**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C.  20549**
  
 
 **FORM 10-Q**
  (Mark
        One)
 
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT
                  OF 1934
 
 For
        the
        quarterly period ended October 31, 2005
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT
                  OF 1934
 
 For
        the
        transition period from _________________________ to
        ____________________
 
 Commission
        File Number 1-8366
 
 POLYDEX
                  PHARMACEUTICALS LIMITED(Exact
                  Name of Registrant as Specified in Its
                  Charter)
 
 Commonwealth
                  of the Bahamas
              None(State
                  or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
                  Employer Identification No.)
 
 421Comstock
                  Road, Toronto, Ontario, Canada
              M1L2H5(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 
 Registrant’s
        Telephone Number, Including Area Code (416)
        755-2231
  Former
                    Name, Former Address and Former Fiscal Year, if Changed Since
                    Last
                    Report
  Indicate
        by check whether the registrant (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for the past 90 days.  Yes x No
o
 
 Indicate
        by check whether the registrant is an accelerated filer (as defined in Exchange
        Act Rule 12b-2).  Yes o  No
x
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes o  No
x
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        shares, as of the latest practicable date.
 
 Common
                  Shares, $.0167 Par Value
              3,052,296
                  shares(Title
                  of Class)
              (Outstanding
                  at December 13, 2005)
 
 
 **POLYDEX
        PHARMACEUTICALS LIMITED**
 
 **TABLE
        OF CONTENTS**
  **PAGE****PART
                  I**
              **FINANCIAL
                  INFORMATION**Item
                  1
              CONSOLIDATED
                  FINANCIAL STATEMENTS(UNAUDITED)Consolidated
                  Balance SheetsOctober
                  31, 2005 and January31, 2005
              1Consolidated
                  Statements of Operationsand
                  Comprehensive Income (Loss)Three
                  and Nine months ended October 31, 2005 and 2004
              3Consolidated
                  Statements of Shareholders’ EquityNine
                  months ended October 31, 2005 and 2004
              4Consolidated
                  Statements of Cash FlowsNine
                  months ended October 31, 2005 and 2004
              5Notes
                  to Consolidated Financial Statements (Unaudited)
              6Item
                  2
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OFFINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS
              13Item
                  3
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURESABOUT
                  MARKET RISK
              30Item
                  4
              CONTROLS
                  AND PROCEDURES
              33**PART
                  II**
              **OTHER
                  INFORMATION**Item
                  6
              EXHIBITS
              34Signatures
                  and Certifications
              35
  
  **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.
  
  **PART
        I**
 **FINANCIAL
        INFORMATION**
 
 **Item
        1. Consolidated Financial Statements (unaudited).**
  **POLYDEX
        PHARMACEUTICALS LIMITED**




Consolidated
        Balance Sheets (Unaudited)
 (Expressed
          in United States dollars)


October
                31
            
            January
                312005
            
            2005**Assets**Current
                assets:Cash
                and cash equivalents (note 3)
            
            $
            1,454,560
            
            $
            2,401,051Trade
                accounts receivable
            
            
            584,363
            
            
            922,267Interest
                receivable
            
            
            —
            
            
            41,511Income
                taxes recoverable
            
            
            132,000
            
            
            —Inventories:Finished
                goods
            
            
            1,184,029
            
            
            1,187,158Work
                in process
            
            
            338,451
            
            
            123,730Raw
                materials
            
            
            189,934
            
            
            206,0051,712,414
            
            
            1,516,893Prepaid
                expenses and other current assets
            
            
            156,319
            
            
            115,542Total
                current assets
            
            
            4,039,656
            
            
            4,997,264Property,
                plant and equipment, net
            
            
            3,153,227
            
            
            3,124,185Patents
                and intangible assets, net
            
            
            62,931
            
            
            68,959Assets
                held for sale
            
            
            12,699
            
            
            12,085Investments
                available for sale (note 4)
            
            
            2,345,182
            
            
            1,909,305Due
                from shareholder
            
            
            605,862
            
            
            643,867Deferred
                tax assets
            
            
            190,508
            
            
            56,208$
            10,410,065
            
            $
            10,811,873





1


October
                  31
              
              January
                  312005
              
              2005**Liabilities
                  and Shareholders' Equity**Current
                  liabilities:Bank
                  indebtedness
              
              $
              84,660
              
              $
              24,170Accounts
                  payable
              
              
              588,124
              
              
              463,579Accrued
                  liabilities
              
              
              356,355
              
              
              169,370Payroll
                  and related taxes payable
              
              
              134,796
              
              
              195,897Customer
                  deposits
              
              
              97,859
              
              
              97,859Income
                  taxes payable
              
              
              123,800
              
              
              129,702Current
                  portion of long-term debt
              
              
              950
              
              
              46,353Current
                  portion of capital lease obligations
              
              
              201,228
              
              
              157,531Current
                  portion of due to shareholder
              
              
              4,597
              
              
              21,385Total
                  current liabilities
              
              
              1,592,369
              
              
              1,305,846Long-term
                  debt
              
              
              3,867
              
              
              4,368Capital
                  lease obligations
              
              
              19,464
              
              
              169,344Due
                  to shareholder
              
              
              671,656
              
              
              659,919Deferred
                  income taxes
              
              
              —
              
              
              121,507694,987
              
              
              955,138Total
                  liabilities
              
              
              2,287,356
              
              
              2,260,984Shareholders'
                  equity:Capital
                  stockAuthorized:100,000
                  Class A preferred shares of $0.10 each899,400
                  Class B preferred shares of $0.0167 each10,000,000
                  common shares of $0.0167 eachIssued
                  and outstanding:899,400
                  Class B preferred shares
              
