SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 _________________  FORM 10-Q
  (Mark One)
 [X]
     
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended July 31, 2005  [  ]
     
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934   For the transition period from to ______________________ to ________________________ Commission file number
1-8366
 POLYDEX PHARMACEUTICALS LIMITED ______________________________________________________________________________________________________(Exact name of registrant as specified in its
charter)
 Commonwealth of the Bahamas
     
     None(State or Other Jurisdiction of Incorporation or Organization)
     
     (I.R.S. Employer Identification No.)
     
421 Comstock Road, Toronto, Ontario, Canada
     
     M1L 2H5(Address of
principal executive offices)
     
     (Zip Code)  Registrants telephone number, including area code: (416) 755-2231
  ______________________________________________________________________________________________________Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
  Indicate by
check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X] No [   ]
  Indicate by check whether the
registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   Yes [X] No [   ]
  Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [X] No [   ]
  Indicate the number of shares
outstanding of each of the issuers classes of common shares, as of the latest practicable date.
  
 Common Shares, $.0167 Par Value
     
     
     

     3,052,296 shares(Title of
Class)
     
     
     

     (Outstanding at September 12, 2005)


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POLYDEX PHARMACEUTICALS LIMITED TABLE OF CONTENTS







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

i

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Cautionary Note Regarding Forward-Looking
Statements




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




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


ii

---



PART I

FINANCIAL INFORMATION



Item 1.  Consolidated Financial Statements
(unaudited)


POLYDEX PHARMACEUTICALS LIMITED

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

|                                          |  |  |  | July 312005 |            | January 31 2005
|----------------------------------------- |  |  |  | ----------- | ---------- | ---------------
|                                         
|Assets                                    |  |  |  |             |            |                
|                                         
|Current
assets:                           |  |  |  |             |            |                
|Cash and cash
equivalents (note 3)        |  |  |  | $           | 1,889,643  |                
|Trade accounts
receivable                 |  |  |  |             | 726,361    |                
|Interest
receivable                       |  |  |  |             |           |                
|Inventories:                              |  |  |  |             |            |                
|Finished
goods                            |  |  |  |             | 988,221    |                
|Work in
process                           |  |  |  |             | 182,526    |                
|Raw
materials                             |  |  |  |             | 189,272    |                
|                                         
|Inventories                               |  |  |  |             | 1,360,019  |                
|Prepaid
expenses and other current assets |  |  |  |             | 147,075    |                
|                                         
|Total current
assets                      |  |  |  |             | 4,123,098  |                
|                                         
|Property, plant
and equipment, net        |  |  |  |             | 2,995,187  |                
|Patents and
intangible assets, net        |  |  |  |             | 64,941     |                
|Assets held for
sale                      |  |  |  |             | 12,253     |                
|Investments
available for sale (note 4)   |  |  |  |             | 2,309,641  |                
|Due from
shareholder                      |  |  |  |             | 605,862    |                
|Deferred tax
assets                       |  |  |  |             | 162,332    |                
|                                         
|                                          |  |  |  | $           | 10,273,314 |                

1

---



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



See accompanying notes.


