---

|                                   | 
|---------------------------------- | 
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            

---

# FORM 10-QSB

# (Mark one)

|[X] | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

| | For
the quarterly period ended September 30, 2006.
| | --------------------------------------------------

|[_] | TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------

| | For
the transition period from ____________ to ____________.
| | ------------------------------------------------------------

# Commission File Number
000-26013

---

|                                                                  | 
|----------------------------------------------------------------- | 
|AURIGA LABORATORIES, INC.                                        
|(Exact Name of Small Business Issuer as Specified in its Charter)

|                                         |                                     
|---------------------------------------- | ------------------------------------
|Delaware                                 |                                     
|(State or other jurisdiction of          | 84-1334687                          
|incorporation or organization)           | (I.R.S. Employer Identification No.)
|5555 Triangle Parkway, Suite 300         |                                     
|Norcross, Georgia                        | 30092                               
|(Address of Principal Executive Offices) | (Zip Code)                          

|                                                                                   | 
|---------------------------------------------------------------------------------- | 
|(678) 282-1600                                                                    
|(Issuer's telephone number, including area code)                                  
|Not Applicable                                                                    
|(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

---

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 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 mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes [_]    No [X]

# APPLICABLE ONLY TO
CORPORATE ISSUERS

State
the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practicable date: 40,488,778 as of November 7, 2006.

Transitional
Small Business Disclosure Format (check one):      Yes [_]     No [X]

---

---

# AURIGA LABORATORIES,
INC.INDEX TO FORM 10-QSB

|PART I. | FINANCIAL INFORMATION
|------- | ---------------------

|Item 1. | Financial Statements.
|------- | ---------------------

| | (a) | Consolidated
Balance Sheets at September 30, 2006 (unaudited) and March 31, 2006.
| | --- | ---------------------------------------------------------------------------------

| | (b) | Consolidated
Statements of Operations for the Three Months Ended September 30, 2006 and
                       2005 (unaudited) and for the Six Months Ended September 30, 2006
and From Inception                        (April 12, 2005) to September 30, 2005
(unaudited).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Consolidated
Statements of Cash Flows for the Six Months Ended September 30, 2006
                       (unaudited) and From Inception (April 12, 2005) to September 30,
2005 (unaudited).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Condensed
Notes to Consolidated Financial Statements.
| | --- | -----------------------------------------------------

|Item 2. | Management's Discussion and Analysis or Plan of Operation.
|------- | ----------------------------------------------------------

|Item 3. | Controls and Procedures.
|------- | ------------------------

|PART II. | OTHER INFORMATION
|-------- | -----------------

|Item 1. | Legal Proceedings.
|------- | ------------------

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

|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

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

|Item 5. | Other Information.
|------- | ------------------

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

# SIGNATURES

2

---

# FORWARD-LOOKING
STATEMENTS

This
document contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements of
historical fact are forward-looking statements for purposes of federal and
state securities laws, including, but not limited to, any projections of earnings, revenue
or other financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements concerning proposed new products or
developments; any statements regarding future economic conditions or performance; any
statements of belief; and any statements of assumptions underlying any of the foregoing.

Forward-looking
statements may include the words may, could, will,
estimate, intend, continue, believe,
expect, desire, goal, should,
objective, seek, plan, strive or
anticipate, as well as variations of such words or similar expressions, or the
negatives of these words. These forward-looking statements present our estimates and
assumptions only as of the date of this report. Except for our ongoing obligation to
disclose material information as required by the federal securities laws, we do not
intend, and undertake no obligation, to update any forward-looking statement.

Although
we believe that the expectations reflected in any of our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in any
of our forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and inherent
risks and uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:

| |  | the
concentration of business with large clients;
| | - | -------------------------------------------------

| |  | the
ability to develop and introduce new products;
| | - | --------------------------------------------------

| |  | increases
in interest rates or our cost of borrowing or a default under any material debt
agreements;
| | - | -----------------------------------------------------------------------------------------------------

| |  | increased
competitive pressures from existing competitors and new entrants;
| | - | ---------------------------------------------------------------------------

| |  | adverse
state or federal legislation or regulation that increases the costs of compliance, or
adverse findings by a regulator with respect to existing operations;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | fluctuations
in general economic conditions;
| | - | --------------------------------------------

| |  | loss
of customers or sales weakness;
| | - | ------------------------------------

| |  | inability
to achieve future sales levels or other operating results;
| | - | --------------------------------------------------------------------

| |  | the
unavailability of funds for capital expenditures; and
| | - | ---------------------------------------------------------

| |  | the
risk of product liability claims.
| | - | -------------------------------------

We
caution readers not to place undue reliance on any such forward-looking statements. For a
detailed description of these and other factors that could cause actual results to differ
materially from those expressed in any forward-looking statement, please see the section herein
entitled Risk Factors.

3

---

|PART 1. | FINANCIAL INFORMATION
|------- | ---------------------

|Item 1. | Financial Statements.
|------- | ---------------------

# AURIGA LABORATORIES,
INC. AND SUBSIDIARIES(F/K/A MULTI-LINK TELECOMMUNICATIONS, INC.)

# CONSOLIDATED BALANCE SHEETS

|ASSETS                                                 | SEPTEMBER 30, 2006
(unaudited) | MARCH 31, 2006
|------------------------------------------------------ | ------------------------------ | --------------
|CURRENT ASSETS                                         |                                |               
|Cash and cash equivalents                              |                                |               
|Accounts receivable, net                               |                                |               
|Inventory                                              |                                |               
|Prepaid expenses                                       |                                |               
|                                                       |                                |               
|Total Current Assets                                   |                                |               
|                                                       |                                |               
|PROPERTY AND EQUIPMENT, net                            |                                |               
|                                                       |                                |               
|OTHER ASSETS                                           |                                |               
|Intangibles, net                                       |                                |               
|Deposits                                               |                                |               
|                                                       |                                |               
|Total Other Assets                                     |                                |               
|                                                       |                                |               
|TOTAL ASSETS                                           |                                |               
|                                                       |                                |               
|LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)          |                                |               
|CURRENT LIABILITIES                                    |                                |               
|Accounts payable                                       |                                |               
|Accrued expenses                                       |                                |               
|Bank notes payable                                     |                                |               
|Royalties payable                                      |                                |               
|Product licenses payable                               |                                |               
|Related-party loan, current portion                    |                                |               
|Related-party convertible note                         |                                |               
|Senior secured promissory notes (net of loan discounts |                                |               
|of $1,652,768 and $0 as of September 30, 2006 and      |                                |               
|March 31, 2006, respectively)                          |                                |               
|Deposit on stock subscriptions                         |                                |               
|                                                       |                                |               
|Total Current Liabilities                              |                                |               
|                                                       |                                |               
|LONG-TERM DEBT                                         |                                |               
|Related-party loan, less current portion               |                                |               
|Product licenses payable                               |                                |               
|                                                       |                                |               
|Total Long-Term Debt                                   |                                |               
|                                                       |                                |               
|Total Liabilities                                      |                                |               
|                                                       |                                |               
|COMMITMENTS AND CONTINGENCIES                          |                                |               
|                                                       |                                |               
|STOCKHOLDERS' EQUITY(DEFICIT)                          |                                |               
|Preferred stock:  $0.001 par value, 10,000,000 shares  |                                |               
|authorized; no shares issued and outstanding           |                                |               
|Common stock:  $0.001 par value, 250,000,000 shares    |                                |               
|authorized; 40,413,777 and 30,044,071 shares issued    |                                |               
|and outstanding as of September 30, 2006 and           |                                |               
|March 31, 2006, respectively                           |                                |               
|Additional paid-in capital                             |                                |               
|Stock subscriptions receivable                         |                                |               
|Accumulated deficit                                    |                                |               
|                                                       |                                |               
|Total Stockholders' Equity(Deficit)                    |                                |               
|                                                       |                                |               
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)    |                                |               
|                                                       |                                |               

The accompanying
condensed notes are an integral part of these interim financial statements.

4

---

# AURIGA LABORATORIES,
INC. AND SUBSIDIARIES(F/K/A MULTI-LINK TELECOMMUNICATIONS, INC.)

# CONSOLIDATED STATEMENTS
OF OPERATIONS

|                                                      
|------------------------------------------------------
|REVENUES                                              
|Products                                              
|Royalties from related party                          
|                                                      
|Total Revenues                                        
|COST OF GOODS SOLD                                    
|Materials and supplies                                
|Royalties                                             
|Distribution                                          
|                                                      
|Total Cost of Goods Sold                              
|                                                      
|GROSS PROFIT                                          
|                                                      
|OPERATING EXPENSES                                    
|Sales, marketing and trade expenses (includes non-cash
|equity instrument related expenses of $161,444 and    
|$0 for the three months ended September 30, 2006 and  
|2005, respectively, $226,179 for the six months       
|ended September 30, 2006, and $0 from inception to    
|date to September 30, 2005)                           
|General and administrative expenses (includes non-cash
|equity instrument related expenses of $2,201,278 and  
|$0 for the three months ended September 30, 2006 and  
|2005, respectively, $3,257,998 for the six months     
|ended September 30, 2006, and $0 from inception to    
|date to September 30, 2005)                           
|Research and development expenses                     
|                                                      
|Total Operating Expenses                              
|                                                      
|OPERATING LOSS                                        
|OTHER INCOME(EXPENSES)                                
|Interest expense                                      
|Other income(expenses)                                
|                                                      
|Total Other Income(Expenses)                          
|                                                      
|LOSS BEFORE TAXES                                     
|INCOME TAXES                                          
|                                                      
|NET LOSS                                              
|                                                      
|NET LOSS PER COMMON SHARE,                            
|BASIC AND DILUTED                                     
|                                                      
|WEIGHTED AVERAGE NUMBER OF COMMON                     
|SHARES OUTSTANDING, BASIC AND DILUTED                 
|                                                      

The accompanying
condensed notes are an integral part of these interim financial statements.

5

---

# AURIGA LABORATORIES,
INC. AND SUBSIDIARIES(F/K/A MULTI-LINK TELECOMMUNICATIONS, INC.)CONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                  
|------------------------------------------------------------------
|CASH FLOWS FROM OPERATING ACTIVITIES                              
|Net loss                                                          
|Adjustments to reconcile net loss to net cash                     
|flows provided (used) by operating activities:                    
|Depreciation                                                      
|Bad debt expense                                                  
|Non-cash expenses for equity instruments issued for               
|compensation and services                                         
|Amortization of notes payable discounts                           
|Changes in assets and liabilities:                                
|Receivables                                                       
|Inventory                                                         
|Prepaid expenses                                                  
|Deposits                                                          
|Accounts payable                                                  
|Accrued expenses                                                  
|Royalties payable                                                 
|                                                                  
|Net cash used by operating activities                             
|                                                                  
|CASH FLOWS FROM INVESTING ACTIVITIES                              
|Purchase of fixed assets                                          
|Payments for new product licenses                                 
|                                                                  
|Net cash used by investing activities                             
|                                                                  
|CASH FLOWS FROM FINANCING ACTIVITIES                              
|Net proceeds from stock sales and exercise of stock options       
|Proceeds from stock subscriptions receivable                      
|Proceeds from bank notes payable                                  
|Payments on related-party loan                                    
|Payments on bank notes payable                                    
|Proceeds from senior secured promissory notes                     
|Proceeds from convertible secured note payable                    
|                                                                  
|Net cash provided by financing activities                         
|                                                                  
|Net increase(decrease) in cash                                    
|Cash, beginning of period                                         
|                                                                  
|Cash, end of period                                               
|                                                                  
|SUPPLEMENTAL CASH FLOW DISCLOSURES                                
|Interest paid                                                     
|NON-CASH INVESTING AND FINANCING                                  
|Assets purchased by acquisition/reorganization:                   
|Receivables                                                       
|Goodwill                                                          
|Liabilities assumed by acquisition:                               
|Accounts payable and accrued expenses                             
|Related-party loan                                                
|Assets acquired with stock:                                       
|Inventory                                                         
|Prepaid expenses                                                  
|Intangibles                                                       
|Warrants issued in connection with senior secured promissory notes
|Accrued bonus paid with related-party convertible note            

The accompanying
condensed notes are an integral part of these interim financial statements.

6

---

# AURIGA LABORATORIES,
INC. AND SUBSIDIARIES(F/K/A MULTI-LINK TELECOMMUNICATIONS, INC.)

# CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006
(Unaudited)

|1. | COMPANY
OVERVIEW AND BASIS OF PRESENTATION.
|-- | -------------------------------------------

Auriga Laboratories, Inc., a Delaware
corporation (the Company), is currently focused on delivering unique solutions
for the respiratory, dermatology, psychiatry and gastroenterology markets. The
Companys product portfolio consists of its Extendryl®, Levall® and
Aquoral product lines. The Extendryl® and Levall® families of prescription
products are indicated for relief of symptoms associated with a range of acute respiratory
diseases. Aquoral, which will be launched in early 2007, is an FDA-cleared,
prescription-only treatment for xerostomia, or dry mouth.

The Companys business strategy
is to acquire valuable brand portfolios that are no longer a strategic focus for large
pharmaceutical companies, then capitalize on untapped marketplace opportunities through
brand extension and directed sales/marketing programs. The Companys drug development
pipeline leverages novel material science and advanced drug delivery technologies to
produce improved formulations of successful brands to further expand markets, sales and
clinical indications for proven, successful products. In addition, the Company plans to
become a fully-integrated pharmaceutical company by acquiring its own manufacturing and
development capabilities.

These interim consolidated financial
statements have been prepared from the records of the Company without audit. In the
opinion of management, all adjustments, which consist of only normal recurring adjustments
to present fairly the financial position at September 30, 2006 and the results of
operations and cash flows for the six months ended September 30, 2006 and for the
period from April 12, 2005 (Inception) to September 30, 2005, have been made.
These interim consolidated financial statements should be read in conjunction with the
Companys audited financial statements and notes thereto for the period from
Inception to March 31, 2006 contained in the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission (SEC) on May 18, 2006 (the
Merger 8-K). The results of operations for the six months ended September 30,
2006 are not necessarily indicative of the results to be expected for any other interim
period or for the full fiscal year.

|2. | REVERSE
MERGER.
|-- | ---------------

On May 17, 2006, Auriga Laboratories,
Inc., a privately-held Delaware corporation (Auriga) completed a merger (the
Merger) with Multi-Link Telecommunications, Inc., a shell company
organized under the laws of the State of Colorado (Multi-Link). The Merger was
effected pursuant to the terms of an Agreement and Plan of Merger (Merger
Agreement), entered into on May 4, 2006, by and among Auriga, Multi-Link, and
Multi-Link Acquisition, Inc., a newly-formed Delaware corporation and wholly-owned
subsidiary of Multi-Link (the Subsidiary). Pursuant to the terms of the Merger
Agreement, the Subsidiary was merged with and into Auriga, with Auriga as the surviving
entity. Auriga continued its business under the name of Auriga Laboratories, Inc. as a
subsidiary of Multi-Link. All references to Multi-Link or the Company also refer to
Auriga, unless the context indicates otherwise.