              
              15,010
              
              
              15,0103,052,296
                  common shares (January 31, 2005 - 3,042,296)
              
              
              50,842
              
              
              50,676Contributed
                  surplus
              
              
              23,356,052
              
              
              23,303,718Deficit
              
              
              (15,969,869
              )
              
              (15,144,357
              )Accumulated
                  other comprehensive income
              
              
              670,674
              
              
              325,8428,122,709
              
              
              8,550,889$
              10,410,065
              
              $
              10,811,873
  See
        accompanying notes.





2





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


Three
                  Months Ended
              
              Three
                  Months Ended
              
              Nine
                  Months Ended
              
              Nine
                  Months EndedOctober
                  31
              
              October
                  31
              
              October
                  31
              
              October
                  312005
              
              2004
              
              2005
              
              2004Sales
              
              $
              1,062,075
              
              $
              1,205,859
              
              $
              3,658,229
              
              $
              5,066,062Cost
                  of goods sold
              
              
              989,275
              
              
              1,105,899
              
              
              3,336,086
              
              
              3,841,07372,800
              
              
              99,960
              
              
              322,143
              
              
              1,224,989Expenses:General
                  and administrative
              
              
              333,349
              
              
              337,072
              
              
              1,094,148
              
              
              1,047,649Research
                  and development
              
              
              89,955
              
              
              55,049
              
              
              148,858
              
              
              85,109Selling
                  and promotion
              
              
              25,966
              
              
              34,750
              
              
              80,801
              
              
              83,376Interest
                  expense
              
              
              20,891
              
              
              20,667
              
              
              60,808
              
              
              70,966Depreciation
              
              
              12,924
              
              
              7,476
              
              
              36,322
              
              
              18,281Amortization
              
              
              —
              
              
              2,008
              
              
              —
              
              
              14,543Foreign
                  exchange (gain) loss
              
              
              (5,576
              )
              
              (64,731
              )
              
              (15,366
              )
              
              (75,864
              )Gain
                  on sale of assets (note 7)
              
              
              (57
              )
              
              —
              
              
              (3,703
              )
              
              (1,859,471
              )Interest
                  and other income
              
              
              (20,907
              )
              
              (25,705
              )
              
              (60,553
              )
              
              (32,386
              )456,545
              
              
              366,586
              
              
              1,341,315
              
              
              (647,797
              )Income
                  (loss) before income taxes
              
              
              (383,745
              )
              
              (266,626
              )
              
              (1,019,172
              )
              
              1,872,786Provision
                  for (recovery of) income taxes
              
              
              (122,294
              )
              
              (26,074
              )
              
              (193,660
              )
              
              839,911Net
                  income (loss) for the period
              
              
              (261,451
              )
              
              (240,552
              )
              
              (825,512
              )
              
              1,032,875Unrealized
                  gain (loss) on investments available for sale
              
              
              (36,044
              )
              
              (8,698
              )
              
              (31,790
              )
              
              (12,909
              )Currency
                  translation adjustment
              
              
              269,583
              
              
              633,825
              
              
              376,622
              
              
              624,496Comprehensive
                  income (loss) for the period
              
              $
              (27,912
              )
              $
              384,575
              
              $
              (480,680
              )
              $
              1,644,462Per
                  share information:Earnings
                  (loss) per common share:Basic
              
              $
              (0.09
              )
              $
              (0.08
              )
              $
              (0.27
              )
              $
              0.34Diluted
              
              $
              (0.09
              )
              $
              (0.08
              )
              $
              (0.27
              )
              $
              0.34Weighted
                  average number of common shares used incomputing
                  net earnings per share for the period:Basic
              
              
              3,052,296
              
              
              3,042,296
              
              
              3,052,296
              
              
              3,035,852Diluted
              
              
              3,052,296
              
              
              3,042,296
              
              
              3,052,296
              
              
              3,063,484


See
        accompanying notes.





3





**POLYDEX
        PHARMACEUTICALS LIMITED**
  Consolidated
        Statements of Shareholders' Equity (Unaudited)
 (Expressed
        in United States dollars)


Nine
                  Months Ended
              
              Nine
                  Months EndedOctober
                  31
              
              October
                  312005
              
              2004Preferred
                  Shares:Balance,
                  beginning and end of period
              
              $
              15,010
              
              $
              15,010Common
                  Shares:Balance,
                  beginning of period
              
              $
              50,676
              
              $
              50,434Common
                  share options exercised
              
              
              166
              
              
              242Balance,
                  end of period
              
              $
              50,842
              
              $
              50,676Contributed
                  Surplus:Balance,
                  beginning of period
              