2

---

POLYDEX PHARMACEUTICALS LIMITED

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

|                                                                                                  |  |  |  | Three Months Ended July 31 2005 |           | Three Months Ended July 31 2004 |  | Six Months Ended July 31 2005 |           | Six Months Ended July 312004
|------------------------------------------------------------------------------------------------- |  |  |  | ------------------------------- | --------- | ------------------------------- |  | ----------------------------- | --------- | ----------------------------
|                                                                                                 
|Sales                                                                                             |  |  |  | $                               | 1,273,470 |                                 |  | $                             | 1,338,409 |                             
|Cost of goods
sold                                                                                |  |  |  |                                 | 1,027,528 |                                 |  |                               | 864,549   |                             
|                                                                                                 
|                                                                                                  |  |  |  |                                 | 245,942   |                                 |  |                               | 473,860   |                             
|                                                                                                 
|Expenses:                                                                                        
|General and
administrative                                                                        |  |  |  |                                 | 305,863   |                                 |  |                               | 278,381   |                             
|Depreciation                                                                                      |  |  |  |                                 | 129,939   |                                 |  |                               | 117,307   |                             
|Research and
development                                                                          |  |  |  |                                 | 26,574    |                                 |  |                               | 16,636    |                             
|Interest
expense                                                                                  |  |  |  |                                 | 20,135    |                                 |  |                               | 19,608    |                             
|Selling and
promotion                                                                             |  |  |  |                                 | 33,487    |                                 |  |                               | 23,459    |                             
|Foreign
exchange (gain) loss                                                                      |  |  |  |                                 | (13,950   | )                               |  |                               | (26,493   | )                           
|Amortization                                                                                      |  |  |  |                                 | 2,009     |                                 |  |                               | 2,008     |                             
|                                                                                                 
|                                                                                                  |  |  |  |                                 | 504,057   |                                 |  |                               | 430,906   |                             
|                                                                                                 
|Income (loss)
before the following                                                                |  |  |  |                                 | (258,115  | )                               |  |                               | 42,954    |                             
|                                                                                                 
|Other income (expense):                                                                          
|Gain on sale
of assets (note 7)                                                                   |  |  |  |                                 | 3,646     |                                 |  |                               |          |                             
|Other income
(expense), net                                                                       |  |  |  |                                 | 3,508     |                                 |  |                               | 21,753    |                             
|                                                                                                 
|                                                                                                  |  |  |  |                                 | 7,154     |                                 |  |                               | 21,753    |                             
|                                                                                                 
|Income (loss)
before income taxes                                                                 |  |  |  |                                 | (250,961  | )                               |  |                               | 64,707    |                             
|                                                                                                 
|Provision for
(recovery of) income taxes                                                          |  |  |  |                                 | (22,529   | )                               |  |                               | 51,948    |                             
|                                                                                                 
|Net income
(loss) for the period                                                                  |  |  |  |                                 | (228,432  | )                               |  |                               | 12,759    |                             
|                                                                                                 
|Unrealized
gain (loss) on investments available for sale                                          |  |  |  |                                 | 71,815    |                                 |  |                               | (4,211    | )                           
|                                                                                                 
|Currency
translation adjustment                                                                   |  |  |  |                                 | 202,066   |                                 |  |                               | 204,717   |                             
|                                                                                                 
|Comprehensive
income (loss) for the period                                                        |  |  |  | $                               | 45,449    |                                 |  | $                             | 213,265   |                             
|                                                                                                 
|Per
share information:                                                                           
|Earnings (loss) per common share:                                                                
|Basic                                                                                             |  |  |  | $                               | (0.07     | )                               |  | $                             |          |                             
|Diluted                                                                                           |  |  |  | $                               | (0.07     | )                               |  | $                             |          |                             
|                                                                                                 
|Weighted
average number of common shares used in computing net earnings per share for the period: |  |  |  |                                 |           |                                 |  |                               |           |                             
|Basic                                                                                             |  |  |  |                                 | 3,052,296 |                                 |  |                               | 3,037,463 |                             
|Diluted                                                                                           |  |  |  |                                 | 3,052,296 |                                 |  |                               | 3,071,158 |                             



See accompanying notes.


3

---

POLYDEX PHARMACEUTICALS LIMITED

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

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



See accompanying notes.


4

---

POLYDEX PHARMACEUTICALS LIMITED

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

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



See accompanying notes.


5

---



1. Basis of Presentation:




The information contained in the
interim consolidated financial statements is condensed from that which would appear in annual consolidated financial statements. The interim
consolidated financial statements included herein should be read in conjunction with the audited financial statements, and notes thereto, and other
financial information contained in the 2005 Annual Report on Form 10-K for the fiscal year ended January 31, 2005 as filed by Polydex Pharmaceuticals
Limited (the Company) with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of July 31,
2005 and 2004 include all normal recurring adjustments which management considers necessary for a fair presentation. The results of operations for the
interim periods presented are not necessarily indicative of the results that may be expected for the entire fiscal year. The interim consolidated
financial statements include the accounts and transactions of the Company and its majority owned subsidiaries in which the Company has equal to or more
than a 50% ownership interest and exercises control.




2. Significant Accounting Policies:




Basis of consolidation




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




Use of estimates




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




Cash and cash equivalents




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




Inventories




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




Investments available for sale




Investments available for sale
consist of medium-term fixed income instruments, trust income funds and mutual funds and are stated at fair market value, based on quoted market
prices. Interest income is included in other income (expense) in the consolidated statement of operations as it is earned. Changes in market values
during the holding period are reported as unrealized gain (loss) on investments available for sale and are included in other comprehensive income
(loss). Realized gains (losses) are reclassified from accumulated other comprehensive income (loss) on a specific item basis when the security is sold
or matured.


