended       |   | Ended       |   | Ended       |   | Ended      
|                                                                                                      |   | July 31     |   | July 31     |   | July 31     |   | July 31    
|                                                                                                      |   | 2007        |   | 2006        |   | 2007        |   | 2006       
|                                                                                                      |   | (Unaudited) |   | (Unaudited) |   | (Unaudited) |   | (Unaudited)
|                                                                                                      |   |             |   |             |   |             |   |            
|Sales                                                                                                 | $ | 1,504,365   | $ | 1,856,718   | $ | 2,851,498   | $ | 3,290,391  
|Cost of goods sold                                                                                    |   | 1,405,262   |   | 1,625,305   |   | 2,543,434   |   | 2,738,956  
|                                                                                                      |   |             |   |             |   |             |   |            
|                                                                                                      |   | 99,103      |   | 231,413     |   | 308,064     |   | 551,435    
|                                                                                                      |   |             |   |             |   |             |   |            
|Expenses:                                                                                             |   |             |   |             |   |             |   |            
|General and administrative                                                                            |   | 294,955     |   | 333,944     |   | 569,188     |   | 672,506    
|Research and development                                                                              |   | 54,520      |   | 72,484      |   | 75,847      |   | 166,185    
|Selling and promotion                                                                                 |   | 27,081      |   | 45,918      |   | 51,174      |   | 73,505     
|Interest expense                                                                                      |   | 25,008      |   | 24,390      |   | 49,844      |   | 43,888     
|Depreciation                                                                                          |   | 9,685       |   | 13,774      |   | 19,556      |   | 27,188     
|Foreign exchange (gain) loss                                                                          |   | 18,365      |   | (8,120)     |   | 45,586      |   | (8,247)    
|Loss (gain) on sale of assets                                                                         |   | -           |   | 3,486       |   | -           |   | (20)       
|Cash surrender value of life
    insurance                                                            |   | (77,073)    |   |             |   | (77,073)    |   |            
|Interest and other income                                                                             |   | (25,085)    |   | (34,649)    |   | (63,467)    |   | (443,232)  
|                                                                                                      |   |             |   |             |   |             |   |            
|                                                                                                      |   | 327,456     |   | 451,227     |   | 670,655     |   | 531,773    
|                                                                                                      |   |             |   |             |   |             |   |            
|Income (loss) before income
    taxes                                                                 |   | (228,353)   |   | (219,814)   |   | (362,591)   |   | 19,662     
|                                                                                                      |   |             |   |             |   |             |   |            
|Provision for (recovery of)
    income taxes                                                          |   | -           |   | -           |   | -           |   | -          
|                                                                                                      |   |             |   |             |   |             |   |            
|Net income (loss) for the
    period                                                                  |   | (228,353)   |   | (219,814)   |   | (362,591)   |   | 19,662     
|                                                                                                      |   |             |   |             |   |             |   |            
|Unrealized gain (loss) on
    investments available for sale                                          |   | 3,332       |   | 7,450       |   | 397         |   | (1,921)    
|                                                                                                      |   |             |   |             |   |             |   |            
|Currency translation adjustment                                                                       |   | 296,573     |   | -91,841     |   | 728,825     |   | 48,724     
|                                                                                                      |   |             |   |             |   |             |   |            
|Comprehensive income (loss) for
    the period                                                        | $ | 71,552      | $ | -304,205    | $ | 366,631     | $ | 66,465     
|                                                                                                      |   |             |   |             |   |             |   |            
|Per share information:                                                                                |   |             |   |             |   |             |   |            
|Earnings (loss) per common
    share:                                                                 |   |             |   |             |   |             |   |            
|Basic                                                                                                 | $ | (0.07)      | $ | (0.07)      | $ | (0.12)      | $ | 0.01       
|Diluted                                                                                               | $ | (0.07)      | $ | (0.07)      | $ | (0.12)      | $ | 0.01       
|                                                                                                      |   |             |   |             |   |             |   |            
|                                                                                                      |   |             |   |             |   |             |   |            
|                                                                                                      |   |             |   |             |   |             |   |            
|Weighted average number of
    common shares used in computing net earnings per share for the period: |   |             |   |             |   |             |   |            
|Basic                                                                                                 |   | 3,072,846   |   | 3,060,396   |   | 3,072,846   |   | 3,059,646  
|Diluted                                                                                               |   | 3,072,846   |   | 3,060,396   |   | 3,072,846   |   | 3,078,472  
|                                                                                                      |   |             |   |             |   |             |   |            
|See accompanying notes.                                                                               |   |             |   |             |   |             |   |            

F-3

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POLYDEX PHARMACEUTICALS LIMITED
Consolidated Statements of
Shareholders Equity
(Expressed in United States dollars)
Six
    
    SixMonths
    
    MonthsEnded
    
    EndedJuly 31
    
    July 312007
    
    2006(Unaudited)
    
    (Unaudited)Preferred Shares:Balance, beginning and end of period
    $
    15,010
    $
    15,010Common Shares:Balance, beginning of period
    
    51,185
    
    50,953Common share options exercised
    
    -
    
    50Balance, end of period
    $
    51,185
    $
    51,003Contributed Surplus:Balance, beginning of period
    
    23,483,659
    
    23,400,259Common share options issued
    
    -
    
    35,160Common share options exercised
    
    -
    
    8,950Balance, end of period
    $
    23,483,659
    $
    23,444,369Deficit:Balance, beginning of period
    $
    (16,894,033)
    $
    (16,633,410)Net income (loss) for the period
    
    (362,591)
    
    19,662Balance, end of period
    $
    (17,256,624)
    $
    (16,613,748)Accumulated Other Comprehensive
    Income:Balance, beginning of period
    $
    702,493
    $
    945,250Unrealized gain (loss) on investments available
    for sale
    
    397
    
    (1,921)Currency translation adjustment for the period
    
    728,825
    
    48,724Balance, end of period
    $
    1,431,715
    $
    992,053See accompanying notes.F-4
POLYDEX PHARMACEUTICALS LIMITED
Consolidated Statements of Cash Flows (Unaudited)
(Expressed in United States dollars)
Six
    
    SixMonths
    
    MonthsEnded
    
    EndedJuly 31
    
    July 312007
    
    2006(Unaudited)
    
    (Unaudited)Cash provided by (used in):Operating activities:Net income (loss) for the
    period
    $
    (362,591)
    $
    19,662Add (deduct) items not
    affecting cash:Depreciation and amortization
    
    270,685
    
    294,600Amortization of premium on
    investments available for sale
    
    -
    
    473Gain on disposal of equipment
    
    -
    
    (20)Options issued in exchange for
    services
    
    -
    
    35,160Net change in non-cash working
    capital balances related to operations
    
    (229,660)
    
    (205,267)`(321,566)
    
    144,608Investing activities:Additions to property, plant
    and equipment and patents
    
    (1,089,321)
    
    (437,060)Decrease in due from
    shareholder
    
    8,392
    
    29,400Decrease in accrued interest on
    investments
    
    3,232
    
    12,932Unrealized gain on commercial
    paper available for sale
    
    1,335
    
    309Proceeds of investments
    available for sale
    
    774,989
    
    769,869Proceeds from sale of equipment
    
    -
    
    4,450(301,373)
    
    379,900Financing activities:Repayment of long-term debt
    
    (17,193)
    
    (5,645)Repayment of capital lease
    obligations
    
    (2,418)
    