              $
              23,303,718
              
              $
              23,236,498Common
                  share options exercised
              
              
              52,334
              
              
              53,008Balance,
                  end of period
              
              $
              23,356,052
              
              $
              23,289,506Deficit:Balance,
                  beginning of period
              
              $
              (15,144,357
              )
              $
              (16,284,268
              )Net
                  income (loss) for the period
              
              
              (825,512
              )
              
              1,032,875Balance,
                  end of period
              
              $
              (15,969,869
              )
              $
              (15,251,393
              )Accumulated
                  Other Comprehensive Income (Loss):Balance,
                  beginning of period
              
              $
              325,842
              
              $
              (110,343
              )Unrealized
                  gain (loss) on investments available for sale
              
              
              (31,790
              )
              
              (12,909
              )Currency
                  translation adjustment for the period
              
              
              376,622
              
              
              624,496Balance,
                  end of period
              
              $
              670,674
              
              $
              501,244


See
        accompanying notes.





4




**POLYDEX
        PHARMACEUTICALS LIMITED**
  Consolidated
        Statements of Cash Flows (Unaudited)


(Expressed
      in United States dollars)


Nine
                  Months Ended
              
              Nine
                  Months EndedOctober
                  31
              
              October
                  312005
              
              2004Cash
                  provided by (used in):Operating
                  activities:Net
                  income (loss) for the period
              
              $
              (825,512
              )
              $
              1,032,875Add
                  (deduct) items not affecting cash:Depreciation
                  and amortization
              
              
              401,980
              
              
              376,829Imputed
                  interest on long-term debt
              
              
              1,363
              
              
              11,853Deferred
                  income taxes
              
              
              (249,311
              )
              
              566,140Gain
                  on disposal of equipment
              
              
              (3,703
              )
              
              —Gain
                  on sale of veterinary products business
              
              
              —
              
              
              (1,859,471
              )Net
                  change in non-cash working capital balancesrelated
                  to operations
              
              
              329,902
              
              
              (129,750
              )(345,281
              )
              
              (1,524
              )Investing
                  activities:Additions
                  to property, plant and equipment and patents
              
              
              (269,940
              )
              
              (146,463
              )Decrease
                  in due from shareholder
              
              
              38,005
              
              
              37,460Unrealized
                  loss on commercial paper available for sale
              
              
              (479
              )
              
              (736
              )Acquisition
                  of investments available for sale
              
              
              (361,426
              )
              
              (1,712,958
              )Proceeds
                  from sale of equipment
              
              
              3,703
              
              
              —Proceeds
                  from sale of veterinary products business
              
              
              —
              
              
              4,599,218(590,137
              )
              
              2,776,521Financing
                  activities:Repayment
                  of long-term debt
              
              
              (47,513
              )
              
              (276,682
              )Repayment
                  of capital lease obligations
              
              
              (119,340
              )
              
              (118,230
              )Increase
                  (decrease) in due to shareholder
              
              
              (5,051
              )
              
              (1,284
              )Increase
                  (decrease) in bank indebtedness
              
              
              —
              
              
              (118,850
              )Exercise
                  of common share options
              
              
              52,500
              
              
              —(119,404
              )
              
              (515,046
              )Effect
                  of exchange rate changes on cash
              
              
              108,331
              
              
              335,719Increase
                  in cash and cash equivalents
              
              
              (946,491
              )
              
              2,595,670Cash
                  and cash equivalents, beginning of period
              
              
              2,401,051
              
              
              371,528Cash
                  and cash equivalents, end of period
              
              $
              1,454,560
              
              $
              2,967,198Cash
                  and cash equivalents is comprised of the following:Cash
              
              $
              188,351
              
              $
              162,745Cash
                  equivalents
              
              
              1,266,209
              
              
              2,804,453$
              1,454,560
              
              $
              2,967,198


See
        accompanying notes.





5





**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 October 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 interest and other income in
      the
      consolidated statement of operations as it is earned. Changes in market values
      during the holding period are reported as unrealized gain (loss) on investments
      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


Property,
      plant and equipment and patents and intangible assets




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


Buildings
              15
                  yearsMachinery
                  and equipment
              3
                  to 10 years




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




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




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




Revenue
      recognition




Revenue
      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


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 nine months ended October
      31,
      2005 (2004 - 3,035,852). 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 27,599 at
      October 31, 2005 and October 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 October 31, 2005 and October 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:


October
                  31
              
              January
                  312005
              
              2005Cash
              
              $
              188,351
              
              $
              129,818Short-term
                  deposits
              
              
              1,266,209
              
              
              2,271,233$
              1,454,560
              
              $
              2,401,051




Short-term
        deposits in the amount of $1,009,020 bear interest at 2.60% and mature on
        December 9, 2005. Short-term deposits, consisting of commercial paper and
        money
        market fund units, 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:


October
                  31
              
              January
                  312005
              
              2005Canadian
                  medium-term fixed income instruments
              
              $
              1,815,455
              
              $
              1,909,305Canadian
                  income trust and mutual fund units
              
              
              529,727
              
              
              —$
              2,345,182
              
              $
              1,909,305




8


Canadian
        medium-term fixed income instruments mature within the next two years and
        have
        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
        loss
        of $48,026 for the nine months ending October 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.
        In
        October 2005, $9,000 was paid to the principal investigator. The Company
        is
        committed to make an additional payment of $34,112 upon the completion of
        patient enrolment, which is expected to occur during the fourth quarter of
        fiscal year 2006, and a final payment of $21,568 upon completion of the clinical
        study, which is expected to be in second quarter of fiscal year
        2007.
  **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 October
        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
        October 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 October 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.
  9
 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.




