SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
  _________________  FORM 10-Q
/A
 (Amendment No. 1)
   (Mark One)
  [X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended July 31, 2005  [  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934   For the transition period from to ______________________ 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 [   ]
   Indicate by check whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
  Yes [   ] No [X]
   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes [   ] No [X]
   Indicate the number of shares outstanding of each of the issuers classes of common shares, as of the latest practicable date.
   
  Common Shares, $.0167 Par Value



3,052,296 shares(Title of Class)



(Outstanding at September 12, 2005)




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EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q of Polydex Pharmaceuticals Limited for the quarterly period ended July 31, 2005 is being filed for the sole purpose of correcting typographical errors on the cover page to this report. With the exception of the foregoing, the content of this Form 10-Q/A and related exhibits has not changed from the original filing, and, for the convenience of the reader, this Form 10-Q/A includes the original filing in its entirety. This Form 10-Q/A speaks as of the original filing date of the report and has not been updated to reflect events occurring subsequent to the original filing date.







POLYDEX PHARMACEUTICALS LIMITEDTABLE OF CONTENTS











|        |  |  |  |                                                                                                                       |  | PAGE
|------- |  |  |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I  |  |  |  | FINANCIAL INFORMATION                                                                                                 |  |     
|        |  |  |  |                                                                                                                       |  |     
|Item 1  |  |  |  | CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)                                                                          |  |     
|        |  |  |  |                                                                                                                       |  |     
|        |  |  |  | Consolidated Balance SheetsJuly 31, 2005 and January 31, 2005                                                         |  |     
|        |  |  |  |                                                                                                                       |  |     
|        |  |  |  | Consolidated Statements of Operationsand Comprehensive Income (Loss)Three and Six months ended July 31, 2005 and 2004 |  |     
|        |  |  |  |                                                                                                                       |  |     
|        |  |  |  | Consolidated Statements of Shareholders EquitySix months ended July 31, 2005 and 2004                                |  |     
|        |  |  |  |                                                                                                                       |  |     
|        |  |  |  | Consolidated Statements of Cash Flows                                                                                 |  |     
|        |  |  |  | Six months ended July 31, 2005 and 2004                                                                               |  |     
|        |  |  |  |                                                                                                                       |  |     
|        |  |  |  | Notes to Consolidated Financial Statements (Unaudited)                                                                |  |     
|        |  |  |  |                                                                                                                       |  |     
|Item 2  |  |  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS                                  |  |     
|        |  |  |  |                                                                                                                       |  |     
|Item 3  |  |  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK                                                             |  |     
|        |  |  |  |                                                                                                                       |  |     
|Item 4  |  |  |  | CONTROLS AND PROCEDURES                                                                                               |  |     
|        |  |  |  |                                                                                                                       |  |     
|PART II |  |  |  | OTHER INFORMATION                                                                                                     |  |     
|        |  |  |  |                                                                                                                       |  |     
|Item 4  |  |  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   |  |     
|        |  |  |  |                                                                                                                       |  |     
|Item 6  |  |  |  | EXHIBITS                                                                                                              |  |     
|        |  |  |  |                                                                                                                       |  |     
|        |  |  |  | Signatures and Certifications                                                                                         |  |     

i





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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.




ii





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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)





|                                          |  |  |  | July 312005 |            | January 312005
|----------------------------------------- |  |  |  | ----------- | ---------- | --------------
|                                         
|Assets                                    |  |  |  |             |            |               
|                                         
|Current assets:                           |  |  |  |             |            |               
|Cash and cash equivalents (note 3)        |  |  |  | $           | 1,889,643  |               
|Trade accounts receivable                 |  |  |  |             | 726,361    |               
|Interest receivable                       |  |  |  |             |           |               
|Inventories:                              |  |  |  |             |            |               
|Finished goods                            |  |  |  |             | 988,221    |               
|Work in process                           |  |  |  |             | 182,526    |               
|Raw materials                             |  |  |  |             | 189,272    |               
|                                         
|Inventories                               |  |  |  |             | 1,360,019  |               
|Prepaid expenses and other current assets |  |  |  |             | 147,075    |               
|                                         
|Total current assets                      |  |  |  |             | 4,123,098  |               
|                                         
|Property, plant and equipment, net        |  |  |  |             | 2,995,187  |               
|Patents and intangible assets, net        |  |  |  |             | 64,941     |               
|Assets held for sale                      |  |  |  |             | 12,253     |               
|Investments available for sale (note 4)   |  |  |  |             | 2,309,641  |               
|Due from shareholder                      |  |  |  |             | 605,862    |               
|Deferred tax assets                       |  |  |  |             | 162,332    |               
|                                         
|                                          |  |  |  | $           | 10,273,314 |               

1





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|                                                       |  |  |  | July 312005 |             | January 312005
|------------------------------------------------------ |  |  |  | ----------- | ----------- | --------------
|Liabilities and Shareholders Equity                  
|                                                      
|Current liabilities:                                   |  |  |  |             |             |               
|Bank indebtedness                                      |  |  |  | $           | 24,508      |               
|Accounts payable                                       |  |  |  |             | 511,421     |               
|Accrued liabilities                                    |  |  |  |             | 258,410     |               
|Payroll and related taxes payable                      |  |  |  |             | 127,469     |               
|Customer deposits                                      |  |  |  |             | 106,350     |               
|Income taxes payable                                   |  |  |  |             | 25,722      |               
|Current portion of long-term debt                      |  |  |  |             | 12,524      |               
|Current portion of capital lease obligations           |  |  |  |             | 225,378     |               
|Current portion of due to shareholder                  |  |  |  |             | 7,967       |               
|                                                      
|Total current liabilities                              |  |  |  |             | 1,299,749   |               
|                                                      
|Long-term debt                                         |  |  |  |             | 3,970       |               
|Capital lease obligations                              |  |  |  |             | 27,941      |               
|Due to shareholder                                     |  |  |  |             | 669,526     |               
|Deferred income taxes                                  |  |  |  |             | 121,507     |               
|                                                      
|                                                       |  |  |  |             | 822,944     |               
|                                                      
|Total liabilities                                      |  |  |  |             | 2,122,693   |               
|                                                      
|Shareholders equity:                                 
|Capital stock                                         
|Authorized:                                           
|100,000 Class A preferred shares of $0.10 each        
|899,400 Class B preferred shares of $0.0167 each       |  |  |  |             |             |               
|10,000,000 common shares of $0.0167 each              
|Issued and outstanding:                               
|899,400 Class B preferred shares                       |  |  |  |             | 15,010      |               
|3,052,296 common shares (January 31, 2005  3,042,296) |  |  |  |             | 50,842      |               
|Contributed surplus                                    |  |  |  |             | 23,356,052  |               
|Deficit                                                |  |  |  |             | (15,708,418 | )             
|Accumulated other comprehensive income (loss)          |  |  |  |             | 437,135     |               
|                                                       |  |  |  |             | 8,150,621   |               
|                                                       |  |  |  | $           | 10,273,314  |               



See accompanying notes.