    (92,459)Increase (decrease) in due to
    shareholder
    
    (4,383)
    
    1,175Increase in long-term bank
    indebtedness
    
    -
    
    442,987Exercise of common share
    options
    
    -
    
    9,000(23,994)
    
    355,058Effect of exchange rate changes
    on cash
    
    56,684
    
    (4,878)Increase (decrease) in cash and
    cash equivalents
    
    (590,250)
    
    874,688Cash and cash equivalents,
    beginning of period
    
    1,384,995
    
    971,451Cash and cash equivalents, end
    of period
    $
    794,745
    $
    1,846,139Cash and cash equivalents is
    comprised of the following:Cash
    $
    240,523
    $
    694,062Short-term deposits
    
    554,222
    
    1,152,077$
    794,745
    $
    1,846,139See accompanying notes.F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)1. Basis of
Presentation:

The information contained in the interim consolidated
financial statements is condensed from that which would appear in annual
consolidated financial statements. The interim consolidated financial statements
included herein should be read in conjunction with the audited financial
statements, and notes thereto, and other financial information contained in the
2007 Annual Report on Form 10-K for the fiscal year ended January 31, 2007 as
filed by Polydex Pharmaceuticals Limited (the "Company") with the Securities and
Exchange Commission. The unaudited interim consolidated financial statements as
of July 31, 2007 and 2006 include all normal recurring adjustments which
management considers necessary for a fair presentation. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be expected for the entire fiscal year. The interim
consolidated financial statements include the accounts and transactions of the
Company and its majority owned subsidiaries in which the Company has equal to or
more than a 50% ownership interest and exercises control.

2.

Basis of consolidationThe interim consolidated financial statements include the accounts of the
Company and its subsidiaries. All inter-company accounts and transactions have
been eliminated on consolidation.

Use of estimatesThe preparation of consolidated financial statements in conformity with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the interim consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.

Cash and cash equivalentsCash and cash equivalents include cash and short-term deposits with
maturities of less than three months at the date of purchase.

InventoriesInventories of raw materials are stated at the lower of cost and net
realizable value, cost being determined on a first-in, first-out basis.
Work-in-process and finished goods are valued at the lower of cost and net
realizable value, and include the cost of raw materials, direct labor and fixed
and variable overhead expenses.

Investments available for saleInvestments available for sale consist of medium-term fixed income
instruments, trust income funds, and mutual funds, and are stated at fair market
value based on quoted market prices. Interest income is included in other income
in the consolidated statement of operations as it is earned. Changes in market
values during the holding period are reported as unrealized gain

Page |F-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(loss) on investments available for sale and are included in
other comprehensive income (loss). Realized gains (losses) are reclassified from
accumulated other comprehensive income (loss) on a specific item basis when the
security is sold or matured.

Property, plant and equipment and patents and intangible
assetsProperty, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets as follows:

Buildings 15 years 
Machinery and equipment 3 to 10 years

Patents and intangible assets are recorded at cost and are
amortized on a straight-line basis over their estimated useful lives of ten
years. Intangible assets consist of intellectual property, government licenses
and government license applications.

Useful life is the period over which the asset is expected to
contribute to the Companys future cash flows. The Company reviews the
recoverability of its long-lived assets when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable.
The assessment of possible impairment is based on the Companys ability to
recover the carrying value of the asset from the expected future pre-tax cash
flows of the related operations. If these cash flows are less than the carrying
value of such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value.

Costs related to plant refurbishments and equipment upgrades
that represent improvements to existing facilities are capitalized. Costs
related to repair and maintenance of buildings and equipment are expensed. The
Company has no major planned maintenance activity.

Revenue recognitionRevenue results from sales of bulk manufactured products. Revenue is
recognized when title and risk of ownership of products pass to the customer.
Title and risk of ownership pass to the customer pursuant to the applicable
sales contract, either upon shipment of product or upon receipt by the customer.

Product sold in bulk quantities is tested, prior to release
for shipment, to ensure that it meets customer specifications, and in many
cases, customers receive samples for their own testing. Approval is obtained
from the customer prior to shipping. Further purchases by a customer of a bulk
product with the same specifications do not require approvals. Returns of bulk
product are rare and generally are not accepted.

Shipping and handling costsShipping and handling costs incurred by the Company for shipment of products
to customers are included in cost of goods sold.

Research and developmentResearch and development costs are expensed as incurred and are stated net
of investment tax credits earned.

Page |F-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Foreign currency translationThe functional currency of the Companys Canadian operations has been
determined to be the Canadian dollar. All asset and liability accounts of the
Company except capital stock have been translated into United States dollars
using the current exchange rates at the interim consolidated balance sheet
dates. Capital stock is recorded at historical rates. Revenue and expense items
are translated using the average exchange rates for the year. The resulting
gains and losses have been reported separately as accumulated other
comprehensive income within shareholders equity.
Stock optionsThe Company has elected to follow Statement of Financial Accounting
Standards No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS 123(R)").
Under SFAS 123(R), compensation expense is recognized on the date of grant,
based on the fair value of the options granted.
Earnings (loss) per common share 
Basic earnings (loss) per common share is computed using the weighted average
number of common shares outstanding of 3,072,846 for the three months ended July
31, 2007 (2006 - 3,060,396). Diluted earnings (loss) per common share is
computed using the weighted average number of common shares outstanding adjusted
for the incremental shares, using the treasury stock method, attributed to
outstanding options to purchase common stock. Incremental shares of nil at July
31, 2007 and July 31, 2006 were used in the calculation of diluted earnings
(loss) per common share, as their effect was anti-dilutive. Options to purchase
common shares of nil were included in the computation of diluted earnings per
share as at July 31, 2007. Options to purchase common shares of 35,175 at July
31, 2006 were included in the computation of diluted earnings (loss) per common
share.3. Cash and Cash
Equivalents:

Cash and cash equivalents consist of the following:

|                   |   | July 31 |   | January 31
|------------------ | - | ------- | - | ----------
|                   |   | 2007    |   | 2007      
|                   |   |         |   |           
|Cash               | $ | 240,523 | $ | 382,419   
|Short-term deposit |   | 554,222 |   | 1,002,576 
|                   | $ | 794,745 | $ | 1,384,995 

Short-term deposit in the amount of Cdn. $590,008 bears
interest at 4.39% and mature on September 14, 2007. Short-term deposits consist
of commercial paper and are available for sale and are stated at fair market
value, based on quoted market prices. An unrealized loss of $8,313 has been
included in accumulated other comprehensive income.

Page |F-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)4. Investments
Available For Sale:

Investments available for sale consist of the following:

|                                                 |   | July 31 |   | January 31
|------------------------------------------------ | - | ------- | - | ----------
|                                                 |   | 2007    |   | 2007      
|                                                 |   |         |   |           
|Canadian medium-term
    fixed income fund       | $ | 314,902 | $ | 636,024   
|Canadian income trust units and mutual
    funds | $ | 466,836 | $ | 801,612   
|                                                 | $ | 781,738 | $ | 1,437,636 

Canadian medium-term fixed income fund has maturity dates
extending from one to two years and a yield of approximately 4.9%. Investments
available for sale are stated at fair market value, based on quoted market
prices. An unrealized gain of $8,710 has been included in accumulated other
comprehensive income.

5.

