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**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      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 April 30, 2006





o
            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.
                Employer  Identification No.)





421 Comstock
                Road, Toronto, Ontario, Canada
            M1L 2H5(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant’s
      Telephone Number, Including Area Code (416)
      755-2231








Former
      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
o





Indicate
      by check whether the registrant is an accelerated filer (as defined in Exchange
      Act Rule 12b-2).  Yes
o 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
            
            3,058,896
                shares(Title
                of Class)
            
            (Outstanding
                at June 14, 2006)







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**POLYDEX
      PHARMACEUTICALS LIMITED**





**TABLE
      OF CONTENTS**




**PAGE****PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1
            CONSOLIDATED
                FINANCIAL STATEMENTS
                (UNAUDITED)Consolidated
                Balance Sheets April 30, 2006 and January 31,
                2006
            1Consolidated
                Statements of Operations and Comprehensive Income
                (Loss) Three months ended April 30, 2006 and 2005
            2Consolidated
                Statements of Shareholders’ Equity Three months
                ended April 30, 2006 and 2005
            3Consolidated
                Statements of Cash Flows Three months ended April
                30, 2006 and 2005
            4Notes
                to Consolidated Financial Statements
                (Unaudited)
            5Item
                2
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS
            11Item
                3
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            25Item
                4
            CONTROLS
                AND PROCEDURES
            27**PART
                II**
            **OTHER
                INFORMATION**Item
                6
            EXHIBITS
                AND REPORTS ON FORM 8-K
            28Signatures
                and Certifications
            29






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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 Company’s expectations or beliefs 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 (Unaudited)(Expressed
                  in United States dollars)April
                  30
              
              January
                  312006
              
              2006**Assets**Current
                  assets:Cash
                  and cash equivalents (note 3)
              
              $
              1,507,195
              
              $
              971,451Trade
                  accounts receivable
              
              
              946,708
              
              
              744,720Interest
                  receivable
              
              
              6,482
              
              
              41,511Promissory
                  note receivable (note 7)
              
              
              350,000Inventories:Finished
                  goods
              
              
              1,283,167
              
              
              1,108,626Work
                  in process
              
              
              303,681
              
              
              285,422Raw
                  materials
              
              
              191,575
              
              
              155,4961,778,423
              
              
              1,549,544Prepaid
                  expenses and other current assets
              
              
              62,653
              
              
              129,362Total
                  current assets
              
              
              4,651,461
              
              
              3,436,588Property,
                  plant and equipment, net
              
              
              3,395,924
              
              
              3,280,724Patents
                  and intangible assets, net
              
              
              59,581
              
              
              61,591Assets
                  held for sale
              
              
              4,473
              
              
              4,390Investments
                  available for sale (note 4)
              
              
              1,727,412
              
              
              2,638,441Due
                  from shareholder
              
              
              488,711
              
              
              488,711$
              10,327,562
              
              $
              9,910,445**Liabilities
                  and Shareholders' Equity**Current
                  liabilities:Accounts
                  payable
              
              $
              681,420
              
              $
              574,270Accrued
                  liabilities
              
              
              227,502
              
              
              246,620Payroll
                  and related taxes payable
              
              
              111,359
              
              
              113,530Customer
                  deposits
              
              
              92,932
              
              
              92,932Income
                  taxes payable
              
              
              44,698
              
              
              44,877Current
                  portion of long-term debt
              
              
              1,030
              
              
              1,011Current
                  portion of capital lease obligations
              
              
              126,495
              
              
              168,430Current
                  portion of due to shareholder
              
              
              4,597
              
              
              4,597Total
                  current liabilities
              
              
              1,290,033
              
              
              1,246,267Long-term
                  debt
              
              
              3,571
              
              
              3,748Capital
                  lease obligations
              
              
              15,346
              
              
              16,108Due
                  to shareholder
              
              
              671,252
              
              
              671,322Deferred
                  income taxes
              
              
              198,628
              
              
              194,938888,797
              
              
              886,116Total
                  liabilities
              
              
              2,178,830
              
              
              2,132,383Shareholders'
                  equity:Capital
                  stockAuthorized:100,000
                  Class A preferred shares of $0.10 each899,400
                  Class B preferred shares of $0.0167 each10,000,000
                  common shares of $0.0167 eachIssued
                  and outstanding:899,400
                  Class B preferred shares
              
              
              15,010
              
              
              15,0103,058,896
                  common shares (January 31, 2006 - 3,058,896)
              
              
              50,953
              
              
              50,953Contributed
                  surplus
              
              
              23,400,259
              
              
              23,400,259Deficit
              
              
              (16,393,934
              )
              
              (16,633,410
              )Accumulated
                  other comprehensive income (loss)
              
              
              1,076,444
              
              
              945,2508,148,732
              
              
              7,778,062$
              10,327,562
              
              $
              9,910,445See
                  accompanying notes.