10


Three
                    Months
                
                Three
                    Months
                
                Nine
                    Months
                
                Nine
                    MonthsEnded
                
                Ended
                
                Ended
                
                EndedOctober
                    31
                
                October
                    31
                
                October
                    31
                
                October
                    312005
                
                2004
                
                2005
                
                2004**Sales:**Dextran
                
                $
                1,056,793
                
                $
                1,200,905
                
                $
                3,639,623
                
                $
                4,064,595Less:
                    intercompany saleselimination
                
                
                100,338
                
                
                94,134
                
                
                353,508
                
                
                295,800956,455
                
                
                1,106,771
                
                
                3,286,115
                
                
                3,768,795Chemdex
                
                
                105,620
                
                
                99,088
                
                
                372,114
                
                
                1,297,267Total
                    consolidated sales
                
                $
                1,062,075
                
                $
                1,205,859
                
                $
                3,658,229
                
                $
                5,066,062**Income
                    (loss) before income taxes:**Dextran
                
                $
                (117,470
                )
                $
                (93,050
                )
                $
                (378,816
                )
                $
                322,061Chemdex
                
                
                (22,041
                )
                
                23,134
                
                
                (48,510
                )
                
                2,013,415Total
                    pre-tax income (loss)from
                    segments
                
                
                (139,511
                )
                
                (69,916
                )
                
                (427,326
                )
                
                2,335,476Less:
                    Unallocated corporateexpenses
                
                
                (244,234
                )
                
                196,710
                
                
                (591,846
                )
                
                462,690Total
                    consolidated pre-tax income(loss)
                
                $
                (383,745
                )
                $
                (266,626
                )
                $
                (1,019,172
                )
                $
                1,872,786**Total
                    revenue by significant customer:**Customer
                    A
                
                $
                384,204
                
                $
                285,254
                
                $
                859,462
                
                $
                782,273Customer
                    B
                
                $
                155,320
                
                $
                85,760
                
                $
                452,820
                
                $
                85,760Customer
                    C
                
                $
                105,620
                
                $
                106,278
                
                $
                372,114
                
                $
                234,917Customer
                    D
                
                $
                86,400
                
                $
                117,000
                
                $
                345,800
                
                $
                289,000**Sales
                    revenue by product group:**Bulk
                    dextran and derivatives
                
                $
                1,062,075
                
                $
                1,205,859
                
                $
                3,658,229
                
                $
                3,974,161Sterile
                    injectible veterinaryproducts
                
                
                —
                
                
                —
                
                
                —
                
                
                663,629Oral
                    and topical veterinaryproducts
                
                
                —
                
                
                —
                
                
                —
                
                
                428,272Total
                    consolidated sales
                
                $
                1,062,075
                
                $
                1,205,859
                
                $
                3,658,229
                
                $
                5,066,062






11


October
                  31, 2005
              
              January
                  31, 2005**Assets:**Dextran
              
              $
              9,401,276
              
              $
              9,933,254Chemdex
              
              
              306,497
              
              
              233,539Total
                  assets from segments
              
              
              9,707,773
              
              
              10,166,793Corporate
                  assets
              
              
              702,292
              
              
              645,080Total
                  consolidated assets
              
              $
              10,410,065
              
              $
              10,811,873


**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 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.
  12
  **Item
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 *The
        Company’s fiscal year ends on January 31* *st* *of
        each year.  In this report, fiscal year 2006 refers to the Company’s fiscal
        year ended January 31, 2006.  The following discussion should be read
        in
        conjunction with the October 31, 2005 interim consolidated financial statements
        and notes thereto included elsewhere in this report. Operating results for
        the
        nine months ended October 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 make 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 actively explore the use
        of
        Ushercell as a treatment for Bacterial Vaginosis (BV), the most common vaginal
        disorder among reproductive-age women.  If effective, BV treatment
        may
        present an opportunity for commercial viability of Ushercell in advance of
        the
        completion of the much lengthier required testing for its use as an antiviral
        contraceptive gel. ****
 
 13
 ***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.
  **Results
        of Operations**
  *Three
        and nine months ended October 31, 2005 compared to three and nine months
        ended
        October 31, 2004*
 
 14
 **Three
                  Months**
                **Ended**
                **October
                  31, 2005**
              
              **Three
                  Months**
                **Ended**
                **October
                  31, 2004**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31, 2005**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31, 2004**Net
                  income (loss)
              
              $
              (261,451
              )
              $
              (240,552
              )
              $
              (825,512
              )
              $
              1,032,875Earnings
                  (loss) per share
              
              $
              (0.09
              )
              $
              (0.08
              )
              $
              (0.27
              )
              $
              0.34
 
 The
        net
        loss for the third quarter of fiscal year 2006 ended October 31, 2005, as
        compared to the third 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 Ended**
                **October
                  31, 2005**
              