Pursuant to the terms of the Merger,
Multi-Link acquired all of the outstanding shares of Common Stock of Auriga (Auriga
Common Stock) in exchange for shares of Series A Convertible Preferred Stock, par
value $0.01 per share of Multi-Link (Preferred Stock). At the closing of the
Merger (the Closing), each outstanding share of Auriga Common Stock held by
the stockholders of Auriga (the Auriga Stockholders) was converted into the
right to receive approximately 0.06 shares of Preferred Stock, or a total of 1,000,042
shares of Preferred Stock, and each outstanding option and warrant to purchase shares of
Auriga Common Stock was assumed by Multi-Link and converted into an option or warrant to
purchase approximately 30.01 shares of Multi-Link Common Stock (Common Stock)
for each one share convertible into Auriga Common Stock pursuant to such option or warrant
(with the exercise price being adjusted accordingly).

7

---

Pursuant to the terms of the
Preferred Stock, each share of Preferred Stock was convertible into approximately 494.96
shares of Common Stock. Accordingly, immediately following the closing, the Auriga
Stockholders owned 1,000,042 shares of Preferred Stock (convertible into a total of
494,977,491 shares of Common Stock). The 37,215,913 shares of Common Stock outstanding
prior to the Merger remained outstanding following the Merger. As of the closing, and
assuming the conversion in full of the Preferred Stock, the Auriga Stockholders owned
approximately 93% of the total outstanding shares of Common Stock (or 95%, assuming
exercise in full of the outstanding Auriga options and warrants that were assumed by
Multi-Link in connection with the Merger), and the remaining stockholders of Multi-Link
owned approximately 7% of the total outstanding shares of Common Stock (or 5%, assuming
exercise in full of the outstanding Auriga options and warrants that were assumed by
Multi-Link in connection with the Merger).

Pursuant to the terms of the
Preferred Stock, the Preferred Stock was subject to automatic conversion into shares of
Common Stock (the Mandatory Conversion) upon the approval by a majority of the
holders of Common Stock and Preferred Stock (voting together on an
as-converted-to-common-stock basis) of a 1-for-15 reverse stock split of Common Stock (the
Reverse Split).

On July 11, 2006, the Reverse
Split was effectuated, resulting in the Mandatory Conversion. Immediately following the
foregoing, Multi-Link was re-domiciled in the State of Delaware, its name was changed to
Auriga Laboratories, Inc. and its authorized shares of Common Stock and
Preferred Stock were changed to 250 million shares and 10 million shares, respectively.
Unless the context indicates otherwise, all share and other information in this Quarterly
Report on Form 10-QSB (this Report) has been restated to give effect to the
Merger, the Reverse Split, the Mandatory Conversion, the change in the Companys
authorized shares and the Companys re-domicile to the State of Delaware.

Due to the change in control of
Multi-Link as a result of the Merger, the Merger was accounted for as an acquisition of
Multi-Link by Auriga and a recapitalization of Auriga. Accordingly, the consolidated
financial statements of the Company subsequent to the Merger consist of the balance sheets
of both companies at historical cost, the historical operations of Auriga, and the
operations of both companies from the Merger date of May 17, 2006. At the time of the
Merger, Multi-Link was a shell company and had no material assets, liabilities or
operations.

As a result of the Merger and
pursuant to the Merger Agreement, the Companys fiscal year was changed to March 31.
Multi-Link had been reporting on a fiscal year ending September 30.

The foregoing transactions are more
fully described in the Merger 8-K.

|3. | GOING
CONCERN.
|-- | --------------

Since Inception, the Company has
incurred significant operating and net losses and has been unable to meet its cash flow
needs with internally generated funds. The Companys cash requirements (primarily
working capital requirements and cash for product development activities) have been
satisfied through borrowings and the issuance of securities in a number of private
placements. At September 30, 2006, the Company had cash and cash equivalents on hand of
approximately $495,000, a negative working capital position of $1,883,826 and long-term
debt commitments of $2,198,702. The present financial position of the Company raises
substantial doubt about its ability to continue as a going concern. On a going forward
basis, the Companys primary business strategy is to continue to focus on its
existing Extendryl® line of products, promote and sell the newly acquired Levall®
product line and the Aquoral product line and continue to acquire proven brand name
products. The Company has successfully raised capital during the current quarter in the
form of the issuance of two promissory notes, the proceeds of which were used for
payments related to new license rights and working capital. The total proceeds from these notes were $2 million as
of September 30, 2006, with an additional amount of $250,000 received in October, 2006.
The Company will need to continue to raise additional equity or debt financing to
adequately fund its strategies and to satisfy its ongoing working capital requirements. If
the Company is unable to obtain such financing in a timely manner, it could be forced to
curtail or cease operations. Even if it is able to pursue these strategies, there can be
no assurances that the Company will ever attain profitability.

8

---

The accompanying consolidated
financial statements do not include any adjustments that might result from the outcome of
this uncertainty.

|4. | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES.
|-- | -------------------------------------------

This summary of significant
accounting policies of the Company is presented to assist in understanding the
Companys consolidated financial statements. The consolidated financial statements
and consolidated notes are representations of the Companys management, which is
responsible for their integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of America, and have been
consistently applied in the preparation of these consolidated financial statements.

Estimates

The process of preparing financial
statements in conformity with accounting principles generally accepted in the United
States of America requires the use of estimates and assumptions regarding certain types of
assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.

Fair Value of Financial
Instruments

The Companys financial instruments,
as defined by Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures about Fair Value of Financial Instruments, include cash,
receivables, prepaid expenses, payables, accrued expenses, royalties payable and
short-term borrowings. All instruments are accounted for on an historical cost basis,
which, due to the short maturity of these financial instruments, approximates fair value.

Reclassifications

Certain reclassifications have been
made to the prior year to conform to the current presentation.

Cash and Cash Equivalents

The Company considers all
highly-liquid investments, with a maturity of three months or less at the date of
acquisition, to be cash equivalents.

Revenue Recognition

The Company recognizes revenue from
the sale of pharmaceutical products, including shipping fees, if any, when title to the
products is transferred to the customer (which usually occurs on delivery) and when
collectibility is reasonably assured. Revenue from sales of the Companys products is
recorded, net of allowances. According to the terms of the Companys sales contracts,
a customer may only return up to a specified maximum amount of product under certain
conditions. Sales return allowances for product returns and contractual rebates are
calculated based upon current economic conditions and the underlying contractual terms as
product is sold. Royalty revenue is recognized when earned.

9

---

Accounting for Stock
Options and Warrants Granted to Employees and Non-Employees

In December 2004, the Financial
Accounting Standards Board (FASB) issued a revision to SFAS No. 123R,
Accounting for Stock Based Compensation. This statement supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. This statement establishes standards for the
accounting of transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of those equity instruments.
This statement focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This statement does not change the
accounting guidance for share-based payment transactions with parties other than employees
provided in SFAS No. 123R. This statement does not address the accounting for employee
share ownership plans, which are subject to the American Institute of Certified Public
Accountants Statement of Position 93-6, Employers Accounting for Employee
Stock Ownership Plans. The Company expects no changes to its financial reporting as
a result of the application of the foregoing because it is already reporting and complying
with the fair value method of SFAS No. 123R.

Provision for Taxes

Income taxes are provided based upon
the liability method of accounting pursuant to SFAS No. 109, Accounting for Income
Taxes. Under this approach, deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end. A valuation allowance
has been recorded against deferred tax assets as management does not believe the Company
has met the more likely than not standard imposed by SFAS No. 109 to allow
recognition of such an asset.

Basic and Diluted
Earnings Per Share

The Company has adopted SFAS No. 128,
Earnings Per Share. Basic earnings per share is computed by dividing net
income(loss) by the weighted average number of common shares outstanding for the period.
Diluted earnings per share is computed by dividing the net income(loss) by the weighted
average number of basic shares outstanding increased by the number of shares that would be
outstanding assuming conversion of the exercisable stock options and warrants. Diluted net
loss per share is the same as basic net loss per share as of September 30, 2006 and
September 30, 2005 as inclusion of the common stock equivalents would be anti-dilutive. A
total of 21,336,958 and 1,105,507 shares of common stock were issuable upon exercise of
outstanding options and warrants at September 30, 2006 and September 30, 2005,
respectively.

Recent Accounting
Pronouncements

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements. This standard defines fair
value, establishes a framework for measuring fair value in accounting principles generally
accepted in the United States of America, and expands disclosure about fair value
measurements. This pronouncement applies to other accounting standards that require or
permit fair value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company will be
required to adopt SFAS No. 157 in the third quarter of fiscal year 2008. Management
is currently evaluating the requirements of SFAS No. 157 and has not yet determined
the impact on the Companys consolidated financial statements.

10

---

In September 2006, the
SEC issued Staff Accounting Bulletin (SAB) No. 108. Due to diversity
in practice among registrants, SAB No. 108 expresses SEC staff views regarding the process
by which misstatements in financial statements are evaluated for purposes of determining
whether financial statement restatement is necessary. SAB No. 108 is effective for fiscal
years ending after November 15, 2006. The Company will adopt SAB No. 108 during the
fourth quarter of fiscal year 2007. The Companys management does not believe the
adoption of SAB No. 108 will have a material impact on the Companys consolidated
financial statements.

In June 2006, the FASB issued
Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48), which clarifies
the accounting for uncertainty in income taxes recognized in financial statements. FIN 48
requires the impact of a tax position to be recognized in the financial statements if that
position is more likely than not of being sustained by the taxing authority. The Company
will be required to adopt FIN 48 in the first quarter of fiscal year 2008. The
Companys management is currently evaluating the requirements of FIN 48 and has not
yet determined the impact on the Companys consolidated financial statements.

|5. | ACCOUNTS
RECEIVABLE.
|-- | --------------------

Accounts receivable as of September
30, 2006 and March 31, 2006 were as follows:

|                                       |  | September 30, 2006 |  | March 31, 2006
|-------------------------------------- |  | ------------------ |  | --------------
|Accounts receivable                    |  |                    |  | $1,393,903    
|Less:  allowance for doubtful accounts |  |                    |  | 233           
|                                       |  |                    |  |               
|Accounts receivable, net               |  |                    |  | $1,393,670    
|                                       |  |                    |  |               

Bad debt expense for the six months ended
September 30, 2006 and for the period from Inception to September 30, 2005 was $364 and
$0, respectively.

|6. | INVENTORY.
|-- | ----------

Inventory as of September 30, 2006
and March 31, 2006 consisted of finished pharmaceutical products of $260,590 (net of
reserves of $94,573) and $214,300, respectively.

|7. | INTANGIBLE
ASSETS.
|-- | ------------------

On August 31, 2006, the Company
entered into a license agreement with Athlon Pharmaceuticals, Inc. (Athlon) in
which it obtained an exclusive worldwide license for the Levall® product line. The
total amount paid for the license rights was $1.5 million in cash and 2.5 million shares of restricted Company
stock, which were paid at closing. The total amount paid was allocated in the amount of $5.6
million to the intangible asset and approximately $300,000 for inventory and samples
received as part of the agreement. An additional $200,000 in consulting expenses related to this
agreement is also included in the total amount of $5.6 million. Royalty fees will be paid
beginning 45 days after the closing date, until the total royalties and closing payments
equals $20 million, based on actual future product sales. For further information, please refer to Note 16 
Commitments and Contingencies.

The intangible asset recorded in
connection with the purchase of the Levall® license rights will be amortized over a
period of fifteen years and will be reviewed annually and more often as needed for
impairment.

11

---

On September 6, 2006, the Company
amended its license agreement with Cornerstone Biopharma, Ltd. (Cornerstone).
The Company paid for this license amendment with 200,000 shares of Common Stock, which
were valued at $1.95 per share at the time of issuance. For further information, please
refer to Note 16  Commitments and Contingencies.

On September 13, 2006, the Company
entered into an exclusive U.S. distribution agreement with Laboratories Carilene S.A.S., a
French corporation (Carilene), for a certain delivery device that will be
marketed by the Company under the name Aquoral. The cost of this distribution right
is $1.5 million, paid over time periods beginning with the initial U.S. product launch.
Initial costs of $200,000 were incurred in securing the rights to distribute this product.
For further information, please refer to Note 16  Commitments and
Contingencies.

The intangible asset recorded in
connection with the purchase of these distribution rights will be amortized over a period
of fifteen years, beginning with the product launch, and will be reviewed annually and
more often as needed for impairment.

Intangible assets which are not
deemed to have an indefinite life are amortized on a straight-line basis over their
respective useful lives. The following table reflects the components of intangible assets
of the Company as of September 30, 2006:

|                               | Gross Amount |  | Accumulated
Amortization |                    | Net Amount |  | Expected Life     | 
|------------------------------ | ------------ |  | ------------------------ | ------------------ | ---------- |  | ----------------- | 
|Licensing rights/product lines |              |  |                          | $        5,997,389 |            |  | $        (33,319) | 
|Supply/distribution agreements |              |  |                          | 1,700,000          |            |  | --                | 
|Goodwill                       |              |  |                          | 92,316             |            |  | --                | 
|                               |              |  |                          |                    |            |  |                   | 
|Total                          |              |  |                          | $        7,789,705 |            |  | $        (33,319) | 
|                               |              |  |                          |                    |            |  |                   | 

As of September 30, 2005, the
intangible assets of the Company consisted of goodwill in the amount of $92,316.