2





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POLYDEX PHARMACEUTICALS LIMITED





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





|                                                                                                  |  |  |  | Three MonthsEndedJuly 312005 |           | Three MonthsEndedJuly 312004 |  | Six MonthsEndedJuly 312005 |           | Six MonthsEndedJuly 312004
|------------------------------------------------------------------------------------------------- |  |  |  | ---------------------------- | --------- | ---------------------------- |  | -------------------------- | --------- | --------------------------
|                                                                                                 
|Sales                                                                                             |  |  |  | $                            | 1,273,470 |                              |  | $                          | 1,338,409 |                           
|Cost of goods sold                                                                                |  |  |  |                              | 1,027,528 |                              |  |                            | 864,549   |                           
|                                                                                                 
|                                                                                                  |  |  |  |                              | 245,942   |                              |  |                            | 473,860   |                           
|                                                                                                 
|Expenses:                                                                                        
|General and administrative                                                                        |  |  |  |                              | 305,863   |                              |  |                            | 278,381   |                           
|Depreciation                                                                                      |  |  |  |                              | 129,939   |                              |  |                            | 117,307   |                           
|Research and development                                                                          |  |  |  |                              | 26,574    |                              |  |                            | 16,636    |                           
|Interest expense                                                                                  |  |  |  |                              | 20,135    |                              |  |                            | 19,608    |                           
|Selling and promotion                                                                             |  |  |  |                              | 33,487    |                              |  |                            | 23,459    |                           
|Foreign exchange (gain) loss                                                                      |  |  |  |                              | (13,950   | )                            |  |                            | (26,493   | )                         
|Amortization                                                                                      |  |  |  |                              | 2,009     |                              |  |                            | 2,008     |                           
|                                                                                                 
|                                                                                                  |  |  |  |                              | 504,057   |                              |  |                            | 430,906   |                           
|                                                                                                 
|Income (loss) before the following                                                                |  |  |  |                              | (258,115  | )                            |  |                            | 42,954    |                           
|                                                                                                 
|Other income (expense):                                                                          
|Gain on sale of assets (note 7)                                                                   |  |  |  |                              | 3,646     |                              |  |                            |          |                           
|Other income (expense), net                                                                       |  |  |  |                              | 3,508     |                              |  |                            | 21,753    |                           
|                                                                                                 
|                                                                                                  |  |  |  |                              | 7,154     |                              |  |                            | 21,753    |                           
|                                                                                                 
|Income (loss) before income taxes                                                                 |  |  |  |                              | (250,961  | )                            |  |                            | 64,707    |                           
|                                                                                                 
|Provision for (recovery of) income taxes                                                          |  |  |  |                              | (22,529   | )                            |  |                            | 51,948    |                           
|                                                                                                 
|Net income (loss) for the period                                                                  |  |  |  |                              | (228,432  | )                            |  |                            | 12,759    |                           
|                                                                                                 
|Unrealized gain (loss) on investments available for sale                                          |  |  |  |                              | 71,815    |                              |  |                            | (4,211    | )                         
|                                                                                                 
|Currency translation adjustment                                                                   |  |  |  |                              | 202,066   |                              |  |                            | 204,717   |                           
|                                                                                                 
|Comprehensive income (loss) for the period                                                        |  |  |  | $                            | 45,449    |                              |  | $                          | 213,265   |                           
|                                                                                                 
|Per share information:                                                                           
|Earnings (loss) per common share:                                                                
|Basic                                                                                             |  |  |  | $                            | (0.07     | )                            |  | $                          |          |                           
|Diluted                                                                                           |  |  |  | $                            | (0.07     | )                            |  | $                          |          |                           
|                                                                                                 
|Weighted average number of common shares used in computing net earnings per share for the period: |  |  |  |                              |           |                              |  |                            |           |                           
|Basic                                                                                             |  |  |  |                              | 3,052,296 |                              |  |                            | 3,037,463 |                           
|Diluted                                                                                           |  |  |  |                              | 3,052,296 |                              |  |                            | 3,071,158 |                           



See accompanying notes.




3





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POLYDEX PHARMACEUTICALS LIMITED





Consolidated Statements of Shareholders Equity (Unaudited)(Expressed in United States dollars)





|                                                         |  |  |  | Six MonthsEndedJuly 31, 2005 |             | Six MonthsEndedJuly 31, 2004
|-------------------------------------------------------- |  |  |  | ---------------------------- | ----------- | ----------------------------
|Preferred Shares:                                       
|Balance, beginning and end of period                     |  |  |  | $                            | 15,010      |                             
|                                                        
|Common Shares:                                          
|Balance, beginning of period                             |  |  |  | $                            | 50,676      |                             
|Common share options exercised                           |  |  |  |                              | 166         |                             
|Balance, end of period                                   |  |  |  | $                            | 50,842      |                             
|                                                        
|Contributed Surplus:                                    
|Balance, beginning of period                             |  |  |  | $                            | 23,303,718  |                             
|Common share options exercised                           |  |  |  |                              | 52,334      |                             
|Balance, end of period                                   |  |  |  | $                            | 23,356,052  |                             
|                                                        
|Deficit:                                                
|Balance, beginning of period                             |  |  |  | $                            | (15,144,357 | )                           
|Net income (loss) for the period                         |  |  |  |                              | (564,061    | )                           
|Balance, end of period                                   |  |  |  | $                            | (15,708,418 | )                           
|                                                        
|Accumulated Other Comprehensive Income (Loss):          
|Balance, beginning of period                             |  |  |  | $                            | 325,842     |                             
|Unrealized gain (loss) on investments available for sale |  |  |  |                              | 4,254       |                             
|Currency translation adjustment for the period           |  |  |  |                              | 107,039     |                             
|Balance, end of period                                   |  |  |  | $                            | 437,135     |                             



See accompanying notes.