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  **POLYDEX
                  PHARMACEUTICALS LIMITED**Consolidated
                  Statements of Operations and Comprehensive Income
                  (Loss) (Unaudited)(Expressed
                  in United States dollars)Actual
              
              ActualYear
                  to Date
              
              Year
                  to DateApril
                  30
              
              April
                  302006
              
              2005Sales
              
              $
              1,433,673
              
              $
              1,322,684Cost
                  of goods sold
              
              
              1,113,651
              
              
              1,199,365320,022
              
              
              123,319Expenses:General
                  and administrative
              
              
              338,562
              
              
              454,936Research
                  and development
              
              
              93,701
              
              
              32,329Selling
                  and promotion
              
              
              27,587
              
              
              21,348Interest
                  expense
              
              
              19,498
              
              
              19,782Depreciation
              
              
              13,414
              
              
              11,368Foreign
                  exchange (gain) loss
              
              
              (127
              )
              
              4,160Gain
                  on sale of assets
              
              
              (3,506
              )
              
              —Interest
                  and other income
              
              
              (408,583
              )
              
              (36,138
              )80,546
              
              
              507,785Income
                  (loss) before income taxes
              
              
              239,476
              
              
              (384,466
              )Provision
                  for (recovery of) income taxes
              
              
              —
              
              
              (48,837
              )Net
                  income (loss) for the period
              
              
              239,476
              
              
              (335,629
              )Unrealized
                  (loss) on investments available for sale
              
              
              (9,371
              )
              
              (67,561
              )Currency
                  translation adjustment
              
              
              140,565
              
              
              (95,027
              )Comprehensive
                  income (loss) for the period
              
              $
              370,670
              
              $
              (498,217
              )Per
                  share information:Earnings
                  (loss) per common share:Basic
              
              $
              0.08
              
              $
              (0.11
              )Diluted
              
              $
              0.08
              
              $
              (0.11
              )Weighted
                  average number of common shares used incomputing
                  net earnings per share for the period:Basic
              
              
              3,058,896
              
              
              3,052,296Diluted
              
              
              3,080,393
              
              
              3,052,296See
                  accompanying notes.


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**POLYDEX
                  PHARMACEUTICALS LIMITED**Consolidated
                  Statements of Shareholders' Equity
                  (Unaudited)(Expressed
                  in United States dollars)Three
                  Months
              
              Three
                  MonthsEnded
              
              EndedApril
                  30
              
              April
                  302006
              
              2005Preferred
                  Shares:Balance,
                  beginning and end of period
              
              $
              15,010
              
              $
              15,010Common
                  Shares:Balance,
                  beginning of period
              
              $
              50,953
              
              $
              50,676Common
                  share options exercised
              
              
              —
              
              
              166Balance,
                  end of period
              
              $
              50,953
              
              $
              50,842Contributed
                  Surplus:Balance,
                  beginning of period
              
              $
              23,400,259
              
              $
              23,303,718Common
                  share options exercised
              
              
              —
              
              
              52,334Balance,
                  end of period
              
              $
              23,400,259
              
              $
              23,356,052Deficit:Balance,
                  beginning of period
              
              $
              (16,633,410
              )
              $
              (15,144,357
              )Net
                  income (loss) for the period
              
              
              239,476
              
              
              (335,629
              )Balance,
                  end of period
              
              $
              (16,393,934
              )
              $
              (15,479,986
              )Accumulated
                  Other Comprehensive Income (Loss):Balance,
                  beginning of period
              
              $
              945,250
              
              $
              325,842Unrealized
                  loss on investments available for sale
              
              
              (9,371
              )
              
              (67,561
              )Currency
                  translation adjustment for the period
              
              
              140,565
              
              
              (95,027
              )Balance,
                  end of period
              
              $
              1,076,444
              
              $
              163,254See
                  accompanying notes.
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  **POLYDEX
                  PHARMACEUTICALS LIMITED**Consolidated
                  Statements of Cash Flows
                  (Unaudited)(Expressed
                  in United States dollars)Three
                  Months
              
              Three
                  MonthsEnded
              
              EndedApril
                  30
              
              April
                  302006
              
              2005Cash
                  provided by (used in):Operating
                  activities:Net
                  income (loss) for the period
              
              $
              239,476
              
              $
              (335,629
              )Add
                  (deduct) items not affecting cash:Depreciation
                  and amortization
              
              
              144,111
              
              
              130,812Imputed
                  interest on long-term debt
              
              
              —
              
              
              822Deferred
                  income taxes
              
              
              —
              
              
              (42,144
              )Amortization
                  of premium on investments available for sale
              
              
              468
              
              
              —Gain
                  on disposal of equipment
              
              
              (3,506
              )
              
              —Net
                  change in non-cash working capital balancesrelated
                  to operations
              
              
              (559,793
              )
              
              75,832(179,244
              )
              
              (170,307
              )Investing
                  activities:Additions
                  to property, plant and equipment and patents
              
              
              (194,606
              )
              
              (14,932
              )Unrealized
                  loss on commercial paper available for sale
              
              
              —
              
              
              (196
              )Proceeds
                  (Acquisition) of investments available for sale
              
              
              929,652
              
              
              (81,046
              )Proceeds
                  from sale of equipment
              
              
              3,506
              
              
              —738,552
              
              
              (96,174
              )Financing
                  activities:Repayment
                  of long-term debt
              
              
              (243
              )
              
              (17,783
              )Repayment
                  of capital lease obligations
              
              
              (45,236
              )
              
              (38,329
              )Decrease
                  in due to shareholder
              
              
              (70
              )
              
              (1,735
              )Decrease
                  in bank indebtedness
              
              
              —
              
              
              (24,314
              )Exercise
                  of common share options
              
              
              —
              
              
              52,500(45,549
              )
              
              (29,661
              )Effect
                  of exchange rate changes on cash
              
              
              21,985
              
              
              35,170Increase
                  (decrease) in cash and cash equivalents
              
              
              535,744
              
              
              (260,972
              )Cash
                  and cash equivalents, beginning of period
              
              
              971,451
              
              
              2,401,051Cash
                  and cash equivalents, end of period
              
              $
              1,507,195
              
              $
              2,140,079Cash
                  and cash equivalents is comprised of the following:Cash
              
              $
              240,986
              
              $
              225,872Cash
                  equivalents
              
              
              1,266,209
              
              
              1,914,207$
              1,507,195
              
              $
              2,140,079See
                  accompanying notes.