For the three and six months ended
September 30, 2006, amortization expense related to the intangible assets of the
Company was $33,319 and $0, respectively. Amortization is calculated on a straight-line
basis over the estimated useful life of the intangible asset, and the Company estimates
the annual amortization expense for each of the five succeeding fiscal years to be as
follows (in thousands):

|Amount
|------
|2007  
|2008  
|2009  
|2010  
|2011  

|8. | NOTES
PAYABLE.
|-- | --------------

Bank Notes Payable

On August 4, 2006, the Company
terminated an asset-based line of credit (Facility) from Silicon Valley Bank
(SVB) in the amount of $1,000,000. As of March 31, 2006, the Company owed
$172,519 under the Facility. Advances under the Facility were subject to finance charges
based on an interest rate of 1.5% to 2.00% over prime and a collateral handling fee with a
minimum monthly charge of $2,500 per month.

12

---

Amounts advanced under the Facility
were subject to automatic repayment if the loan covenants were no longer maintained by the
Company. On August 4, 2006, all amounts due on the Facility were repaid and the Facility
was terminated.

The Company has a short-term
financing facility with Wells Fargo Bank, which, as of September 30, 2006 and March 31,
2006, had outstanding balances of $62,304 and $62,294, respectively.

Related-Party Loan

On December 15, 2005, the
Company repurchased 1,500,000 shares of its common stock held by a resigning director and
his affiliates. The purchase price was paid in the form of an unsecured subordinated
promissory note (the Note). The remaining loan principal is payable in
annual installments of $600,000, $750,000 and $750,000 due January 2, 2007, January 2,
2008 and January 2, 2009, respectively. As a result of this transaction, the Company
recorded imputed loan interest, loan discount, in order to realize a 7.5%
effective interest rate. The remaining loan discount will be realized as interest expense
based upon the outstanding principal. Interest accrues at a rate equal to 2% per annum on
the unpaid principal amount of the Note. Interest is payable in arrears in cash by the
Company and included with each annual principal installment.

Related-Party Senior
Secured Convertible Note

On August 4, 2006, the Company
issued to Sorrento Financial Partners, LLC (SFP) a senior secured convertible
note (the SFP Note) in the principal amount of $632,000. The SFP Note bears
interest at the rate of 8% per annum and is due and payable in full on May 15, 2007.
Accrued interest on the SFP Note is payable monthly in arrears. The Companys Chief
Executive Officer (CEO) is the beneficial owner of SFP. Of the SFP Notes
principal amount of $632,000, (i) $400,000 represents funds advanced by SFP to the
Company, and (ii) $232,000 represents an accrued bonus that was owed by the Company
to its CEO. At SFPs option, the SFP Note is convertible, in whole or in part and at
any time after August 4, 2006 and prior to the SFP Notes full repayment, into
shares of Common Stock. The number of shares that are issuable upon a conversion of the
SFP Note is equal to the amount determined by dividing (i) the outstanding principal
amount of the SFP Note to be converted by (ii) the conversion price of $1.388. As of
September 30, 2006, the outstanding balance under the SFP Note remains $632,000.

Related-Party Senior
Secured Promissory Note

On August 29, 2006, the Company
issued to Levall Finance Corp. LLC (LFC) a senior secured promissory note (the
LFC Note) in the principal amount of $1.5 million, the proceeds of which were
used to complete the licensing agreement for the Levall® product line. The LFC Note was amended on
September 28, 2006 for certain provisions that were effective as of August 29, 2006. The
LFC Note is due and payable in full on the earlier to occur of (i) the closing by the
Company of an equity or debt financing, the net proceeds of which equal or exceed $1.5
million, or (ii) December 15, 2006. In lieu of interest payments, the Company issued a
warrant exercisable for 1.5 million fully paid and non-assessable shares of Common Stock
at an exercise price of $1.92. In connection with this warrant, the Company recorded
$1,267,350 as a loan discount, which will be amortized over the life of the loan (please
refer to Note 13). As of September 30, 2006, the Company expensed $114,582 of this loan
discount as interest expense. The warrant provides LFC with piggyback
registration rights with respect to shares of common stock acquired upon exercise of the
warrant. The LFC Note also requires the Company to make quarterly payments to LFC equal to
6% of the gross sales by the Company (less customary deductions) of the Levall®
product line. For further information, please refer to Note 16  Commitments
and Contingencies.

The LFC Note is secured by a
first-priority perfected security interest in all of the Companys assets. The first
priority security provided by the Company is on a pro-rata basis and pari passu to
the senior secured note entered into by the Company and Aquoral Finance Corp. LLC
(AFC) dated September 28, 2006 and is senior in right of payment to any and
all of the Companys other indebtedness. The Company can prepay all or any portion of
the LFC Note at any time without premium or penalty.

13

---

As a condition to the foregoing
transaction, the Company and SFP were required to enter into a subordination agreement
with LFC pursuant to which SFP agreed that all amounts owed to it by the Company would be
subordinated to amounts owed to LFC.

SFP is the managing member of LFC.
The Companys CEO contributed $125,000 to LFC in exchange for his ownership interest
in LFC. The remaining contributions to LFC were made by individuals who are not affiliates
of the Company.

As of September 30, 2006, the
outstanding balance under the LFC Note was $1.5 million which was offset by the loan
discount in the amount of $1,152,768.

Related-Party Senior
Secured Promissory Note

On September 28, 2006, the Company
issued to AFC a senior secured promissory note (the AFC Note). The AFC Note
provides for up to $1.5 million of advances to be made by AFC from time to time, each
advance requiring the Companys consent. The proceeds from the AFC Note will be
used to satisfy the Company's obligations under the distribution agreement with Carilene.
All amounts advanced under the AFC Note are
due and payable in full on the earlier to occur of (i) the closing by the Company of an
equity or debt financing, the gross proceeds of which equal or exceed $1.5 million
(exclusive of advances made under the AFC Note), or (ii) March 31, 2007. The AFC Note
requires the Company to make quarterly payments to AFC, commencing with the quarter ending
March 31, 2007, equal to 0.5% of the gross sales by the Company (less customary
deductions) of its recently acquired Aquoral product line during the preceding
quarter for every $125,000 of outstanding funds advanced under the AFC Note. This payment obligation
continues in perpetuity.

The AFC Note is secured by a
first-priority security interest in all of the Companys assets and is senior in
right of payment to any and all of the Companys other indebtedness, except that the
AFC Note ispari passu with the Companys $1.5 million obligation to LFC.

As additional consideration, the
Company agreed that, concurrent with each advance made by AFC under the AFC Note, it would
issue to AFC a five-year warrant to acquire one share of Common Stock, at an exercise
price of $1.50 per share, for each one dollar so advanced. The warrant provides AFC with
piggyback registration rights with respect to shares of Common Stock acquired
upon exercise of such warrant. As of September 30, 2006, the Company had issued warrants
to acquire up to 500,000 shares of Common Stock. In connection with these warrants, the
Company recorded $573,619 as a loan discount that will be amortized over the life of the
loan (please refer to Note 12). As of September 30, 2006, the Company had expensed $73,619
of this loan discount as interest expense.

SFP is the managing member of AFC.
The Companys CEO contributed $125,000 to AFC in exchange for his ownership interest
in AFC. The remaining contributions to AFC were made by individuals who are not affiliates
of the Company. Affiliates of the Company may make additional contributions to AFC to fund
a portion of future advances under the AFC Note.

As of September 30, 2006, the
outstanding balance under the AFC Note was $500,000, which balance was offset by the loan
discount for the same amount.

|9. | ROYALTIES
PAYABLE.
|-- | ------------------

As part of the distribution agreement
entered into with Carilene, the Company agreed to pay to Carilene royalty payments of $1.5
million. These payments are listed on the Companys balance sheet as product licenses
payable, current and long-term, in the amounts of $750,000 each, respectively. The terms
of the agreement call for these payments to be made as follows:

14

---

| |  | $250,000
upon the commercial launch of the product in the U.S.;
| | - | ---------------------------------------------------------------

| |  | $500,000
on or before the 90th day after the commercial launch; and
| | - | -------------------------------------------------------------------

| |  | $750,000
upon the earlier of twelve months after the commercial launch of the product or at the
time the Company achieves $5,000,000 in net sales of the Aquoral product line.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In order to maintain exclusive rights
to the Aquoral product line, the Company must purchase specified minimum amounts of
the product. The agreement also provides for a termination of the license upon the
expiration of the patent covering the technology practiced by the product.

|10. | CAPITAL
STOCK.
|--- | --------------

Preferred Stock

The Company is authorized to issue
10,000,000 shares of Preferred Stock, par value $0.001 per share. As of September 30,
2006, there were no shares of preferred stock issued or outstanding.

Common Stock

The Company is authorized to issue
250,000,000 shares of Common Stock, par value $0.001 per share. As of September 30, 2006,
there were 40,413,777 shares of Common Stock issued and outstanding.

The holders of shares of Common Stock
are entitled to one vote for each share.

Private Placement

In April 2006, the Company completed
a private placement of Common Stock to accredited investors and received $2,734,444 in
gross proceeds, less costs associated with this private placement of $289,550, of which
$250,000 was paid to Sorrento Financial Group, LLC, an entity owned by the Companys CEO,
for its financial services in structuring this private placement. In connection with this
private placement, the Company issued 2,957,636 shares of Common Stock.

In September 2006, the Company
completed a private placement of Common Stock to accredited investors and received
$1,090,000 in gross proceeds, less finders fees of $100,868. In connection with this
private placement, the Company issued 1,090,000 shares of Common Stock and warrants to
purchase 1,090,000 shares of Common Stock at an exercise price of $1.25 per share. Each
warrant provides the holder with piggyback registration rights with respect to
shares of Common Stock acquired upon exercise of such warrant.

Reverse Merger Costs

In connection with the Merger on May
17, 2006, the Company incurred $683,089 in costs that were charged against Common Stock.

Treasury Stock

Pursuant to the terms of the Merger
Agreement, the Company retired all shares of Common Stock held in treasury stock on May
17, 2006.

|11. | EQUITY
INCENTIVE PLAN.
|--- | ----------------------

In August 2006, the Board of
Directors of the Company (the Board) approved the Companys 2006 Equity
Incentive Plan, pursuant to which 1,500,000 shares of Common Stock are available to be
granted thereunder. Awards issued under this plan may be issued to employees, non-employee
directors or consultants and advisors. Awards may be issued or granted in the form of
stock options, stock appreciation rights, restricted shares, restricted stock units and
performance-based awards. The value of each award is based upon the current fair market
value of the Common Stock at the time of grant. The 2006 Equity Incentive Plan expires in
August 2016.

15

---

For the three and six months ended as
of September 30, 2006, the Company issued 1,095,125 shares of Common Stock under the 2006
Equity Incentive Plan, recorded $1,723,250 for compensation and professional service
expenses and capitalized $400,000 for intangibles.

|12. | STOCK
OPTIONS.
|--- | --------------

2005 Stock Option Plan
(2005 Stock Plan)

Pursuant to the terms of the Merger
Agreement, the Company assumed each outstanding option under the 2005 Stock Plan to
purchase shares of pre-Merger Auriga Common Stock, which options were exercisable for
approximately 30.01 shares of Common Stock, with the exercise price being adjusted
accordingly.

During the six months ended September
30, 2006, stock options granted under the 2005 Stock Plan to purchase 410,188 shares of
Common Stock were issued to participants. These options are exercisable any time at prices
ranging from $0.50 to $0.93 per share. The shares issuable upon exercise of the options
are subject to a repurchase right of the Company in the event the grantee fails to meet
certain vesting requirements. The options vest 12/48ths after one year of continuous
service and 1/48th for each month thereafter until fully vested. For the six months ended
September 30, 2006, the average fair value of the outstanding options was $0.21 per share
(estimated using the Black Scholes Option Pricing Model). The following assumptions were
made to value the stock options: (i) risk-free interest rate between 4.55% and 4.60%;
(ii) expected life of 10 years; and (iii) expected volatility of 39% with no
dividends expected to be paid.

During the six months ended September
30, 2006, stock options issued under the 2005 Stock Plan to purchase 677,321 shares of
Common Stock were forfeited as a result of employee terminations, and stock options to
purchase 15,007 shares of Common Stock were exercised. As of September 30, 2006,
cumulative stock options outstanding under the 2005 Stock Plan were 4,942,256, of which
158,823 were vested. As of September 30, 2005, cumulative stock options outstanding under
the 2005 Stock Plan were 970,445, of which none were vested.

For the three and six months ended
September 30, 2006, compensation expense associated with stock options that vested during
the periods was $64,736 and $89,680, respectively.

2006 Stock Option Plan
(2006 Stock Plan)

In July 2006, the stockholders of the
Company approved the 2006 Stock Plan, pursuant to which 7,000,000 shares of the
Companys common stock are available to be granted thereunder. Options granted under
the 2006 Stock Plan may be incentive stock options or nonstatutory stock options, as
determined by the Board at the time of grant and subject to the applicable provisions of
Section 422 of the Internal Revenue Code of 1986, as amended, as well as the regulations
and interpretations promulgated under the 2006 Stock Plan. Nonstatutory stock options may
be granted to employees and consultants. Incentive stock options may be granted only to
employees. The Board may at any time offer to repurchase for a payment in cash or shares
of Common Stock an option previously granted under the 2006 Stock Plan based on such terms
and conditions as the Board shall establish and communicate to the optionee at the time
that such offer is made. The 2006 Stock Plan shall continue in effect for a term of 10
years following its adoption by the Board, which was August 29, 2006. The 2006 Stock Plan
provided that the term of each option granted thereunder shall be no more than 10 years
from the date of grant or such shorter term as may be provided in the option agreement,
except that, in the case of an incentive stock option granted to a person who at the time
of such grant is a 10% holder of the Common Stock, the term of the option shall be five
years from the date of grant or such shorter term as may be provided in the option
agreement.

16

---

During the six months ended September
30, 2006, stock options granted under the 2006 Stock Plan to purchase 1,911,230 shares of
Common Stock were issued to participants. The options are exercisable any time at prices
ranging from $1.48 to $2.55 per share. The shares issuable upon exercise of the options
are subject to a repurchase right of the Company in the event the grantee fails to meet
certain vesting requirements. For the six months ended September 30, 2006, the average
fair value of the outstanding options was $1.26 per share (estimated using the Black
Scholes Option Pricing Model). The following assumptions were made to value the stock
options: (i) risk-free interest rate between 4.88% and 5.01%; (ii) expected life
of 10 years; and (iii) expected volatility of 62% with no dividends expected to be
paid.