              **Three
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance**
              
              **Nine
                  Months Ended**
                **October
                  31, 2005**
              
              **Nine
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance**Consolidated
              
              $
              (383,745
              )
              $
              (266,626
              )
              
              (44
              )%
              $
              (1,019,172
              )
              $
              1,872,786
              
              
              (154
              )%Dextran
                  Products
              
              
              (117,470
              )
              
              (93,050
              )
              
              (126
              )%
              
              (378,816
              )
              
              322,061
              
              
              (218
              )%Chemdex
              
              
              (22,041
              )
              
              23,134
              
              
              (195
              )%
              
              (48,510
              )
              
              2,013,415
              
              
              (102
              )%
 
 The
        decrease in operating results in the third 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 third 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 decrease in operating results at Chemdex during the third quarter of
        fiscal
        2006 was due to interest expense relating to amounts advanced to Chemdex
        by
        Dextran Products.
 
 15
 **Sales**
              
              **Three
                  Months Ended October 31, 2005**
              
              **Three
                  Months Ended October 31, 2004**
              
              **Variance**
              
              **Nine
                  Months Ended October 31, 2005**
              
              **Nine
                  Months Ended October 31, 2004**
              
              **Variance**Consolidated
              
              $
              1,062,075
              
              $
              1,205,859
              
              
              (12
              )%
              $
              3,658,229
              
              $
              5,066,062
              
              
              (28
              )%Dextran
                  Products
              
              
              956,455
              
              
              1,106,771
              
              
              (14
              )%
              $
              3,286,115
              
              $
              3,768,795
              
              
              (13
              )%Percentage
                  of Company sales
              
              
              90
              %
              
              92
              %
              
              
              
              
              90
              %
              
              74
              %Chemdex
              
              
              105,620
              
              
              99,088
              
              
              7
              %
              $
              372,114
              
              $
              1,297,267
              
              
              71
              %Percentage
                  of Company sales
              
              
              10
              %
              
              8
              %
              
              
              
              
              10
              %
              
              26
              %
  The
        sales
        decrease in the third quarter of fiscal year 2006 was attributable to the
        Dextran Products operating segment and was due to pricing, the timing of
        shipments and the extended plant maintenance shutdown.
 
 *Dextran
        Products* . 
        Sales of dextran and related products in the third quarter of fiscal year
        2006
        were less than the sales levels achieved during the third 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, there was an extended
        plant maintenance shutdown, which delayed shipments in the third quarter
        of
        fiscal year 2006.
 
 *Chemdex* . 
        Increased sales in the third quarter of fiscal 2006 was due to slightly
        increased volume of products shipped to Sparhawk.
 
 **Gross
                  profit**
              
              **Three
                  Months Ended**
                **October
                  31, 2005**
              
              **Three
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance**
              
              **Nine
                  Months Ended**
                **October
                  31, 2005**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31, 2004**
              
              **Variance**Consolidated
              
              $
              72,800
              
              $
              99,960
              
              
              (27
              )%
              $
              322,143
              
              $
              1,224,989
              
              
              (48
              )%Percentage
                  of sales
              
              
              7
              %
              
              8
              %
              
              
              
              
              9
              %
              
              23
              %Dextran
                  Products
              
              $
              43,116
              
              
              66,067
              
              
              (35
              )%
              
              210,799
              
              
              836,044
              
              
              (75
              )%Percentage
                  of sales
              
              
              5
              %
              
              8
              %
              
              
              
              
              6
              %
              
              23
              %Chemdex
              
              
              3,159
              
              
              2,094
              
              
              51
              %
              
              11,412
              
              
              274,028
              
              
              (96
              )%Percentage
                  of sales
              
              
              3
              %
              
              2
              %
              
              
              
              
              5
              %
              
              11
              %
  The
        third
        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 third quarter of fiscal year 2006 is 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 in the Canadian dollar relative to the United
        States
        dollar. In addition, significant equipment repair costs were incurred during
        the
        third quarter of fiscal year 2006 due to the extended plant maintenance
        shutdown. Management expects these repair costs to reduce with the planned
        replacement of equipment as part of the plant refurbishment.
  16
 *Chemdex* . 
        The only activity in the Chemdex operating segment now is the resale of raw
        materials produced by Dextran Products. Chemdex earns approximately 3% margin
        on
        these sales.
 
 **Three
                  Months Ended**
                **October
                  31, 2005**
              
              **Three
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance**
              
              **Nine
                  Months Ended**
                **October
                  31, 2005**
              
              **Nine
                  Months Ended**
                **October
                  31,**
                **2004**
              
              **Variance****Selling,
                  promotion,**
                **general
                  and**
                **administrative
                  expenses**
              
              $
              359,315
              
              $
              371,822
              
              
              (3
              )%
              $
              1,174,949
              
              $
              1,131,025
              
              
              4
              %
  Selling,
        promotion, general and administrative expenses increased for the nine months
        ended October 31, 2005 due primarily to the death benefit payable to Thomas
        C.
        Usher’s estate. The decrease for the third quarter of fiscal year 2006 was due
        to the related decrease in administrative salaries.
  **Research
                  and**
                **Development**
              
              **Three
                  Months Ended**
                **October
                  31, 2005**
              
              **Three
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance**
              
              **Nine
                  Months Ended**
                **October
                  31, 2005**
              
              **Nine
                  Months Ended**
                **July
                  31, 2004**
              
              **Variance**Research
                  and development expenditures
              
              $
              89,955
              
              $
              55,049
              
              
              63
              %
              $
              148,858
              
              $
              85,109
              
              
              75
              %
  The
        increase in research and development expenses during the third quarter of
        fiscal
        year 2006 is a result of continued work on the cellulose sulphate project
        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.
 