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**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 2006 Annual Report on Form
      10-K
      for the fiscal year ended January 31, 2006 as filed by Polydex Pharmaceuticals
      Limited (the “Company”) with the Securities and Exchange Commission. The
      unaudited interim consolidated financial statements as of April 30, 2006 and
      2005 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.** **Significant
      Accounting Policies:**





Basis
      of consolidation


The
      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
      estimates


The
      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 equivalents


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





Inventories


Inventories
      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 sale


Investments
      available for sale consist of medium-term fixed income instruments and trust
      income 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 (loss) on investments


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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 assets


Property,
      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
      recognition


Revenue
      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 costs


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





Research
      and development


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





Foreign
      currency translation


The
      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
      options


The
      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 3,058,896 for the three months ended April
      30,
      2006 (2005 - 3,052,296). 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 21,497 at April 30,
      2006
      and nil at April 30, 2005 were used in the calculation of diluted earnings
      (loss) per common share. Options to purchase common shares of 42,175.were
      included in the computation of diluted earnings per share as at April 30, 2006.
      Options to purchase common shares of 56,300 at April 30, 2005 were not included
      in the computation of diluted earnings (loss) per common share because their
      effect was anti-dilutive.





**3.** **Cash
      and Cash Equivalents:**





Cash
      and
      cash equivalents consist of the following:


April
                30
            
            January
                312006
            
            2006Cash
            
            $
            240,986
            
            $
            236,422Short-term
                deposits
            
            
            1,266,209
            
            
            735,029$
            1,507,195
            
            $
            971,451


Short-term
      deposits in the amount of Cdn. $1,447,463 bear interest at 3.6% and mature
      on
      May 24 and July 5, 2006. 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 $983 has been included in accumulated other
      comprehensive income.








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            Contents**




**4.** **Investments
      Available For Sale:**





Investments
      available for sale consist of the following:


April
                30
            
            January
                312006
            
            2006Canadian
                medium-term fixed income instruments
            
            $
            1,066,156
            
            $
            2,064,492Canadian
                income trust units and mutual funds
            
            $
            661,256
            
            $
            573,949$
            1,727,412
            
            $
            2,638,441





Canadian
      medium-term fixed income instruments have maturity dates extending from one
      to
      two years and interest rates ranging from 2.26% to 3.35%. Investments available
      for sale are stated at fair market value, based on quoted market prices. An
      unrealized loss of $8,388 has been included in accumulated other comprehensive
      income.





**5.** **Commitments
      and Contingencies:**





During
      September 2004, the Company entered into an agreement with a research
      organization to conduct a pilot clinical study on the use of cellulose sulphate
      for the treatment of bacterial vaginosis. Payments totaling $43,112 were made
      to
      the research organization and the principal investigator in September 2004.
      The
      Company is committed to make a payment of $38,668 upon the completion of the
      clinical study, which is expected to occur during the fourth quarter of fiscal
      year 2007. In March of 2006 the Company entered into an agreement for the
      monitoring of the clinical trial, and is expecting to make payments in the
      fourth quarter of fiscal 2007 in the amount of $31,986.





**6.** **Stock-based
      Employee Compensation:**





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 April 30,
      2006, the Company had 42,175 options outstanding at exercise prices ranging
      from
      $2.50 to $7.72 and a weighted average exercise price of $4.24. The options,
      which are immediately exercisable and expire on dates between May 31, 2006
      and
      January 31, 2011, 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, 2006 to
      April  30, 2006, because there were no options granted during this period.
      Similarly, no stock-based employee compensation expense


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was
      recorded during the period from February 1, 2005 to April  30, 2005,
      because there were no options granted during this period.





**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. At April 30, 2006 interest of $6,482 (2005 - nil) 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 10 years from date of
      issue. The warrant became exercisable the day after the fifth anniversary from
      the date of issue. 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.




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.





**8.** **Segmented
      Information:**





All
      operations are carried out through Dextran Products Limited ("Dextran") in
      Canada and through Chemdex in the United States. Each of Dextran and Chemdex
      operated as separate strategic business units offering different products,
      until
      the sale of the finished product


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veterinary
      pharmaceutical business on March 4, 2004 *[note
      7]* .
      Until
      March 4, 2004, each subsidiary comprised a reportable segment as
      follows:





Dextran
              -
            manufactures
                and sells bulk quantities of dextran and several of its derivatives
                to
                large pharmaceutical companies throughout the
                world.




Chemdex
              -
            manufactured
                and sold veterinary pharmaceutical products and specialty chemicals
                in the
                United States. The primary customers were distributors and private
                labelers, who in turn sold to the end user of the
                products.