6

---



Property, plant and equipment and patents and intangible
assets




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


|                        | 
|----------------------- | 
|Buildings               | 
|Machinery and equipment | 



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




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




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




Revenue recognition




Revenue is from sales of bulk
manufactured products. There was also revenue from finished dosage manufactured products up to March 4, 2004, at which time the Companys
investment in the Vet Labs  Sparhawk Joint Venture was sold (see note 7). Revenue is recognized when title and risk of ownership of products pass
to the customer. Title and risk of ownership pass to the customer pursuant to the applicable sales contract, either upon shipment of product or upon
receipt by the customer.




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




No testing and approval is
required for finished dosage product because of its nature. Returns of finished dosage product are rare and generally are not
accepted.




Shipping and handling costs




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




Research and development




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


7

---



Foreign currency translation




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




Stock Based Compensation




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




Earnings (loss) per common share




Basic earnings (loss) per common
share is computed using the weighted average number of common shares outstanding of 3,052,296 for the three months ended July 31, 2005
(20043,037,463). Diluted earnings (loss) per common share is computed using the weighted average number of common shares outstanding adjusted for
the incremental shares, using the treasury stock method, attributed to outstanding options to purchase common stock. Incremental shares of nil and
30,854 at July 31, 2005 and July 31, 2004, respectively, were used in the calculation of diluted earnings (loss) per common share. Options to purchase
46,300 and 3,885 common shares at July 31, 2005 and July 31, 2004, respectively, were not included in the computation of diluted earnings (loss) per
common share because their effect was anti-dilutive.




3. Cash and Cash Equivalents:




Cash and cash equivalents consist
of the following:


|                    |  |  |  | July 31 2005 |           |  | January 31 2005 |  
|------------------- |  |  |  | ------------ | --------- |  | --------------- | -
|Cash                |  |  |  | $            | 207,747   |  |                 | $
|Short-term
deposits |  |  |  |              | 1,681,896 |  |                 |  
|                    |  |  |  | $            | 1,889,643 |  |                 | $



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




4. Investments Available For Sale:




Investments available for sale
consist of the following:


8

---



|                                              |  |  |  | July 31 2005 |           |  | January 31 2005 |  
|--------------------------------------------- |  |  |  | ------------ | --------- |  | --------------- | -
|Canadian
medium-term fixed income instruments |  |  |  | $            | 1,784,254 |  |                 | $
|Canadian income
trust and mutual fund units   |  |  |  |              | 525,387   |  |                 |  
|                                              |  |  |  | $            | 2,309,641 |  |                 | $



Canadian medium-term fixed income
instruments have maturity dates extending from one to two years and interest rates ranging from 2.26% to 2.86%. Investments available for sale are
stated at fair market value, based on quoted market prices. The unrealized gain of $4,254 for the six months ending July 31, 2005 has been included in
accumulated other comprehensive income.




5. Commitments and Contingencies:




During September 2004, the
Company entered into an agreement with a research organization to conduct a pilot clinical study on the use of cellulose sulphate for the treatment of
bacterial vaginosis. Payments totaling $43,112 were made to the research organization and the principal investigator in September 2004. The Company is
committed to make an additional payment of $43,112 upon the completion of patient enrolment, which is expected to occur during the third quarter of
fiscal year 2006, and a final payment of $21,556 upon completion of the clinical study, which is expected to be in fourth quarter of fiscal year
2006.




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




6. Stock-based Employee Compensation:




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




All options granted have terms of
five years and vest immediately. At July 31, 2005, the Company had 46,300 options outstanding at exercise prices ranging from $2.50 to $7.72 and a
weighted average exercise price of $3.99. The options, which are immediately exercisable and expire on dates between January 11, 2006 and January 31,
2010, entitle the holder of an option to acquire one common share of the Company.




The Company uses the fair value
method in accordance with SFAS 123 to account for awards of stock-based employee compensation. No stock-based employee compensation expense was
recorded during the period from February 1, 2005 to July 31, 2005, because there were no options granted during this period. Similarly, no stock-based
employee compensation expense was recorded during the period from February 1, 2004 to July 31, 2004, because there were no options granted during this
period.