 In
        addition, during the third quarter of fiscal 2006 the Company established
        a
        Scientific Strategic Advisory Board. The purpose of SSAB is to provide
        management and the Board of Directors with expert advice, counsel and direction,
        including the formulation of an implementation program to optimize the
        commercial value capture from cellulose sulphate. Costs of this activity
        also
        include development of new intellectual property in the third quarter of
        fiscal
        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.
  17
 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
        product development activities the Company expects to perform and fund outside
        of its partnership relationships.
 
 **Three
                  Months Ended**
                **October
                  31, 2005**
              
              **Three
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance**
              
              **Nine
                  Months Ended**
                **October
                  31, 2005**
              
              **Nine
                  Months Ended**
                **October
                  31, 2004**
              
              **Variance****Depreciation
                  and amortization expense**
              
              $
              12,924
              
              $
              9,484
              
              
              30
              %
              $
              36,322
              
              $
              32,824
              
              
              11
              %
 
 The
        increase in depreciation and amortization expense in the third quarter of
        fiscal
        year 2006 is attributable to depreciation on equipment additions at Dextran
        Products.
  **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance****Interest
                  expense**
              
              $
              20,891
              
              $
              20,667
              
              
              1
              %
              $
              60,808
              
              $
              70,966
              
              
              (14
              )%
 
 The
        slight increase in interest expense in third 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
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance****Foreign
                  exchange gain**
              
              $
              (5,576
              )
              $
              (64,731
              )
              
              (91
              )%
              $
              (15,366
              )
              $
              (75,864
              )
              
              (80
              )%
 
 A
        foreign
        exchange gain was realized at Dextran Products during the third quarter of
        fiscal 2006 because the value of the Canadian dollar increased relative to
        the
        United States dollar. However compared to the third quarter of fiscal year
        2005,
        the value of the Canadian dollar rose by a lesser amount. At October 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.
  18
 **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance****Interest
                  and other income**
              
              $
              20,907
              
              $
              25,705
              
              
              (18
              )%
              $
              60,553
              
              $
              32,386
              
              
              87
              %
  Interest
        income in the third quarter of fiscal year 2006 has decreased due to a reduction
        in short-term deposits. Interest rates have increased during fiscal year
        2006,
        and the investments and short-term deposits were held for the entire nine
        months
        in fiscal year 2006, compared to only seven months in fiscal year 2005.
 
 **Provision
                  for (recovery of) income taxes**
              
              **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Three
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2005**
              
              **Nine
                  Months**
                **Ended**
                **October
                  31,**
                **2004**
              
              **Variance**Consolidated
              
              $
              (122,294
              )
              $
              (26,074
              )
              
              (369
              )%
              $
              (193,660
              )
              $
              839,911
              
              
              (123
              )%Dextran
                  Products
              
              
              (21,945
              )
              
              (35,074
              )
              
              37
              %
              
              (126,311
              )
              
              104,911
              
              
              (220
              )%Chemdex
              
              
              (156,950
              )
              
              (9,000
              )
              
              (1,644
              )%
              
              (123,950
              )
              
              735,000
              
              
              (117
              )%
 
 The
        tax
        recovery in the third quarter of fiscal year 2006 is a result of the tax
        losses
        at Dextran Products and the realization of a deferred tax asset at Chemdex,
        for
        which a full valuation allowance had previously been taken. The Canadian
        operations continue to have significant research and development tax pools
        to
        offset current taxes payable. These tax recoveries at the operating segments
        were partially offset by non-resident tax on interest income earned by
        Polydex.
  **Liquidity
        and Capital Resources**
  As
        of
        October 31, 2005, the Company had cash and cash equivalents of $1,454,560,
        compared to cash and cash equivalents of $2,401,051 at January 31, 2005. 
        In the third quarter of fiscal year 2006 the Company expended cash of $251,032
        in its operating activities, compared to cash generated of $34,175 for the
        third
        quarter of fiscal year 2005.  The decrease of cash generated from
        operations during the third quarter of fiscal year 2006 is primarily due
        to the
        loss incurred during the quarter. 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 $2,447,287 of working capital and a current ratio of 2.5 to 1
        as of
        October 31, 2005 compared to $3,691,418 and 3.8 to 1 as of January 31,
        2005.
  The
        Company at present, does not have any material commitments for capital
        expenditures, although management intends to continue the plant refurbishment
        process at Dextran Products in Toronto.
  19
 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
        October 31, 2005, the Company had accounts receivable of $584,363 and inventory
        of $1,712,414, compared to $922,267 and $1,516,893 at January 31, 2005 and
        $643,332 and $1,452,948  at
        October 31, 2004.  The decrease in accounts receivable during the
        third
        quarter ended October 31, 2005 **** is
        due to
        decreased sales during the quarter **.**
  At
        October 31, 2005, the Company had accounts payable of $588,124 compared to
        $463,579 at January 31, 2005 and $401,068  at
        October 31, 2004.  The increase in accounts payable was due to timing
        of
        supplier payments, including the acquisition of new
        equipment.
  During
        the third quarter of fiscal year 2006, capital expenditures totaled $182,408,
        as
        compared to $89,852 in the third 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.
        $100,000 (U.S. $84,660) was utilized at October 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% (October 31, 2005 - 5.5%; 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, to be paid in 25 equal monthly installments of $5,860. The Company
        fully repaid the outstanding balance during the third quarter of fiscal year
        2006. Since this installment contract is non-interest bearing, it has been
        discounted using a discount rate of 9%.
 