After
      March 4, 2004, Chemdex only sells bulk quantities of a specific dextran
      derivative to Sparhawk under the Supply Agreement, as described in *note
      7* .
      Management has since determined that Polydex Pharmaceuticals does not operate
      differing segments, and that providing such information would not be informative
      to readers of these financial statements. The comparative information from
      the
      prior period has therefore been restated to conform to this basis of
      reporting.





Three
                Months
            
            Three
                MonthsEnded
            
            EndedApril
                30
            
            April
                302006
            
            2005**Total
                revenue by significant customer:**Customer
                A
            
            $
            255,125
            
            $
            181,770Customer
                B
            
            $
            211,100
            
            $
            173,000Customer
                C
            
            $
            171,316
            
            $
            107,151Customer
                D
            
            $
            164,922
            
            $
            —Customer
                E
            
            $
            3,200
            
            $
            192,134





Three
                Months
            
            Three
                MonthsEnded
            
            EndedApril
                30
            
            April
                302006
            
            2005**Sales
                by geographic destination:**Europe
            
            $
            630,288
            
            $
            478,960United
                States
            
            $
            301,411
            
            $
            310,680Canada
            
            $
            229,772
            
            $
            100,149Pacific
                Rim
            
            $
            96,172
            
            $
            303,910Other
            
            $
            176,030
            
            $
            128,985$
            1,433,673
            
            $
            1,322,684








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





*The
      Company’s fiscal year ends on January 31* *st* *of
      each year.  In this report, fiscal year 2007 refers to the Company’s fiscal
      year ended January 31, 2007.  The following discussion should be read in
      conjunction with the April 30, 2006 interim consolidated financial statements
      and notes thereto included elsewhere in this report. Operating results for
      the
      three months ended April 30, 2006 are not necessarily indicative of the results
      that may be expected for the fiscal year ended January 31, 2007. 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, 2006.*  *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 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
      a Canadian subsidiary, Dextran Products, 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 2007* . 
      In fiscal year 2007, 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. 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 2007 with respect to the Company’s manufacturing operations located in
      Toronto. ****




Research
      and development of the Company’s human pharmaceutical products is coordinated at
      Dextran Products.  Ushercell, the Company’s leading human pharmaceutical
      compound, is a high molecular weight Cellulose Sulphate envisioned for topical
      vaginal use primarily in the prevention of transmission of AIDS and other
      sexually transmitted diseases, as well as unplanned pregnancies.  Multiple
      clinical trials have been completed, and additional trials have commenced or
      are
      being actively planned, to evaluate various aspects of the use of Cellulose
      Sulphate as a contraceptive gel with antiviral capabilities.  The Company
      also intends


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to
      significantly explore the use of Ushercell as a treatment for Bacterial
      Vaginosis (BV), the most common vaginal disorder among reproductive-age
      women.  If effective, BV treatment may present an opportunity for
      commercial viability of Ushercell in advance of the completion of the much
      lengthier required testing for its use as an antiviral or contraceptive
      gel.




***Chemdex,
      Vet Labs and the Joint Venture Business***




During
      approximately one month of the 2005 fiscal year, 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 (2005 - nil) 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. 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.




**Results
      of Operations**




***Three
      months ended April 30, 2006 compared to three months ended April 30, 2005***





**Three
                Months**
              **Ended**
              **April
                30,****2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005****Net
                income (loss)**
            
            $
            239,476
            
            $
            (335,629
            )**Earnings
                (loss) per share**
            
            $
            0.08
            
            $
            (0.11
            )





The
      net
      income for the first quarter of fiscal year 2007 as compared to the net loss
      in
      the first quarter in fiscal year 2006 is attributable primarily to the
      recognition of the deferred gain on the promissory note related to the sale
      of
      the veterinary products assets to Sparhawk.(Note 7) as well as the increase
      in
      sales and gross margins. Without this gain and the related interest received,
      the Company would have incurred a net loss of $117,006 and the loss per share
      would have been $0.04.


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**Three
                Months**
              **Ended**
              **April
                30, 2006**
            
            **Three
                Months**
              **Ended**
              **April
                30, 2005**
            
            **Variance****Sales**
            
            $
            1,433,673
            
            $
            1,322,684
            
            
            8
            %




The
      majority of the first quarter sales increase in fiscal year 2007 was
      attributable to price increases as well as increased demand for core products
      especially iron dextran.





**Three
                Months**
              **Ended**
              **April
                30,****2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005**
            
            **Variance****Gross
                profit**
            
            $
            320,022
            
            $
            123,319
            
            
            160
            %Percentage
                of sales
            
            
            22
            %
            
            9
            %




The
      increase in gross margin is due to several factors. First, prices were increased
      on most of the product lines. Second, certain direct costs such as labour and
      materials, were reduced as a result of management initiatives. Third, there
      was
      a reduction in equipment related costs partially as result of the investment
      made in this regard during fiscal year 2006.





**Three
                Months**
              **Ended**
              **April
                30, 2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005**
            
            **Variance****Selling,
                promotion,****general
                and****administrative
                expenses**
            
            $
            366,149
            
            $
            476.284
            
            
            (23
            )%




The
      decrease during the first quarter of fiscal year 2007 in selling, promotion,
      general and administrative expenses is primarily due to a death benefit accrual
      payable to the estate of the former vice-chairman of the Company established
      in
      the first quarter of fiscal year 2006.