The Company is committed to make a payment of $21,556 upon
the completion of the final report of the bacterial vaginosis clinical study,
begun in September 2004, which is expected to occur during fiscal year 2008. In
March 2006, the Company entered into an agreement for the monitoring of the
bacterial vaginosis clinical trial. A payment of $26,563 was made in the second
quarter of fiscal year 2008, and a final payment is expected to made in fiscal
year 2008 in the amount of $5,423.

As at July 31, 2007, the Company had commitments of $45,081
for capital expenditures related to the plant refurbishment at Dextran Products
in Toronto, and is expecting to make payment on these refurbishments in fiscal
year 2008.

6.

The Company maintains an incentive share option plan for
management personnel for options to purchase up to 1,000,000 common shares. The
Company also issues options to certain consultants for services provided to the
Company.

All options granted have terms of five years and vest
immediately. At July 31, 2007, the Company had 37,725 options outstanding at
exercise prices ranging from $2.50 to $10.01 and a weighted average exercise
price of $5.64. The options, which are immediately exercisable and expire on
dates between January 31, 2008 and January 31, 2012, entitle the holder of an
option to acquire one common share of the Company.

The Company uses the fair value method in accordance with
SFAS 123 to account for awards of stock-based employee compensation. No
stock-based employee compensation expense was recorded during the period from
February 1, 2007 to July 31, 2007, because there were no options granted during
this period. During the three months ended July 31, 2006, 7,500 common share
stock options were granted to employees and non-employees of the Company. These
options were valued at $35,160 and were charged to general and administrative
expense, in


accordance with SFAS 123. The fair value of these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.04%; dividend yield of nil; volatility
factor of the expected market price of the Companys common stock of 0.644, and
an expected life of the options of five years.

Page |F-

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)7. Promissory Note
Receivable:

In 1992, Veterinary Laboratories,
Inc. ["Vet Labs"] and Sparhawk Laboratories, Inc. ["Sparhawk"] entered into the
Vet Labs - Sparhawk Joint Venture [the "Joint Venture"] for the manufacture and
sale of veterinary pharmaceutical products. Vet Labs and Sparhawk each owned 50%
of the Joint Venture. The Company controlled the Joint Venture through its
control of the Joint Venture Policy Committee and therefore consolidated its
assets, liabilities, revenue and expenses in these consolidated financial
statements until March 4, 2004. The Company had funded the Joint Ventures
losses since 1992 and, accordingly, has recorded 100% of these cumulative losses
in the consolidated financial statements.

On January 13, 2004, the Company
entered into an Asset Purchase Agreement with Sparhawk. Pursuant to this Asset
Purchase Agreement, the Company agreed to sell the finished product veterinary
pharmaceutical business, including substantially all of the assets of Vet Labs,
to Sparhawk for $5,500,000 in cash. Effective March 4, 2004, this sale was
completed. Simultaneously, on March 4, 2004, Chemdex, Inc. ["Chemdex"], a
wholly-owned subsidiary of the Company, advanced $350,000 to Sparhawk in
exchange for a promissory note bearing interest at 13% per annum and a warrant
to purchase 4% of the equity of Sparhawk for no additional consideration. The
promissory note was due in full on March 4, 2009. Interest was payable annually
on the anniversary date, but could be deferred and added to the principal
balance of the promissory note each year at Sparhawks discretion. The warrant
expired at the earlier of payment in full of the promissory note or 10 years
from date of issue and therefore expired before it could be exercised. Pursuant
to a definitive supply agreement [the "Supply Agreement"] entered into on March
4, 2004, Chemdex agreed to supply ferric hydroxide and hydrogenated dextran
solution to Sparhawk on an exclusive basis in the United States for 10 years.
Chemdex also granted to Sparhawk an exclusive license to use the drug master
file to manufacture 10% bulk Iron Dextran for veterinary use, and the use of
certain equipment during the 10-year period of the Supply Agreement. Pursuant to
definitive agreements, the Company made representations, warranties and
indemnities and agreed to a full release of all claims against Sparhawk arising
from litigation. Similarly, Sparhawk agreed to a full release of all claims
against the Company arising from the Joint Venture litigation.

The sale resulted in a gain of
$2,209,471, of which $1,859,471 was recognized in the consolidated statements of
operations and $350,000 was deferred. The deferred gain of $350,000 related to
the promissory note receivable from Sparhawk as Sparhawk was thinly capitalized
and highly leveraged. Since payment in full on the promissory note was received
on May 31, 2006, the deferred gain of $350,000 was recognized at April 30, 2006
and included in other income on the statement of operations.

Page |F-

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)8. Segmented
Information:

|                                       | Six Months | Six Months
|-------------------------------------- | ---------- | ----------
|                                       | Ended      | Ended     
|                                       | July 31,   | July 31,  
|                                       | 2007       | 2006      
|                                       |            |           
|Total revenue by significant customer: |            |           
|Customer A                             | $          | 588,945   
|Customer B                             | $          | 290,117   
|Customer C                             | $          | 258,091   
|Customer D                             | $          | 194,400   
|Customer E                             | $          | 170,240   
|Customer F                             | $          | 103,600   
|Customer F                             | $          | 1,605,393 



|                                 | Six Months | Six Months
|-------------------------------- | ---------- | ----------
|                                 | Ended      | Ended     
|                                 | July 31,   | July 31,  
|                                 | 2007       | 2006      
|                                 |            |           
|Sales by geographic destination: |            |           
|Europe                           | $          | 1,214,033 
|United States                    | $          | 523,037   
|Canada                           | $          | 483,494   
|Pacific Rim                      | $          | 370,056   
|Other                            | $          | 260,878   
|                                 | $          | 2,851,498 



Page |F-

---



Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations

The Companys fiscal year ends on
January 31st of each year. In this report, fiscal year 2008 refers to
the Companys fiscal year ended January 31, 2008. The following discussion
should be read in conjunction with the July 31, 2007 interim consolidated
financial statements and notes thereto included elsewhere in this report.
Operating results for the six months ended July 31, 2007 are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 2008. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys annual report on Form
10-K for the fiscal year ended January 31, 2007. The Companys financial
statements are prepared in accordance with United States generally accepted
accounting principles. All amounts are in United States dollars, unless
otherwise denoted.

Overview

The Company is engaged in the
research, development, manufacture and marketing of biotechnology-based products
for the human pharmaceutical market, and also manufactures bulk pharmaceutical
intermediates for the worldwide veterinary pharmaceutical industry. The Company
conducts its business operations through its wholly-owned subsidiaries, Dextran
Products and Chemdex.

The manufacture and sale of bulk
quantities of dextran and derivative products for sale to large pharmaceutical
companies throughout the world is conducted through Dextran Products in Canada,
and Chemdex in the United States which provides ferric hydroxide and
hydrogenated dextran to Sparhawk pursuant to a definitive supply agreement.

Management Objectives for Fiscal 2008.
In fiscal year 2008, management intends to continue to focus on the core
products of Dextran Products that have historically been the backbone of the
Company. Opportunities to increase distribution chains for existing Dextran
products in certain overseas markets, such as India, China and Russia continue
to be explored by management. New customers have also been identified in Europe.
Expanding current market opportunities and the potential for new market
penetration has led management to make plant refurbishments. and the expansion
of production capacity a priority for fiscal year 2008 with respect to the
Companys manufacturing operations located in Toronto.The first step has
been construction of new drying facilities to produce increased quantities of
higher quality product. These products have traditionally generated higher
margins. Production of product utilizing this new equipment is planned for the
third quarter of fiscal year 2008.