As of September 30, 2006, cumulative
stock options outstanding under the 2006 Stock Plan were 1,911,230, of which none were
vested.

|13. | COMMON
STOCK WARRANTS.
|--- | ----------------------

Pursuant to the terms of the Merger
Agreement, the Company assumed each outstanding warrant to purchase shares of pre-Merger
Auriga Common Stock, which warrants were exercisable for approximately 30.01 shares of
Common Stock, with the exercise price being adjusted accordingly.

During the six months ended September
30, 2006, the Company issued warrants to acquire a total of up to 9,262,277 shares of
Common Stock. As of September 30, 2006, warrants to purchase up to 14,483,471 shares of
Common Stock were outstanding, and warrants to purchase 12,327,915 shares of Common Stock
were vested.

For the three and six months ended
September 30, 2006, compensation expense for services for warrants to purchase Common
Stock using the Black Scholes Option Pricing Model was $614,528 and $1,671,248,
respectively. Additionally, the Company recorded $1,840,969 in loan discount charges in
connection with warrants granted to purchase 2,125,000 shares of Common Stock associated
with the issuance by the Company of certain promissory notes (please refer to Note 8). The
following assumptions were made to value the warrants: (i) risk-free interest rate
between 4.00% and 4.71%; (ii) expected lives of 10 years; and (iii) expected
volatility of 39% and 62%.

|14. | RELATED-PARTY
TRANSACTIONS.
|--- | ---------------------------

Pursuant to an employment agreement
dated March 29, 2006, during the quarter ended September 30, 2006, and as a result of the
Company becoming publicly-traded, the Companys CEO earned a bonus of $250,000 and
was granted immediate acceleration of his warrant to purchase 5,002,294 shares of Common
Stock.

During the six months ended September
30, 2006, the Company paid royalties to Cornerstone associated with the amended and
restated license agreement pursuant to which the Company was granted exclusive rights to
market and sell the Extendryl® product line, in exchange for the payment to
Cornerstone of a royalty fee (please refer to Note 16). The royalty expense for the three
and six months ended September 30, 2006 amounted to 115,125 and $247,377,
respectively. Cornerstones chief executive officer is a significant stockholder of
the Company. For further information on other related-party transactions, please refer to
Note 8  Notes Payable.

17

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|15. | SIGNIFICANT
CUSTOMERS (CONCENTRATIONS).
|--- | ---------------------------------------

During the three months ended
September 30, 2006, three customers accounted for a combined total of approximately 75% of
gross sales of the Company. During the three months ended September 30, 2005, two
customers accounted for a combined total of approximately 91% of gross sales of the
Company. No other customer accounted for more than 10% of the Companys sales during
the respective quarters.

During the six months ended September
30, 2006, five customers accounted for a combined total of approximately 91% of gross
sales of the Company. From Inception to September 30, 2005, two customers accounted for a
combined total of approximately 91% of gross sales of the Company. No other customer
accounted for more than 10% of the Companys sales during the respective periods.

|16. | COMMITMENTS
AND CONTINGENCIES.
|--- | ------------------------------

Cornerstone Sublicense
Agreement

The Company was party to a license
agreement (the Prior License Agreement) with Cornerstone dated as of May 24,
2005, as amended. Effective August 1, 2005, the Company paid Cornerstone a royalty of 30%
on net sales of the Extendryl® product line up to $4,000,000, and a royalty of 8% on
net sales in excess of $4,000,000. The annual maximum royalty was capped at $1,700,000.

This agreement was amended effective
as of September 6, 2006, to provide for the following revised royalty payment schedule:

| |  | 30%
of net sales during the quarter ended September 30, 2006;
| | - | -------------------------------------------------------------

| |  | 10%
of net sales during the last quarter of 2006 and the first quarter of 2007;
| | - | -------------------------------------------------------------------------------

| |  | 8%
of net sales during the second, third and fourth quarters of 2007;
| | - | ---------------------------------------------------------------------

| |  | 7%
of net sales during 2008; and
| | - | --------------------------------

| |  | 5%
of net sales during 2009 and thereafter.
| | - | -------------------------------------------

Athlon Pharmaceuticals,
Inc. License Agreement

On August 19, 2006, the Company
entered into entered into a license agreement with Athlon which set forth the terms upon
which the Company would obtain an exclusive, worldwide license (the License)
from Athlon for the Levall® product line (the Products), together with an
exclusive license to all of Athlons intellectual property related to the Products
and certain other tangible and intangible assets related to, or necessary for the
continued development and marketing of, the Products. On August 31, 2006, the parties
amended and restated the license agreement to permit the Company to make, have made, sell,
offer to sell, have sold, market, promote, distribute, import and otherwise transfer the
Products on an exclusive, worldwide basis.

The amount paid by the
Company for the License consisted of the following:

| |  | $1,500,000
paid at the closing; and
| | - | -----------------------------------

18

---

| |  | 2,500,000
shares of restricted Common Stock delivered to Athlon at the closing (the "2,500,000
Shares").
| | - | --------------------------------------------------------------------------------------------------------

In addition, the Company is obligated
to pay to Athlon royalties as follows:

| |  | 50%
of net sales of the Products up to $10,000,000 commencing 45 days after the closing date
through the end of the first year following the closing date;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 20%
of net sales of the Products in excess of $10,000,000 commencing 45 days after the
closing date through the end of the first year following the closing date;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 35%
of net sales of the Products for the second year following the closing date;
| | - | --------------------------------------------------------------------------------

| |  | 25%
of net sales of the Products for the third year following the closing date;
| | - | -------------------------------------------------------------------------------

| |  | 8%
of net sales of the Products for each year following the third year after the closing
date until such time as the amounts paid by the Company (including the 2,500,000 Shares)
total $20,000,000 (the Royalty Payment Ceiling); and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 1%
of net sales of the Products for each year after achievement by the Company of payments
equaling the Royalty Payment Ceiling.
| | - | --------------------------------------------------------------------------------------------------------------------------------

For purposes of calculating the value
of the 2,500,000 Shares, the parties have agreed that the per share price shall equal the
closing bid price of the Common Stock on the earlier of (i) the earliest date after a
registration statement covering the resale of such shares is declared effective by the
SEC, or the date at which the Companys twenty (20)-day average daily trading volume
of the Common Stock is equal to or greater than 15,000 shares per day, or (ii) the
earliest date on which the 2,500,000 Shares can be sold under Rule 144(k), or the date at
which the Companys twenty (20)-day average daily trading volume of the Common Stock
is equal to or greater than 15,000 shares per day.

The future amounts payable by
the Company (i) are subject to
reduction in the event that a proceeding commenced by the U.S. Food and Drug
Administration against any Product impairs net sales and (ii) are subject to a 50%
reduction, without a reduction of the Royalty Payment Ceiling, in the event that the
thirty (30)-day average closing price of the Common Stock following the registration with
the SEC of the 2,500,000 Shares is equal to or greater than $5.00 per share and the 30-day
average daily trading volume of the Common Stock is equal to or greater than 75,000 shares
per day.

Carilene Distribution
Agreement

On September 13, 2006, the Company
and Carilene entered into a distribution agreement that provides the Company with an
exclusive license to market, sell, distribute, sublicense, exploit and market,
Aquoral, an oral artificial saliva product, throughout the United States. Carilene
has agreed to supply the Company with all of its requirements for the product, and the
Company has agreed to buy inventory exclusively from Carilene.

The amount paid by the
Company for the distribution rights consisted of the following:

| |  | $250,000
payable upon commercial launch of the product in the U.S.;
| | - | -------------------------------------------------------------------

| |  | $500,000
payable 90 days following commercial launch of the product; and
| | - | ------------------------------------------------------------------------

19

---

| |  | $750,000
payable in cash or Common Stock, as determined in the sole discretion of Carilene, upon
the earlier of twelve months after the launch of the product or at the time that the
Company generates total net sales of $5.0 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the Company is obligated
for royalty payments of 5% of net sales by the Company of the Aquoral product line.

In order to maintain exclusive rights to
the Aquoral product line, the Company must purchase specified minimum amounts of the
product. The agreement provides for a termination of the license upon the expiration of
the patent covering the technology practiced by the product.

|17. | SUBSEQUENT
EVENTS.
|--- | ------------------

On October 18, 2006, the Company
entered into a distribution agreement with Rivers Edge Pharmaceuticals LLC
(Rivers Edge) that provides for Rivers Edge to market and
distribute authorized generic equivalents of the Companys branded products,
Extendryl® and Levall®. Beginning on January 1, 2007, the agreement provides
that Rivers Edge will receive a commission of 30% of the net sales of these
products. Rivers Edge will provide all distribution services for the authorized
generic products and invoice customers directly, providing the Company with a monthly
accounting of all sales.

On October 20, 2006, the Company and
Pharmelle LLC (Pharmelle) entered into a co-promotion agreement in which
Pharmelle was appointed the exclusive co-promotor and marketer of the Companys
Aquoral product line. Pharmelle will establish and maintain a sales force of at
least 25 sales representatives and perform at least 9,000 visits to physicians who
specialize in the treatment of xerostomia (dry mouth). This agreement expires on January
15, 2009 and is renewable for an additional two year term if the parties mutually consent
to an extension.

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|Item 2. | Managements Discussion and Analysis or Plan of Operation.
|------- | ----------------------------------------------------------

Investors
should read the following discussion and analysis in conjunction with the consolidated
financial statements and related consolidated notes of Auriga Laboratories, Inc. (the
Company, we, us or our) contained in this
Quarterly Report on Form 10-QSB (Form 10-QSB) and our Form 8-K filed with the
Securities and Exchange Commission (the SEC) on May 18, 2006 (May
18, 2006 Form 8-K), which includes our audited financial statements and related
notes for the period from April 12, 2005 (Inception) through March 31,
2006 (under the name of Multi-Link Telecommunications, Inc.).

# OVERVIEW

We
are a specialty pharmaceutical company capitalizing on high-revenue markets and
opportunities in the pharmaceutical industry through proactive sales, integrated marketing
and advanced in-house drug development capabilities. Our high-growth business model
combines acquisition of proven brand names, powerful product development strategies and
rapidly-growing national sales teams and marketing operations.

We
are currently focused on delivering unique solutions for the respiratory, dermatology,
psychiatry and gastroenterology markets. Our product portfolio consists of our
Extendryl®, Levall® and Aquoral product lines. Our Extendryl® and
Levall® families of prescription products are indicated for relief of symptoms
associated with a range of acute respiratory diseases. Aquoral, which will be
launched in early 2007, is an FDA-cleared, prescription-only treatment for xerostomia, or
dry mouth. Xerostomia is a widespread condition affecting approximately 25 million
Americans and represents a potential marketplace opportunity estimated to exceed $1
billion. Additionally, we expect to compete in the $5 billion dermatology marketplace
with the introduction of five newly-branded prescription dermatology products in 2007.
Lastly, our development pipeline targets the $3 billion GI anti-inflammatory market.

An
innovative, commission-only sales force structure allows us to retain a highly-motivated
workforce at a minimal investment. By the summer of 2007, we expect to have a total of 200
sales representatives divided among three sales teams. Extendryl® and Levall® are
currently promoted by our respiratory sales team targeting allergists, pediatricians and
select primary care physicians with high prescription volume. We will promote
Aquoral to psychiatrists and rheumatologists, while Pharmelle LLC, our co-marketing
partner, will promote Aquoral to urologists. Our new dermatology products, which we
intend to introduce in early 2007, will be promoted by a dedicated sales team targeting
dermatologists with high prescription volume.

Our
business strategy is to acquire rights to valuable brand portfolios that are no longer a strategic
focus for large pharmaceutical companies, then capitalize on untapped marketplace
opportunities through brand extension and directed sales/marketing programs. Our drug
development pipeline leverages novel material science and advanced drug delivery
technologies to produce improved formulations of successful brands to further expand
markets, sales and clinical indications for proven, successful products. In addition, we
plan to become a fully-integrated pharmaceutical company by acquiring our own
manufacturing and development capabilities. Moving forward, we plan to acquire and/or
in-license additional products and technologies to further grow revenues.

# CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

There
have been no material changes to our critical accounting policies and estimates since the
end of our last fiscal year. For detailed information on our critical accounting policies
and estimates, see our financial statements and notes thereto included in this Form 10-QSB
and the audited financial statements as of and for the period from Inception to March 31,
2006 included in our May 18, 2006 Form 8-K.

21

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The
following discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in accordance
with the standards of the Public Company Accounting Oversight Board (United States). The
preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates including, among others, those affecting revenues, the allowance for doubtful
accounts, and the useful lives of tangible and intangible assets. The discussion below is
intended to be a brief discussion of some of the judgments and uncertainties that can
impact the application of these policies and the specific dollar amounts reported in our
financial statements. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which
form our basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, or if management made different
judgments or utilized different estimates. Many of our estimates or judgments are based on
anticipated future events or performance, and as such are forward-looking in nature, and
are subject to many risks and uncertainties, including those discussed above and elsewhere
in this Form 10-QSB. We do not undertake any obligation to update or revise this
discussion to reflect any future events or circumstances.

We
have identified below some of our accounting policies that we consider critical to our
business operations and the understanding of our results of operations. This is neither a
complete list of all of our accounting policies, nor does it include all the details
surrounding the accounting policies we have identified. There are other accounting
policies that are significant to us. For a more detailed discussion on the application of
these and our other accounting policies, please refer to our Consolidated Notes to
Consolidated Financial Statements included herein and to our Consolidated
Notes to Consolidated Financial Statements included in our May 18, 2006 Form 8-K.

# REVENUE RECOGNITION

We
recognize revenue from the sale of pharmaceutical products, including shipping fees, if
any, when title to the product is transferred to the customer (which usually occurs on
delivery) and when collectibility is reasonably assured. Revenue from sales of our
products is recorded, net of allowances. According to the terms of our sales contracts, a
customer may only return up to a specified maximum amount of product under certain
conditions. We calculate sales return allowances for product returns and contractual
rebates based upon current economic conditions and the underlying contractual terms as
product is sold. We recognize royalty revenue when it is earned.

# OPERATING EXPENSES

We
have segregated our recurring operating expenses among four categories: cost of goods
sold, including royalties; sales, marketing and trade expenses; general and administrative
expenses; and research and development. Cost of goods sold includes the direct costs
associated with materials and supplies, royalties and distribution. Sales, marketing and
trade expenses include salaries for sales and marketing staff, advertising and promotional
expenses, samples used by the sales force, market research and travel expenses. General
and administrative expenses includes salaries and benefits for our executives, business
development, human resources, finance, information technology staffing and general
operating expenses. General operating expenses includes overall corporate expenses, such
as rent, supplies, and corporate financial promotion activities. Research and development
expenses includes research into development of proprietary patents, development of
applications for rapid-dissolve technology, partnerships with third parties in developing
proprietary drug delivery technologies and development of line extensions to our
Extendryl® line. These expenses also include salaries and benefits, legal fees for
patent reviews and scientific advisory board stipends attributable to such development
activities.