**Three
                Months**
              **Ended**
              **April
                30, 2006**
            
            **Three
                Months**
              **Ended**
              **April
                30, 2005**
            
            **Variance****Research
                and development expenditures**
            
            $
            93,701
            
            $
            32,329
            
            
            190
            %




The
      increase in research and development expenses during the first quarter of fiscal
      year 2007 is a result of continued work on the cellulose sulphate project,
      primarily extending patent protection related to processes and uses of cellulose
      sulphate in various countries of the world.





The
      bacterial vaginosis clinical study is related to an alternate use of cellulose
      sulphate and therefore is outside the scope of funding provided by the Company’s
      research and


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development
      partners for the investigation of this product as a contraceptive gel with
      antiviral properties. Expenses for this clinical study are expected to continue
      at similar levels during the remainder of fiscal year 2007.





Funding
      for the Company’s primary development product, cellulose sulphate, is provided
      directly by third party public and/or private sector groups to the entities
      carrying out such research.  The Company does not take possession or
      control over these funds.  The Company benefits 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 the
      funding or to purchase the results of the research.




Significant
      funding from research and development partners for the current phase of the
      project investigating the use of cellulose sulphate as a contraceptive gel
      with
      antiviral properties project is expected to continue at necessary levels for
      the
      foreseeable future.  The Company’s total research and development
      expenditures are expected to increase in fiscal year 2007 over fiscal year
      2006
      due to additional product development activities the Company expects to perform
      and fund outside of its partnership relationships.





**Three
                Months**
              **Ended**
              **April
                30, 2006**
            
            **Three
                Months**
              **Ended**
              **April
                30, 2005**
            
            **Variance****Depreciation
                and amortization expense**
            
            $
            144,111
            
            $
            130,812
            
            
            10
            %





The
      increase in depreciation and amortization expense in the first quarter of fiscal
      year 2007 is primarily due to the decrease in the United States dollar compared
      to the Canadian dollar, as well as depreciation on equipment additions at
      Dextran Products subsequent to the first quarter of fiscal year
      2006.





**Three
                Months**
              **Ended**
              **April
                30,****2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005**
            
            **Variance****Interest
                expense**
            
            $
            19,498
            
            $
            19,782
            
            
            (—
            )%





Interest
      expense for the first quarter of fiscal 2007 remained consistent with the first
      quarter of fiscal year 2006. This is a result of the decrease in long-term
      debt
      and capital lease obligations, offset by the increase in value of the Canadian
      dollar relative to the United States dollar, as well as the increase in interest
      rates applicable to the due to shareholder.




**Three
                Months**
              **Ended**
              **April
                30,****2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005**
            
            **Variance****Foreign
                exchange (gain) loss**
            
            $
            (127
            )
            $
            4,160
            
            
            (103
            )%





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The
      foreign exchange gain at Dextran Products in the first quarter of fiscal year
      2007 was due to the decline in value of the United States dollar compared to
      the
      Canadian dollar, combined with the change in Dextran Products’ net exposure to
      the United States dollar from a net liability to a significant net asset amount.
      At April 30, 2006, Dextran Products has a net asset exposure to the United
      States dollar because intercompany payables denominated in United States dollars
      were less than its United States dollar denominated accounts receivable balance.





**Three
                Months**
              **Ended**
              **April
                30,****2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005**
            
            **Variance****Interest
                and other income**
            
            $
            408,583
            
            $
            36,138
            
            
            1030
            %




Other
      income in the first quarter of fiscal year 2007 is primarily related to
      recognition of the deferred gain on the promissory note receivable from Sparhawk
      (Note 7). Other income in the first quarter of fiscal year 2006 is primarily
      related to interest income.





**Three
                Months**
              **Ended**
              **April
                30,****2006**
            
            **Three
                Months**
              **Ended**
              **April
                30,****2005**
            
            **Variance****Provision
                for (recovery of) income taxes**
            
            
            —
            
            $
            (48,837
            )
            
            (100
            )%





The
      tax
      provision of nil for the quarter ended April 30, 2006 results from the
      carryforward of unused tax losses, and tax credits arising from unused research
      and development expenditures.




The
      decrease in tax provision for the first quarter of fiscal year 2006 is a result
      of a decrease in taxable income. Dextran Products suffered tax losses during
      the
      first quarter of fiscal 2006 resulting in a tax recovery. The Canadian
      operations continue to have significant research and development tax pools
      to
      offset current taxes payable




**Liquidity
      and Capital Resources**




As
      of
      April 30, 2006, the Company had cash and cash equivalents of $1,507,195,
      compared to cash and cash equivalents of $971,451 at January 31, 2006.  In
      the first quarter of fiscal year 2007 the Company used cash of $179,244 in
      its
      operating activities, compared to $170,307 for the first quarter of fiscal
      year
      2006.  The use of cash for operations during the first quarter of fiscal
      year 2007 is primarily due to the increases in inventory and receivables.
      Depreciation and amortization continues to be a large non-cash expense of the
      Company.




The
      Company’s working capital improved to $ 3,361,428
      and a working capital ratio of 3.6 to 1 as of April 30, 2006, compared to
      $2,190,321 and 2.8 to 1 as of January 31, 2006.




Management
      expects the primary source of its future capital needs to be a combination
      of
      company earnings, cash on hand and borrowings.


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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.