7. Vet Labs  Sparhawk Joint
Venture:




In 1992, Veterinary Laboratories,
Inc. (Vet Labs) and Sparhawk Laboratories, Inc. (Sparhawk) entered into the Vet Labs  Sparhawk Joint Venture (the
Joint Venture) for the manufacture and sale of veterinary pharmaceutical products. Vet Labs and Sparhawk each owned 50% of the Joint
Venture.


9

---



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




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




8. Segmented Information:




All operations are carried out
through Dextran Products Limited (Dextran) in Canada and through Chemdex in the United States. Each of Dextran and Chemdex operated as
separate strategic business units offering different products, until the sale of the finished product veterinary pharmaceutical business on March 4,
2004 [note 7]. Until March 4, 2004, each subsidiary comprised a reportable segment as follows:


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

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



After March 4, 2004, Chemdex only
sells bulk quantities of a specific dextran derivative to Sparhawk under the Supply Agreement, as described in note 7.


10

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

11

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



9. Recent Accounting Pronouncements:




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




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




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




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


12

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


13

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




The Companys fiscal year
ends on January 31st of each year. In this report, fiscal year 2006 refers to the
Companys fiscal year ended January 31, 2006. The following discussion should be read in conjunction with the July 31, 2005 interim consolidated
financial statements and notes thereto included elsewhere in this report. Operating results for the six months ended July 31, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ended January 31, 2006. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys annual report on Form 10-K for the fiscal year ended January 31, 2005. The
Companys financial statements are prepared in accordance with United States generally accepted accounting principles. All amounts are in United
States dollars, unless otherwise denoted.




Overview




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




Dextran Products
Business




The manufacture and sale of bulk
quantities of dextran and derivative products for sale to large pharmaceutical companies throughout the world is conducted through a Canadian
subsidiary, Dextran Products.




Management Objectives for
Fiscal 2006. In fiscal year 2006, management intends to focus on the core businesses of Dextran Products that have historically been the backbone
of the Company. Opportunities to increase distribution chains for existing Dextran products in certain overseas markets, such as India, China and
Russia are being explored by management. Expanding current market opportunities and the potential for new market penetration has led management to
initiate plant refurbishments and the expansion of production capacity a priority for fiscal year 2006 with respect to Dextran Products
operations.




Research and development of the
Companys human pharmaceutical products is coordinated at the Dextran Products facility. Ushercell, the Companys leading human
pharmaceutical compound, is a high molecular weight Cellulose Sulphate envisioned for topical vaginal use primarily in the prevention of transmission
of AIDS and other sexually transmitted diseases, as well as unplanned pregnancies. Multiple clinical trials have been completed, and additional trials
have commenced or are being actively planned, to evaluate various aspects of the use of Cellulose Sulphate as a contraceptive gel with antiviral
capabilities. The Company also intends to significantly explore the use of Ushercell as a treatment for Bacterial Vaginosis (BV), the most common
vaginal disorder among reproductive-age women. If effective, BV


14

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treatment may present an
opportunity for commercial viability of Ushercell in advance of the completion of the much lengthier required testing for its use as an antiviral
contraceptive gel.




Chemdex, Vet Labs and the Joint
Venture Business




During approximately one month of
the 2005 fiscal year, the Company also engaged in the finished product veterinary pharmaceutical business through its United States subsidiary Chemdex,
which, in turn, conducted its operations through its subsidiary, Vet Labs. On December 1, 1992, Vet Labs and Sparhawk Laboratories Inc. entered into a
Joint Venture for the purpose of manufacturing and selling veterinary pharmaceutical products.