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# RESULTS OF OPERATIONS:
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 ANDTHREE MONTHS ENDED SEPTEMBER 30,
2005 AND APRIL 12, 2005 THROUGH SEPTEMBER 30, 2005

The
following analysis and discussion pertains to our results of operations for the three
months ended September 30, 2006, compared to our results of operations for the three
months ended September 30, 2005, and our results of operations for the six months ended
September 30, 2006, compared to our results of operations for the period from Inception
through September 30, 2005.

Net
Revenue. Our net revenues for the three months ended September 30, 2006 increased
$1,061,000, or 145%, to $1,791,000, as compared to $730,000 for the three months ended
September 30, 2005. Our net revenues for the six months ended September 30, 2006 increased
$1,547,000, or 206%, to $2,298,000 from $751,000 for the period from Inception through
September 30, 2005. We began operations in April, 2005 and began actively selling and
promoting the Extendryl ® line during the quarter ended September 30, 2005. Our
revenues for the three month and six months ending September 30, 2006 include one month of
sales from the recently acquired Levall® product line, which accounted for 45% of
total revenue for the quarter ended September 30, 2006.

Cost
of Goods Sold. Cost of goods, which includes royalties, for the three and six months
ended September 30, 2006 were $576,000 and $905,000, as compared to $517,000 for both the
three months ended September 30, 2005 and from Inception through September 30, 2005. This
increase in cost of goods sold was a result of the increase in our revenues for the three
and six months ended September 30, 2006.

Sales,
Marketing and Trade Expenses. Sales, marketing and trade expenses for the three months
ended September 30, 2006 increased $776,000 to $928,000, as compared to $152,000 for the
three months ended September 30, 2005. Sales, marketing and trade expenses for the six
months ended September 30, 2006 increased $2,339,000 to $2,536,000, as compared to
$197,000 for the period from Inception through September 30, 2005. We incurred only
nominal salary expenses for a start-up sales staff for the period from Inception through
September 30, 2005. The increase in sales, marketing and trade expenses in comparing the
two periods was due primarily to the addition of sales representatives and significant
increases in market research and overall sales and marketing activities, including
advertising, sample distribution and promotion. Included in these expenses are $161,000
and $226,000 of non-cash equity instrument costs for the three and six months ended
September 30, 2006. Salary and benefit expenses decreased from $782,000 for the quarter
ended June 30, 2006 to $372,000 for the quarter ended September 30, 2006 as a result of a
restructuring of the sales force in July that significantly decreased the number of
salaried sales representatives and increased the deployment of independent commission
sales representatives working on a straight commission basis. We plan for our sales force
to grow to as many as 100 representatives in the future in order to fully support our
newly acquired product lines and distribution rights, while maintaining a significantly
reduced sales and marketing cost structure.

General
and Administrative Expense. General and administrative expenses increased $2.86
million to $3.13 million for the three months ended September 30, 2006, as compared to
$247,000 for the three months ended September 30, 2005. General and administrative
expenses increased $4.7 million to $5.06 million for the six months ended September 30,
2006, as compared to $360,000 for the period from Inception through September 30, 2005. Of
the $3.13 million expense in the current quarter, $2.2 million of this, or 70.3%, was
related to non-cash expenses in the form of stock warrants issued to our vendors for
services rendered or to be rendered in the future and non-cash compensation expense
associated with vested stock options. The balance was due primarily to increases in salary
and benefit expenses for our executive, finance, information technology, human resources
and administrative staff. These salary and benefit costs comprised $546,000, or 30.2%, of
overall general and administrative costs for the six months ended September 30, 2006,
exclusive of non-cash charges.

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Research
and Development Expense. Research and development expenses increased $161,000, or 68%,
to $397,000 for the three months ended September 30, 2006, as compared to $236,000 for the
three months ended September 30, 2005. Research and development expenses increased
$331,000, or 99%, to $664,000 for the six months ended September 30, 2006, as compared to
$333,000 for the period from Inception through September 30, 2005. This increase was
primarily due to staff additions and our increased investment in development projects. We
expect expenses in this area to continue to increase in the future, as we develop new
products designed to significantly increase our market share in our targeted market areas.

Interest
Expense. Interest expense increased $233,000 to $236,000 for the three months ended
September 30, 2006, as compared to $3,400 for the three months ended September 30, 2005.
Interest expense increased $276,000 to $281,000 for the six months ended September 30,
2006, as compared to $5,000 for the period from Inception through September 30, 2005. The
interest expense is comprised of discount amortization of $188,000 on notes payable that
began during the three months ended September 30, 2006. The balance of this expense
is primarily related to the note payable owed to a related party and the interest incurred
in financing accounts receivables with our bank.

# LIQUIDITY AND CAPITAL
RESOURCES

The
following section discusses the effects of changes in our balance sheet and cash flow on
our liquidity and capital resources.

Since
Inception, we have incurred significant operating and net losses and have been unable to
meet our cash flow needs with internally generated funds. Our cash requirements (primarily
working capital requirements and cash for product development activities) have been
satisfied through borrowings and the issuance of securities in a number of private
placements. At September 30, 2006, we had cash and cash equivalents on hand of
approximately $494,000, a negative working capital position of $1.9 million and long-term
debt commitments of $2.2 million. Although we have taken actions to significantly reduce
operating losses by reducing operating expenses and headcount, and have also reduced our
royalty expenses as a result of a recent agreement with a licensee, we expect to continue
to generate losses for the foreseeable future. Our present financial position raises
substantial doubt about our ability to continue as a going concern. The consolidated
financial statements included in this Form 10-QSB do not include any adjustments that
might result from the outcome of this uncertainty.

On
a going forward basis, our primary business strategy is to continue to focus on our
existing Extendryl® line of products, promote our newly-acquired Levall® product
line and develop the distribution rights for our Aquoral product line. We will need
to secure additional equity or debt financing to adequately fund these strategies and to
satisfy our ongoing working capital requirements. If we are unable to obtain such
financing in a timely manner, we could be forced to curtail or cease operations. Even if
we are able to successfully execute these strategies, there can be no assurances that we
will ever attain profitability.

Our
cash and cash equivalents were $494,000 on September 30, 2006, as compared to $504,000 at
March 31, 2006. Net cash used by operating activities for the six months ended September
30, 2006 was $2.85 million. This use of cash was the result of a net loss of $7.2 million
for the six months ended September 30, 2006 (adjusted for non-cash items), an increase in
accounts receivable of $619,000, an increase in prepaid expenses of $174,000 and a
decrease in royalties payable of $234,000. These uses of cash were partially offset by a
decrease in inventory of $188,000, a decrease in deposits of $6,000, an increase in
accounts payable of $1,070,000 and an increase in accrued expenses of $330,000.

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Our
cash and cash equivalents were $369,000 on September 30, 2005. Net cash used by operating
activities for the period from Inception through September 30, 2005 was $645,000. This use
of cash was the result of a net loss for the period of $659,000, an increase in
receivables of $678,000 and an increase in deposits and prepaids of $26,000. Partially
offsetting the use of cash from operations was cash generated from an increase in accounts
payable of $189,000, an increase in accrued expenses of $139,000 and an increase in
royalties payable of 385,219.

Net
cash used in investing activities for the six months ended September 30, 2006 was
$1,590,000. The uses of cash were for payments for product licenses of $1.5 million and
property and equipment for $90,000. Net cash used in investing activities for the period
from Inception through September 30, 2005 was $169,000, which was used to purchase
property and equipment.

Net
cash provided by financing activities was $4.4 million for the six months ended
September 30, 2006 resulting from net proceeds from a private stock placement
offering to qualified investors of $2.2 million, proceeds from senior secured notes of $2
million, proceeds from convertible secured notes of $400,000, proceeds from bank notes
payable of $386,000 and proceeds from stock subscription deposits and receivables of
$21,500. We used $559,000 for payments of bank notes payable.

Net
cash provided by financing activities was $1,184,000 for the period from Inception through
September 30, 2005. Cash provided was $1,232,000 from proceeds received from stock
subscriptions as part of a private placement offering to qualified investors. An
additional $52,000 in cash was provided by proceeds from bank notes, which was offset by
the payment of $100,000 on a related-party loan.

On
August 4, 2006, we paid off all outstanding amounts due to Silicon Valley Bank and
terminated the financing arrangement we had with them.

On
August 7, 2006, we executed an 8% senior secured convertible note (convertible
note) with Sorrento Financial Partners, LLC (SFP), an entity owned by
Philip S. Pesin, our chief executive officer (CEO). The principal sum of the
convertible note is $632,000 and is due on May 15, 2007. We began paying interest on the
aggregate unconverted and the then-outstanding principal amount of the convertible note
monthly in arrears in September 2006.

SFP
is the managing member of Levall Finance Corp. LLC (LFC). Our CEO contributed
$125,000 to LFC in exchange for his ownership interest in LFC. The remaining contributions
to LFC were made by individuals who are not affiliates of the Company.

On
August 29, 2006, we issued to LFC a senior secured promissory note (the LFC
Note) in the principal amount of $1.5 million. The LFC Note was amended on September
28, 2006 for certain provisions that were effective as of August 29, 2006. The LFC Note is
due and payable in full on the earlier to occur of (i) the closing by us of an equity or
debt financing, the net proceeds of which equal or exceed $1.5 million, or (ii) December 15,
2006. In lieu of interest payments, we issued a warrant exercisable for 1.5 million fully
paid and non-assessable shares of our common stock at an exercise price of $1.92. The LFC
Note is secured by a first-priority perfected security interest in all of our assets. The
first priority security interest provided by us contains terms that are pro-rata to the
senior secured note, dated September 28, 2006, issued by us to Aquoral Finance Corp. LLC
(AFC) and is senior in right of payment to any and all of our other
indebtedness. We can prepay all or any portion of the LFC Note at any time without premium
or penalty.

25

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As
a condition to the foregoing transaction, we and SFP were required to enter into a
subordination agreement with LFC pursuant to which SFP agreed that all amounts owed to it
by us would be subordinated to amounts owed to LFC.

As
of September 30, 2006, the outstanding balance under the LFC Note was $1,500,000 which was
offset by the loan discount in the amount of $1,152,768.

On
September 28, 2006, we issued to AFC a senior secured promissory note (the AFC
Note). The AFC Note provides for up to $1.5 million of advances to be made by AFC
from time to time. All amounts advanced under the AFC Note are due and payable in full on
the earlier to occur of (i) the closing by us of an equity or debt financing, the gross
proceeds of which equal or exceed $1.5 million (exclusive of advances made under the AFC
Note), or (ii) March 31, 2007. The AFC Note requires us to make quarterly payments to AFC
commencing with the quarter ending March 31, 2007, equal to 0.5% of the gross sales by us
(less customary deductions) of our recently acquired Aquoral product during the
preceding quarter for every $125,000 of outstanding funds advanced under the AFC Note. This payment obligation
continues in perpetuity.

The
AFC Note is secured by a first-priority security interest in all of our assets, and is
senior in right of payment to any and all of our other indebtedness, except that the AFC
Note contains rights and obligations that are pro rata to the LFC Note.

As
additional consideration, we agreed that, concurrent with each advance made by AFC under
the AFC Note, we will issue to AFC a five-year warrant to acquire one share of our common
stock, at an exercise price of $1.50 per share, for each one dollar so advanced. Each
warrant includes piggyback registration rights with respect to shares of
common stock acquired upon exercise of such warrant. As of September 30, 2006, we have
issued warrants to AFC to acquire up to 500,000 shares of common stock.

SFP
is the managing member of AFC. Our CEO contributed $125,000 to AFC in exchange for his
ownership interest in AFC. Our remaining contributions to AFC were made by individuals who
are not affiliates of the Company. Affiliates of the Company may make additional
contributions to AFC to fund a portion of future advances under the AFC Note.

As
of September 30, 2006, the outstanding balance under the AFC Note was $500,000, which was
offset by a loan discount for the same amount.

# RISK FACTORS

Risks Related To Our
Business

SOME
OF OUR SPECIALTY PHARMACEUTICAL PRODUCTS ARE NOT THE SUBJECT OF FDA-APPROVED NEW DRUG
APPLICATIONS.

New
drugs must be the subject of a Food and Drug Administration (FDA) approved New
Drug Application (NDA) or Abbreviated New Drug Application (ANDA)
demonstrating safety and effectiveness before they may be marketed in the U.S. Some
prescription and other drugs marketed by pharmaceutical companies have not been the
subject of an FDA-approved marketing application because NDAs or ANDAs requiring
demonstration of safety and effectiveness were not required at the time that these active
ingredients were initially marketed. While the FDA reviewed classes of these products in
the 1960s and 1970s as part of the Drug Efficacy Study Implementation (DESI)
program, there are several types of drugs, including some cold and cough drugs, that the
FDA has not yet evaluated and remain on the market without FDA approval.

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Our
Extendryl® and our Levall® lines of products are marketed in the U.S. without an
FDA-approved marketing application because they have been considered by us to be
identical, related or similar to products that have existed in the market without an NDA
or ANDA. These products are marketed subject to the FDAs regulatory discretion
and/or enforcement policies. FDA has adopted a risk-based enforcement policy concerning
unapproved drugs. The agency has articulated that, in enforcing the NDA requirements, it
prioritizes drugs that pose potential safety risks, lack evidence of effectiveness and
prevent patients from seeking effective therapies, and those that are marketed
fraudulently. In addition, the FDA has indicated that approval of an NDA for one drug
within a class of drugs marketed without FDA approval may also trigger agency enforcement
of the other drugs in that class. Once the FDA issues an approved NDA for one of the drug
products at issue or completes the efficacy review for that drug product, it may require
us to also file a NDA or ANDA for other drugs in the same class of drugs in order to
continue marketing them in the U.S. While the FDA generally allows a one-year grace
period, it is not statutorily required to do so. In addition, although we may be given
time to submit a marketing application for a product before the FDA would take enforcement
action, the time it takes us to complete the necessary clinical studies and submit an
application to the FDA may exceed the one-year grace period, resulting in an interruption
of marketing. It is also possible that the FDA could disagree with our determination that
some or all of these products are identical, related or similar to products that have
existed in the marketplace without an NDA or ANDA.