At
      April
      30, 2006, the Company had accounts receivable of $946,708 and inventory of
      $1,778,423, compared to $744,720 and $1,549,544 at January 31, 2006 and
      $1,013,806 and $1,397,936 at April 30, 2005.  The increase in accounts
      receivable during the first quarter ended April 30, 2006 is due to increased
      sales during the latter part of the quarter and the timing of customer payments.




At
      April
      30, 2006, the Company had accounts payable of $681,420 compared to $574,270
      at
      January 31, 2006 and $448,896 at April 30, 2005.  The increase in accounts
      payable was due to the increase in inventory and the timing of supplier
      payments.




During
      the first quarter of fiscal year 2007, capital expenditures totaled $194,606,
      as
      compared to $14,932 in the first quarter of fiscal year 2006. The
      expenditures for the first quarter of fiscal 2007 were primarily for engineering
      consulting fees related to the planned plant refurbishment, as compared to
      the
      production equipment expenditures in the first quarter of fiscal 2006.
      Management intends to continue its plant refurbishment and expansion plan at
      Dextran Products in Toronto during the remainder of fiscal year 2007, and
      expects capital expenditures to increase during this period.




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.  This
      currency translation adjustment arises from the translation of Dextran Products’
financial statements to U.S. dollars.




Dextran
      Products has a Cdn. $1,250,000 (U.S. $1,095,600) operating line of credit,
      of
      which none was utilized at April 30, 2006 and January 31, 2006.  This line
      of credit bears interest at the Canadian banks’ prime lending rate plus 0.50%
      (April 30, 2006 - 5.75.%; January 31, 2006 - 5.25%).  In May 2006 a fixed
      term rate loan of Cdn. $500,000 (U.S. $447,000) was obtained to fund capital
      purchases. The interest rate is 0.75% over Canadian bank prime lending rate
      (5.75%). 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
      decrease in long-term debt and capital lease obligations from January 31, 2006
      is due to continuing payments by the Company.  The majority of the
      long-term debt and capital lease obligations are due in the next
      year.




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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 monthly payments and through offsets by the Company against royalty payments
      due Thomas C. Usher pursuant to intellectual property license agreements and
      bonus payments, if any, granted Thomas C. Usher as an employee of the
      Company.  The amount outstanding under the Loan as of April 30, 2006 was
      $331,209, as compared to $323,972 at January 31, 2006, including accrued
      interest.  The Company has taken a cumulative provision of $300,098 against
      accrued interest on this loan at April 30, 2006, compared to a cumulative
      provision of $292,860 at January 31, 2006.




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 April 30,
      2006 and January 31, 2006 was $207,599.  Thomas C. Usher also owed $250,000
      to a subsidiary of the Company, Novadex International Limited, as of April
      30,
      2006, pursuant to a non-interest bearing loan with no specific repayment
      terms.  The outstanding amount of this loan has not changed from January
      31, 2006. The amounts continue to remain owing from the estate of Thomas C.
      Usher.




Thomas
      C.
      Usher had pledged 307,909 common shares of the Company as security for these
      amounts owing to the Company.  These common shares had a market value of
      $3,078,782 at April 30, 2006, based on the closing price of the Company’s common
      shares on the NASDAQ SmallCap Market on April 28, 2006, the last trading day
      prior to April 30, 2005. The Company intends to continue to hold the 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 April 30,
      2006 is $50,886.





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


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decreased
      to $675,849 at April 30, 2006 from $675,919 at January 31, 2006 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
      April 30, 2006, 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**
            
            **Less
                than**
              **1
                year**
            
            **1
                - 3**
              **years**
            
            **3
                - 5**
              **years**
            
            **More
                than**
              **5
                years**Long-term
                debt obligations (1)
            
            $
            681,171
            
            $
            61,501
            
            $
            123,001
            
            $
            120,750
            
            $
            375,919Capital
                lease obligations (2)
            
            
            143,553
            
            
            129,042
            
            
            12,899
            
            
            1,612
            
            
            --Operating
                Lease obligations (3)
            
            
            1,288
            
            
            322
            
            
            322
            
            
            322
            
            
            322Purchase
                obligations (4)
            
            
            189,209
            
            
            189,209
            
            
            —
            
            
            —
            
            
            —Revolving
                loans (5)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            1,015,221
            
            $
            380,074
            
            $
            136,222
            
            $
            122,684
            
            $
            376,241





1.
            Consists
                of:




(a)
            Note
                payable in quarterly payments of Cdn. $419 (US $375), 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
                $5,000.





2.
            Consists
                of capital lease obligations for:




(a)
            Production
                equipment of Cdn. $113,386 (US $101,419) repayable in monthly
                installments, bearing interest at 9% and maturing November
                2006;




(b)
            Production
                equipment of Cdn. $23,085 (US $20,648) repayable in monthly installments,
                bearing interest at 7.59% and maturing November 2006;
                and




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(c)
            Office
                equipment of Cdn. $22,108 (US $19,775) 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 $144) terminating June
                2006.




4.
            Consists
                of purchase obligations for research and development services payable
                as
                specified milestones are achieved.





5.
            Consists
                of Canadian operating line of credit bearing interest at the Canadian
                banks’ prime lending rate plus 0.75%, repayable upon demand. No balance
                is
                outstanding at April 30, 2006.




**Risk
      Factors**




The
      risks, uncertainties and other factors described below could materially and
      adversely affect the Company’s business, financial condition, operating results
      and prospects.