4





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POLYDEX PHARMACEUTICALS LIMITED





Consolidated Statements of Cash Flows (Unaudited)(Expressed in United States dollars)





|                                                                      |  |  |  | Six MonthsEndedJuly 31, 2005 |           | Six MonthsEndedJuly 31, 2004
|--------------------------------------------------------------------- |  |  |  | ---------------------------- | --------- | ----------------------------
|Cash provided by (used in):                                          
|                                                                     
|Operating activities:                                                 |  |  |  |                              |           |                             
|Net income (loss) for the period                                      |  |  |  | $                            | (564,061  | )                           
|Add (deduct) items not affecting cash:                               
|Depreciation and amortization                                         |  |  |  |                              | 262,760   |                             
|Imputed interest on long-term debt                                    |  |  |  |                              | 1,274     |                             
|Deferred income taxes                                                 |  |  |  |                              | (104,366  | )                           
|Gain on disposal of equipment                                         |  |  |  |                              | (3,646    | )                           
|Gain on sale of veterinary products business                          |  |  |  |                              |          |                             
|Net change in non-cash working capital balances related to operations |  |  |  |                              | 313,790   |                             
|                                                                     
|                                                                      |  |  |  |                              | (94,249   | )                           
|                                                                     
|Investing activities:                                                
|Additions to property, plant and equipment and patents                |  |  |  |                              | (87,542   | )                           
|Decrease in due from shareholder                                      |  |  |  |                              | 38,005    |                             
|Unrealized loss on commercial paper available for sale                |  |  |  |                              | (534      | )                           
|Acquisition of investments available for sale                         |  |  |  |                              | (365,767  | )                           
|Proceeds from sale of equipment                                       |  |  |  |                              | 3,645     |                             
|Proceeds from sale of veterinary products business                    |  |  |  |                              |          |                             
|                                                                     
|                                                                      |  |  |  |                              | (412,193  | )                           
|Financing activities:                                                
|Repayment of long-term debt                                           |  |  |  |                              | (35,570   | )                           
|Repayment of capital lease obligations                                |  |  |  |                              | (64,623   | )                           
|Increase (decrease) in due to shareholder                             |  |  |  |                              | (3,811    | )                           
|Increase (decrease) in bank indebtedness                              |  |  |  |                              |          |                             
|Exercise of common share options                                      |  |  |  |                              | 52,500    |                             
|                                                                     
|                                                                      |  |  |  |                              | (51,504   | )                           
|Effect of exchange rate changes on cash                               |  |  |  |                              | 46,538    |                             
|                                                                     
|Increase in cash and cash equivalents                                 |  |  |  |                              | (511,408  | )                           
|                                                                     
|Cash and cash equivalents, beginning of period                        |  |  |  |                              | 2,401,051 |                             
|Cash and cash equivalents, end of period                              |  |  |  | $                            | 1,889,643 |                             
|                                                                     
|Cash and cash equivalents is comprised of the following:             
|Cash                                                                  |  |  |  | $                            | 207,747   |                             
|Cash equivalents                                                      |  |  |  |                              | 1,681,896 |                             
|                                                                     
|                                                                      |  |  |  | $                            | 1,889,643 |                             



See accompanying notes.




5





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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 2005 Annual Report on Form 10-K for the fiscal year ended January 31, 2005 as filed by Polydex Pharmaceuticals Limited (the Company) with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of July 31, 2005 and 2004 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 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 labour and overhead expenses.






Investments available for sale






Investments available for sale consist of medium-term fixed income instruments, trust income funds and mutual funds and are stated at fair market value, based on quoted market prices. Interest income is included in other income (expense) 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 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.




6





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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               | 
|Machinery and equipment | 



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 is from sales of bulk manufactured products. There was also revenue from finished dosage manufactured products up to March 4, 2004, at which time the Companys investment in the Vet Labs  Sparhawk Joint Venture was sold (see note 7). 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.






No testing and approval is required for finished dosage product because of its nature. Returns of finished dosage 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






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




7





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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 have been translated into United States dollars using the current exchange rates at the interim consolidated balance sheet dates. Revenue and expense items are translated using the average exchange rates for the period. The resulting gains and losses have been reported separately as accumulated other comprehensive income within shareholders equity.






Stock Based Compensation






SFAS No. 123, Accounting for Stock-Based Compensation, establishes and encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of the grant or the date at which the performance of the services is completed and is recognized over the periods in which the related services are rendered. The Company uses the fair value method for equity instruments granted to employees and non-employees and uses the Black Scholes model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.






Earnings (loss) per common share






Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding of 3,052,296 for the three months ended July 31, 2005 (20043,037,463). Diluted earnings (loss) per common share is computed using the weighted average number of common shares outstanding adjusted for the incremental shares, using the treasury stock method, attributed to outstanding options to purchase common stock. Incremental shares of nil and 30,854 at July 31, 2005 and July 31, 2004, respectively, were used in the calculation of diluted earnings (loss) per common share. Options to purchase 46,300 and 3,885 common shares at July 31, 2005 and July 31, 2004, respectively, 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:




|                    |  |  |  | July 312005 |           |  | January 312005 |  
|------------------- |  |  |  | ----------- | --------- |  | -------------- | -
|Cash                |  |  |  | $           | 207,747   |  |                | $
|Short-term deposits |  |  |  |             | 1,681,896 |  |                |  
|                    |  |  |  | $           | 1,889,643 |  |                | $



Short-term deposits in the amount of Cdn. $2,058,808 bear interest at 2.40% and mature on September 14, 2005. Short-term deposits consist of commercial paper and are available for sale and are stated at fair market value, based on quoted market prices.






4. Investments Available For Sale:






Investments available for sale consist of the following:




8





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|                                              |  |  |  | July 312005 |           |  | January 312005 |  
|--------------------------------------------- |  |  |  | ----------- | --------- |  | -------------- | -
|Canadian medium-term fixed income instruments |  |  |  | $           | 1,784,254 |  |                | $
|Canadian income trust and mutual fund units   |  |  |  |             | 525,387   |  |                |  
|                                              |  |  |  | $           | 2,309,641 |  |                | $



Canadian medium-term fixed income instruments have maturity dates extending from one to two years and interest rates ranging from 2.26% to 2.86%. Investments available for sale are stated at fair market value, based on quoted market prices. The unrealized gain of $4,254 for the six months ending July 31, 2005 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 an additional payment of $43,112 upon the completion of patient enrolment, which is expected to occur during the third quarter of fiscal year 2006, and a final payment of $21,556 upon completion of the clinical study, which is expected to be in fourth quarter of fiscal year 2006.






