UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

____________

FORM 10-Q

(Mark One)

Q

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

For the quarterly period ended July 31,
2008

£

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

For the transition period from
_________________________ to ____________________

Commission File Number  1-8366

POLYDEX PHARMACEUTICALS LIMITED


(Exact Name of Registrant as Specified in
Its Charter)

|Commonwealth of the Bahamas                                        | None               
|------------------------------------------------------------------ | -------------------
|(State or Other Jurisdiction of
    Incorporation or Organization) | (I.R.S. Employer   
|                                                                   | Identification No.)
|                                                                   |                    
|421 Comstock Road, Toronto, Ontario, Canada                        | M1L 2H5            
|(Address
    of Principal Executive Offices)                       | (Zip Code)         
|                                                                   |                    

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

Former Name, Former Address and Former
  Fiscal Year, if Changed Since Last Report


Indicate by check whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

YesQ        
No£

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):

|Large accelerated filer           
    £ | Accelerated
    filer             £  
|---------------------------------------- | -------------------------------------
|Non-accelerated filer            
    £  | Smaller reporting company      
    Q

Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
£NoQ

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

|Common Shares, $.0167 Par Value | 3,072,846                       
|------------------------------- | --------------------------------
|(Title of Class)                | (Outstanding at August 31, 2008)

---



POLYDEX
PHARMACEUTICALS LIMITED

TABLE OF CONTENTS

|PART I  
    FINANCIAL INFORMATION |                                                                         
|---------------------------------- | ------------------------------------------------------------------------
|                                   |                                                                         
|Item 1                             | CONSOLIDATED FINANCIAL STATEMENTS                                       
|                                   | (UNAUDITED)                                                             
|                                   |                                                                         
|                                   | Consolidated Balance Sheets                                             
|                                   | July 31, 2008 (Unaudited)
    and January 31, 2008 (Audited)            
|                                   |                                                                         
|                                   | Consolidated Statements of Operations                                   
|                                   | and Comprehensive Income (Loss)                                         
|                                   | Three months and six months ended July 31,
    2008 and 2007 (Unaudited)
|                                   |                                                                         
|                                   | Consolidated Statements of
    Shareholders Equity                     
|                                   | Six months ended July 31,
    2008 and 2007 (Unaudited)                 
|                                   |                                                                         
|                                   | Consolidated Statements of Cash Flows                                   
|                                   | Six months ended July 31, 2008 and 2007 (Unaudited)                     
|                                   |                                                                         
|                                   | Notes to Consolidated
    Financial Statements (Unaudited)              
|                                   |                                                                         
|Item 2                             | MANAGEMENTS DISCUSSION AND ANALYSIS OF                                 
|                                   | FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           
|                                   |                                                                         
|Item 3                             | QUANTITATIVE AND
    QUALITATIVE DISCLOSURES                            
|                                   | ABOUT MARKET RISK                                                       
|                                   |                                                                         
|Item 4                             | CONTROLS AND PROCEDURES                                                 
|                                   |                                                                         
|PART II  
    OTHER INFORMATION    |                                                                         
|                                   |                                                                         
|Item 1                             | LEGAL PROCEEDINGS                                                       
|                                   |                                                                         
|Item 2                             | UNREGISTERED SALES OF
    EQUITY SECURITIES AND                         
|                                   | USE OF PROCEEDS                                                         
|                                   |                                                                         
|Item 3                             | DEFAULTS UPON SENIOR SECURITIES                                         
|                                   |                                                                         
|Item 4                             | SUBMISSION OF MATTERS TO A
    VOTE OF SECURITY HOLDERS                 
|                                   |                                                                         
|Item 5                             | OTHER INFORMATION                                                       
|                                   |                                                                         
|Item 6                             | EXHIBITS                                                                
|                                   |                                                                         
|                                   | Signatures and Certifications                                           



---



Cautionary Note Regarding Forward-Looking Statements



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



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



---

PART I

FINANCIAL INFORMATION



Item 1.  Consolidated Financial Statements (Unaudited).



|POLYDEX PHARMACEUTICALS
    LIMITED     
|----------------------------------------
|                                        
|Consolidated Balance Sheets             
|(Expressed in United States
    dollars)
|                                        
|                                        
|                                        
|                                        
|                                        
|Assets                                  
|                                        
|Current assets:                         
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Total current assets                    
|                                        
|Property, plant and equipment,
    net  
|Patents and intangible assets,
    net  
|Due from shareholder                    
|                                        
|                                        

F-1

---

|                                     |                                                            |             |              |           
|------------------------------------ | ---------------------------------------------------------- | ----------- | ------------ | ----------
|                                     |                                                            | July 31     |              | January 31
|                                     |                                                            | 2008        |              | 2008      
|                                     |                                                            | (Unaudited) |              | (Audited) 
|Liabilities and Shareholders' Equity |                                                            |             |              |           
|                                     |                                                            |             |              |           
|Current liabilities:                 |                                                            |             |              |           
|                                     | Bank indebtedness                                          | $           | 195,314      | $         
|                                     | Accounts payable                                           |             | 538,600      |           
|                                     | Accrued liabilities                                        |             | 242,896      |           
|                                     | Payroll and related taxes payable                          |             | 121,447      |           
|                                     | Customer deposits                                          |             | 92,932       |           
|                                     | Current portion of long-term debt                          |             | 41,455       |           
|                                     | Current portion of capital lease obligations               |             | 6,104        |           
|                                     | Current portion of due to shareholder                      |             | 30,000       |           
|                                     |                                                            |             |              |           
|Total current liabilities            |                                                            | 1,268,748   |              | 989,199   
|                                     |                                                            |             |              |           
|Long-term debt                       |                                                            | 369,812     |              | 398,540   
|Capital lease obligations            |                                                            | 3,551       |              | 6,734     
|Due to shareholder                   |                                                            | 602,450     |              | 628,569   
|Deferred income taxes                |                                                            | -           |              | 55,962    
|                                     |                                                            | 975,813     |              | 1,089,805 
|                                     |                                                            |             |              |           
|Total liabilities                    |                                                            | 2,244,561   |              | 2,079,004 
|                                     |                                                            |             |              |           
|Shareholders' equity:                |                                                            |             |              |           
|                                     | Capital stock                                              |             |              |           
|                                     | Authorized:                                                |             |              |           
|                                     | 100,000 Class A preferred shares of $0.10 each             |             |              |           
|                                     | 899,400 Class B preferred shares of $0.0167 each           |             |              |           
|                                     | 10,000,000 common shares of $0.0167 each                   |             |              |           
|                                     | Issued and outstanding:                                    |             |              |           
|                                     | 899,400 Class B preferred shares                           |             | 15,010       |           
|                                     | 3,072,846 common shares (January 31, 2008 -
    3,072,846) |             | 51,185       |           
|                                     | Contributed surplus                                        |             | 23,499,154   |           
|                                     | Deficit                                                    |             | (17,917,260) |           
|                                     | Accumulated other comprehensive income                     |             | 1,770,293    |           
|                                     |                                                            |             |              |           
|                                     |                                                            | 7,418,382   |              | 7,684,266 
|                                     |                                                            |             |              |           
|                                     | $                                                          | 9,662,943   | $            | 9,763,270 

See accompanying notes.