On January 13, 2004, the Company,
Chemdex and Vet Labs entered into an Asset Purchase Agreement with Sparhawk pursuant to which the Company agreed to sell its finished product
veterinary pharmaceutical business, including substantially all of the assets of Vet Labs and its ownership interest in the Joint Venture, to Sparhawk
for $5,500,000 in cash. The sale was completed on March 4, 2004. Simultaneously with the closing, Chemdex advanced $350,000 to Sparhawk in exchange for
an unsecured subordinated promissory note bearing interest at 13% per annum and a warrant to purchase 4% of the equity of Sparhawk. The promissory note
is payable in full on March 4, 2009. Interest is payable annually, but can be deferred and added to the principal balance of the promissory note each
year at Sparhawks discretion. The warrant becomes exercisable on March 5, 2009 and expires at the earlier of payment in full of the promissory
note or March 4, 2014. Chemdex also entered into a supply agreement with Sparhawk to supply ferric hydroxide and hydrogenated dextran solution to
Sparhawk on an exclusive basis in the United States for 10 years. In connection with the sale, the litigation involving the Joint Venture, Sparhawk
Laboratories, Inc. v. Veterinary Laboratories, Inc., et al, Case No. 02CV07426, County of Johnson, State of Kansas, was settled, and a Motion of
Approval of Settlement and Stipulation of Dismissal with Prejudice was filed with the Court on March 4, 2004.




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


15

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Results of Operations


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

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



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


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



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




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




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


16

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



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




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




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


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



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




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


17

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




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


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



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


|Research and development              |  |  |  | Three Months Ended July 31, 2005 |        | Three Months Ended July 31, 2004 |  | Variance
|------------------------------------- |  |  |  | -------------------------------- | ------ | -------------------------------- |  | --------
|Research and
development expenditures |  |  |  | $                                | 26,574 |                                  |  | $       



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




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




Significant funding from research
and development partners, including third party public and/or private sector groups, for the current phase of the project investigating the use of
cellulose sulphate as a contraceptive gel with antiviral properties project is expected to continue at necessary levels for the foreseeable future. The
Companys total research and development expenditures are expected to increase in fiscal year 2006 over fiscal year 2005 due to
additional


18

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


|                                      |  |  |  | Three Months Ended July 31, 2005 |         | Three Months Ended July 31, 2004 |  | Variance
|------------------------------------- |  |  |  | -------------------------------- | ------- | -------------------------------- |  | --------
|Depreciation and amortization expense |  |  |  | $                                | 129,939 |                                  |  | $       



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


|                 |  |  |  | Three Months Ended July 31, 2005 |        | Three Months Ended July 31, 2004 |  | Variance
|---------------- |  |  |  | -------------------------------- | ------ | -------------------------------- |  | --------
|Interest
expense |  |  |  | $                                | 20,135 |                                  |  | $       



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


|                      |  |  |  | Three Months Ended July 31, 2005 |        | Three Months Ended July 31, 2004 |  | Variance
|--------------------- |  |  |  | -------------------------------- | ------ | -------------------------------- |  | --------
|Foreign
exchange gain |  |  |  | $                                | 13,950 |                                  |  | $       



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


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



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


19

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


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



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




Liquidity and Capital Resources




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




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




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




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




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


20

---



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




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




During the second quarter of
fiscal year 2006, capital expenditures totaled $72,610, as compared to $15,536 in the second quarter of fiscal year 2005. The majority of capital
expenditures were for production equipment at the Dextran Products plant in Toronto during both of these periods. Management intends to continue its
plant refurbishment and expansion plan during the remainder of fiscal year 2006, and expects capital expenditures to increase during this
period.




The change in accumulated other
comprehensive income of the Company is primarily attributable to the currency translation adjustment of Dextran Products. Dextran Products
functional currency is the Canadian dollar. This currency translation adjustment arises from the translation of Dextran Products financial
statements to U.S. dollars.




Dextran Products has a Cdn.
$1,250,000 (U.S. $1,021,000) line of credit, of which Cdn. $30,000 (U.S. $24,500) was utilized at July 31, 2005. At January 31, 2005, Cdn. $30,000
(U.S. $24,000) of this line of credit was utilized. This line of credit bears interest at the Canadian banks prime lending rate plus 0.75% (July
31, 2005  5%; January 31, 2005  5%). This indebtedness is collateralized by a general security agreement over the Companys assets and
a collateral mortgage of Cdn. $500,000 on the Dextran Products building in Toronto. This line of credit is used periodically by the Company to cover
temporary short-term Canadian dollar cash needs. For these short-term cash needs, the interest expense on the credit line is typically less than the
transaction costs incurred in selling short-term investments.




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




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




Changes in the relative values of
the Canadian dollar and the United States dollar occur from time to time and may, in certain instances, materially affect the Companys results of
operations.