In July 2005, the Company committed to the purchase of a pharmaceutical stainless steel spray dryer in the amount of approximately $132,000 with full payment expected to be made during the third quarter of fiscal 2006.






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 July 31, 2005, the Company had 46,300 options outstanding at exercise prices ranging from $2.50 to $7.72 and a weighted average exercise price of $3.99. The options, which are immediately exercisable and expire on dates between January 11, 2006 and January 31, 2010, 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, 2005 to July 31, 2005, because there were no options granted during this period. Similarly, no stock-based employee compensation expense was recorded during the period from February 1, 2004 to July 31, 2004, because there were no options granted during this period.






7. Vet Labs  Sparhawk Joint Venture:






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.




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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 is due in full on March 4, 2009. Interest is payable annually, but can be deferred and added to the principal balance of the promissory note each year at Sparhawks discretion. The warrant expires at the earlier of payment in full of the
promissory note or 10 years from date of issue. The warrant becomes 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. Pursuant to definitive agreements, the Company made customary representations, warranties and indemnities and agreed to a full release of all claims against Sparhawk arising from the Joint Venture litigation. Similarly, Sparhawk agreed to a full release of all claims against the Company arising from the Joint Venture litigation.






The sale resulted in a gain of $2,209,471, of which $1,859,471 was recognized in the interim consolidated statement of operations and $350,000 was deferred. The deferred gain of $350,000 relates to the promissory note receivable from Sparhawk as Sparhawk is thinly capitalized and highly leveraged. The Company will monitor the financial position of Sparhawk and will recognize this deferred gain at such time as Sparhawks cash flows from operations are sufficient to fund debt service on a full accrual basis.






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 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   |  | manufactures and sells veterinary pharmaceutical products and specialty chemicals in the United States. The primary customers are distributors and private labelers, who in turn sell 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.




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|                                          |  |  |  | Three MonthsEndedJuly 31, 2005 |           | Three MonthsEndedJuly 31, 2004 |  | Six MonthsEndedJuly 21, 2005 |           | Six MonthsEndedJuly 21, 2004
|----------------------------------------- |  |  |  | ------------------------------ | --------- | ------------------------------ |  | ---------------------------- | --------- | ----------------------------
|Sales:                                   
|Dextran                                   |  |  |  | $                              | 1,265,504 |                                |  | $                            | 1,333,866 |                             
|Less: intercompany sales elimination      |  |  |  |                                | 151,377   |                                |  |                              | 101,735   |                             
|                                          |  |  |  |                                | 1,114,127 |                                |  |                              | 1,232,131 |                             
|Chemdex                                   |  |  |  |                                | 159,343   |                                |  |                              | 106,278   |                             
|Total consolidated sales                  |  |  |  | $                              | 1,273,470 |                                |  | $                            | 1,338,409 |                             
|                                         
|Income (loss) before income taxes:       
|Dextran                                   |  |  |  | $                              | (112,897  | )                              |  | $                            | 145,832   |                             
|Chemdex                                   |  |  |  |                                | 44,304    |                                |  |                              | 9,890     |                             
|Total pre-tax income (loss) from segments |  |  |  |                                | (68,593   | )                              |  |                              | 155,722   |                             
|Less: Unallocated corporate expenses      |  |  |  |                                | 182,368   |                                |  |                              | 91,015    |                             
|Total consolidated pre-tax income (loss)  |  |  |  | $                              | (250,961  | )                              |  | $                            | 64,707    |                             
|                                         
|Total revenue by significant customer:   
|Customer A                                |  |  |  | $                              | 293,488   |                                |  | $                            | 285,254   |                             
|Customer B                                |  |  |  | $                              | 189,980   |                                |  | $                            | 85,760    |                             
|Customer C                                |  |  |  | $                              | 159,344   |                                |  | $                            | 106,278   |                             
|Customer D                                |  |  |  | $                              | 86,400    |                                |  | $                            | 117,000   |                             
|                                         
|Sales revenue by product group:          
|Bulk dextran and derivatives              |  |  |  | $                              | 1,273,470 |                                |  | $                            | 1,338,409 |                             
|Sterile injectible veterinary products    |  |  |  |                                |          |                                |  |                              |          |                             
|Oral and topical veterinary products      |  |  |  |                                |          |                                |  |                              |          |                             
|Total consolidated sales                  |  |  |  | $                              | 1,273,470 |                                |  | $                            | 1,338,409 |                             
|                                          |  |  |  |                                |           |                                |  |                              |           |                             

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|                           |  |  |  | July 31, 2005 |            | January 31, 2005
|-------------------------- |  |  |  | ------------- | ---------- | ----------------
|Assets:                   
|Dextran                    |  |  |  | $             | 9,255,234  |                 
|Chemdex                    |  |  |  |               | 281,682    |                 
|Total assets from segments |  |  |  |               | 9,536,916  |                 
|Corporate assets           |  |  |  |               | 736,398    |                 
|Total consolidated assets  |  |  |  | $             | 10,273,314 |                 



9. Recent Accounting Pronouncements:






In December 2004, the Financial Accounting Standards Board [the FASB] issued FASB Statement No. 123 (Revised 2004), Share-Based Payment [Statement 123(R)], which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation [Statement 123]. Statement 123(R) supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Effective February 1, 2003, the Company has adopted the fair value accounting method provided
for under Statement 123 to apply recognition provisions to its employee stock options granted, modified or settled after February 1, 2003. Statement 123(R) will have no impact on the consolidated financial statements of the Company.






In November 2004, the FASB issued Statement 151, Inventory Costs, which clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not anticipate that this guidance will impact the consolidated financial statements of the Company.






In December 2004, the FASB issued Statement 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. Statement 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Statement 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Statement 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of Statement 153 should be applied prospectively. The Company does not anticipate that the application of Statement 153 will have an impact on the consolidated financial statements of the Company.