F-2

---

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

|                                                      |   | Three Months |   | Three Months |   | Six Months  |   | Six Months 
|----------------------------------------------------- | - | ------------ | - | ------------ | - | ----------- | - | -----------
|                                                      |   | Ended        |   | Ended        |   | Ended       |   | Ended      
|                                                      |   | July 31      |   | July 31      |   | July 31     |   | July 31    
|                                                      |   | 2008         |   | 2008         |   | 2008        |   | 2007       
|                                                      |   | (Unaudited)  |   | (Unaudited)  |   | (Unaudited) |   | (Unaudited)
|                                                      |   |              |   |              |   |             |   |            
|Sales                                                 | $ | 1,296,704    | $ | 1,504,365    | $ | 2,516,489   | $ | 2,851,498  
|Cost of goods sold                                    |   | 1,104,798    |   | 1,405,262    |   | 2,060,587   |   | 2,543,434  
|                                                      |   |              |   |              |   |             |   |            
|                                                      |   | 191,906      |   | 99,103       |   | 455,902     |   | 308,064    
|                                                      |   |              |   |              |   |             |   |            
|Expenses:                                             |   |              |   |              |   |             |   |            
|General and administrative                            |   | 281,833      |   | 294,955      |   | 539,308     |   | 569,188    
|Interest expense                                      |   | 15,781       |   | 25,008       |   | 35,003      |   | 49,844     
|Selling and promotion                                 |   | 17,958       |   | 27,081       |   | 31,937      |   | 51,174     
|Research and development                              |   | 23,263       |   | 54,520       |   | 28,047      |   | 75,847     
|Depreciation                                          |   | 9,101        |   | 9,685        |   | 18,262      |   | 19,556     
|Foreign exchange loss (gain)                          |   | (7,456)      |   | 18,365       |   | (8,087)     |   | 45,586     
|Cash surrender value of life insurance                |   | -            |   | (77,073)     |   | -           |   | (77,073)   
|Interest and other expense (income)                   |   | 20,961       |   | (25,085)     |   | 6,589       |   | (63,467)   
|                                                      |   |              |   |              |   |             |   |            
|                                                      |   | 361,441      |   | 327,456      |   | 651,059     |   | 670,655    
|                                                      |   |              |   |              |   |             |   |            
|Loss before income taxes                              |   | (169,535)    |   | (228,353)    |   | (195,157)   |   | (362,591)  
|                                                      |   |              |   |              |   |             |   |            
|Recovery of income taxes                              |   | (57,141)     |   | -            |   | (57,141)    |   | -          
|                                                      |   |              |   |              |   |             |   |            
|Net loss for the period                               |   | (112,394)    |   | (228,353)    |   | (138,016)   |   | (362,591)  
|                                                      |   |              |   |              |   |             |   |            
|Unrealized gain on
    investments available for sale |   | 24,741       |   | 3,332        |   | 24,845      |   | 397        
|                                                      |   |              |   |              |   |             |   |            
|Currency translation adjustment                       |   | (136,744)    |   | 296,573      |   | (152,713)   |   | 728,825    
|                                                      |   |              |   |              |   |             |   |            
|Comprehensive income (loss) for the period            | $ | (224,397)    | $ | 71,552       | $ | (265,884)   | $ | 366,631    

|                                                     |   |           |   |           |   |           |   |          
|---------------------------------------------------- | - | --------- | - | --------- | - | --------- | - | ---------
|Per share information:                               |   |           |   |           |   |           |   |          
|Loss per common share:                               |   |           |   |           |   |           |   |          
|Basic                                                | $ | (0.04)    | $ | (0.07)    | $ | (0.04)    | $ | (0.12)   
|Diluted                                              | $ | (0.04)    | $ | (0.07)    | $ | (0.04)    | $ | (0.12)   
|                                                     |   |           |   |           |   |           |   |          
|Weighted average number of common shares used
    in |   |           |   |           |   |           |   |          
|computing net earnings per share for the period:     |   |           |   |           |   |           |   |          
|Basic                                                |   | 3,072,846 |   | 3,072,846 |   | 3,072,846 |   | 3,072,846
|Diluted                                              |   | 3,072,846 |   | 3,072,846 |   | 3,072,846 |   | 3,072,846

See accompanying notes.

F-3

---

|                                                    |                                                                    |             |              |            
|--------------------------------------------------- | ------------------------------------------------------------------ | ----------- | ------------ | -----------
|POLYDEX PHARMACEUTICALS
    LIMITED                 |                                                                    |             |              |            
|                                                    |                                                                    |             |              |            
|Consolidated Statements of
    Shareholders' Equity |                                                                    |             |              |            
|(Expressed in United States
    dollars)            |                                                                    |             |              |            
|                                                    |                                                                    |             |              |            
|                                                    |                                                                    | Six Months  |              | Six Months 
|                                                    |                                                                    | Ended       |              | Ended      
|                                                    |                                                                    | July 31     |              | July 31    
|                                                    |                                                                    | 2008        |              | 2007       
|                                                    |                                                                    | (Unaudited) |              | (Unaudited)
|                                                    |                                                                    |             |              |            
|Preferred Shares:                                   |                                                                    |             |              |            
|                                                    | Balance, beginning and end of period                               | $           | 15,010       | $          
|                                                    |                                                                    |             |              |            
|Common Shares:                                      |                                                                    |             |              |            
|                                                    | Balance, beginning and end of period                               | $           | 51,185       | $          
|                                                    |                                                                    |             |              |            
|Contributed Surplus:                                |                                                                    |             |              |            
|                                                    | Balance, beginning and end of period                               | $           | 23,499,154   | $          
|                                                    |                                                                    |             |              |            
|Deficit:                                            |                                                                    |             |              |            
|                                                    | Balance, beginning of period                                       | $           | (17,779,244) | $          
|                                                    | Net loss for the period                                            |             | (138,016)    |            
|                                                    |                                                                    |             |              |            
|                                                    | Balance, end of period                                             | $           | (17,917,260) | $          
|                                                    |                                                                    |             |              |            
|Accumulated Other Comprehensive Income:             |                                                                    |             |              |            
|                                                    | Balance, beginning of period                                       | $           | 1,898,161    | $          
|                                                    | Unrealized loss reclassified on
    investments available for sale |             | 24,845       |            
|                                                    | Currency translation adjustment for the period                     |             | (152,713)    |            
|                                                    |                                                                    |             |              |            
|                                                    | Balance, end of period                                             | $           | 1,770,293    | $          

See accompanying notes.