The Company does not believe that
the impact of inflation and changing prices has had a material effect on its operations or financial results at any time in the last three
years.


21

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Related Party Transactions




In August 1997, the Company
loaned the late Thomas C. Usher, its former Vice-Chairman, Director of Research and Development, a member of its Board of Directors and the beneficial
owner of greater than 5% of the outstanding common shares of the Company, $691,500 at an interest rate equal to the prime rate of Toronto Dominion Bank
plus 1.50% (the Loan). The Loan was used to partially fund a $1,000,000 payment to the State of Florida in order to allow Thomas C. Usher
to regain possession of 430,000 Common Shares of the Company then held by the State as collateral security relating to the liquidation of insurance
companies formerly owned by Thomas C. Usher. Repayment of the Loan is accomplished by monthly payments and through offsets by the Company against
royalty payments due Thomas C. Usher pursuant to intellectual property license agreements and bonus payments, if any, granted Thomas C. Usher as an
employee of the Company. The amount outstanding under the Loan as of July 31, 2005 was $349,057, as compared to $373,373 at January 31, 2005, including
accrued interest. The Company has taken a cumulative provision of $278,232 against accrued interest on this loan at July 31, 2005, compared to a
cumulative provision of $264,543 at January 31, 2005.




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




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




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




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


22

---



Off-Balance Sheet Arrangements




The Company has no off-balance
sheet arrangements.




Tabular Disclosure of Contractual
Obligations




As of July 31 2005, future
minimum cash payments due under contractual obligations, including, among others, the Dextran Products line of credit, the loan payable to Ruth Usher,
the long-term debt obligation in connection with the Chemdex redemption, research and development agreements and capital lease agreements, are as
follows:


|Payment due by period           | 
|------------------------------- | 
|
|Long-term
debt obligations (1)  | 
|Capital
lease obligations (2)   | 
|Operating
Lease obligations (3) | 
|Purchase
obligations (4)        | 
|Revolving
loans (5)             | 
|Total                           | 






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

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

| | (b) |  | Note payable in quarterly payments of Cdn. $419 (US $342),
bearing interest at 10.43% and maturing December 2009; and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------

| | (c) |  | Amounts due to shareholder which bear interest at the U.S. bank
prime lending rate plus 1.5%, with required minimum monthly payments, including interest, of $5,000.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Consists of capital lease obligations for:
|-- |  | ------------------------------------------

| | (a) |  | Production equipment of Cdn. $236,455 (US $193,166) repayable in
monthly installments, bearing interest at 9% and maturing November 2006;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------

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

23

---

| | (c) |  | Office equipment of Cdn. $25,237 (US $20,617) repayable in
quarterly installments, bearing interest at 10.43% and maturing December 2009.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Consists of operating lease obligations for office equipment
requiring quarterly payments of Cdn. $161 (US $132) terminating June 2006.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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



Risk Factors




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




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




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


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

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

| |  | that the developmental product will be found to be ineffective
or unsafe;
|- |  | -------------------------------------------------------------------------

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

24

---

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

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



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




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




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


| |  | the product is uneconomical or if the market for the product
does not develop or diminishes;
|- |  | --------------------------------------------------------------------------------------------

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

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

| |  | others hold proprietary rights that preclude the Company from
commercializing the product;
|- |  | ------------------------------------------------------------------------------------------

| |  | others have brought to market similar or superior
products;
|- |  | -----------------------------------------------------------

| |  | others have superior resources to market similar products or
technologies;
|- |  | --------------------------------------------------------------------------

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

| |  | the product has undesirable or unintended side effects that
prevent or limit its commercial use.
|- |  | ------------------------------------------------------------------------------------------------



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




The Companys strategy for
development and commercialization of its products is to rely on licensing agreements with third party partners. As a result, the ability of the Company
to commercialize future products is dependent upon the success of third parties in performing


25

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clinical trials, obtaining
regulatory approvals, manufacturing and successfully marketing its products. There can be no assurance that such third party collaborations will be
successful. Should any of the Companys current research and development partnerships be discontinued, it may not be able to find others to
develop and commercialize its current product candidates.




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




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




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




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




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




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


26

---



It is also possible that the
Companys patents may infringe on patents or other rights owned by others, licenses to which may not be available to the Company. The Company may
have to alter its products or processes, pay licensing fees or cease certain activities altogether because of patent rights of third
parties.