In May 2005, the FASB issued Statement 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3, which applies to all voluntary changes in accounting principle. This Statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This




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Statement is effective for fiscal years beginning after December 15, 2005. The Company does not anticipate that this guidance will impact the consolidated financial statements of the Company.




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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 31st of each year. In this report, fiscal year 2006 refers to the Companys fiscal year ended January 31, 2006. The following discussion should be read in conjunction with the July 31, 2005 interim consolidated financial statements and notes thereto included elsewhere in this report. Operating results for the six months ended July 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ended January 31, 2006. 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, 2005. 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, which operate as strategic business units: Dextran Products and Chemdex.






Dextran Products Business






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.






Management Objectives for Fiscal 2006. In fiscal year 2006, management intends to focus on the core businesses 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 are being explored by management. Expanding current market opportunities and the potential for new market penetration has led management to initiate plant refurbishments and the expansion of production capacity a priority for fiscal year 2006 with respect to Dextran Products operations.






Research and development of the Companys human pharmaceutical products is coordinated at the Dextran Products facility. 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 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




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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 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 is payable in full on March 4, 2009. Interest is payable annually, but can be deferred and added to the principal balance of the promissory note each year at Sparhawks discretion. The warrant becomes exercisable on March 5, 2009 and expires 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.






Following the sale of the United States finished product veterinary pharmaceutical business, the operations of Chemdex are limited to sales of the raw materials ferric hydroxide and hydrogenated dextran solution to Sparhawk under the terms of a long-term supply agreement between the parties.




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Results of Operations




Three months ended July 31, 2005 compared to three months ended July 31, 2004





|                          |  |  |  | Three MonthsEndedJuly 31,2005 |          | Three MonthsEndedJuly 31,2004
|------------------------- |  |  |  | ----------------------------- | -------- | -----------------------------
|                         
|Net income (loss)         |  |  |  | $                             | (228,432 | )                            
|                         
|Earnings (loss) per share |  |  |  | $                             | (0.07    | )                            



The net loss for the second quarter of fiscal year 2006 ended July 31, 2005, as compared to the second quarter in fiscal year 2005 is attributable to the net loss at Dextran Products and increased corporate expenses. The year to date net income for fiscal year 2005 is a result of the gain on sale of the Vet Labs assets in March 2004.




|Income (loss) before income taxes |  |  |  | Three Months EndedJuly 31, 2005 |          | Three Months EndedJuly 31, 2004 |  | Variance
|--------------------------------- |  |  |  | ------------------------------- | -------- | ------------------------------- |  | --------
|                                 
|Consolidated                      |  |  |  | $                               | (250,961 | )                               |  | $       
|Dextran Products                  |  |  |  |                                 | (112,897 | )                               |  |         
|Chemdex                           |  |  |  |                                 | 44,304   |                                 |  |         



The decrease in operating results in the first quarter of fiscal year 2006 is primarily attributable to the decrease in sales at Dextran Products and increased corporate expenses.






Dextran Products. The decrease in operating results at Dextran Products is due to decreased gross profit during the second quarter of fiscal year 2006. Gross profit decreased due to a reduction in sales and gross margins. The decrease in gross margins is a result of the lower sales volume and the rise in the value of the Canadian dollar relative to the United States dollar. Sales at Dextran Products are primarily denominated in the United States dollar, while the majority of expenses are incurred in Canadian dollars. Therefore, when the value of the Canadian dollar rises against the United States dollar, the gross margin percentage at Dextran Products declines.






Chemdex. The increase in operating results at Chemdex was due to a decrease in administrative wages.




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|Sales                       |  |  |  | Three MonthsEndedJuly 31, 2005 |           | Three MonthsEndedJuly 31, 2004 |  | Variance
|--------------------------- |  |  |  | ------------------------------ | --------- | ------------------------------ |  | --------
|Consolidated                |  |  |  | $                              | 1,273,470 |                                |  | $       
|Dextran Products            |  |  |  | $                              | 1,114,127 |                                |  | $       
|Percentage of Company sales |  |  |  |                                | 87        | %                              |  |         
|Chemdex                     |  |  |  | $                              | 159,343   |                                |  | $       
|Percentage of Company sales |  |  |  |                                | 13        | %                              |  |         



The sales decrease in the second quarter of fiscal year 2006 was attributable to the Dextran Products operating segment due to pricing and the timing of shipments.






Dextran Products. Sales of dextran and related products in the second quarter of fiscal year 2006 were less than the sales levels achieved during the second quarter of fiscal year 2005. First, bulk purchasing has now become prevalent with our customers, resulting in fewer but larger shipments that reduce shipping costs slightly while lowering pricing due to volume discounts. Second, the timing of shipments is affected due to their lower frequency.






Chemdex. Increased sales in the second quarter of fiscal 2006 was due to increased customer demand, consisting of one extra shipment to Sparhawk, as compared to the second quarter of fiscal 2005.




|Gross profit        |  |  |  | Three MonthsEndedJuly 31, 2005 |         | Three MonthsEndedJuly 31, 2004 |  | Variance
|------------------- |  |  |  | ------------------------------ | ------- | ------------------------------ |  | --------
|Consolidated        |  |  |  | $                              | 245,942 |                                |  | $       
|Percentage of sales |  |  |  |                                | 19      | %                              |  |         
|Dextran Products    |  |  |  | $                              | 238,202 |                                |  | $       
|Percentage of sales |  |  |  |                                | 21      | %                              |  |         
|Chemdex             |  |  |  | $                              | 7,740   |                                |  | $       
|Percentage of sales |  |  |  |                                | 5       | %                              |  |         



The second quarter fiscal year 2006 decrease in consolidated gross profit is a result of the decline in sales and margins at Dextran Products. The decrease in gross profit percentage during the second quarter of fiscal year 2006 is primarily due to the decrease in the gross profit percentage realized by Dextran Products.






Dextran Products. Decreased gross profit percentages were experienced at the Dextran Products operating segment because of the decreased sales volume, which increases the average cost per unit because of fixed manufacturing costs, increased costs of raw materials and the rise




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in the Canadian dollar relative to the United States dollar. In addition, significant equipment repair costs were incurred during the second quarter of fiscal year 2006. Management expects these repair costs to reduce with the planned replacement of equipment as part of the contemplated plant refurbishment.