***The
      Company’s product development efforts may be reduced or discontinued due to
      difficulties or delays in clinical trials.***




To
      achieve sustained profitability, the Company must, alone or with corporate
      partners and collaborators, successfully research, develop and commercialize
      identified technologies or product candidates.  Current developmental
      product candidates are in various stages of clinical and pre-clinical
      development and will require significant further funding, research, development,
      preclinical and/or clinical testing, regulatory approval and commercialization
      testing, and are subject to the risks of failure inherent in the development
      of
      products based on innovative or novel technologies.  These products are
      also rigorously regulated by the U.S. federal government, particularly the
      FDA,
      and by comparable agencies in state and local jurisdictions and in foreign
      countries.  Specifically, each of the following results is possible with
      respect to any one of the Company’s developmental product
      candidates:




•
            that
                the Company will not be able to maintain its current research and
                development schedules;




•
            that
                the Company will not be able to enter into human clinical trials
                because
                of scientific, governmental or financial reasons, or that it will
                encounter problems in clinical trials that will cause a delay or
                suspension of the development of the product
                candidate;




•
            that
                the developmental product will be found to be ineffective or
                unsafe;




•
            that
                government regulations will delay or prevent the product’s marketing for a
                considerable period of time and impose costly procedures upon the
                Company’s activities;




•
            that
                the FDA or other regulatory agencies will not approve the product
                or the
                process by which the product is manufactured, or will not do so on
                a
                timely basis; and/or




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•
            that
                the FDA’s policies may change and additional government regulations and
                policies may be instituted, which could prevent or delay regulatory
                approval of the product.




If
      any of
      the risks set forth above occurs, the Company may not be able to successfully
      develop its identified developmental product candidates.




***The
      Company’s developmental product commercialization efforts may not be
      successful.***




It
      is
      possible that, for reasons including, but not limited to those set forth below,
      the Company may be unable to commercialize or receive royalties from the sale
      of
      any given developmental product, even if it is shown to be effective,
      if:




•
            the
                product is uneconomical or if the market for the product does not
                develop
                or diminishes;




•
            the
                Company is not able to enter into arrangements or collaborations
                to
                commercialize and/or market the
                product;




•
            the
                product is not eligible for third-party reimbursement from government
                or
                private insurers;




•
            others
                hold proprietary rights that preclude the Company from commercializing
                the
                product;




•
            others
                have brought to market similar or superior
                products;




•
            others
                have superior resources to market similar products or
                technologies;




•
            government
                regulation imposes limitations on the indicated uses of the product,
                or
                later discovery of previously unknown problems with the product results
                in
                added restrictions on the product or results in the product being
                withdrawn from the market; and/or




•
            the
                product has undesirable or unintended side effects that prevent or
                limit
                its commercial use.




***The
      Company depends on partnerships with third parties for the development and
      commercialization of its products.***




The
      Company’s strategy for development and commercialization of its products is to
      rely on licensing agreements with third party partners.  As a result, the
      ability of the Company to commercialize future products is dependent upon the
      success of third parties in performing clinical trials, obtaining regulatory
      approvals, manufacturing and successfully marketing its products.  There
      can be no assurance that such third party collaborations will be
      successful.  Should any of the Company’s current research and development
      partnerships be discontinued, it may not be able to find others to develop
      and
      commercialize its current product candidates.


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***The
      Company does not currently have agreements with third parties to market its
      developmental products.***




The
      commercialization of any of the Company’s developmental products that receive
      FDA approval will depend upon the Company’s ability to enter into agreements
      with companies that have sales and marketing capabilities.  The Company
      currently intends to sell its products in the United States and internationally
      in collaboration with one or more marketing partners.  The Company may not
      be able to enter into any such collaboration to market its developmental
      products in a timely manner or on commercially reasonable terms, if at
      all.




***The
      Company may be unable to commercialize its products if it is unable to protect
      its proprietary rights, and may be liable for significant costs and damages
      if
      it faces a claim of intellectual property infringement by a third
      party.***




The
      Company’s success depends in part on its ability to obtain and maintain patents,
      protect trade secrets and operate without infringing upon the proprietary rights
      of others.  In the absence of patent and trade secret protection,
      competitors may adversely affect the Company’s business by independently
      developing and marketing substantially equivalent or superior products, possibly
      at lower prices.  The Company could also incur substantial costs in
      litigation and suffer diversion of attention of technical and management
      personnel if it is required to defend intellectual property infringement suits
      brought by third parties, with or without merit, or if required to initiate
      litigation against others to protect or assert intellectual property
      rights.  Moreover, any such litigation may not be resolved in favor of the
      Company.




The
      Company has received various patents covering the uses of its developmental
      products.  However, the patent position of companies in the pharmaceutical
      industry generally involves complex legal and factual questions, and recently
      has been the subject of much litigation.  Any patents the Company has
      obtained, or may obtain in the future, may be challenged, invalidated or
      circumvented.  To date, no consistent policy has been developed by the
      United States Patent and Trademark Office regarding the breadth of claims
      allowed in biotechnology patents.




In
      addition, because patent applications in the United States are maintained in
      secrecy until patents issue, and because publication of discoveries in
      scientific or patent literature often lags behind actual discoveries, the
      Company cannot be certain that it and its licensors are the first creators
      of
      inventions covered by any licensed patent applications or patents or that the
      Company or such licensors are the first to file.  The United States Patent
      and Trademark Office may commence interference proceedings involving patents
      or
      patent applications, in which the question of first inventorship is
      contested.  Accordingly, the patents owned by or licensed to the Company
      may not be valid or may not afford the Company protection against competitors
      with similar intellectual property.