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




Critical Accounting Policies




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




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




Revenue
Recognition




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




Allowance for Doubtful
Accounts




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


27

---



Long-Lived
Assets




Long-lived assets are stated at
cost, less accumulated depreciation or amortization computed using the straight-line method based on their estimated useful lives ranging from three to
fifteen years. Useful life is the period over which the asset is expected to contribute to the Companys future cash flows. A significant change
in estimated useful lives could have a material impact on the results of operations. The Company reviews the recoverability of its long-lived assets,
including buildings, equipment and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is based on the Companys ability to recover the carrying value of the asset
from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than
the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement
of impairment requires management to make estimates of these cash flows related to long-lived assets as well as other fair value
determinations.




Deferred Tax
Assets




The Company has recorded a
valuation allowance on deferred tax assets where there is uncertainty as to the ultimate realization of the future tax deduction. Dextran Products has
incurred capital losses, which are only deductible against capital gains. It is not certain that Dextran Products will realize capital gains in the
future to use these Canadian capital loss deductions.




The Joint
Venture




In 1992, Vet Labs and Sparhawk
entered into the Joint Venture for the manufacture and sale of veterinary pharmaceutical products. Vet Labs and Sparhawk each owned 50% of the Joint
Venture during its operation. The Joint Venture was governed by the Agreement for the Operation of Veterinary Laboratories, Inc.s Lenexa Facility
and Sparhawk Lab of KC as a Joint Venture, dated December 1, 1992, by and among Sparhawk, Chemdex and Vet Labs (the Joint Venture
Agreement).




Pursuant to the Joint Venture
Agreement, the Joint Venture Policy Committee was responsible for the overall management of the Joint Venture, including the direction and control of
the persons designated with the daily management responsibilities of the Joint Venture, and the general supervision of the management and conduct of
the affairs of the Joint Venture. The Policy Committee consisted of five members, three of which were selected by Vet Labs and two of which were
selected by Sparhawk. Decisions of the Policy Committee required a simple majority vote.




Because the Company controlled
the operating, financing and investing decisions of the Joint Venture through Vet Labs control of the Policy Committee, it consolidated the
Joint


28

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




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




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




Changes in Accounting Policies




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




Recent Accounting Pronouncements




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


29

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




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




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


30

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Item 3.  Quantitative and Qualitative Disclosures About Market
Risk




Exchange Rate Sensitivity




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




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




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




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


31

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

32

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Interest Rate Sensitivity




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




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


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

33

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Item 4.  Controls and Procedures.




The Company completed an
evaluation as of the end of the period covered by this report under the supervision and with the participation of management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures are effective in alerting them on a timely basis of material information relating to the Company
(including its consolidated subsidiaries) required to be included in its periodic Securities and Exchange Commission filings.




There have been no changes in the
Companys internal control over financial reporting identified in connection with the evaluation discussed above that occurred in the
Companys last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.


34

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PART II OTHER INFORMATION



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


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

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



Proposal 1  Election of
Derek John Michael Lederer:


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

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



Proposal 2  Ratification
of Independent Registered Accounting Firm:


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

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

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

35

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Item 6.  Exhibits.


|3.1 |  | Memorandum of Association of Polydex Pharmaceuticals Limited, as
amended to date (filed as Exhibit 3.1 to the Annual Report on Form 10-K filed April 30, 1997, and incorporated herein by reference)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Articles of Association of Polydex Pharmaceuticals Limited, as
amended to date (filed as Exhibit 3.2 to the Quarterly Report on Form 10-Q filed September 13, 1999, and incorporated herein by reference)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
|---- |  | -------------------------------------------------------------------------------------------------------------

|31.2 |  | Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
|---- |  | -------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification of Chief Executive Officer pursuant to 19 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification of Chief Financial Officer pursuant to 19 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

36

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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 14, 2005




POLYDEX PHARMACEUTICALS LIMITED
(Registrant)


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

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

37

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Exhibit Index


|31.1 |  | Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
|---- |  | -------------------------------------------------------------------------------------------------------------

|31.2 |  | Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
|---- |  | -------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification of Chief Executive Officer pursuant to 19 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification of Chief Financial Officer pursuant to 19 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

38

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