Chemdex. The only activity in the Chemdex operating segment now is the resale of raw materials produced by Dextran Products. Chemdex earns 5% margin on these sales.




|                                                        |  |  |  | Three MonthsEndedJuly 31, 2005 |         | Three MonthsEndedJuly 31, 2004 |  | Variance
|------------------------------------------------------- |  |  |  | ------------------------------ | ------- | ------------------------------ |  | --------
|Selling, promotion, general and administrative expenses |  |  |  | $                              | 339,350 |                                |  | $       



The increase during the second quarter of fiscal year 2006 in selling, promotion, general and administrative expenses is primarily due to the costs related to an offsite Directors strategy session.




|Research and development              |  |  |  | Three MonthsEndedJuly 31, 2005 |        | Three MonthsEndedJuly 31, 2004 |  | Variance
|------------------------------------- |  |  |  | ------------------------------ | ------ | ------------------------------ |  | --------
|Research and development expenditures |  |  |  | $                              | 26,574 |                                |  | $       



The increase in research and development expenses during the second quarter of fiscal year 2006 is a result of continued work on the cellulose sulphate project, including consulting fees and further costs of a pilot clinical study on the use of cellulose sulphate for the treatment of bacterial vaginosis. This 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 development partners for the investigation of this product as a contraceptive gel with antiviral properties. Expenses for this clinical study are expected to increase during the remainder of fiscal year 2006.






Funding for the Companys primary development products 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, including third party public and/or private sector groups, 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 2006 over fiscal year 2005 due to additional




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product development activities the Company expects to perform and fund outside of its partnership relationships.




|                                      |  |  |  | Three MonthsEndedJuly 31, 2005 |         | Three MonthsEndedJuly 31, 2004 |  | Variance
|------------------------------------- |  |  |  | ------------------------------ | ------- | ------------------------------ |  | --------
|Depreciation and amortization expense |  |  |  | $                              | 129,939 |                                |  | $       



The increase in depreciation and amortization expense in the second quarter of fiscal year 2006 is attributable to depreciation on equipment additions at Dextran Products subsequent to the second quarter of fiscal year 2005.




|                 |  |  |  | Three MonthsEndedJuly 31, 2005 |        | Three MonthsEndedJuly 31, 2004 |  | Variance
|---------------- |  |  |  | ------------------------------ | ------ | ------------------------------ |  | --------
|Interest expense |  |  |  | $                              | 20,135 |                                |  | $       



The slight increase in interest expense in second quarter of fiscal year 2006 is primarily attributable to the rise in value of the Canadian dollar relative to the United States dollar, offset by the decrease in long-term debt and capital lease obligations.




|                      |  |  |  | Three MonthsEndedJuly 31, 2005 |        | Three MonthsEndedJuly 31, 2004 |  | Variance
|--------------------- |  |  |  | ------------------------------ | ------ | ------------------------------ |  | --------
|Foreign exchange gain |  |  |  | $                              | 13,950 |                                |  | $       



A foreign exchange gain was realized at Dextran Products during the second quarter of fiscal 2006 because the value of the Canadian dollar increased relative to the United States dollar. However compared to the second quarter of fiscal year 2005, the value of the Canadian dollar rose by a lesser amount. At July 31, 2005, Dextran Products has a net liability exposure to the United States dollar because intercompany payables denominated in United States dollars exceed its United States dollar denominated accounts receivable balance.




|                       |  |  |  | Three MonthsEndedJuly 31, 2005 |       | Three MonthsEndedJuly 31, 2004 |  | Variance
|---------------------- |  |  |  | ------------------------------ | ----- | ------------------------------ |  | --------
|Other income (expense) |  |  |  | $                              | 7,154 |                                |  | $       



Other income in the second quarter of fiscal year 2006 is primarily related to a gain on the disposal of equipment, and interest income earned at Dextran Products. The decrease in




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interest income is related to the periodic adjustment of interest premiums on original purchase amounts.




|Provision for (recovery of) income taxes |  |  |  | Three MonthsEndedJuly 31, 2005 |         | Three MonthsEndedJuly 31, 2004 |  | Variance
|---------------------------------------- |  |  |  | ------------------------------ | ------- | ------------------------------ |  | --------
|Consolidated                             |  |  |  | $                              | (22,529 | )                              |  | $       
|Dextran Products                         |  |  |  |                                | (39,529 | )                              |  |         
|Chemdex                                  |  |  |  |                                | 17,000  |                                |  |         



The tax recovery in the second quarter of fiscal year 2006 is a result of the tax losses at Dextran Products during the second quarter of fiscal 2006. The Canadian operations continue to have significant research and development tax pools to offset current taxes payable. Chemdex had increased taxable income during the second quarter of fiscal year 2006, as compared to the second quarter of fiscal year 2005, resulting in an increased tax provision.






Liquidity and Capital Resources






As of July 31, 2005, the Company had cash and cash equivalents of $1,889,643, compared to cash and cash equivalents of $2,401,051 at January 31, 2005. In the second quarter of fiscal year 2006 the Company generated cash of $76,058 in its operating activities, compared to $144,514 for the second quarter of fiscal year 2005. The decrease of cash generated from operations during the second quarter of fiscal year 2006 is primarily due to the loss incurred during the quarter. Significant cash was utilized for investing activities related to new equipment and the acquisition of additional investments available for sale. Although there was a large increase in net income in the first quarter of fiscal year 2005, the increase resulted from the sale of the Vet Labs assets and its interest in the Joint Venture, which was an investing activity. Depreciation and amortization continues to be a large non-cash expense of
the Company.






The Company had $2,823,349 of working capital and a current ratio of 3.2 to 1 as of July 31, 2005 compared to $3,691,418 and 3.8 to 1 as of January 31, 2005.






In July 2005, the Company committed to the purchase of a pharmaceutical stainless steel spray dryer in the amount of approximately $132,000 with full payment expected to be made during the third quarter of fiscal 2006. The Company at present does not have any other material commitments for capital expenditures, although management intends to continue the plant refurbishment process at Dextran Products in Toronto.






Management expects the primary source of its future capital needs to be a combination of company earnings, existing cash reserves and borrowings. The Company believes that, based upon the current levels of revenues and spending, its existing working capital resources will be sufficient to support continuing operations for the foreseeable future.