The rise in the Canadian dollar as
compared to the United States dollar in the third quarter as well as the year to
date of fiscal year 2008 has had a significant negative impact on costs related
to the operations of the Company, which are located in Toronto, Canada.
Management is addressing this issue through price increases, and continued cost
reductions in all areas, especially those related to cost of sales, without
compromising the quality of our products.

---

Research and development of the
Companys human pharmaceutical products is coordinated at Dextran Products.
Ushercell is a high molecular weight Cellulose Sulphate that was envisioned for
topical vaginal use primarily in the prevention of unplanned pregnancies, as
well as the transmission of AIDS and other sexually transmitted diseases. On
January 31, 2007, the Company announced that trials, originally intended to
evaluate various aspects of the use of Cellulose Sulphate as a gel with
antiviral capabilities, were being halted due to higher than expected rates of
HIV seroconversion. Announcements were prepared and distributed in conjunction
with CONRAD and other agencies which were involved with the trials. A full
investigation is now underway as to the potential cause and to determine exactly
what occurred. The final report is expected towards the end of fiscal year 2008.
The Company never received any financial gain from this project, and as a
result, there is no immediate or direct effect on sales or revenues. Management
is investigating potential uses for Cellulose Sulphate in the contraceptive
field.
Chemdex, Vet Labs and the Joint Venture Business
During approximately one month of
fiscal year 2005, the Company also engaged in the finished product veterinary
pharmaceutical business through its United States subsidiary Chemdex, which, in
turn, conducted its operations through its subsidiary, Vet Labs. On December 1,
1992, Vet Labs and Sparhawk Laboratories Inc. entered into a Joint Venture for
the purpose of manufacturing and selling veterinary pharmaceutical products. On
January 13, 2004, the Company, Chemdex and Vet Labs entered into an Asset
Purchase Agreement with Sparhawk pursuant to which the Company agreed to sell
its finished product veterinary pharmaceutical business, including substantially
all of the assets of Vet Labs and its ownership interest in the Joint Venture,
to Sparhawk for $5,500,000 in cash. The sale was completed on March 4, 2004.
Simultaneously with the closing, Chemdex advanced $350,000 to Sparhawk in
exchange for an unsecured subordinated promissory note bearing interest at 13%
per annum and a warrant to purchase 4% of the equity of Sparhawk. The promissory
note was payable in full on March 4, 2009. Interest was payable annually, but
could be deferred and added to the principal balance of the promissory note each
year at Sparhawks discretion. At April 30, 2006, interest of $6,482 was accrued
and reported as interest receivable on the balance sheet. On May 31, 2006,
payment in full for principal and interest was received. The warrant expired at
the earlier of payment in full of the promissory note or March 4, 2014, and
therefore expired before it could be exercised. Chemdex also entered into a
supply agreement with Sparhawk to supply ferric hydroxide and hydrogenated
dextran solution to Sparhawk on an exclusive basis in the United States for 10
years.
Management considered the finished
goods veterinary pharmaceuticals industry to be a highly competitive, mature
industry, and believed that meaningful growth in this industry would require
significant investment in new product development. The Companys investment in
this industry through the Joint Venture required the sharing of profits with its
partner. Management believed that the Company could expect to obtain a higher
return on investment by focusing on its current Dextran Products business and on
human pharmaceutical research and development projects. The sale of this
business segment resulted in a significant reduction in consolidated sales and
gross profits during fiscal year 2006.

---

Results of Operations

|                          | Three      | Three       |          |            |            |         
|------------------------- | ---------- | ----------- | -------- | ---------- | ---------- | --------
|                          | Months     | Months      |          | Six Months | Six Months |         
|                          | Ended      | Ended       |          | Ended      | Ended      |         
|                          | July 31,   | July 31,    |          | July 31,   | July 31,   |         
|                          | 2007       | 2006        | Variance | 2007       | 2006       | Variance
|Net income (loss)         | $(228,353) | $ (219,814) | (4)%     | $(362,591) | $19,662    | (1944)% 
|                          |            |             |          |            |            |         
|Earnings (Loss) per Share | $(0.07)    | $(0.07)     |          | $(0.12)    | $0.01      |         

The net loss for the second quarter
of fiscal year 2008, as compared to the second quarter of fiscal year 2007, is a
result of the low gross margins and lower sales volumes experienced during the
period, partially offset by increased investment income. The net income for the
year to date of fiscal year 2007 was attributable primarily to the recognition
of the deferred gain on the promissory note related to the sale of the
veterinary products assets to Sparhawk (see note 7 to the Consolidated Financial Statements) as well as the higher sales and
gross margins experienced during that period. Without that gain and the related
interest received, the Company would have incurred a net loss of $336,820 and
the loss per share would have been $0.08 for the year to date of fiscal year
2007.

|      | Three      | Three      |          |            |            |         
|----- | ---------- | ---------- | -------- | ---------- | ---------- | --------
|      | Months     | Months     |          | Six Months | Six Months |         
|      | Ended      | Ended      |          | Ended      | Ended      |         
|      | July 31,   | July 31,   |          | July 31,   | July 31,   |         
|      | 2007       | 2006       | Variance | 2007       | 2006       | Variance
|Sales | $1,504,365 | $1,856,718 | (19)%    | $2,851,498 | $3,290,391 | (13)%   

The sales decrease for the second
quarter and year to date of fiscal year 2008 compared to the second quarter and
year to date of fiscal year 2007 was primarily due to plant equipment repairs
that decreased overall sales volumes, but especially affected higher margin
product sales. In addition, the annual plant shutdown occurred approximately 10
days earlier this year.

|                    | Three    | Three    |          |            |            |         
|------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                    | Months   | Months   |          | Six Months | Six Months |         
|                    | Ended    | Ended    |          | Ended      | Ended      |         
|                    | July 31, | July 31, |          | July 31,   | July 31,   |         
|                    | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Gross profit        | $99,103  | $231,413 | (57)%    | $308,064   | $551,435   | (44)%   
|Percentage of sales | 6.6%     | 12.5%    |          | 10.8%      | 16.8%      |         

The decrease in gross margin for the
second quarter and the year to date of fiscal year 2008 compared to the second
quarter and year to date of fiscal year 2007 is primarily due to several factors
throughout both quarters of fiscal year 2008. First, as mentioned above, the
sales mix did not favor higher margin product. Second, certain direct costs were
higher than anticipated: repairs and maintenance increased as a result of
repairs to key production equipment, and utilities increased due to supplier
price increases. Third, since production
is based at the Dextran Products Limited facility in Toronto, Canada, the rise
of the Canadian dollar relative to the US dollar throughout this period
significantly increased the cost of sales.