WE
ANTICIPATE THAT WE WILL NEED ADDITIONAL FUNDING IN THE FUTURE, AND IF WE ARE UNABLE TO
RAISE CAPITAL WHEN NEEDED, WE WOULD BE FORCED TO DELAY, REDUCE OR ELIMINATE OUR PRODUCT
DEVELOPMENT PROGRAMS OR COMMERCIAL EFFORTS.

Developing
pharmaceutical products, seeking approvals for such products from regulatory authorities,
establishing manufacturing capabilities and marketing developed products is costly. We
anticipate that we will need to raise substantial additional capital in the future in
order to execute our business plan and fund the development and commercialization of our
specialty pharmaceutical product candidates. We have received a report from our
independent registered public accounting firm on our consolidated financial statements for
the fiscal quarter ended September 30, 2006, in which our auditors have included
explanatory paragraphs indicating that our significant net losses and working capital
deficiency cause substantial doubt about our ability to continue as a going concern.

We
expect to finance future cash needs through public or private equity offerings, debt
financings or strategic collaboration and licensing arrangements. To the extent that we
raise additional funds by issuing equity securities, our stockholders may experience
additional dilution, and debt financing, if available, may involve restrictive covenants.
If we raise additional funds through collaboration and licensing arrangements, it may be
necessary to relinquish some rights to our products, technologies or our development
projects or to grant licenses on terms that are not favorable to us. We cannot be certain
that additional funding will be available on acceptable terms, or at all. If adequate
funds are not available from the foregoing sources, we may consider additional strategic
financing options, including sales of assets (such as some of our specialty pharmaceutical
products), or we may be required to delay, reduce the scope of, or eliminate one or more
of our research or development programs or curtail some of our commercialization efforts
of our operations. We may seek to access the public or private equity markets whenever
conditions are favorable, even if we do not have an immediate need for additional capital.

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OUR
LICENSE, ACQUISITION AND DEVELOPMENT OF ADDITIONAL PRODUCTS MAY NOT BE SUCCESSFUL.

As
part of our growth strategy, we intend to license, acquire and develop additional
products, product candidates or approved products. The success of this strategy depends
upon our ability to identify, select and license or acquire pharmaceutical products that
meet the criteria we have established. Any product or product candidate we acquire or
license may require additional research and development efforts prior to commercial sale,
including extensive pre-clinical and/or clinical testing and approval by the FDA and
corresponding foreign regulatory authorities. All products or product candidates are prone
to the risks of failure inherent in pharmaceutical product development, including the
possibility that the product candidate will not be safe, non-toxic and effective or
approved by regulatory authorities. In addition, we cannot assure that any products or
approved products that we develop, acquire or license will be manufactured or produced
economically, successfully commercialized, widely accepted in the marketplace or that we
will be able to recover our significant expenditures in connection with the development,
acquisition or license of such products. In addition, proposing, negotiating and
implementing an economically viable acquisition or license is a lengthy and complex
process. Other companies, including those with substantially greater financial, marketing
and sales resources, may compete with us for the acquisition or license of products,
product candidates and approved products. We may not be able to acquire the rights to
additional products, product candidates and approved products on terms that we find
acceptable, or at all. In addition, if we acquire or license products or product
candidates from third parties, we will be dependent on third parties to supply such
products to us for sale. We could be materially adversely affected by the failure or
inability of such suppliers to meet performance, reliability and quality standards.

WE
MAY ENGAGE IN STRATEGIC TRANSACTIONS THAT FAIL TO ENHANCE STOCKHOLDER VALUE.

From
time to time, we may consider possible strategic transactions, including the potential
acquisitions or licensing of products, technologies and companies, and other alternatives
with the goal of maximizing stockholder value. We will continue to evaluate potential
strategic transactions and alternatives that we believe may enhance stockholder value. We
may never complete a strategic transaction, and in the event that we do complete a
strategic transaction, it may not be consummated on terms favorable to us. Further, such
transactions may impair stockholder value or otherwise adversely affect our business. Any
such transaction may require us to incur non-recurring or other charges and may pose
significant integration challenges and/or management and business disruptions, any of
which could harm our results of operation and business prospects.

THE
REGULATORY STATUS OF SOME OF OUR PRODUCTS MAKES THESE PRODUCTS SUBJECT TO INCREASED
COMPETITION AND OTHER RISKS.

The
regulatory status of our products may allow third parties to more easily introduce
competitive products. Our Extendryl® and our Levall® lines of products are
marketed in the U.S. without an FDA-approved marketing application because they have been
considered by us to be identical, related or similar to products that have existed in the
market without an NDA or ANDA. Our competitors also market drugs similar to our
Extendryl® and our Levall® lines of products without an FDA-approved marketing
application for the same reason. In addition, we do not hold rights in patents protecting
our current Extendryl® and our Levall® lines of products, which may result in
increased competition because other companies can enter the market without having to
submit safety and efficacy data to sell competing products. On several occasions, the FDA
has considered changing the classification of certain single entity and combination
product types of drugs from prescription to over-the-counter use, and permitting sponsors
to utilize foreign over-the-counter experience data to establish a product as safe and
effective for over-the-counter use in the U.S. If the FDA changes such classification, we
may have to reformulate certain of our products or submit safety and efficacy data on such
products, which would be costly, or we may have to discontinue selling certain products if
the FDA does not approve any marketing application for such products.

In
addition, the FDA considers certain products to be new drugs, but has indicated its intent
to exercise enforcement discretion and not pursue regulatory action unless certain
conditions occur. If these conditions were to materialize, or the FDA disagreed with our
conclusions about the regulatory status of such products, we might be required to submit
an NDA and/or cease marketing until the FDA grants approval to do so. The FDA could also,
at any time, promulgate new regulations or policies to require the submission of an NDA
for each of these products.

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IF
WE FAIL TO OBTAIN FDA APPROVAL, WE MAY BE UNABLE TO COMMERCIALIZE OUR CURRENT OR FUTURE
PRODUCT CANDIDATES.

Development,
testing, manufacturing and marketing of pharmaceutical products are subject to extensive
regulation by numerous governmental authorities in the U.S. and other countries. The
process of obtaining FDA approval of pharmaceutical products is costly and time consuming.
Any new pharmaceutical product must undergo rigorous preclinical and clinical testing and
an extensive regulatory approval process mandated by the FDA. Such regulatory review
includes the determination of manufacturing capability and product performance.

There
can be no assurance that the pharmaceutical products currently in development, or those
products that we acquire or license, will be approved by the FDA. In addition, there can
be no assurance that all necessary approvals will be granted for future products or that
FDA review or actions will not result in delays caused by the FDAs request for
additional information or testing that could adversely affect the time to market and sale
of our products. For our currently marketed products and our future products, failure to
comply with applicable regulatory requirements may, among other things, result in the
suspension of regulatory approval, as well as possible civil and criminal sanctions.

We
expect that 505(b)(2) applications, which rely in part on investigations not
performed for or by the applicant and for which the applicant has not obtained a right of
reference, and ANDAs, may be submitted for some of our specialty pharmaceutical products
under development. There can be no assurance that any of our specialty pharmaceutical
products will be suitable for, or approved under, such application procedures. Certain
505(b)(2) application procedures have been the subject of petitions filed by brand name
manufacturers, which seek changes in the FDAs approval process for such 505(b)(2)
applications. These requested changes include, among other things, disallowance of the use
by an applicant of a 505(b)(2) application with data considered proprietary by the
original manufacturer that was submitted to the FDA as part of an original NDA. We are
unable to predict at this time whether the FDA will make any changes to its application
procedures as a result of such petitions or the effect that such changes may have on us.

Any
delay in any approval or any failure to obtain approval of a product could delay or impair
our ability to commercialize and generate revenue for such product.

WE
MAY NOT BE ABLE TO GAIN OR SUSTAIN MARKET ACCEPTANCE FOR OUR SERVICES AND PRODUCTS.

Failure
to establish a brand and presence in the marketplace on a timely basis could adversely
affect our financial condition and results of operations. Moreover, there can be no
assurance that we will successfully complete our development and introduction of new
products or product enhancements or that any such products will achieve acceptance in the
marketplace. We may also fail to develop and deploy new products and product enhancements
on a timely basis.

In
addition, a material component of our revenue to date has been a result of our customers,
which may include wholesalers/distributors, retail pharmacies and hospitals, accumulating
inventory, which is subject to our standard return policy and those of our distributors.
Some or even a material component of our revenue to date, and any revenues generated in
the future, could be significantly and adversely impacted due to returns as a result of
insufficient demand in the marketplace or product expiration dating. Such product returns
and the resulting financial impact could have a material adverse effect on our financial
condition and results of operations if such product returns exceed established reserves
for anticipated product returns.

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OUR
BUSINESS IS HEAVILY REGULATED BY GOVERNMENTAL AUTHORITIES, AND FAILURE TO COMPLY WITH SUCH
REGULATION OR CHANGES IN SUCH REGULATIONS COULD NEGATIVELY AFFECT OUR FINANCIAL RESULTS.

Our
business is regulated by many government authorities, including, among others, the FDA,
the SEC, foreign regulatory authorities, the Drug Enforcement Administration, the Consumer
Product Safety Commission, the Federal Trade Commission, the Occupational Safety and
Health Administration, the Department of Health and Human Services, the Centers for
Medicare and Medicaid Services, the Environmental Protection Agency, the Department of
Labor, state, local and foreign governments and the Internal Revenue Service. We may incur
significant expenses to comply with regulations imposed by these authorities. Also, our
future results of operations could be negatively impacted by changes in governmental
regulation over the pharmaceutical industry, including regulation of Medicare, Medicaid
and similar programs, by reducing our revenue and profits and/or increasing our costs and
expenses in order to comply with such regulation. In addition, all of our third-party
manufacturers, product packaging companies and other supply and distribution chain
partners are subject to inspection by the FDA and, in appropriate cases, the Drug
Enforcement Administration and foreign regulators. If our third-party manufacturers and
other supply and distribution chain partners do not comply with FDA regulations in the
future, they may not deliver products to us or deliver samples to our representatives, or
we may have to recall products. Even if deficiencies observed by the FDA do not relate to
our products, our third-party manufacturers, product packaging companies and other supply
and distribution chain partners may be delayed in manufacturing and in supplying our
products to us in a timely manner until they address their compliance issues with the FDA.

Any
regulatory approvals that we or our partners receive for our product candidates may also
be subject to limitations on the indicated uses for which the drug may be marketed or
contain requirements for potentially costly post-marketing follow-up studies. The
subsequent discovery of previously unknown problems with the drug, including adverse
effects of unanticipated severity or frequency, may result in restrictions on the
marketing of the drug, and could include withdrawal of the drug from the market.

Our
U.S. manufacturing, labeling, storage and distribution activities are also subject to
strict regulation and licensing by the FDA. Regulatory authorities require post-marketing
surveillance to monitor and report to the FDA potential adverse effects of our products or
product candidates. Congress or the FDA, in specific situations, can modify the regulatory
process. Once approved, a products failure to comply with applicable regulatory
requirements could, among other things, result in warning letters, fines, suspension or
revocation of regulatory approvals, product recalls or seizures, operating restrictions,
injunctions and criminal prosecutions.

The
FDAs policies may change and additional government regulations may be enacted that
could prevent or delay regulatory approval of our product candidates. We cannot predict
the likelihood, nature or extent of adverse government regulation that may arise from
future legislation or administrative action, either in the U.S. or abroad. If we are not
able to maintain regulatory compliance, we might not be permitted to market our products
and our business could suffer.

Although
we do not currently have sales of our products outside the U.S., we believe it would
beneficial to develop a global presence for our products. Distribution of our products
outside the U.S. is subject to extensive government regulation. These regulations,
including the requirements for approvals or clearance to market, the length of time
required for regulatory review and the sanctions imposed for violations, vary from country
to country. There can be no assurance that we will obtain regulatory approvals in such
countries or that we will not be required to incur significant costs in obtaining or
maintaining these regulatory approvals. In addition, the export by us of certain of our
products that have not yet been cleared for domestic commercial distribution may be
subject to FDA export restrictions. Failure to obtain necessary regulatory approvals, the
restriction, suspension or revocation of existing approvals or any other failure to comply
with regulatory requirements would impair our ability to generate revenue, increase our
compliance costs and have a material adverse effect on our future business, financial
condition and results of operations.

30

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Some
of our products contain hydrocodone bitartrate as an active ingredient. Hydrocodone is a
controlled substance and is subject to extensive regulation by the U.S. Drug Enforcement
Agency (DEA) and internationally by the International Narcotics Control Board.
These regulations apply to the manufacture, shipment, sale and use of products containing
controlled substances. These regulations are also imposed on prescribing physicians and
other third parties, and could make the storage, transport and use of such products
relatively complicated and expensive. The DEA is also involved in the review of labeling,
promotion and risk management plans with the FDA for certain controlled substances. With
the increased concern for safety by the FDA and the DEA with respect to products
containing controlled substances, it is possible that these regulatory agencies could
impose additional restrictions on marketing or even withdraw regulatory approval for such
products.

In
addition, adverse publicity may result in rejection of the product by the medical
community. If the DEA, FDA or a foreign medical authority withdrew the approval of, or
placed additional significant restrictions on, these products, our product sales and
ability to promote our products could be substantially affected. In addition, there can be
no assurance that the DEA will not, in the future, seek to regulate other ingredients in
our products as controlled substances.

Several
of our pharmaceutical products also contain pseudoephedrine. The DEA regulates
pseudoephedrine, pursuant to the Controlled Substances Act and the Domestic Chemical
Diversion Control Act of 1993, as a listed chemical because it can be used in
the production of illicit drugs. Between the two groups, List I chemicals and List II
chemicals, List I chemicals are more strictly regulated. Pseudoephedrine is a List I
chemical. Persons or firms who manufacture, distribute, import or export listed chemicals
in amounts above specified threshold levels, or chemical mixtures that contain listed
chemicals above specified threshold amounts, must fulfill certain requirements regarding,
among other things, registration, recordkeeping, reporting and security. Places where
regulated persons or firms handle listed chemicals or chemical mixtures are subject to
administrative inspections by the DEA. Failure to comply with relevant DEA regulations can
result in civil penalties, refusal to renew necessary registrations or initiating
proceedings to revoke such registrations. In certain circumstances, violations can lead to
criminal prosecution. Pseudoephedrine is subject to tighter controls than most other
listed chemicals that are lawfully marketed under the Federal Food, Drug, and Cosmetic
Act. Recent regulatory actions at the state level may also affect future distribution,
advertising and promotion of products containing pseudoephedrine.