At July 31, 2005, the Company had accounts receivable of $726,361 and inventory of $1,360,019, compared to $922,267 and $1,516,893 at January 31, 2005 and $698,866 and $1,351,927 at July 31, 2004. The decrease in accounts receivable during the second quarter




20





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ended July 31, 2005 is due to decreased sales during the quarter. Accounts receivable and inventory levels at July 31, 2005 are consistent with the levels at July 31, 2004.






At July 31, 2005, the Company had accounts payable of $511,421 compared to $463,579 at January 31, 2005 and $368,554 at July 31, 2004. The increase in accounts payable was due to timing of supplier payments, including the acquisition of new equipment.






During the second quarter of fiscal year 2006, capital expenditures totaled $72,610, as compared to $15,536 in the second quarter of fiscal year 2005. The majority of capital expenditures were for production equipment at the Dextran Products plant in Toronto during both of these periods. Management intends to continue its plant refurbishment and expansion plan during the remainder of fiscal year 2006, 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. $1,021,000) line of credit, of which Cdn. $30,000 (U.S. $24,500) was utilized at July 31, 2005. At January 31, 2005, Cdn. $30,000 (U.S. $24,000) of this line of credit was utilized. This line of credit bears interest at the Canadian banks prime lending rate plus 0.75% (July 31, 2005  5%; January 31, 2005  5%). This 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. This 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.






Chemdex entered into a long-term debt obligation relating to the redemption of the 10% minority interest in Chemdex in fiscal year 2004. The redemption amount was $146,500, which is to be paid in 25 equal monthly installments of $5,860. The Company has made 23 payments through July 31, 2005. Since this installment contract is non-interest bearing, it has been discounted using a discount rate of 9%. The present value of this installment contract is $11,631, which has been recorded as a current liability.






The decrease in long-term debt and capital lease obligations from January 31, 2005 is due to continuing payments by the Company. The majority of the long-term debt and capital lease obligations are due in the next two years.






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.




21





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Related Party Transactions






In August 1997, the Company loaned the late Thomas C. Usher, its former 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 July 31, 2005 was $349,057, as compared to $373,373 at January 31, 2005, including accrued interest. The Company has taken a cumulative provision of $278,232 against accrued interest on this loan at July 31, 2005, compared to a cumulative provision of $264,543 at January 31, 2005.






In August 1999, Thomas C. Usher personally assumed all of the assets and liabilities of Novadex Corp., including the balance of receivables (the Receivables) due to the Company from Novadex Corp. The Receivables have no specific repayment terms. The total outstanding amount of the Receivables as of July 31, 2005 and January 31, 2005 was $285,037. Thomas C. Usher also owes $250,000 to a subsidiary of the Company, Novadex International Limited, as of July 31, 2005, pursuant to a non-interest bearing loan with no specific repayment terms. The outstanding amount of this loan has not changed from January 31, 2005.






Thomas C. Usher had pledged 315,450 common shares of the Company as security for these amounts owing to the Company. These common shares have a market value of $1,577,250 at July 31, 2005, based on the closing price of the Companys common shares on the Nasdaq SmallCap market on July 29, 2005, the last trading day prior to July 31, 2005.






During February 2005, Thomas C. Usher passed away. All assets and liabilities of Thomas C. Usher transferred to his estate. The Company will continue to hold the pledged assets as collateral until the loan is repaid. The Company has a commitment to pay an amount of $110,000 to Thomas C. Ushers estate within one year of his death. At July 31, 2005, $22,200 of this benefit has been paid to the estate.






The Company also has an outstanding loan payable to Ruth Usher, a member of the Board of Directors until her retirement on October 31, 2003, the beneficial owner of greater than 5% of the outstanding common shares of the Company, and the widow of Thomas C. Usher. The amount due from the Company pursuant to this loan decreased to $677,470 at July 31, 2005 from $681,304 at January 31, 2005 due to monthly payments by the Company less interest charges.




22





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Off-Balance Sheet Arrangements






The Company has no off-balance sheet arrangements.






Tabular Disclosure of Contractual Obligations






As of July 31 2005, 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           | 
|------------------------------- | 
|
|Long-term debt obligations (1)  | 
|Capital lease obligations (2)   | 
|Operating Lease obligations (3) | 
|Purchase obligations (4)        | 
|Revolving loans (5)             | 
|Total                           | 








|1. |  | Consists of:
|-- |  | ------------

| | (a) |  | Note payable in monthly payments of $5,860 maturing September 19, 2005;
| | --- |  | -----------------------------------------------------------------------

| | (b) |  | Note payable in quarterly payments of Cdn. $419 (US $342), 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. $236,455 (US $193,166) repayable in monthly installments, bearing interest at 9% and maturing November 2006;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Production equipment of Cdn. $54,107 (US $44,201) repayable in monthly installments, bearing interest at 7.59% and maturing November 2006; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

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| | (c) |  | Office equipment of Cdn. $25,237 (US $20,617) 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 $132) terminating June 2006.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Consists of:
|-- |  | ------------

| | (a) |  | Purchase obligations of $64,668 for research and development services payable as specified milestones are achieved.
| | --- |  | -------------------------------------------------------------------------------------------------------------------

| | (b) |  | Purchase obligation of GBP 75,000 (US $132,000) for production equipment, half payable in September 2005, and the remainder upon shipment.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | Consists of Canadian operating line of credit bearing interest at the Canadian banks prime lending rate plus 0.75%, repayable upon demand.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

24





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| |  | 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
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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




25





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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.






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.




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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 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




28





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Ventures assets, liabilities, revenue and expenses in the Companys financial statements. The Company has funded the Joint Ventures cumulative losses since 1992 and, accordingly, has recorded 100% of these losses in the consolidated financial statements.






On January 13, 2004, the Company, Chemdex and Vet Labs entered into an Asset Purchase Agreement with Sparhawk. Pursuant to the Asset Purchase Agreement, the Company agreed to sell substantially all of the assets of Vet Labs, including its interest in the Joint Venture, to Sparhawk for $5,500,000 in cash. Effective March 4, 2004, this sale was completed and a gain of $1,859,471 was recognized. Simultaneously with the closing, Chemdex advanced $350,000 to Sparhawk in exchange for an unsecured subordinated promissory note bearing interest at 13% per annum and a warrant to purchase 4% of the equity of Sparhawk. The promissory note is payable in full on March 4, 2009. Interest is payable annually, but can be deferred and added to the principal balance of the promissory note each year at Sparhawks discretion. The warrant expires at the earlier of payment in full of the promissory note or 10 years from date
of issue. The warrant becomes exercisable the day after the fifth anniversary from the date of issue. 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.