---



|                        | Three    | Three    |          |            |            |         
|----------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                        | Months   | Months   |          | Six Months | Six Months |         
|                        | Ended    | Ended    |          | Ended      | Ended      |         
|                        | July 31, | July 31, |          | July 31,   | July 31,   |         
|                        | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Selling, promotion,     |          |          |          |            |            |         
|general and             |          |          |          |            |            |         
|administrative expenses | $322,036 | $379,862 | (15)%    | $620,362   | $746,011   | (17)%   

The decrease during the second
quarter and year to date of fiscal year 2008 in selling, promotion, general and
administrative expenses is primarily due to a general decrease in the expenses
of the Company, offset by the continued increase in the value of the Canadian
dollar, as mentioned above. These reductions included legal, insurance,
consulting and reporting costs, and are a result of the continued focus by
management to minimize this cost center.

|                         |          |          |          |            |            |         
|------------------------ | -------- | -------- | -------- | ---------- | ---------- | --------
|                         | Three    | Three    |          |            |            |         
|                         | Months   | Months   |          | Six Months | Six Months |         
|                         | Ended    | Ended    |          | Ended      | Ended      |         
|                         | July 31, | July 31, |          | July 31,   | July 31,   |         
|                         | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Research and development |          |          |          |            |            |         
|expenditures             | $54,520  | $72,484  | (25)%    | $75,847    | $166,185   | (54)%   

The decrease in research and
development expenses during the second quarter and year to date of fiscal year
2008 is a result of the reduction in activities due to the suspension of Phase
III clinical trials for Ushercell, which was announced in January 2007. An
independent review board is examining all of the data associated with the
clinical trial and its report is expected later this fiscal year. Additionally,
the costs related to patent issuance fees and consulting fees were reduced in
the second quarter and year to date of fiscal year 2008 as compared to the
second quarter and year to date of fiscal year 2007.

The bacterial vaginosis trial that was run in fiscal
2007 is also due to generate a report in fiscal 2008. At this time, no further
research regarding bacterial vaginosis is planned.

Funding for the Companys primary
development product, cellulose sulphate, has been provided directly by third
party public and/or private sector groups to the entities carrying out such
research. The Company did not take possession or control over these funds. The
Company has benefited from the results of research projects through the
ownership of patents and/or licenses with respect to the products involved. The
Company has no commitments to repay this funding or to purchase the results of
such research.

Further funding from research and development
partners for these projects has been put on hold, pending receipt of the
independent review board report mentioned above.

---



|                     | Three    | Three    |          |            |            |         
|-------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                     | Months   | Months   |          | Six Months | Six Months |         
|                     | Ended    | Ended    |          | Ended      | Ended      |         
|                     | July 31, | July 31, |          | July 31,   | July 31,   |         
|                     | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Depreciation and     |          |          |          |            |            |         
|amortization expense | $139,764 | $150,489 | (7)%     | $270,685   | $294,600   | (8)%    

The decrease in depreciation and
amortization expense for the second quarter and year to date of fiscal year 2008
compared to the second quarter and year to date of fiscal year 2007 resulted
primarily from some assets, primarily in plant equipment, having reached their
fully depreciated values. This decrease is partially offset by the increased
value of the Canadian dollar noted above. Significant asset acquisitions related
to the plant refurbishment have not been put into service and are therefore not
yet being depreciated.

|                 | Three    | Three    |          |            |            |         
|---------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                 | Months   | Months   |          | Six Months | Six Months |         
|                 | Ended    | Ended    |          | Ended      | Ended      |         
|                 | July 31, | July 31, |          | July 31,   | July 31,   |         
|                 | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Interest Expense | $25,008  | $24,390  | 2%       | $49,844    | $43,888    | 13%     

Interest expense for the second
quarter of fiscal 2008 increased from the comparative amount for the second
quarter of fiscal year 2007 primarily due to the rise in value of the Canadian
dollar. In addition to the rise in value of the Canadian dollar, the increase in
the year to date of fiscal year 2008 compared to fiscal year 2007 is also due to
the increase in long-term debt related to the capital equipment loan obtained in
the second quarter of fiscal year 2007, partially offset by the reduction in
capital lease obligations.

|                                 | Three    | Three    |          |            |            |         
|-------------------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                                 | Months   | Months   |          | Six Months | Six Months |         
|                                 | Ended    | Ended    |          | Ended      | Ended      |         
|                                 | July 31, | July 31, |          | July 31,   | July 31,   |         
|                                 | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|                                 |          |          |          |            |            |         
|Foreign exchange (gain)
    loss | $18,365  | $(8,120) | (326)%   | $45,586    | $(8,247)   | (653)%  

The foreign exchange loss for the
first quarter and year to date of fiscal year 2008 compared to the gain for the
first quarter and year to date of fiscal year 2007 was due to the continued
decline in value of the United States dollar compared to the Canadian dollar. At
July 31, 2007, Dextran Products has a net asset exposure to the United States
dollar because its liabilities denominated in United States dollars were less
than its United States dollar denominated accounts receivable balances.

---



|                   | Three    | Three    |          |            |            |         
|------------------ | -------- | -------- | -------- | ---------- | ---------- | --------
|                   | Months   | Months   |          | Six Months | Six Months |         
|                   | Ended    | Ended    |          | Ended      | Ended      |         
|                   | July 31, | July 31, |          | July 31,   | July 31,   |         
|                   | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Interest and other |          |          |          |            |            |         
|income and cash    |          |          |          |            |            |         
|surrender value of |          |          |          |            |            |         
|life insurance     | $102,158 | $34,649  | 195%     | $140,540   | $443,232   | (68)%   

The increase in other income in the
second quarter of fiscal year 2008 is primarily related to the redemption of the
cash surrender value of an insurance policy that is no longer required. The
decrease in other income in the year to date of fiscal year 2008 compared to the
year to date of fiscal year 2007 is primarily related to recognition of the
deferred gain on the promissory note receivable from Sparhawk
(see note 7 to the Consolidated
Financial Statements)in the
first quarter of fiscal year 2007. Interest income in the second quarter and the
year to date of fiscal year 2008 is also increased by the cessation of the
allowance related to the shareholder loan (see Related Party Transactions
below).

|                     | Three    | Three    |          |            |            |         
|-------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                     | Months   | Months   |          | Six Months | Six Months |         
|                     | Ended    | Ended    |          | Ended      | Ended      |         
|                     | July 31, | July 31, |          | July 31,   | July 31,   |         
|                     | 2007     | 2006     | Variance | 2007       | 2006       | Variance
|Provision for        |          |          |          |            |            |         
|(recovery of) income |          |          |          |            |            |         
|taxes                |         |         |         |           |           |        

The tax provision of nil for the
quarter and year to date ended July 31, 2007 and July 31, 2006 results from the
carryforward of unused tax losses, and tax credits arising from unused research
and development expenditures. The Canadian operations continue to have
significant research and development tax pools to offset current taxes payable.