F-4

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|                                                             |                                                                           |             |           |            
|------------------------------------------------------------ | ------------------------------------------------------------------------- | ----------- | --------- | -----------
|POLYDEX PHARMACEUTICALS
    LIMITED                         
|                                                             |                                                                           |             |           |            
|Consolidated Statements of Cash
    Flows                    |                                                                           |             |           |            
|(Expressed in United States
    dollars)                     |                                                                           |             |           |            
|                                                             |                                                                           |             |           |            
|                                                             |                                                                           | Six Months  |           | Six Months 
|                                                             |                                                                           | Ended       |           | Ended      
|                                                             |                                                                           | July 31     |           | July 31    
|                                                             |                                                                           | 2008        |           | 2007       
|                                                             |                                                                           | (Unaudited) |           | (Unaudited)
|                                                             |                                                                           |             |           |            
|Cash provided by (used in):                                  |                                                                           |             |           |            
|                                                             |                                                                           |             |           |            
|Operating activities:                                        |                                                                           |             |           |            
|                                                             | Net loss for the period                                                   | $           | (138,016) | $          
|                                                             | Add (deduct) items not affecting cash:                                    |             |           |            
|                                                             | Depreciation and amortization                                             |             | 303,570   |            
|                                                             | Interest on shareholder loan                                              |             | (10,242)  |            
|                                                             | Loss on investments available for sale                                    |             | 31,724    |            
|                                                             | Net change in non-cash working capital balances related to
    operations |             | (935,231) |            
|                                                             |                                                                           |             |           |            
|                                                             |                                                                           |             | (748,195) |            
|                                                             |                                                                           |             |           |            
|Investing activities:                                        |                                                                           |             |           |            
|                                                             | Additions to property, plant and equipment and patents                    |             | (27,913)  |            
|                                                             | Decrease in due from shareholder                                          |             | -         |            
|                                                             | Decrease in accrued interest on investments                               |             | -         |            
|                                                             | Proceeds of investments available for sale                                |             | 376,623   |            
|                                                             |                                                                           |             |           |            
|                                                             |                                                                           |             | 348,710   |            
|                                                             |                                                                           |             |           |            
|Financing activities:                                        |                                                                           |             |           |            
|                                                             | Repayment of long-term debt                                               |             | (20,428)  |            
|                                                             | Repayment of capital lease obligations                                    |             | (2,941)   |            
|                                                             | Decrease in due to shareholder                                            |             | (26,119)  |            
|                                                             | Increase in bank indebtedness                                             |             | 195,314   |            
|                                                             |                                                                           |             |           |            
|                                                             |                                                                           | 145,826     |           | (23,994)   
|                                                             |                                                                           |             |           |            
|                                                             | Effect of exchange rate changes on cash                                   |             | (61,327)  |            
|                                                             |                                                                           |             |           |            
|Decrease in cash and cash
    equivalents                    |                                                                           | (314,986)   |           | (590,250)  
|                                                             |                                                                           |             |           |            
|Cash and cash equivalents, beginning of period               |                                                                           | 468,570     |           | 1,384,995  
|                                                             |                                                                           |             |           |            
|Cash and cash equivalents, end of period                     | $                                                                         | 153,584     | $         | 794,745    
|                                                             |                                                                           |             |           |            
|                                                             |                                                                           |             |           |            
|Cash and cash equivalents is
    comprised of the following: |                                                                           |             |           |            
|                                                             | Cash                                                                      | $           | 68,909    | $          
|                                                             | Short-term deposits                                                       |             | 84,675    |            
|                                                             |                                                                           |             |           |            
|                                                             | $                                                                         | 153,584     | $         | 794,745    
|                                                             |                                                                           |             |           |            
|See accompanying notes.                                      |                                                                           |             |           |            

F-5

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1.

Basis of Presentation:



The information contained in the interim consolidated financial statements is condensed from that which would appear in annual consolidated financial statements.  The interim consolidated financial statements included herein should be read in conjunction with the audited financial statements, and notes thereto, and other financial information contained in the 2008 Annual Report on Form 10-K for the fiscal year ended January 31, 2008 as filed by Polydex Pharmaceuticals Limited (the Company) with the Securities and Exchange Commission.  The unaudited interim consolidated financial statements as of July 31, 2008 and 2007 include all normal recurring adjustments which management considers necessary for a fair presentation.  The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire fiscal year.  The interim consolidated financial statements include the accounts and transactions of the Company and its majority owned subsidiaries in which the Company has equal to or more than a 50% ownership interest and exercises control.



2.

Significant Accounting Policies:



Basis of consolidation

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



Use of estimates

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



Cash and cash equivalents

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



Inventories

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



F-6

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Investments available for sale

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



Property, plant and equipment and patents and intangible assets

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



Buildings  15 years

Machinery and equipment   3 to 10 years



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



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



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



Revenue recognition

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



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



F-7

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



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.



Foreign currency translation

The functional currency of the Companys Canadian operations has been determined to be the Canadian dollar.  All asset and liability accounts of the Company except capital stock have been translated into United States dollars using the current exchange rates at the interim consolidated balance sheet dates.  Capital stock is recorded at historical rates. Revenue and expense items are translated using the average exchange rates for the year.  The resulting gains and losses have been reported separately as accumulated other comprehensive income within shareholders equity.



Stock options

The Company has elected to follow Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based Compensation (SFAS 123(R)).  Under SFAS 123(R), compensation expense is recognized on the date of grant, based on the fair value of the options granted.