WE
MAY NOT BE ABLE TO OBTAIN MARKETING APPROVAL FOR ANY OF THE PRODUCTS RESULTING FROM OUR
DEVELOPMENT EFFORTS, AND FAILURE TO OBTAIN THESE APPROVALS COULD MATERIALLY HARM OUR
BUSINESS.

Successfully
completing extensive clinical trials and demonstrating manufacturing capability is
typically required to obtain FDA approval of a new drug. Clinical development is
expensive, uncertain and lengthy, often taking a number of years for a NDA to be filed
with and ultimately approved by the FDA. Of the large number of drugs in development, only
a small percentage result in the submission of an NDA to the FDA and even fewer are
approved for commercialization.

We
may need to address a number of challenges in order to successfully complete the
development of our future products. For example, to obtain marketing approval for a new
product candidate, we and our third-party manufacturers will be required to consistently
produce the active pharmaceutical ingredient in commercial quantities and of specified
quality on a repeated basis. This requirement is referred to as process validation. If we
or our third-party manufacturers are unable to satisfy this process validation requirement
for a future product candidate, we will not receive approval to market such product.

31

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In
addition, the FDA and other regulatory agencies may apply new standards for safety,
manufacturing, packaging and distribution of future product candidates. Complying with
such standards may be time-consuming and costly and could result in delays in our
obtaining marketing approval for future product candidates, or possibly preclude us from
obtaining such approval. Such a delay could also materially increase our commercialization
costs.

Furthermore,
our future products may not be effective or may prove to have undesirable or unintended
side effects, toxicities or other characteristics that may preclude us from obtaining
regulatory approval or prevent or limit commercial use. The FDA and other regulatory
authorities may not approve any product that we develop. Even if we do obtain regulatory
approval, such regulatory approval may be subject to limitations on the indicated uses for
which we may market a product, which may limit the size of the market for such product.

THE
MARKET FOR PRODUCTS AND SERVICES IN THE PHARMACEUTICALS INDUSTRY IS HIGHLY COMPETITIVE,
AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.

The
market for products and services in the pharmaceuticals industry is highly competitive.
Most of the competitors in the industry have longer operating histories and significantly
greater financial, technical, marketing and other resources than us, and may be able to
respond more quickly than we can to new or changing opportunities and customer
requirements. Also, many competitors have greater name recognition and more extensive
customer bases that they can leverage to gain market share. Such competitors are able to
undertake more extensive promotional activities, adopt more aggressive pricing policies
and offer more attractive terms to purchasers than we can.

THE
COMMERCIALIZATION OF PRODUCTS UNDER DEVELOPMENT MAY NOT BE PROFITABLE.

In
order for the commercialization of our product candidates to be profitable, our products
must be cost-effective and economical to manufacture on a commercial scale. Furthermore,
if our products do not achieve market acceptance, we may not be profitable. Subject to
regulatory approval, we expect to incur significant development, sales, marketing and
manufacturing expenses in connection with the commercialization of AU-015, our
investigational alternate therapy for inflammatory bowel diseases, and our other product
candidates. Even if we receive additional financing, we may not be able to complete
planned clinical trials and the development, manufacturing and marketing of any or all of
our product candidates. Our future profitability will depend on many factors, including,
but not limited to:

| |  | the
costs and timing of developing a commercial-scale manufacturing facility or the costs of
outsourcing                   our manufacturing of product candidates;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
costs of filing, prosecuting, defending and enforcing any patent claims and other
intellectual                   property rights;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | the
costs of establishing sales, marketing and distribution capabilities;
| | - | -------------------------------------------------------------------------

| |  | the
effect of competing technological and market developments; and
| | - | ------------------------------------------------------------------

| |  | the
terms and timing of any collaborative, licensing and other arrangements that we may
establish.
| | - | --------------------------------------------------------------------------------------------------

Even
if we receive regulatory approval for our product candidates, including regulatory
approval of a commercial-scale manufacturing facility if such a facility is necessary or
desirable, we may not ever earn significant revenues from such product candidates. With
respect to the products in our development pipeline that are being developed by or in
close conjunction with third parties, our ability to generate revenues from such products
will depend in large part on the efforts of such third parties. To the extent that we are
not successful in commercializing our product candidates, our product revenues will
suffer, we will incur significant additional losses and the price of our common stock will
be negatively affected.

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THE
LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGEMENT COULD LIMIT OUR GROWTH
AND NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.

We
depend highly upon our senior management team. We will continue to depend on operations
management personnel with pharmaceutical and scientific industry experience. At this time,
we do not know of the availability of such experienced management personnel or how much it
may cost to attract and retain such personnel. The loss of the services of any member of
senior management or the inability to hire experienced operations management personnel
could have a material adverse effect on our financial condition and results of operations.

WE
ARE DEPENDENT ON THIRD PARTIES FOR THE DEVELOPMENT OF SOME OF OUR PRODUCTS AND ON
THIRD-PARTY CONTRACT MANUFACTURERS FOR THE SUPPLY OF ALL OF OUR PRODUCTS.

We
currently rely on third-party contract manufacturers to produce our currently marketed
products and the product candidates in our pipeline. In addition, some of the products in
our development pipeline are being developed by third parties. We are or will be
substantially dependent on third parties in connection with our current and future
products and product candidates.

Our
ability to commercialize the products that we develop with our partners and generate
revenues from product sales depends on our partners ability to assist us in
establishing the safety and efficacy of our product candidates, obtaining and maintaining
regulatory approvals and achieving market acceptance of the products once commercialized.
Our partners may elect to delay or terminate development of one or more product
candidates, independently develop products that could compete with ours or fail to commit
sufficient resources to the marketing and distribution of products developed through their
strategic relationships with us. If our partners fail to perform as we expect, our
potential for revenue from products developed through our strategic relationships could be
dramatically reduced.

The
risks associated with our reliance on contract manufacturers include the following:

| |  | Contract manufacturers may encounter difficulties in achieving volume production, quality
control and quality assurance, and also may experience shortages in qualified personnel
and obtaining active ingredients for our products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If we should need to change manufacturers, the FDA and corresponding foreign regulatory
agencies must approve these manufacturers in advance. This would involve testing and
pre-approval inspections to ensure compliance with FDA and foreign regulations and
standards.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Contract manufacturers are subject to ongoing periodic, unannounced inspections by the FDA
and corresponding state and foreign agencies or their designees to ensure strict
compliance with Current Good Manufacturing Practices (cGMP) and other
governmental regulations and corresponding foreign standards. Other than through contract,
we do not have control over compliance by our contract manufacturers with these
regulations and standards. Our present or future contract manufacturers may not be able to
comply with cGMP and other U.S. requirements or similar regulatory requirements outside
the U.S. Failure of contract manufacturers to comply with applicable regulations could
result in sanctions being imposed on us, including fines, injunctions, failure of
regulatory authorities to grant marketing approval of our product candidates, delays,
suspension or withdrawal of approvals, seizures or recalls of products and product
candidates, operating restrictions and criminal prosecutions, any of which could
significantly and adversely affect our business.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Contract manufacturers may breach the manufacturing agreements that we or our development
partners have entered into because of factors beyond our control, or may terminate or fail
to renew a manufacturing agreement based on their own business priorities at a time that
is costly or inconvenient for us.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
we are not able to obtain adequate supplies of our current and future products, it will be
more difficult for us to develop our product candidates and compete effectively. If we or
any of our third-party development partners are unable to continue to access sufficient
supply from our third-party contract manufacturers, we may not be able to find another
suitable source of supply that meets our need to manufacture the Aquoral device or
any of our other products. Dependence upon third parties for the manufacture of our
product candidates may reduce our profit margins, if any, on the sale of our products, and
may limit our ability to develop and deliver products on a timely and competitive basis,
which could increase costs and delay our ability to generate revenue.

OUR
RESULTS OF OPERATIONS MAY BE AFFECTED BY FACTORS BEYOND OUR CONTROL, INCLUDING CHANGING
MARKET PRICES AND/OR REQUIREMENTS FOR PHARMACEUTICALS.

Our
results of operations may be affected by changing resale prices or market requirements for
pharmaceuticals, some of which are priced on a commodity basis. The sale price, and market
demand for, these materials can be volatile due to numerous factors beyond our control,
which may cause significant variability in its period-to-period results of operations.

A
number of factors, many of which are beyond our control, may cause variations in our
results of operations, including:

| |  | demand
and price for our products;
| | - | ----------------------------------

| |  | the
timing of product sales;
| | - | ----------------------------

| |  | unexpected
delays in developing and introducing products;
| | - | ---------------------------------------------------------

| |  | unexpected
delays in manufacturing our products;
| | - | ------------------------------------------------

| |  | increased
expenses, whether related to marketing, product development, administration or otherwise;
| | - | ---------------------------------------------------------------------------------------------------

| |  | insufficient
demand in the marketplace causing our distributors to return product;
| | - | ----------------------------------------------------------------------------------

| |  | the
mix of revenues derived from products;
| | - | ------------------------------------------

| |  | the
hiring, retention and utilization of personnel; and
| | - | -------------------------------------------------------

| |  | general
economic factors.
| | - | -------------------------

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IF
PHYSICIANS AND PATIENTS DO NOT ACCEPT OUR CURRENT OR FUTURE PRODUCTS, WE MAY BE UNABLE TO
GENERATE SIGNIFICANT REVENUE, IF ANY.

The
products we currently market, or products that we may develop or acquire in the future,
could fail to gain market acceptance among physicians, health care payors, patients and
the medical community. Physicians may elect not to recommend these drugs for a variety of
reasons including:

| |  | timing
of market introduction of competitive drugs;
| | - | ---------------------------------------------------

| |  | lower
demonstrated clinical safety and efficacy compared to other drugs;
| | - | ------------------------------------------------------------------------

| |  | lack
of cost-effectiveness;
| | - | ---------------------------

| |  | lack
of availability of reimbursement from managed care plans and other third-party payors;
| | - | -------------------------------------------------------------------------------------------

| |  | lack
of convenience or ease of administration;
| | - | ----------------------------------------------

| |  | prevalence
and severity of adverse side effects;
| | - | ------------------------------------------------

| |  | other
potential advantages of alternative treatment methods; and
| | - | ----------------------------------------------------------------

| |  | ineffective
marketing and distribution support.
| | - | -----------------------------------------------

If
our products fail to achieve market acceptance, we would not be able to generate
significant revenue.

WE
MAY NOT OBTAIN ADEQUATE THIRD-PARTY REIMBURSEMENTS.

Our
ability to successfully commercialize our products under development or under
consideration for acquisition or license is dependent in part on the extent to which
appropriate levels of reimbursement for our products are obtained from government
authorities, private health insurers, and managed care organizations such as health
maintenance organizations (HMOs). We estimate that a significant portion of
our cumulative revenues may be subject to the reimbursement rules of such organizations.
Managed care organizations and other third-party payors are increasingly challenging the
pricing of pharmaceutical products. The trend toward managed healthcare in the U.S., the
growth of organizations such as HMOs and legislative proposals to reform healthcare and
government insurance programs could significantly influence the purchase of pharmaceutical
products, resulting in lower prices and reduced demand for our current products or our
products under development or under consideration for acquisition or license. Such cost
containment measures and potential legislative reform could affect our ability to sell our
current products or our products under development or consideration for acquisition or
license, and may have a material adverse effect on our business. Significant uncertainty
exists about the reimbursement status of newly-approved pharmaceutical products. Although
we have obtained approvals for reimbursement for the cost of our current products from
many third-party payors, such approvals in the U.S. and in foreign countries may be
discontinued for our current products or any of our products under development or under
consideration for acquisition or license. The unavailability or inadequacy of third-party
reimbursement for our current products, or our products under development or to be
acquired or licensed, may reduce the demand for, or negatively affect the price of, these
products, which would have a material adverse effect on our business.

There
have been, and we expect that there will continue to be, federal and state proposals to
constrain expenditures for medical products and services, which may affect payments for
any of our approved products. The Centers for Medicare and Medicaid Services frequently
change product descriptors, coverage policies, product and service codes, payment
methodologies and reimbursement values. Third-party payors often follow Medicare coverage
policy and payment limitations in setting their own reimbursement rates and may have
sufficient market power to demand significant price reductions. As a result of actions by
these third-party payors, the health care industry is experiencing a trend toward
containing or reducing costs through various means, including lowering reimbursement
rates, limiting therapeutic class coverage and negotiating reduced payment schedules with
service providers for drug products.

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Our
inability to promptly obtain coverage and profitable reimbursement rates from
government-funded and private payors for any approved products could have a material
adverse effect on our financial condition and results of operations.

RECENT
FEDERAL LEGISLATION WILL INCREASE THE PRESSURE TO REDUCE PRICES OF PHARMACEUTICAL PRODUCTS
PAID FOR BY MEDICARE, WHICH COULD ADVERSELY AFFECT OUR REVENUES, IF ANY.

The
Medicare Prescription Drug Improvement and Modernization Act of 2003 (the MMA)
changes the way that Medicare will cover and pay for pharmaceutical products. The
legislation expanded Medicare coverage for drug purchases by the elderly and will
eventually introduce a new reimbursement methodology based on average sales prices for
drugs. In addition, this legislation provides authority for limiting the number of drugs
that will be covered in any therapeutic class. As a result of this legislation and the
expansion of federal coverage of drug products, we expect that there will be additional
pressure to contain and reduce costs. These cost reduction initiatives and other
provisions of this legislation could decrease the coverage and price that we receive for
any approved products and could seriously harm our business. While the MMA applies only to
drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage
policy and payment limitations in setting their own reimbursement rates, and any reduction
in reimbursement that results from the MMA may result in a similar reduction in payments
from private payors.

WE
ARE EXPOSED TO THE RISK OF LIABILITY CLAIMS, FOR WHICH WE MAY NOT HAVE ADEQUATE INSURANCE.