 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.
  20
 Changes
        in the relative values of the Canadian dollar and the United States dollar
        occur
        from time to time and may, in certain instances, materially affect the Company’s
        results of operations.
  The
        Company does not believe that the impact of inflation and changing prices
        has
        had a material effect on its operations or financial results at any time
        in the
        last three years.
  **Related
        Party Transactions**
  In
        August
        1997, the Company loaned the late Thomas C. Usher, its former Vice-Chairman,
        Director of Research and Development, a former member of its Board of Directors
        and formerly 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
        October 31, 2005 was $356,226, as compared to $373,373 at January 31, 2005,
        including accrued interest.  The Company has taken a cumulative provision
        of $285,402 against accrued interest on this loan at October 31, 2005, compared
        to a cumulative provision of $264,543 at January 31, 2005.
  In
        August
        1999, the late 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 October 31, 2005 and January 31, 2005 was $285,037. 
        Thomas C. Usher also owed $250,000 to a subsidiary of the Company, Novadex
        International Limited, as of October 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
        $1,873,773 at October 31, 2005, based on the closing price of the Company’s
        common shares on the NASDAQ Capital Market on October 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 October 31, 2005, $38,090 of this benefit has been
        paid to
        the estate.
  21
 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 $676,230 at October 31, 2005 from $681,304 at January
        31,
        2005 due to monthly payments by the Company less interest charges.
  **Off-Balance
        Sheet Arrangements**
  The
        Company has no off-balance sheet arrangements.
  **Tabular
        Disclosure of Contractual Obligations**
  As
        of
        October 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****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than**
                **1
                  year**
              
              **1
                  - 3**
                **years**
              
              **3
                  - 5**
                **years**
              
              **More
                  than**
                **5
                  years**Long-term
                  debt obligations (1)
              
              $
              680,866
              
              $
              61,240
              
              $
              122,841
              
              $
              120,355
              
              $
              376,250Capital
                  lease obligations (2)
              
              
              227,546
              
              
              210,948
              
              
              15,072
              
              
              1,526
              
              
              —Operating
                  Lease obligations (3)
              
              
              410
              
              
              410
              
              
              —
              
              
              —
              
              
              —Purchase
                  obligations (4)
              
              
              55,668
              
              
              55,668
              
              
              —
              
              
              —
              
              
              —Revolving
                  loans (5)
              
              
              84,660
              
              
              84,660
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              1,049,150
              
              
              413,106
              
              $
              137,913
              
              $
              121,881
              
              $
              376,250
 
 
 
 1.
        Consists of:
 
 (a)
              Note
                  payable in quarterly payments of Cdn. $419 (US $345), 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.
 
 22
 2.
        Consists of capital lease obligations for:
  (a)
              Production
                  equipment of Cdn. $201,381 (US $170,500) repayable in monthly
                  installments, bearing interest at 9% and maturing November
                  2006;
  (b)
              Production
                  equipment of Cdn. $43,962 (US $37,218) repayable in monthly installments,
                  bearing interest at 7.59% and maturing November 2006;
                  and
  (b)
              Office
                  equipment of Cdn. $23,435 (US $19,840) repayable in quarterly
                  installments, bearing interest at 10.43% and maturing December
                  2009.
  3.
              Consists
                  of operating lease obligations for office equipment requiring quarterly
                  payments of Cdn. $161 (US $133) terminating June
                  2006.
 
 4.
              Consists
                  of purchase obligations of $55,668 for research and development
                  services
                  payable as specified milestones are
                  achieved.
 