Earnings (loss) per common share

Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding of 3,072,846 for the three months ended July 31, 2008 (2007 - 3,072,846).  Diluted earnings (loss) per common share is computed using the weighted average number of common shares outstanding adjusted for the incremental shares, using the treasury stock method, attributed to outstanding options to purchase common stock.  Incremental shares of nil at July 31, 2008 and July 31, 2007 were used in the calculation of diluted earnings (loss) per common share, as their effect was anti-dilutive.  Options to purchase common shares of nil were included in the computation of diluted earnings per share as at July 31, 2008.



F-8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



3.

Cash and Cash Equivalents:



Cash and cash equivalents consist of the following:



|                   |   | July 31 |   | January 31
|------------------ | - | ------- | - | ----------
|                   |   | 2008    |   | 2008      
|                   |   |         |   |           
|Cash               | $ | 68,909  | $ | 171,625   
|Short-term deposit |   | 84,675  |   | 296,945   
|                   | $ | 153,584 | $ | 468,570   



Short-term deposit consists of Canadian money market funds in the amount of Cdn. $86,707, and bears interest at 2.86%.



4.

Investments Available For Sale:



Investments available for sale consist of the following:



|                                                  |   | July 31   |   | January 31
|------------------------------------------------- | - | --------- | - | ----------
|                                                  |   | 2008      |   | 2008      
|                                                  |   |           |   |           
|Canadian short-term fixed income fund             | $ | 252,246   | $ | 346,845   
|Global fixed income bond fund                     | $ | 205,885   | $ | 498,189   
|                                                  | $ | 458,131   | $ | 845,034   
|Current portion of investments available for sale | $ | (458,131) | $ | (845,034) 
|                                                  | $ |          | $ |          



Canadian short-term fixed income bond fund is currently yielding 3.35%. The Global fixed income bond fund is curently yielding 3.1%. Investments available for sale are stated at fair market value, based on quoted market prices. An
unrealized loss of $24,845 has been reclassified from Accumulated other comprehensive income.



5.

Commitments and Contingencies:



Subsequent to July 31, 2008, the Company installed a replacement copying system, and is committed to 22 quarterly payments of Cdn $ 1,998. This contract replaced the existing capital lease and a portion of the existing long-term debt.



6.

Stock-based Employee Compensation:



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



All options granted have terms of five years and vest immediately.  At July 31, 2008, the Company had 63,699 options outstanding at exercise prices ranging from $0.79 to $10.01 and a weighted average exercise price of $3.34.  The options, which are immediately exercisable and expire on dates between January 31, 2009 and January 31, 2013, entitle the holder of an option to acquire one common share of the Company.



F-9

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



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, 2008 to July 31, 2008, because there were no options granted during this period.



7.

Segmented Information:



|                                       | Six Months | Six Months
|-------------------------------------- | ---------- | ----------
|                                       |            | Ended     
|                                       |            | July 31,  
|                                       |            | 2008      
|                                       |            |           
|Total revenue by significant customer: |            |           
|Customer A                             | $          | 607,962   
|Customer B                             | $          | 491,026   
|Customer C                             | $          | 343,531   
|Customer D                             | $          | 110,080   
|Customer E                             | $          | 53,960    
|Customer F                             | $          |          
|                                       | $          | 1,606,559 
|                                       |            |           
|                                       |            |           
|                                       | Six Months | Six Months
|                                       |            | Ended     
|                                       |            | July 31,  
|                                       |            | 2008      
|                                       |            |           
|Sales by geographic destination:       |            |           
|United States                          | $          | 872,103   
|Europe                                 | $          | 743,343   
|Canada                                 | $          | 627,596   
|Pacific Rim                            | $          | 77,350    
|Other                                  | $          | 196,097   
|                                       | $          | 2,516,489 



F-10

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



The Companys fiscal year ends on January 31st of each year.  In this report, fiscal year 2009 refers to the Companys fiscal year ended January 31, 2009.  The following discussion should be read in conjunction with the July 31, 2008 interim consolidated financial statements and notes thereto included elsewhere in this report.  Operating results for the six months ended July 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2009.  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, 2008.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 manufactures bulk pharmaceutical intermediates for the worldwide veterinary pharmaceutical industry.  The Company conducts its business operations through its wholly-owned subsidiaries, Dextran Products and Chemdex.



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



Management Objectives for Fiscal 2009.



The past year and a half has been difficult for Polydex Pharmaceuticals Limited. As a Canadian based manufacturer of pharmaceutical based compounds exporting internationally, the increase in value of the Canadian dollar by approximately 18%
compared to the United States dollar from January of 2007 has severely reduced the profitability of the Canadian operations, and negatively impacted the Companys cash flows.  More recently, the world wide increase in the price of commodities has resulted in lowered pig production, especially in Europe, where the Company has traditionally derived a substantial portion of its sales.  The cancellation of Phase III HIV clinical trials in January of 2007 for the Companys cellulose sulphate compound known as Ushercell was very disappointing to the Company, and resulted in a drastic decline in our share price on NASDAQ, though it did not have an impact on our core operations. Throughout this period, the Company has been investing its significant cash reserves in the refurbishment of the Toronto plant, in order to capitalize on the higher margins available for its powdered products line. With all of these challenges occurring at the same time, management has reacted in a number of
effective ways, including:



•

The Company has managed to increase its pricing across all product lines to partially compensate for the increased value of the Canadian dollar. This has been a challenging process, as our sales quotes can be up to six months in advance, and with the lowered demand for our products has been met with resistance.



1

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•

Cost reduction has been a hallmark throughout this period of struggle. All of Polydexs personnel have contributed to the shrinking of everything from the cost of raw materials, plant repairs, and sludge removal, to overheads such as insurance, legal, consulting and reporting costs. Payroll reductions have been de rigeur, with management compensation being reduced and the implementation of shorter plant hours of work when appropriate. Cost control is an ongoing endeavor that will provide a stronger base for future earnings.

•

The Company has been actively striving to optimize its product mix, and the results of this effort are beginning to be seen in the last 6 months, with improved margins helping to reduce overall losses in spite of the decline in sales volumes. Management believes that this improvement will only increase when the plant refurbishment is operational.

•

The new plant equipment will also allow the Company to expand its markets, especially large international pharmaceutical companies who rely on production from high quality facilities.

•

The Company is continuing to investigate opportunities related to the contraceptive indication for Ushercell.



With all this in the past, there remain a number of challenges before us. Though rigorous cost cutting and careful price increases have been effective, our cash reserves have been significantly reduced, and the Companys future will only be assured through meeting the increasingly competitive demands of our customers, who are experiencing their own pressures in the turbulence of the global marketplace.