---

Liquidity and Capital Resources
As of July 31, 2007, the Company had
cash and cash equivalents of $794,745, compared to cash and cash equivalents of
$1,384,995 at January 31, 2007. In the second quarter of fiscal year 2008 the
Company utilized cash of $626,930 in its operating activities, compared to
generating cash of $323,852 for the second quarter of fiscal year 2007. The
decrease in cash from operations during the second quarter of fiscal year 2008
was primarily due to the loss from operations during the period, as well as the
increase in receivables and inventory. Depreciation continues to be a large
non-cash expense of the Company.
The Companys working capital decreased to $2,130,203
and a working capital ratio of 2.8 to 1 as of July 31, 2007, compared to
$2,375,436 and 2.5 to 1 as of January 31, 2007.
Management expects the primary source of its future
capital needs to be a combination of company earnings, cash on hand and
borrowings.
The Company believes that, based upon
the current levels of revenues and spending, its existing working capital
resources will be sufficient to support continuing operations for the
foreseeable future.
As of July 31, 2007, the Company had
accounts receivable of $859,308 and inventory of $1,530,111, compared to
$1,139,186 and $1,338,857 respectively at January 31, 2007 and $1,047,865 and
$1,601,219 respectively at July 31, 2006. The decrease in accounts receivable is
due to the timing of customer payments.
At July 31, 2007, the Company had
accounts payable of $721,298 compared to $1,213,518 at January 31, 2007 and
$707,157 at July 31, 2006. The decrease in accounts payable was due to
reductions in outstanding amounts related to the plant refurbishment and the
timing of supplier payments.
During the second quarter of fiscal
year 2008, capital expenditures totaled $351,578, as compared to $242,454 in the
second quarter of fiscal year 2007. The expenditures for the second quarter of
fiscal 2008 were primarily for construction costs relating to the plant
refurbishment, as compared to production equipment costs at the Dextran Products
plant in Toronto in the second quarter of fiscal year 2007. Management intends
to complete Phase I of its plant refurbishment and expansion plan at Dextran
Products in Toronto during the third quarter of fiscal year 2008 and expects
capital expenditures to substantially decrease during the remainder of fiscal
year 2008.
The change in accumulated other
comprehensive income of the Company is primarily attributable to the currency
translation adjustment of Dextran Products. Dextran Products functional
currency is the Canadian dollar, which has substantially appreciated compared to
the United States dollar during the second quarter and year to date of fiscal
year 2008. This currency translation adjustment arises from the translation of
Dextran Products financial statements to U.S. dollars.
Dextran Products has a Cdn. $750,000
(U.S. $703,037) operating line of credit, of which none was utilized at July 31,
2007 and January 31, 2007. This line of credit bears interest at the Canadian
banks prime lending rate plus 0.75% (July 31, 2007  6.25.%; January 31, 2007 
6.00%). In May 2006 a fixed term rate loan of Cdn. $500,000 (U.S. $468,700) was
obtained to fund capital purchases. The interest rate is 0.75% over Canadian
bank prime lending rate (6.95%). Bank indebtedness is collateralized by a
general security agreement over the Companys assets and a collateral mortgage
of Cdn. $500,000 on the Dextran Products building in Toronto. The line of credit
is used periodically by the Company to cover temporary short-term Canadian
dollar cash needs. For these short-term cash needs, the interest expense on the
credit line is typically less than the transaction costs incurred in selling
short-term investments.

---

The increase in long-term debt and
capital lease obligations from January 31, 2007 is due to the increase in value
of the Canadian dollar compared to the United States dollar during the quarter
and year to date ended July 31, 2007.
Changes in the relative values of the Canadian dollar and the
United States dollar occur from time to time and may, in certain instances,
materially affect the Companys results of operations.
The Company does not believe that the impact of inflation and changing prices
has had a material effect on its operations or financial results at any time in
the last three years.
Related Party Transactions
In August 1997, the Company loaned the late Thomas C. Usher,
its Vice-Chairman, Director of Research and Development, a member of its Board
of Directors and the beneficial owner of greater than 5% of the outstanding
common shares of the Company, $691,500 at an interest rate equal to the prime
rate of Toronto Dominion Bank plus 1.50% (the "Loan"). The Loan was used to
partially fund a $1,000,000 payment to the State of Florida in order to allow
Thomas C. Usher to regain possession of 430,000 Common Shares of the Company
then held by the State as collateral security relating to the liquidation of
insurance companies formerly owned by Thomas C. Usher. Repayment of the Loan is
accomplished by periodic payments and, in the past, bonus payments, if any,
granted to Thomas C. Usher as an employee of the Company. The amount outstanding
under the Loan as of July 31, 2007 was $298,435, as compared to $306,827 at
January 31, 2007, including accrued interest. The Company has taken a cumulative
provision of $323,490 against accrued interest on this loan at July 31, 2007,
and January 31, 2007. Obligations with respect to the Loan transferred to the
estate of Thomas C. Usher.
In August 1999, Thomas C. Usher personally assumed all of the
assets and liabilities of Novadex Corp., including the balance of receivables
(the "Receivables") due to the Company from Novadex Corp. The Receivables have
no specific repayment terms. The total outstanding amount of the Receivables as
of July 31, 2007 and January 31, 2007 was $130,619. The Company continues to be
obligated to make royalty payments to Mr. Ushers estate pursuant to
intellectual property license agreements, and intends to continue to offset such
payments against the Receivables. Thomas C. Usher also owed $250,000 to a
subsidiary of the Company, Novadex International Limited, as of July 31, 2007,
pursuant to a non-interest bearing loan with no specific repayment terms. The
outstanding amount of this loan has not changed from January 31, 2007. The
amounts continue to remain owing from the estate of Thomas C. Usher
upon his death on February 26, 2005.

---

As of
July 31, 2007, Thomas C. Usher, now through his estate, had pledged 288,706
common shares of the Company as security for these amounts owing to the Company.
These common shares had a market value of $490,800 at July 31, 2007, based on
the closing price of the Company s common shares on the NASDAQ Capital Market on
July 31, 2007. During the second quarter of fiscal year 2008, George G. Usher,
Chief Executive Officer of the Company, purchased 13,703 shares of the Company
from the estate for a cost of $23,432, based on the share market price at the
time of purchase. Proceeds were used to reduce the
shareholder loan owing to the Company. The Company intends to continue to hold
the remaining pledged assets as collateral until the amounts owing discussed
above are repaid.
The Company had a commitment to pay
an amount equal to one years salary, $110,000, to Thomas C. Ushers estate. The
amount owing on this commitment as at July 31, 2007 is $38,408.
The Company also has an outstanding
loan payable to Ruth Usher, a former director and the widow of Thomas C. Usher.
The amount due from the Company pursuant to this loan decreased to $674,900 at
July 31, 2007 from $679,285 at January 31, 2007 due to monthly payments by the
Company, less interest charges.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Tabular Disclosure of Contractual Obligations
As of July 31, 2007, future minimum
cash payments due under contractual obligations, including, among others, the
Dextran Products line of credit, the loan payable to Ruth Usher, the long-term
debt obligation in connection with the Chemdex redemption, research and
development agreements and capital lease agreements, are as follows:

|                | Payment due by period
|--------------- | ---------------------
|Contractual     |                      
|Obligations     | Total                
|Long-term debt  | $ 1,232,675          
|obligations (1) |                      
|Capital lease   | 16,898               
|obligations (2) |                      
|Operating Lease | 4,228                
|obligations (3) |                      
|Purchase        | 72,060               
|obligations (4) |                      
|Revolving loans | --                   
|(5)             |                      
|Total           | $1,325,861           



---

1.    Consists of:
(a)   
Equipment purchase term loan of Cdn $457,957 (US $429,281) repayable to a
Canadian bank in monthly payments of Cdn $5,792 including interest at 6.95%,
maturing May 2011; and
(b)    Note payable
in quarterly payments of Cdn. $419 (US $393), bearing interest at 10.43% and
maturing December 2009; and
(c)   
Amounts due to shareholder which bear interest at the U.S. bank prime lending
rate plus 1.5%, with required minimum monthly payments, including interest, of
$8,000.2.    Consists of
capital lease obligations for office equipment of Cdn. $16,898 (US $15,840)
repayable in quarterly installments, bearing interest at 10.43% and maturing
December 2009.
3.Consists of operating lease obligations for office equipment requiring quarterly
payments of Cdn. $161 (US $151).

4.    Consists of:

(a)    Purchase
obligations of $26,979 for research and development services payable as
specified milestones are achieved.

(b)    Purchase
obligation of $45,081 for completion of construction phases related to the plant
refurbishment.