 5.
              Consists
                  of Canadian operating line of credit bearing interest at the Canadian
                  banks’ prime lending rate plus 0.75%, repayable upon
                  demand.
  **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;
  23
 •
              that
                  government regulations will delay or prevent the product’s marketing for a
                  considerable period of time and impose costly procedures upon the
                  Company’s activities;
  •
              that
                  the FDA or other regulatory agencies will not approve the product
                  or the
                  process by which the product is manufactured, or will not do so
                  on a
                  timely basis; and/or
  •
              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.
  24
 ***The
        Company depends on partnerships with third parties for the development and
        commercialization of its products.***
  The
        Company’s strategy for development and commercialization of its products is to
        rely on licensing agreements with third party partners.  As a result,
        the
        ability of the Company to commercialize future products is dependent upon
        the
        success of third parties in performing clinical trials, obtaining regulatory
        approvals, manufacturing and successfully marketing its products. 
        There
        can be no assurance that such third party collaborations will be
        successful.  Should any of the Company’s current research and development
        partnerships be discontinued, it may not be able to find others to develop
        and
        commercialize its current product candidates.
  ***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.
  25
 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.
  26
 ***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.
  27
 Because
        the Company controlled the operating, financing and investing decisions of
        the
        Joint Venture through Vet Labs ’ control
        of the Policy Committee, it consolidated the Joint Venture ’ s
        assets,
        liabilities, revenue and expenses in the Company ’ s
        financial statements.  The Company has funded the Joint Venture ’ s
        cumulative losses since 1992 and, accordingly, has recorded 100% of these
        losses
        in the consolidated financial statements.
 
 On
        January 13, 2004, the Company, Chemdex and Vet Labs entered into an Asset
        Purchase Agreement with Sparhawk.  Pursuant to the Asset Purchase
        Agreement, the Company agreed to sell substantially all of the assets of
        Vet
        Labs, including its interest in the Joint Venture, to Sparhawk for $5,500,000
        in
        cash.  Effective March 4, 2004, this sale was completed and a gain
        of
        $1,859,471 was recognized.  Simultaneously with the closing, Chemdex
        advanced $350,000 to Sparhawk in exchange for an unsecured subordinated
        promissory note bearing interest at 13% per annum and a warrant to purchase
        4%
        of the equity of Sparhawk.  The promissory note 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.
  28
 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.
  29
  **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.
 
 30
 **Expected
                  Maturity Date****1/31/06**
              
              **1/31/07**
              
              **1/31/08**
              
              **1/31/09**
              
              **1/31/10**
              
              **Thereafter**
              
              **Total**
              
              **Fair 
                  Value****(US$
                  Equivalent)****Assets:**Short-term
                  investments:Fixed
                  rate ($Cdn)
              
              
              1,260,395
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,260,395
              
              
              1,266,209Average
                  interest rate
              
              
              2.60
              %
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2.60
              %Marketable
                  securities:Fixed
                  rate ($Cdn)
              
              
              626,474
              
              
              621,533
              
              
              685,272
              
              
              —
              
              
              —
              
              
              —
              
              
              1,933,279
              
              
              1,815,455Average
                  interest rate
              
              
              2.66
              %
              
              2.85
              %
              
              2.86
              %
              
              —
              
              
              —
              
              
              —
              
              
              2.79
              %**Liabilities:**Long-term
                  debt:Fixed
                  rate ($Cdn)
              
              
              166,412
              
              
              163,387
              
              
              5,732
              
              
              6,360
              
              
              7,055
              
              
              —
              
              
              348,946
              
              
              332,999Average
                  interest rate
              
              
              8.78
              %
              
              8.81
              %
              
              10.43
              %
              
              10.43
              %
              
              10.43
              %
              
              —
              
              
              8.88
              %
  31
  **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****1/31/06**
              
              **1/31/07**
              
              **1/31/08**
              
              **1/31/09**
              
              **1/31/10**
              
              **Thereafter**
              
              **Total**
              
              **Fair 
                  Value****(US$
                  Equivalent)****Assets:**Short-term
                  investments:Fixed
                  rate ($Cdn)
              
              
              1,260,395
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,260,395
              
              
              1,266,209Average
                  interest rate
              
              
              2.60
              %
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2.60
              %Marketable
                  securities:Fixed
                  rate ($Cdn)
              
              
              626,474
              
              
              621,533
              
              
              685,272
              
              
              —
              
              
              —
              
              
              —
              
              
              1,933,279
              
              
              1,815,455Average
                  interest rate
              
              
              2.66
              %
              
              2.85
              %
              
              2.86
              %
              
              —
              
              
              —
              
              
              —
              
              
              2.79
              %Notes
                  receivable:Variable
                  rate ($US)
              
              
              88,832
              
              
              61,896
              
              
              66,848
              
              
              72,196
              
              
              77,972
              
              
              5,629
              
              
              373,373
              
              
              373,373Average
                  interest rate
              
              
              7.50
              %
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %
              
              7.92
              %**Liabilities:**Long-term
                  debt:Fixed
                  rate ($Cdn)
              
              
              166,412
              
              
              163,387
              
              
              5,732
              
              
              6,360
              
              
              7,055
              
              
              —
              
              
              348,946
              
              
              332,999Average
                  interest rate
              
              
              8.78
              %
              
              8.81
              %
              
              10.43
              %
              
              10.43
              %
              
              10.43
              %
              
              —
              
              
              8.88
              %Variable
                  rate ($US)
              
              
              7,404
              
              
              6,090
              
              
              6,577
              
              
              7,103
              
              
              7,671
              
              
              646,4378
              
              
              681,282
              
              
              681,282Average
                  interest rate
              
              
              7.50
              %
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %
              
              8.00
              %
              
              7.92
              %
 
  32
  **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.
  33
  **PART
        II**
 **OTHER
        INFORMATION**
 
 **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
  34
  **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:  December
        14, 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)
  35
  **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
 
 36