Research and development of the Companys human pharmaceutical products is coordinated at Dextran Products.  Ushercell is a high molecular weight cellulose sulphate that was envisioned for topical vaginal use primarily in the prevention of unplanned pregnancies, as well as the transmission of AIDS and other sexually transmitted diseases. However, Phase III HIV clinical trials were cancelled in January of 2007 due to a higher than expected incidence of HIV. The New England Journal of Medicine recently published a report on the Phase III trial data indicating that product adherence was low among participants and concluded that cellulose sulphate may not have increased HIV transmission after all but also may not have an HIV preventative effect.  In an article published in Obstetrics and Gynecology in March 2008, the lead researchers were quoted by Reuters Health as affirming that Cellulose sulphate gel appears to be an effective vaginal contraceptive without many side effects" with data showing an approximate 96% effectiveness rate of pregnancy prevention when the product was used as directed. The researchers added, With time and further research, this vaginal contraceptive may become an alternative to the nonoxynol-9 based contraceptive gels currently available in the U.S. The Company never received any financial gain from this project, and as a result, there is no immediate or direct effect on sales or revenues. Management intends to pursue the development of cellulose sulphate as a contraceptive.



Cellulose sulphate has also been tested for its effect on bacterial vaginosis (BV). In 2007, the report outlining results from a BV trial concluded that although efficacy of cellulose sulphate in prevention of BV was not significant, there were significant questions about patient behavior and product adherence in that trial as well. At this time management is not seeking to pursue continued development of cellulose sulphate for prevention of BV.



2

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Results of Operations



|               | Three      | Three       |          |            |            |         
|-------------- | ---------- | ----------- | -------- | ---------- | ---------- | --------
|               | Months     | Months      |          | Six Months | Six Months |         
|               | Ended      | Ended       |          | Ended      | Ended      |         
|               | July 31,   | July 31,    |          | July 31,   | July 31,   |         
|               | 2008       | 2007        | Variance | 2008       | 2007       | Variance
|               |            |             |          |            |            |         
|Net loss       | $(112,394) | $ (228,353) | 51%      | $(138,016) | $(362,591) | 62%     
|               |            |             |          |            |            |         
|Loss per Share | $(0.04)    | $(0.07)     |          | $(0.04)    | $(0.12)    |         



The decrease in net loss for the second quarter and year to date of fiscal year 2009, as compared to the second quarter and year to date of fiscal year 2008, is a result of improved gross margins, a deferred income tax recovery,
and decreased expenses partially offset by decreased investment income experienced during these periods. Expenses during the second quarter and year to date of fiscal year 2008 were reduced by $77,073, which was due to the collection of the cash surrender value of a life insurance policy during that period.



|      | Three      | Three      |          |            |            |         
|----- | ---------- | ---------- | -------- | ---------- | ---------- | --------
|      | Months     | Months     |          | Six Months | Six Months |         
|      | Ended      | Ended      |          | Ended      | Ended      |         
|      | July 31,   | July 31,   |          | July 31,   | July 31,   |         
|      | 2008       | 2007       | Variance | 2008       | 2007       | Variance
|Sales | $1,296,704 | $1,504,365 | (14)%    | $2,516,489 | $2,851,498 | (12)%   



The sales decrease for the second quarter and year to date of fiscal year 2009 compared to the second quarter and year to date of fiscal year 2008 was primarily due to decreased demand, offset by price increases implemented by management subsequent to those periods.



|                    | Three        | Three        |          |                |                |         
|------------------- | ------------ | ------------ | -------- | -------------- | -------------- | --------
|                    | Months       | Months       |          | Six
    Months | Six
    Months |         
|                    | Ended        | Ended        |          | Ended          | Ended          |         
|                    | July
    31, | July
    31, |          | July
    31,   | July
    31,   |         
|                    | 2008         | 2007         | Variance | 2008           | 2007           | Variance
|Gross profit        | $191,906     | $99,103      | 94%      | $455,902       | $308,064       | 48%     
|Percentage of sales | 14.8%        | 6.6%         |          | 18.1%          | 10.8%          |         



3

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The increase in gross margin for the second quarter and the year to date of fiscal year 2009 compared to the second quarter and year to date of fiscal year 2008 is primarily due to several factors throughout both quarters of fiscal year 2009. First, as mentioned above, sales pricing was increased by management.  Second, the Company experienced increased sales of higher margin powder products during the first quarter of fiscal year 2009. Third, management has been successful in continuing to reduce various direct production costs, especially utilities, equipment repairs and supplies, and sludge removal. These improvements were partially offset by the continued rise of the Canadian dollar relative to the US dollar throughout this period, since production is based at the Dextran Products Limited facility in Toronto, Canada.



|                        | Three    | Three    |          |            |            |         
|----------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                        | Months   | Months   |          | Six Months | Six Months |         
|                        | Ended    | Ended    |          | Ended      | Ended      |         
|                        | July 31, | July 31, |          | July 31,   | July 31,   |         
|                        | 2008     | 2007     | Variance | 2008       | 2007       | Variance
|Selling, promotion,     |          |          |          |            |            |         
|general and             |          |          |          |            |            |         
|administrative expenses | $299,791 | $322,036 | (7)%     | $571,245   | $620,362   | (8)%    



The decrease during the second quarter and year to date of fiscal year 2009 in selling, promotion, general and administrative expenses is primarily due to a general decrease in the expenses of the Company, offset by the continued increase in the value of the Canadian dollar as mentioned above, compared to the second quarter and year to date of fiscal 2008. These reductions included legal, insurance, consulting and reporting costs, and are a result of the continued focus by management to minimize this cost center.



|                         | Three    | Three    |          |            |            |         
|------------------------ | -------- | -------- | -------- | ---------- | ---------- | --------
|                         | Months   | Months   |          | Six Months | Six Months |         
|                         | Ended    | Ended    |          | Ended      | Ended      |         
|                         | July 31, | July 31, |          | July 31,   | July 31,   |         
|                         | 2008     | 2007     | Variance | 2008       | 2007       | Variance
|Research and development |          |          |          |            |            |         
|expenditures             | $23,263  | $54,520  | (57)%    | $28,047    | $75,847    | (63)%   



Research and development expenditures have been reduced considerably in the second quarter and year to date of fiscal year 2009 compared to the same periods for fiscal year 2008, primarily as a result of the cessation of activities related to the Phase III clinical trials for Ushercell announced in January 2007. Expenditures incurred in the second quarter and year to date of fiscal year 2009 are for legal expenses related to maintaining protection for the Companys various existing patents.