5.   
Consists of Canadian $750,000
operating line of credit bearing interest at the Canadian banks prime lending
rate plus 0.75%, repayable upon demand. No balance is outstanding at July 31,
2007.

Critical Accounting Policies

The Companys interim consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, applied on a consistent basis. The
critical accounting policies include the use of estimates of allowance for
doubtful accounts, the useful lives of assets and the realizability of deferred
tax assets. The Companys accounting policies with respect to the Joint Venture
and its disposition are also discussed below.

Management is required to make
estimates and assumptions, in preparing the consolidated financial statements,
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the periods.
The actual results could differ from these estimates. Significant estimates made
by management include the calculation of reserves for uncollectible accounts, inventory allowances, useful lives of
long-lived assets and the realizability of deferred tax assets.

---

Revenue Recognition
Since March 4, 2004, all revenue is
from sales of bulk manufactured products and is recognized when title and risk
of ownership of products pass to the customer. Title and risk of ownership pass
to the customer pursuant to the applicable sales contract, either upon shipment
of product or upon receipt by the customer. Since returns are rare and generally
not accepted, management has not made provision for returns. In addition,
product sold in bulk quantities is tested, prior to release for shipment, to
ensure that it meets customer specifications, and in many cases, customers
receive samples for their own testing. Approval is obtained from the customer
prior to shipping.
Allowance for Doubtful Accounts
Accounts receivable is stated net of
allowances for doubtful accounts. Allowances for doubtful accounts are
determined by each reporting unit on a specific item basis. Management reviews
the credit worthiness of individual customers and past payment history to
determine the allowance for doubtful accounts. Since the majority of sales at
Dextran Products are export, Dextran Products maintains credit insurance through
a crown corporation which is supported by the Canadian government, for the
majority of its customers receivables. There has been no allowance for doubtful
accounts during the past two fiscal years.
Long-Lived Assets
Long-lived assets are stated at cost,
less accumulated depreciation or amortization computed using the straight-line
method based on their estimated useful lives ranging from three to fifteen
years. Useful life is the period over which the asset is expected to contribute
to the Companys future cash flows. A significant change in estimated useful
lives could have a material impact on the results of operations. The Company
reviews the recoverability of its long-lived assets, including buildings,
equipment and other intangible assets, when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable.
The assessment of possible impairment is based on the Companys ability to
recoverthe carrying value of the asset from the expected future pre-tax
cash flows (undiscounted andwithout interest charges) of the related
operations. If these cash flows are less than thecarrying value of such
asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. The measurement of impairment requires
management tomake estimates of these cash flows related to long-lived
assets as well as other fair valuedeterminations.
Deferred Tax Assets
The Company has recorded a valuation
allowance on deferred tax assets where there is uncertainty as to the ultimate
realization of the future tax deduction. Dextran Products has incurred capital
losses, which are only deductible against capital gains. It is not certain that
Dextran Products will realize capital gains in the future to use these Canadian
capital loss deductions.

---

The Joint Venture
In 1992, Vet Labs and Sparhawk
entered into the Joint Venture for the manufacture and sale of veterinary
pharmaceutical products. Vet Labs and Sparhawk each owned 50% of the Joint
Venture during its operation. The Joint Venture was governed by the Agreement
for the Operation of Veterinary Laboratories, Inc.s Lenexa Facility and
Sparhawk Lab of KC as a Joint Venture, dated December 1, 1992, by and among
Sparhawk, Chemdex and Vet Labs (the "Joint Venture Agreement").
Pursuant to the Joint Venture
Agreement, the Joint Venture Policy Committee was responsible for the overall
management of the Joint Venture, including the direction and control of the
persons designated with the daily management responsibilities of the Joint
Venture, and the general supervision of the management and conduct of the
affairs of the Joint Venture. The Policy Committee consisted of five members,
three of which were selected by Vet Labs and two of which were selected by
Sparhawk. Decisions of the Policy Committee required a simple majority vote.
Because the Company controlled the
operating, financing and investing decisions of the Joint Venture through Vet
Labs control of the Policy Committee, it consolidated the Joint Ventures
assets, liabilities, revenue and expenses in the Companys financial statements.
The Company has funded the Joint Ventures cumulative losses since 1992 and,
accordingly, has recorded 100% of these losses in the consolidated financial
statements.
On January 13, 2004, the Company,
Chemdex and Vet Labs entered into an Asset Purchase Agreement with Sparhawk.
Pursuant to the Asset Purchase Agreement, the Company agreed to sell
substantially all of the assets of Vet Labs, including its interest in the Joint
Venture, to Sparhawk for $5,500,000 in cash. Effective March 4, 2004, this sale
was completed and a gain of $1,859,471 was recognized. Simultaneously with the
closing, Chemdex advanced $350,000 to Sparhawk in exchange for an unsecured
subordinated promissory note bearing interest at 13% per annum and a warrant to
purchase 4% of the equity of Sparhawk. The promissory note was payable in full
on March 4, 2009. On May 31, 2006, payment in full for principal and interest
was received. Interest was payable annually, but could be deferred and added to
the principal balance of the promissory note each year at Sparhawks discretion.
The warrant expired at the earlier of payment in full of the promissory note or
March 4, 2014, and therefore expired before it could be exercised. Chemdex also
entered into a supply agreement with Sparhawk to supply ferric hydroxide and
hydrogenated dextran solution to Sparhawk on an exclusive basis in the United
States for 10 years. In connection with the sale, the litigation involving the
Joint Venture, Sparhawk Laboratories, Inc. v. Veterinary Laboratories, Inc.,
et al, Case No. 02CV07426, County of Johnson, State of Kansas, was settled,
and a Motion of Approval of Settlement and Stipulation of Dismissal with
Prejudice was filed with the Court on March 4, 2004.
Since Sparhawk was thinly capitalized
and highly leveraged, the Company had deferred $350,000 of the gain relating to
the promissory note receivable from Sparhawk. Since payment in full on the
promissory note was received on May 31, 2006, the deferred gain of $350,000 was
recognized at April 30, 2006 and included in other income on the statement of
operations.

---

Changes in Accounting Policies
No changes in accounting principles or their
application have been implemented in the reporting period that would have a
material effect on reported income.



---

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Exchange Rate Sensitivity
The Companys operations consist primarily of manufacturing activities
located
in Toronto, Canada. The Companys products are sold in North
America, Europe and the Pacific Rim.
While the majority of the sales of Dextran Products, the
Companys Canadian operation, are denominated in United States dollars, the
majority of its expenses are incurred in Canadian dollars. The majority of the
assets and liabilities of Dextran Products are denominated in Canadian dollars
prior to the currency translation adjustment necessary for preparation of the
consolidated financial statements of the Company contained in this report. When
the Canadian dollar rises in value relative to the United States dollar, the
carrying value of the assets and liabilities of Dextran Products as stated in
United States dollars increases. A rise in the Canadian dollar relative to the
United States dollar also results in a decrease in gross margins and net income
of Dextran Products. Dextran Products also experiences a foreign exchange loss
when the Canadian dollar rises in relation to the United States dollar because
it has a net asset exposure to the United States dollar resulting from accounts
receivables denominated in United States dollars exceeding a
United States dollar denominated intercompany loan. Similarly, a decline in the
Canadian dollar relative to the United States dollar results in a foreign
exchange gain and increased gross margins and net income at Dextran Products.
Management monitors currency fluctuations to ensure that an
acceptable margin level at Dextran Products is maintained. Management has the
ability, to some extent, to adjust sales prices to maintain an acceptable margin
level.
The following table presents information about the Companys
financial instruments other than accounts receivable that are sensitive to
changes in foreign currency exchange rates. All financial instruments are held
for other than trading purposes. The table presents principal cash flows and
related weighted average interest rates by expected maturity dates.