It
      is
      also possible that the Company’s patents may infringe on patents or other rights
      owned by others, licenses to which may not be available to the Company. 
The Company may


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have
      to
      alter its products or processes, pay licensing fees or cease certain activities
      altogether because of patent rights of third parties.




In
      addition to the products for which the Company has patents or have filed patent
      applications, the Company relies upon unpatented proprietary technology and
      may
      not be able to meaningfully protect its rights with regard to that unpatented
      proprietary technology.




**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 for the majority of
      its
      customers receivables. There has been no allowance for doubtful accounts during
      the past two fiscal years.




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***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 recover **** the
      carrying value of the asset from the expected future pre-tax cash flows
      (undiscounted and **** without
      interest charges) 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.  The measurement of impairment requires
      management to **** make
      estimates of these cash flows related to long-lived assets as well as other
      fair
      value **** determinations.




***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.


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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. 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.


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**Item
              3.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**





**Exchange
      Rate Sensitivity**





The
      Company’s operations consist of manufacturing activities in the United States
      and 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 gain when the Canadian dollar rises in
      relation to the United States dollar because it has a net liability exposure
      to
      the United States dollar resulting from 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 loss 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**
            
            
            
            **Fair****1/31/07**
            
            **1/31/08**
            
            **1/31/09**
            
            **1/31/10**
            
            **1/31/11**
            
            **Thereafter**
            
            **Total**
            
            **Value****(US$
                Equivalent)****Assets:**Short-term
                investments:Fixed
                rate ($Cdn)
            
            
            1,294,985
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,294,985
            
            
            1,294,985Average
                interest rate
            
            
            3.36
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3.36
            %Marketable
                securities:Fixed
                rate ($Cdn)
            
            
            405,865
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            405,865
            
            
            404,454Average
                interest rate
            
            
            2.88
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1.44
            %**Liabilities:**Long-term
                debt:Fixed
                rate ($Cdn)
            
            
            127,911
            
            
            5,974
            
            
            6,894
            
            
            5,663
            
            
            —
            
            
            —
            
            
            146,442
            
            
            142,021Average
                interest rate
            
            
            8.84
            %
            
            10.43
            %
            
            10.43
            %
            
            10.43
            %
            
            —
            
            
            —
            
            
            9.04
            %





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**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 Date**
            
            
            
            **Fair****1/31/07**
            
            **1/31/08**
            
            **1/31/09**
            
            **1/31/10**
            
            **1/31/11**
            
            **Thereafter**
            
            **Total**
            
            **Value****(US$
                Equivalent)****Assets:**Short-term
                investments:Fixed
                rate ($Cdn)
            
            
            1,294,985
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,294,985
            
            
            1,294,985Average
                interest rate
            
            
            3.36
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3.36
            %Marketable
                securities:Fixed
                rate ($Cdn)
            
            
            405,865
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            405,865
            
            
            404,454Average
                interest rate
            
            
            2.88
            %
            
            —
            %
            
            —
            %
            
            —
            
            
            —
            
            
            —
            
            
            1.44
            %Notes
                receivable:Variable
                rate ($US)
            
            
            66,468
            
            
            64,957
            
            
            70,965
            
            
            77,530
            
            
            51,291
            
            
            —
            
            
            331,211
            
            
            331,211Average
                interest rate
            
            
            9.25
            %
            
            9.25
            %
            
            9.25
            %
            
            9.25
            %
            
            9.25
            %
            
            —
            
            
            7.71
            %**Liabilities:**Long-term
                debt:Fixed
                rate ($Cdn)
            
            
            127,911
            
            
            5,974
            
            
            6,894
            
            
            5,663
            
            
            —
            
            
            —
            
            
            146,442
            
            
            142,021Average
                interest rate
            
            
            8.84
            %
            
            10.43
            %
            
            10.43
            %
            
            10.43
            %
            
            —
            
            
            —
            
            
            9.04
            %Variable
                rate ($US)
            
            
            (2,514
            )
            
            (2,746
            )
            
            (3,000
            )
            
            (3,278
            )
            
            (3,581
            )
            
            690,943
            
            
            675,825
            
            
            672,825Average
                interest rate
            
            
            9.25
            %
            
            9.25
            %
            
            9.25
            %
            
            9.25
            %
            
            9.25
            %
            
            9.25
            
            
            9.25
            %





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**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-14 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.





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**PART
      II**


**OTHER
      INFORMATION**





**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 19 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 19 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





(b)
            Reports
                on Form 8-K





None.





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**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.





**POLYDEX
              PHARMACEUTICALS LIMITED**Date: 
June
              14, 2006
            By:
            /s/ GEORGE
              G.
              USHERName:  
                George G. Usher
              Title:    
                Chairman, President and Chief Executive Officer
              (Principal Executive Officer)


By:
            /s/ SHARON
              L.
              WARDLAWName:  
                Sharon L. Wardlaw
              Title:    
                Treasurer, Secretary and Chief Financial and
              Accounting Officer
              (Principal Financial Officer)






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 **Back
          to Table of Contents**




**Exhibit
      Index**





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 19 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 19 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002






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