4

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|                     | Three    | Three    |          |            |            |         
|-------------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                     | Months   | Months   |          | Six Months | Six Months |         
|                     | Ended    | Ended    |          | Ended      | Ended      |         
|                     | July 31, | July 31, |          | July 31,   | July 31,   |         
|                     | 2008     | 2007     | Variance | 2008       | 2007       | Variance
|Depreciation and     |          |          |          |            |            |         
|amortization expense | $151,100 | $139,764 | 8%       | $303,570   | $270,685   | 12%     



The increase in depreciation and amortization expense for the second quarter and year to date of fiscal year 2009 compared to the second quarter and year to date of fiscal year 2008 resulted primarily from assets acquired subsequent to the second quarter of fiscal year 2008, as well as the increase in the Canadian dollar relative to the United States dollar during that same period. Significant asset acquisitions related to the plant refurbishment have not been put into service and are therefore not yet being depreciated.



|                 | Three    | Three    |          |            |            |         
|---------------- | -------- | -------- | -------- | ---------- | ---------- | --------
|                 | Months   | Months   |          | Six Months | Six Months |         
|                 | Ended    | Ended    |          | Ended      | Ended      |         
|                 | July 31, | July 31, |          | July 31,   | July 31,   |         
|                 | 2008     | 2007     | Variance | 2008       | 2007       | Variance
|Interest Expense | $15,781  | $25,008  | (37)%    | $35,003    | $49,844    | (30)%   



Interest expense for the second quarter and year to date of fiscal year 2009 decreased from the comparative amounts for the second quarter and year to date of fiscal year 2008 primarily due to the lower interest rates incurred on the shareholder loan, as well as the decreasing balances due on the longterm debt.



|                        | Three        | Three        |          |                |                |         
|----------------------- | ------------ | ------------ | -------- | -------------- | -------------- | --------
|                        | Months       | Months       |          | Six
    Months | Six
    Months |         
|                        | Ended        | Ended        |          | Ended          | Ended          |         
|                        | July
    31, | July
    31, |          | July
    31,   | July
    31,   |         
|                        | 2008         | 2007         | Variance | 2008           | 2007           | Variance
|Foreign exchange (gain) |              |              |          |                |                |         
|loss                    | $(7,456)     | $18,365      | 141%     | $(8,087)       | $45,586        | 118%    



The foreign exchange gain for the second quarter and year to date of fiscal year 2009 compared to the
loss for the second quarter and year to date of fiscal year 2008 was due to the small increase in value of the United States dollar compared to the Canadian dollar.



|                     | Three     | Three    |          |            |            |         
|-------------------- | --------- | -------- | -------- | ---------- | ---------- | --------
|                     | Months    | Months   |          | Six Months | Six Months |         
|                     | Ended     | Ended    |          | Ended      | Ended      |         
|                     | July 31,  | July 31, |          | July 31,   | July 31,   |         
|                     | 2008      | 2007     | Variance | 2008       | 2007       | Variance
|Interest and other   |           |          |          |            |            |         
|income (loss) and    |           |          |          |            |            |         
|cash surrender value |           |          |          |            |            |         
|of life insurance    | $(20,961) | $102,158 | (121)%   | $(6,589)   | $140,540   | (105)%  



5

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The loss in interest and other income in the second quarter of fiscal year 2009 is primarily due to recognition of the loss on investments that was previously carried in Accumulated and other comprehensive income. Investment income for the second quarter and the year to date of fiscal year 2009  also decreased due to the decrease in the investments available for sale and cash equivalents. The second quarter and year to date of fiscal year 2008 also included the redemption of the cash surrender value of an insurance policy that was no longer required.



|                     | Three     | Three    |          |            |            |         
|-------------------- | --------- | -------- | -------- | ---------- | ---------- | --------
|                     | Months    | Months   |          | Six Months | Six Months |         
|                     | Ended     | Ended    |          | Ended      | Ended      |         
|                     | July 31,  | July 31, |          | July 31,   | July 31,   |         
|                     | 2008      | 2007     | Variance | 2008       | 2007       | Variance
|Provision for        |           |          |          |            |            |         
|(recovery of) income |           |          |          |            |            |         
|taxes                | $(57,141) |         |         | $(57,141)  |           |        



The tax recovery for the second quarter and year to date ended July 31, 2008 results from the reversal of the deferred tax provision previously carried as an other liability on the balance sheet, and which was no longer required due to the availability of the Companys carryforward of unused tax losses, and tax credits arising from unused research and development expenditures. The Canadian operations continue to have significant research and development tax pools to offset current taxes payable.



Liquidity and Capital Resources



As of July 31, 2008, the Company had cash and cash equivalents of $153,584, compared to cash and cash equivalents of $468,570 at January 31, 2008.  In the second quarter of fiscal year 2009, the Company utilized cash of $268,040 in its operating activities, compared to utilizing cash of $619,577 for the second quarter of fiscal year 2008.  The decrease in cash from operations during the second quarter of fiscal year 2009 was primarily due to the loss from operations during the period, as well as the increase in receivables and inventory. Depreciation continues to be a large non-cash expense of the Company.



The Companys working capital remained consistent with the year ended January 31, 2008 at $2,403,855, while the working capital ratio of 2.89 to 1 as of July 31, 2008, declined compared to 3.43 to 1 as of January 31, 2008.



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



As of July 31, 2008, the Company had accounts receivable of $951,381 and inventory of $2,000,941, compared to $611,975 and $1,350,490 respectively at January 31, 2008 and $859,308 and $1,530,111 respectively at July 31, 2007.  The increase in accounts receivable is due to the timing of customer payments, while the increase in inventory is due primarily to the production of finished goods for shipment in the third quarter of fiscal year 2009.



6

---



At July 31, 2008, the Company had accounts payable of $538,600 compared to $399,820 at January 31, 2008 and $721,298 at July 31, 2007.  The increase in accounts payable was due to the timing of supplier payments.



During the second quarter of fiscal year 2009, capital expenditures totaled $22,881, as compared to $351,578 in the second quarter of fiscal year 2008. The expenditures for the second quarter of fiscal 2008 were primarily for construction costs relating to the plant refurbishment, which is now substantially complete, and expects capital expenditures to substantially decrease during the remainder of fiscal year 2009.



The change in accumulated other comprehensive income of the Company is primarily attributable to the currency translation adjustment of Dextran Products.  Dextran Products functional currency is the Canadian dollar, which has slightly depreciated compared to the United States dollar during the second quarter and year to date of fiscal year 2008.  This currency translation adjustment arises from the translation of Dextran Products financial statements to U.S. dollars.