|                        | Expected Maturity Date |         |  
|----------------------- | ---------------------- | ------- | -
|                        |                        |         |  
|                        |                        | 1/31/08 |  
|                        |                        |         |  
|Assets:                 |                        |         |  
|Short-term investments: |                        |         |  
|Fixed rate ($Cdn)       |                        | 551,812 |  
|Average interest rate   |                        | 4.39    | %
|Liabilities:            |                        |         |  
|Long-term debt:         |                        |         |  
|Fixed rate ($Cdn)       |                        | 23,980  |  
|Average interest rate   |                        | 9.36    | %



---

Interest Rate Sensitivity
The Company has interest earning assets consisting of
investment grade short-term commercial paper and medium-term fixed income
instruments. A significant portion of the Companys debt is at fixed rates. The
variable rate debt represents the shareholder loan payable, which is partially
offset by the shareholder loan receivable. Both of these financial instruments
carry the same interest rate. As such, the Company has no significant risk
exposure to changes in interest rates.
The following table presents information about the Companys
financial instruments that are sensitive to changes in interest rates. All
financial instruments are held for other than trading purposes. The table
presents principal cash flows and related weighted average interest rates by
expected maturity dates.
Expected Maturity DateFair1/31/08
    
    
    1/31/09
    
    
    1/31/10
    
    
    1/31/11
    
    
    1/31/12
    
    
    Thereafter
    
    
    Total
    
    
    Value(US$ Equivalent
    )Assets:Short-term investments:Fixed rate ($Cdn)
    
    551,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    551,812
    
    
    553,063Average interest rate
    
    4.39%
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.39%
    %Notes receivable:Variable rate ($US)
    
    59,954
    
    
    65,799
    
    
    72,215
    
    
    79,256
    
    
    21,211
    
    
    
    
    
    298,436
    
    
    298,436Average interest rate
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    
    
    
    9.75
    %Liabilities:Long-term debt:Fixed rate($Cdn)
    
    23,980
    
    
    43,474
    
    
    46,807
    
    
    43,375
    
    
    46,488
    
    
    243,196
    
    
    447,320
    
    
    447,320Averageinterest rate
    
    9.36
    %
    
    9.19
    %
    
    9.19
    %
    
    9.00
    %
    
    9.00
    %
    
    9.00
    %
    
    9.12
    %Variable rate($US)
    
    15,099
    
    
    31,669
    
    
    34,757
    
    
    38,146
    
    
    41,865
    
    
    513,364
    
    
    674,901
    
    
    674,901Averageinterest rate
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %
    
    9.75
    %

---

Item 4. Controls and Procedures.

The Company completed an evaluation
as of the end of the period covered by this report under the supervision and
with the participation of management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective in alerting them on a timely basis of material
information relating to the Company (including its consolidated subsidiaries)
required to be included in its periodic Securities and Exchange Commission
filings.
There have been no changes in the
Companys internal control over financial reporting identified in connection
with the evaluation discussed above that occurred in the Companys last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.

---

PART II 
OTHER INFORMATION

|Item 1.  | Legal Proceedings                                                                                                                                                                                    
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                      
|         | The Company is not a party to any pending legal
    proceedings.                                                                                                                                     
|         |                                                                                                                                                                                                      
|Item 1A. | Risk Factors                                                                                                                                                                                         
|         |                                                                                                                                                                                                      
|         | There have been no material changes to the Risk
    Factors previously disclosed in the Companys 10K for the fiscal
    year ended January 31, 2007.                                               
|         |                                                                                                                                                                                                      
|Item 2.  | Unregistered Sales of Equity Securities
    and Use of Proceeds                                                                                                                                      
|         |                                                                                                                                                                                                      
|         | Not applicable.                                                                                                                                                                                      
|         |                                                                                                                                                                                                      
|Item 3.  | Defaults Upon Senior Securities                                                                                                                                                                      
|         |                                                                                                                                                                                                      
|         | Not applicable.                                                                                                                                                                                      
|         |                                                                                                                                                                                                      
|Item 4.  | Submission of Matters to a Vote of Security Holders.                                                                                                                                                 
|         |                                                                                                                                                                                                      
|         | At the July 26, 2007 Annual
    General Meeting of the Members of the Company, the vote of the Members
    entitled to notice of, and to vote at, the 2007 Annual General Meeting was
    as follows:
|         |                                                                                                                                                                                                      

| | Election of Board Members |            |        
| | ------------------------- | ---------- | -------
| |                           | Votes Cast
| |                           |            |        
| |                           | For        | Witheld
| |                           |            |        
| | John L. E. Seidler        | 2,195,410  | 243,897
| | Joseph Buchman            | 2,195,410  | 243,897
| |                           |            |        

| | Ratification of Appointment of Schwartz Levitsky Feldman LLP as Independent
    Registered Accounting Firm
| | ----------------------------------------------------------------------------------------------------------
| |                                                                                                           

| |  | Votes Cast
| |  | ----------
| |  |           
| |  | For       
| |  |           
| |  | 2,266,481 



|        |                  
|------- | -----------------
|Item 5. | Other Information
|        |                  
|        | None.            
|        |                  

---

Item 6.Exhibits and Reports on Form 8-K.(a) Exhibits

| | 3.1  | Memorandum of Association of
    Polydex Pharmaceuticals Limited, as amended to date (filed as Exhibit 3.1 to
    the Annual Report on Form 10-K filed April 30, 1997, and incorporated herein by reference)             
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                          
| | 3.2  | Articles of Association of
    Polydex Pharmaceuticals Limited, as amended
    to date (filed as Exhibit 3.2 to
    the Quarterly Report on Form 10-Q filed September 13, 1999, and
    incorporated herein by reference)
| | 31.1 | Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) under
    the Securities Exchange Act of
    1934                                                                                                
| | 31.2 | Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) under
    the Securities Exchange Act of
    1934                                                                                                
| | 32.1 | Certification of Chief Executive
    Officer pursuant to 18 U.S.C. Section
    1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                            
| | 32.2 | Certification of Chief Financial
    Officer pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002                                                                 
| |      |                                                                                                                                                                                                                          

(b) Reports on Form 8-K

Not applicable.

---

SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date:     September 14, 2007

| |    | POLYDEX PHARMACEUTICALS LIMITED         
| | -- | ----------------------------------------
| |    | (Registrant)                            
| |    |                                         
| | By | /s/ George G. Usher                     
| |    | George G. Usher, Chairman, President and
| |    | Chief Executive Officer                 
| |    | (Principal Executive Officer)           
| |    |                                         
| | By | /s/ John A. Luce                        
| |    | John A. Luce, Chief Financial Officer   
| |    | (Principal Financial Officer)           



---

Exhibit Index
31.1
  







  Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) under
    the Securities Exchange Act of
    193431.2
  







  Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) under
    the Securities Exchange Act of
    193432.1
  







  Certification of Chief Executive
    Officer pursuant to 18 U.S.C. Section
    1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200232.2
  







  Certification of Chief Financial
    Officer pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002



---