Since Sparhawk is thinly capitalized and highly leveraged, the Company has deferred $350,000 of the gain relating to the promissory note receivable from Sparhawk. The Company will monitor the financial position of Sparhawk and will recognize this deferred gain at such time as Sparhawks cash flows from operations are sufficient to fund debt service on a full accrual basis.






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.






Recent Accounting Pronouncements






In December 2004, the Financial Accounting Standards Board [the FASB] issued FASB Statement No. 123 (Revised 2004), Share-Based Payment [Statement 123(R)], which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation [Statement 123]. Statement 123(R) supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Effective February 1, 2003, the Company has adopted the fair value accounting method provided
for under Statement 123 to apply recognition provisions to its employee stock options granted, modified or settled after February 1, 2003. Statement 123(R) will have no impact on the consolidated financial statements of the Company.




29





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In November 2004, the FASB issued Statement 151, Inventory Costs, which clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not anticipate that this guidance will impact the consolidated financial statements of the Company.






In December 2004, the FASB issued Statement 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. Statement 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Statement 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Statement 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of Statement 153 should be applied prospectively. The Company does not anticipate that the application of Statement 153 will have an impact on the consolidated financial statements of the Company.






In May 2005, the FASB issued Statement 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3, which applies to all voluntary changes in accounting principle. This Statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement is effective for fiscal years beginning after December 15, 2005. The Company does not anticipate that this guidance will impact the consolidated financial statements of the Company.




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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.




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|                        |  |  |  | Expected Maturity Date |           |   |  |  |        
|----------------------- |  |  |  | ---------------------- | --------- | - |  |  | -------
|
|
|Assets:                
|Short-term investments: |  |  |  |                        |           |   |  |  |        
|Fixed rate ($Cdn)       |  |  |  |                        | 1,680,226 |   |  |  |       
|Average interest rate   |  |  |  |                        | 2.40      | % |  |  |       
|Marketable securities:  |  |  |  |                        |           |   |  |  |        
|Fixed rate ($Cdn)       |  |  |  |                        | 604,518   |   |  |  | 599,751
|Average interest rate   |  |  |  |                        | 2.66      | % |  |  | 2.85   
|Liabilities:           
|Long-term debt:        
|Fixed rate ($Cdn)       |  |  |  |                        | 160,580   |   |  |  | 157,661
|Average interest rate   |  |  |  |                        | 8.78      | % |  |  | 8.81   

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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 |           |   |  |  |        
|----------------------- |  |  |  | ---------------------- | --------- | - |  |  | -------
|
|
|Assets:                
|Short-term investments:
|Fixed rate ($Cdn)       |  |  |  |                        | 1,680,226 |   |  |  |       
|Average interest rate   |  |  |  |                        | 2.40      | % |  |  |       
|Marketable securities: 
|Fixed rate ($Cdn)       |  |  |  |                        | 604,518   |   |  |  | 599,751
|Average interest rate   |  |  |  |                        | 2.66      | % |  |  | 2.85   
|Notes receivable:       |  |  |  |                        |           |   |  |  |        
|Variable rate ($US)     |  |  |  |                        | 84,737    |   |  |  | 60,045 
|Average interest rate   |  |  |  |                        | 7.50      | % |  |  | 7.50   
|Liabilities:           
|Long-term debt:        
|Fixed rate ($Cdn)       |  |  |  |                        | 160,580   |   |  |  | 157,661
|Average interest rate   |  |  |  |                        | 8.78      | % |  |  | 8.81   
|Variable rate ($US)     |  |  |  |                        | 7,404     |   |  |  | 9,459  
|Average interest rate   |  |  |  |                        | 7.50      | % |  |  | 7.50   

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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 IIOTHER INFORMATION







Item 4.  Submission of Matters to a Vote of Security Holders.




|(a) |  | The 2005 Annual General Meeting of the Members was held on July 8, 2005.
|--- |  | ------------------------------------------------------------------------

|(c) |  | No matters were voted upon at the 2005 Annual Meeting of the Members other than (i) the election of Mr. Derek John Michael Lederer as a director of the Company to hold office for a three-year term expiring at the Annual General Meeting of the Members held in 2008 or until successors are duly elected and qualified, and (ii) the ratification of the appointment of Sloan Partners LLP as the independent registered accounting firm of the Company. The tabulation of votes in person or by proxy at the Annual Meeting with respect to such matters are as follows:
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Proposal 1  Election of Derek John Michael Lederer:




|Class                    |  |  |  | Votes For |           | Votes Against |  | Abstentions andNon-Votes
|------------------------ |  |  |  | --------- | --------- | ------------- |  | ------------------------
|Common Shares            |  |  |  |           | 2,329,521 |               |  |                         
|Class B Preferred Shares |  |  |  |           | 1,798,800 | (1)           |  |                         

|(1) |  | Class B Preferred Shares are entitled to two (2) votes per share.
|--- |  | -----------------------------------------------------------------



Proposal 2  Ratification of Independent Registered Accounting Firm:




|Class                    |  |  |  | Votes For |           | Votes Against |  | Abstentions andNon-Votes
|------------------------ |  |  |  | --------- | --------- | ------------- |  | ------------------------
|Common Shares            |  |  |  |           | 2,331,121 |               |  |                         
|Class B Preferred Shares |  |  |  |           | 1,798,800 | (1)           |  |                         

|(1) |  | Class B Preferred Shares are entitled to two (2) votes per share.
|--- |  | -----------------------------------------------------------------

|(d) |  | Not applicable.
|--- |  | ---------------

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Item 6.  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
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

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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.






Date: September
21 , 2005






POLYDEX PHARMACEUTICALS LIMITED(Registrant)




|By |  | /s/ George G. UsherGeorge G. Usher, Chairman, President andChief Executive Officer(Principal Executive Officer)
|-- |  | ---------------------------------------------------------------------------------------------------------------

|By |  | /s/ Sharon L. WardlawSharon L. Wardlaw, Treasurer, Secretary andChief Financial and Accounting Officer(Principal Financial Officer)
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------

37





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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
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

38





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