Dextran Products has a Cdn. $250,000 (U.S. $244,140) operating line of credit, of which Cdn $ 200,000 (U.S. $195,314) was utilized at July 31, 2008 and none as at January 31, 2008.  This line of credit bears interest at the Canadian banks prime lending rate plus 0.75% (July 31, 2007  5.50.%; January 31, 2008  6.50%). Subsequent to July 31, 2008, the interest rate on the line of credit was increased to prime plus 1%. In May 2006, a fixed term rate loan of Cdn. $500,000 (U.S. $468,700) was obtained to fund capital purchases. The interest rate is 0.75% over Canadian bank prime lending rate (6.95%). Bank indebtedness is collateralized by a general security agreement over the Companys assets and a collateral mortgage of Cdn. $500,000 on the Dextran Products building in Toronto.  The line of credit is used periodically by the Company to cover temporary short-term Canadian dollar cash needs.  For these short-term cash needs, the interest expense on the credit line is typically less than the transaction costs incurred in selling short-term investments.



The decrease in long-term debt and capital lease obligations from January 31, 2008 is due to repayments during the period.



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 has had a material effect on its operations or financial results at any time in the last three years.



Related Party Transactions



In August 1997, the Company loaned the late Thomas C. Usher, its Vice-Chairman, Director of Research and Development, a member of its Board of Directors and the beneficial owner of greater than 5% of the outstanding common shares of the Company, $691,500 at an interest rate equal to the prime rate of Toronto Dominion Bank plus 1.50% (the Loan).  The Loan was used to partially fund a $1,000,000 payment to the State of Florida in order to allow Thomas C. Usher to regain possession of 430,000 Common Shares of the Company then held by the State as collateral security relating to the liquidation of insurance companies formerly owned by Thomas C. Usher.  Repayment of the Loan is accomplished by periodic payments and, in the past, bonus payments, if any, granted to Thomas C. Usher as an employee of the Company.  The amount outstanding under the Loan as of July 31, 2008 was $307,563, as compared to $297,321 at January 31, 2008, including accrued interest.  The Company has taken a cumulative provision of $323,490 against accrued interest on this loan at July 31, 2008, and January 31, 2008. Obligations with respect to the Loan transferred to the estate of Thomas C. Usher upon his death in February 2005.



7

---



In August 1999, Thomas C. Usher personally assumed all of the assets and liabilities of Novadex Corp., including the balance of receivables (the Receivables) due to the Company from Novadex Corp.  The Receivables have no specific repayment terms.  The total outstanding amount of the Receivables as of July 31, 2008 and January 31, 2008 was $60,339. The Company continues to be obligated to make royalty payments to Mr. Ushers estate pursuant to intellectual property license agreements, and intends to continue to offset such payments against the Receivables. Thomas C. Usher also owed $250,000 to a subsidiary of the Company, Novadex International Limited, as of July 31, 2008, pursuant to a non-interest bearing loan with no specific repayment terms.  The outstanding amount of this loan has not changed from January 31, 2008. The amounts continue to remain owing from the estate of Thomas C. Usher upon his death on February 26, 2005.



As of July 31, 2008, Thomas C. Usher, now through his estate, had pledged 270,763 common shares of the Company as security for these amounts owing to the Company.  These common shares had a market value of $186,826 at July 31, 2008, based on the closing price of the Companys common shares on the NASDAQ Capital Market on July 31, 2008. The Company intends to continue to hold the remaining pledged assets as collateral until the amounts owing discussed above are repaid.



The Company had a commitment to pay an amount equal to one years salary, $110,000, to Thomas C. Ushers estate. The amount owing on this commitment as at July 31, 2008 is $36,908.



The Company also has an outstanding loan payable to Ruth Usher, a former director and the widow of Thomas C. Usher.  The amount due from the Company pursuant to this loan decreased to $632,450 at July 31, 2008 from $658,569 at January 31, 2008 due to monthly payments by the Company, less interest charges.



Off-Balance Sheet Arrangements



The Company has no off-balance sheet arrangements.



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 Sparhawk Joint Venture and its disposition are also discussed below.



8

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



Revenue Recognition



Since March 4, 2004, all revenue is from sales of bulk manufactured products and is recognized when title and risk of ownership of products pass to the customer.  Title and risk of ownership pass to the customer pursuant to the applicable sales contract, either upon shipment of product or upon receipt by the customer.  Since returns are rare and generally not accepted, management has not made provision for returns.  In addition, product sold in bulk quantities is tested, prior to release for shipment, to ensure that it meets customer specifications, and in many cases, customers receive samples for their own testing.  Approval is obtained from the customer prior to shipping.



Allowance for Doubtful Accounts



Accounts receivable is stated net of allowances for doubtful accounts.  Allowances for doubtful accounts are determined by each reporting unit on a specific item basis.  Management reviews the credit worthiness of individual customers and past payment history to determine the allowance for doubtful accounts.  Since the majority of sales at Dextran Products are export, Dextran Products maintains credit insurance through a crown corporation which is supported by the Canadian government, for the majority of its customers receivables.  There has been no allowance for doubtful accounts during the past two fiscal years.



Long-Lived Assets



Long-lived assets are stated at cost, less accumulated depreciation or amortization computed using the straight-line method based on their estimated useful lives ranging from three to fifteen years.  Useful life is the period over which the asset is expected to contribute to the Companys future cash flows.  A significant change in estimated useful lives could have a material impact on the results of operations.  The Company reviews the recoverability of its long-lived assets, including buildings, equipment and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable.  The assessment of possible impairment is based on the Companys ability to recoverthe carrying value of the asset from the expected future pre-tax cash flows (undiscounted andwithout interest charges) of the related operations.  If these cash flows are less than thecarrying value of such asset, an impairment loss is recognized for the difference betweenestimated fair value and carrying value.  The measurement of impairment requires management tomake estimates of these cash flows related to long-lived assets as well as other fair valuedeterminations.



9

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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, a subsidiary of Chemdex, Inc. and Sparhawk entered into a 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.



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. On May 31, 2006, payment in full for principal and interest of the promissory note was received. The warrant expired at the earlier of payment in full of the promissory note or March 4, 2014, and therefore expired before it could be exercised.  Chemdex also entered into a supply agreement with Sparhawk to supply ferric hydroxide and hydrogenated dextran solution to Sparhawk on an exclusive basis in the United States for 10 years.



Since Sparhawk was thinly capitalized and highly leveraged, the Company had deferred $350,000 of the gain relating to the promissory note receivable from Sparhawk. Since payment in full on the promissory note was received on May 31, 2006, the deferred gain of $350,000 was recognized at April 30, 2006 and included in other income on the statement of operations.



Changes in Accounting Policies



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



10

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk



Exchange Rate Sensitivity



The Companys operations consist primarily of manufacturing activities located in Toronto, Canada.  The Companys products are sold in North America, Europe and the Pacific Rim.



While the majority of the sales of Dextran Products, the Companys Canadian operation, are denominated in United States dollars, the majority of its expenses are incurred in Canadian dollars.  The majority of the assets and liabilities of Dextran Products are denominated in Canadian dollars prior to the currency translation adjustment necessary for preparation of the consolidated financial statements of the Company contained in this report. When the Canadian dollar rises in value relative to the United States dollar, the carrying value of the assets and liabilities of Dextran Products as stated in United States dollars increases.  A rise in the Canadian dollar relative to the United States dollar also results in a decrease in gross margins and net income of Dextran Products.  Dextran Products also experiences a foreign exchange loss when the Canadian dollar rises in relation to the United States dollar because it has a net asset exposure to the United States dollar resulting from accounts receivables denominated in United States dollars exceeding United States dollar denominated payables.  Similarly, a decline in the Canadian dollar relative to the United States dollar results in a foreign exchange gain and increased gross margins and net income at Dextran Products.



Management monitors currency fluctuations to ensure that an acceptable margin level at Dextran Products is maintained.  Management has the ability, to some extent, to adjust sales prices to maintain an acceptable margin level.



The following table presents information about the Companys financial instruments other than accounts receivable that are sensitive to changes in foreign currency exchange rates.  All financial instruments are held for other than trading purposes.  The table presents principal cash flows and related weighted average interest rates by expected maturity dates.



|                  | Expected Maturity Date |         |        
|----------------- | ---------------------- | ------- | -------
|                  |                        |         |        
|                  | 1/31/08                | 1/31/09 | 1/31/10
|                  | (US$ Equivalent)      
|Assets:           |                        |         |        
|Short-term        |                        |         |        
|investments:      |                        |         |        
|Fixed rate ($Cdn) | 465,617                |        |       
|Average interest  |                        |         |        
|rate              | 3.84%                  |        |       
|Liabilities:      |                        |         |        
|Long-term debt:   |                        |         |        
|Fixed rate ($Cdn) | 23, 643                | 50,300  | 45,188 
|Average interest  |                        |         |        
|rate              | 9.23%                  | 9.23%   | 9.00%  



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Interest Rate Sensitivity



The Company has interest earning assets consisting of investment grade short-term commercial paper and medium-term fixed income instruments.  A significant portion of the Companys debt is at fixed rates.  The variable rate debt represents the shareholder loan payable, which is partially offset by the shareholder loan receivable.  Both of these financial instruments carry the same interest rate.  As such, the Company has no significant risk exposure to changes in interest rates.



The following table presents information about the Companys financial instruments that are sensitive to changes in interest rates.  All financial instruments are held for other than trading purposes.  The table presents principal cash flows and related weighted average interest rates by expected maturity dates.



|                      | Expected Maturity Date |         |        
|--------------------- | ---------------------- | ------- | -------
|                      |                        |         |        
|                      | 1/31/08                | 1/31/09 | 1/31/10
|                      | (US$ Equivalent)      
|Assets:               |                        |         |        
|Short-term            |                        |         |        
|investments:          |                        |         |        
|Fixed rate            |                        |         |        
|($Cdn)                | 465,617                |        |       
|Average               |                        |         |        
|interest rate         | 3.84%                  |        |       
|Notes
    receivable: |                        |         |        
|Variable rate         |                        |         |        
|($US)                 | 76,008                 | 80,949  | 86,211 
|Average               |                        |         |        
|interest rate         | 6.50%                  | 6.50 %  | 6.50%  
|Liabilities:          |                        |         |        
|Long-term debt:       |                        |         |        
|Fixed rate            |                        |         |        
|($Cdn)                | 23, 643                | 50,300  | 45,188 
|Average               |                        |         |        
|interest rate         | 9.23%                  | 9.23%   | 9.23%  
|Variable rate         |                        |         |        
|($US)                 | 15,446                 | 31,897  | 33,970 
|Average               |                        |         |        
|interest rate         | 9.75%                  | 9.75%   | 9.75%  



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Item 4.  Controls and Procedures.



The Company completed an evaluation as of the end of the period covered by this report under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in alerting them on a timely basis of material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic Securities and Exchange Commission filings.



There have been no changes in the Companys internal control over financial reporting that occurred in the Companys fiscal quarter ended July 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II

OTHER INFORMATION



Item  1.        Legal Proceedings



The Company is not a party to any pending legal proceedings.



Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds



Not applicable.



Item 3.         Defaults Upon Senior Securities



Not applicable.



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



At the July 11, 2008 Annual General Meeting of the Members of the Company, the vote of the Members entitled to notice of, and to vote at, the 2008 Annual General Meeting was as follows:



|Election of Board Members                                        |            |         
|---------------------------------------------------------------- | ---------- | --------
|                                                                 | Votes Cast
|                                                                 |            |         
|                                                                 | For        | Withheld
|                                                                 |            |         
|Derek John Michael Lederer                                       | 2,062,088  | 182,547 
|                                                                 |            |         
|                                                                 |            |         
|Ratification of Appointment of Schwartz
    Levitsky Feldman LLP |            |         
|as Independent Registered Accounting Firm                        |            |         
|                                                                 |            |         
|                                                                 | Votes Cast
|                                                                 |            |         
|For                                                              | Against    | Abstain 
|                                                                 |            |         
|2,059,183                                                        | 104,141    | Nil     
|                                                                 |            |         



Item 5.    Other Information



Not applicable.



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Item 6.  Exhibits and Reports on Form 8-K.



(a)  
Exhibits



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

(b)  
Reports on Form 8-K



Not
applicable.



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SIGNATURES



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



Date:  September 12, 2008



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




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Exhibit Index



| | 31.1 | Certification of Chief
    Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange
    Act of 1934                                    
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                          
| | 31.2 | Certification of Chief
    Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange
    Act of 1934                                    
| |      |                                                                                                                                                          
| | 32.1 | Certification of Chief
    Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
| |      |                                                                                                                                                          
| | 32.2 | Certification of Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002



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