Since
we participate in the pharmaceutical industry, we may be subject to liability claims by
employees, customers, end users and third parties. We intend to have proper insurance in
place; however, there can be no assurance that any liability insurance we have or purchase
will be adequate to cover claims asserted against us or that we will be able to maintain
such insurance in the future. We intend to adopt or have adopted prudent risk management
programs to reduce these risks and potential liabilities; however, there can be no
assurance that such programs, if and when adopted, will fully protect us. Adverse rulings
in any legal matters, proceedings and other matters could have a material adverse effect
on our business.

Manufacturing,
marketing, selling and testing our current products, and our products under development or
to be acquired or licensed, entails a risk of product liability claims. We could be
subject to product liability claims in the event that our products or products under
development fail to perform as intended. Even unsuccessful claims could result in the
expenditure of funds in litigation and the diversion of management time and resources, and
could damage our reputation and impair the marketability of our products. While we
currently maintain liability insurance for product liability claims, we may not be able to
maintain such insurance at a commercially reasonable cost. If a successful claim were made
against us, and the amount of insurance was inadequate to cover the costs of defending
against or paying such a claim or the damages payable by us, we would experience a
material adverse effect on our business, financial condition and results of operations.

OTHER
COMPANIES MAY CLAIM THAT WE HAVE INFRINGED UPON THEIR INTELLECTUAL PROPERTY OR PROPRIETARY
RIGHTS.

We
do not believe that our products or processes violate third-party intellectual property
rights. Nevertheless, there is no guarantee that such rights are not being, and will not
be, violated. If any of our products or processes are found to violate third-party
intellectual property rights, we may be required to re-engineer or cause to be
re-engineered one or more of those products or processes, or seek to obtain licenses from
third parties to continue offering our products or processes without substantial
re-engineering, and such efforts may not be successful.

36

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In
addition, future patents may be issued to third parties upon which our technology may
infringe. We may incur substantial costs in defending against claims under any such
patents. Furthermore, parties making such claims may be able to obtain injunctive or other
equitable relief, which effectively could block our ability to further develop or
commercialize some or all of our products in the U.S. or overseas, and could result in the
award of substantial damages against us. In the event of a claim of infringement, we may
be required to obtain one or more licenses from third parties. There can be no assurance
that we will be able to obtain such licenses at a reasonable cost, if at all. Defense of
any lawsuit or failure to obtain any such license could have a material adverse effect on
our business.

OUR
SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.

Our success
depends, to a significant degree, upon the protection of our proprietary technology, and
that of our licensors. Legal fees and other expenses necessary to obtain and maintain
appropriate patent protection could be material. Insufficient funding may inhibit our
ability to obtain and maintain such protection. Additionally, if we must resort to legal
proceedings to enforce our intellectual property rights, the proceedings could be
burdensome and expensive, and could involve a high degree of risk to our proprietary
rights if we are unsuccessful in, or cannot afford to pursue, such proceedings.

We
have filed patent applications covering technologies pertaining to extended release
formulations. We are aware that certain European and U.S. patents have been issued with
claims covering products that contain certain extended release formulations. It may be
argued that certain or all of our products under development may use a formulation covered
by such European or U.S. patents. If that is shown to be the case, we would be prevented
from making, using or selling such products unless we obtained a license under such
patents, which license may not be available on commercially reasonable terms, or at all,
or unless such patents are determined to be invalid in Europe or invalid or unenforceable
in the U.S. Our development of products that may be covered by such patents and our
failure to obtain licenses under such patents in the event such patents are determined to
be valid and enforceable could have an adverse effect on our business.

We
also rely on trade secrets and contract law to protect certain of our proprietary
technology. There can be no assurance that any such contract will not be breached, or that
if breached, will have adequate remedies. Furthermore, there can be no assurance that any
of our trade secrets will not become known or independently discovered by third parties.

There
can be no assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade secrets and
know-how. In addition, we may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that any licenses
required under any patents or proprietary rights would be made available on acceptable
terms, if at all. If we do not obtain such required licenses, we may encounter delays in
product development or find that the development, manufacture or sale of products
requiring such licenses could be foreclosed. Additionally, we may, from time to time,
support and collaborate in research conducted by universities and governmental research
organizations. There can be no assurance that we will have or be able to acquire exclusive
rights to the inventions or technical information derived from such collaborations, or
that disputes will not arise with respect to rights in derivative or related research
programs conducted by us or such collaborators.

37

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Because
the patent positions of pharmaceutical and biotechnology companies are highly uncertain
and involve complex legal and factual questions, any current or future patents owned and
licensed by us may not prevent other companies from developing competing products or
ensure that others will not be issued patents that may prevent the sale of our products or
require licensing and the payment of significant fees or royalties. Furthermore, to the
extent that (i) any of our future products or methods are not patentable,
(ii) such products or methods infringe upon the patents of third parties, or
(iii) our patents or future patents fail to give us an exclusive position in the
subject matter to which such patents relate, we will be adversely affected. We may be
unable to avoid infringement of third-party patents and may have to obtain a license, or
defend an infringement action and challenge the validity of such patents in court. A
license may be unavailable on terms and conditions acceptable to us, if at all. Patent
litigation is costly and time consuming, and we may be unable to prevail in any such
patent litigation or devote sufficient resources to even pursue such litigation. If we do
not obtain a license under such patents, are found liable for infringement and are not
able to have such patents declared invalid, we may be liable for significant money
damages, encounter significant delays in bringing products to market or may be precluded
from participating in the manufacture, use or sale of products or methods of treatment
requiring such licenses.

OUR
FUTURE GROWTH WILL BE INHIBITED BY THE FAILURE TO IMPLEMENT NEW TECHNOLOGIES.

Our future
growth is partially tied to our ability to improve our knowledge and implementation of
pharmaceutical technologies. Inability to successfully implement commercially viable
pharmaceutical technologies in response to market conditions in a manner that is
responsive to our customers requirements could have a material adverse effect on our
business.

WE
ARE HIGHLY DEPENDENT ON OUR SINGLE SOURCES OF SUPPLY.

Our
products are currently sourced from single qualified suppliers or manufacturers. We have
not established arrangements with alternative suppliers for these ingredients or from
alternative manufacturers for the manufacture of our products. Any interruption of raw
material supply, for any reason, in (i) any of the required ingredients for our products
or (ii) the manufacture of such products, could have a material adverse effect on our
ability to manufacture our products or to obtain or maintain regulatory approval of such
products.

WE
OCCASIONALLY BECOME SUBJECT TO COMMERCIAL DISPUTES THAT COULD HARM OUR BUSINESS BY
DISTRACTING OUR MANAGEMENT FROM THE OPERATION OF OUR BUSINESS, INCREASING OUR EXPENSES
AND, IF WE DO NOT PREVAIL, SUBJECTING US TO POTENTIAL MONETARY DAMAGES AND OTHER REMEDIES.

From
time to time, we are engaged in disputes regarding our commercial transactions and
operations. These disputes may result in monetary damages or other remedies that could
adversely impact our financial condition. Even if we prevail in these disputes, they may
distract our management from operating our business. If we do not prevail in such
litigation matters, or if we are required to expend a significant amount of resources
defending such claims, our results of operations and cash flows could be adversely
impacted.

TWO
OF OUR CUSTOMERS GENERATE A LARGE PORTION OF OUR REVENUE, AND ANY REDUCTION, DELAY OR
CANCELLATION OF ORDERS FROM THESE CUSTOMERS COULD REDUCE OUR REVENUES.

For
the quarterly period ended September 30, 2006, two of our customers, each a wholesale
distributor, accounted for approximately ninety-one percent (91%) of our revenue. These
same two customers accounted for approximately ninety-one percent (91%) of our revenue in
the period from inception to September 30, 2006. Any reduction, delay or cancellation of
orders from these customers could reduce our revenue.

OUR
LEVEL OF INDEBTEDNESS REDUCES OUR FINANCIAL FLEXIBILITY AND COULD IMPEDE OUR ABILITY TO
OPERATE.

As
of September 30, 2006, our debt was approximately $4.8 million, including accrued but
unpaid interest, current maturities of long-term debt and lines of credit, not including
discount. Our debt includes the following:

38

---

| |  | On December 15, 2005, we issued an unsecured subordinated promissory note to a
shareholder and a former director (the Note). The remaining loan
principal is payable in annual installments of $600,000, $750,000 and $750,000 due January
2, 2007, January 2, 2008 and January 2, 2009, respectively. Interest accrues at a rate
equal to 2% per annum on the unpaid principal amount of the Note. Interest is payable in
arrears in cash and is included with each annual principal installment.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On August 4, 2006, we issued to Sorrento Financial Partners, LLC (SFP) a
senior secured convertible note (the SFP Note) in the principal amount of
$632,000. The SFP Note bears interest at the rate of 8% per annum and is due and payable
in full on May 15, 2007. Accrued interest on the SFP Note is payable monthly in
arrears. At SFPs option, the SFP Note is convertible, in whole or in part and at any
time after August 4, 2006 and prior to the SFP Notes full repayment, into
shares of Common Stock. The number of shares that are issuable upon a conversion of the
SFP Note is equal to the amount determined by dividing (i) the outstanding principal
amount of the SFP Note to be converted by (ii) the conversion price of $1.388. As of
September 30, 2006, the outstanding balance under the SFP Note remains $632,000.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On August 29, 2006, we issued to Levall Finance Corp. LLC (LFC) a senior
secured promissory note (the LFC Note) in the principal amount of $1.5
million. The LFC Note was amended on September 28, 2006 for certain provisions that were
effective as of August 29, 2006. The LFC Note is due and payable in full on the earlier to
occur of (i) the closing by us of an equity or debt financing, the net proceeds of which
equal or exceed $1.5 million, or (ii) December 15, 2006. The LFC Note is secured by a
first-priority perfected security interest in all of our assets. The first priority
security provided by us is on a pro-rata basis and pari passu to the senior secured
note entered into by us and Aquoral Finance Corp. LLC (AFC) dated September
28, 2006 and is senior in right of payment to any and all of our other indebtedness. We
can prepay all or any portion of the LFC Note at any time without premium or penalty.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On September 28, 2006, we issued to AFC a senior secured promissory note (the AFC
Note). The AFC Note provides for up to $1.5 million of advances to be made by AFC
from time to time, each advance requiring our consent. All amounts advanced under the AFC
Note are due and payable in full on the earlier to occur of (i) the closing by us of an
equity or debt financing, the gross proceeds of which equal or exceed $1.5 million
(exclusive of advances made under the AFC Note), or (ii) March 31, 2007. The AFC Note is
secured by a first-priority security interest in all of our assets and is senior in right
of payment to any and all of our other indebtedness, except that the AFC Note ispari
passu with our $1.5 million obligation to LFC. As of September 30, 2006, the
outstanding balance under the AFC Note was $500,000.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
level of debt affects our operations in several important ways, including the following:

| |  | a
significant portion of our cash flow from operations is likely to be dedicated to the
payment of the                   principal and interest on our indebtedness;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to obtain additional financing in the future for working capital, capital
expenditures or                   acquisitions may be limited;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
may be unable to refinance our indebtedness on terms acceptable to us, or at all;
| | - | ------------------------------------------------------------------------------------

39

---

| |  | our
cash flow may be insufficient to meet our required principal and interest payments; and
| | - | -------------------------------------------------------------------------------------------

| |  | we
may default on our obligations and our lenders may foreclose on their security interests
that secure                   their loans.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

WE
EXPECT TO EXPAND OUR DEVELOPMENT AND MARKETING CAPABILITIES AND, AS A RESULT, WE MAY
ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH, WHICH COULD DISRUPT OUR OPERATIONS.

We
expect to have significant growth in expenditures, the number of our employees and the
scope of our operations, in particular with respect to those product candidates that we
elect to commercialize independently or together with a partner and the expansion of our
sales force. To manage our anticipated future growth, we must continue to implement and
improve our managerial, operational and financial systems, expand our facilities and
continue to recruit and train additional qualified personnel. Due to our limited
resources, we may not be able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The physical expansion of our operations
may lead to significant costs and may divert our management and business development
resources. Any inability to effectively manage growth could delay the execution of our
business plans or disrupt our operations.

WE
HAVE A LIMITED OPERATING HISTORY AND OUR FINANCIAL RESULTS ARE UNCERTAIN.

We have
a limited history and face many of the risks inherent to a new business. As a result of
our limited operating history, it is difficult to accurately forecast our potential
revenue. Our revenue and income potential is unproven and our business model is still
emerging. Therefore, there can be no assurance that we will provide a return on investment
in the future. An investor in our common stock must consider the challenges, risks and
uncertainties frequently encountered in the establishment of new technologies and products
in emerging markets and evolving industries. These challenges include our ability to:

| |  | execute
our business model;
| | - | ---------------------------

| |  | create
brand recognition;
| | - | -------------------------

| |  | manage
growth in our operations;
| | - | --------------------------------

| |  | create
a customer base in a cost-effective manner;
| | - | --------------------------------------------------

| |  | retain
customers;
| | - | -----------------

| |  | access
additional capital when required; and
| | - | --------------------------------------------

| |  | attract
and retain key personnel.
| | - | ---------------------------------

There
can be no assurance that our business model will be successful or that it will
successfully address these and other challenges, risks and uncertainties.

40

---

Risks Related To Our
Common Stock

OUR
COMMON STOCK IS THINLY TRADED AND STOCKHOLDERS MAY NOT BE ABLE TO LIQUIDATE THEIR
INVESTMENT AT ALL, OR MAY ONLY BE ABLE TO LIQUIDATE THEIR INVESTMENT AT A PRICE LESS THAN
OUR VALUE.

Our
common stock is very thinly traded, and the price if traded may not reflect our value.
Consequently, investors may not be able to liquidate their investment at all, or if they
are able to liquidate their investment, it may only be at a price that does not reflect
the value of the business. Even if a more active market should develop, the price of our
common stock may be highly volatile. Because the price for our common stock is low, many
brokerage firms may not be willing to effect transactions. Even if an investor finds a
broker willing to effect a transaction in our common stock, the combination of brokerage
commissions, transfer fees, taxes, if any, and any other selling costs may exceed the
selling price. Further, many lending institutions will not permit the use of our common
stock as collateral for loans.

We
do not qualify or meet the requirements for the listing and/or quotation of our common
stock on the NASDAQ SmallCap or the American Stock Exchange. If we determine that we would
like to pursue such listing and attempt to meet the listing standards, in order to achieve
the minimum required price per share, we would have to effect a reverse stock split which
could reduce the overall value of stockholders investment.

OUR
COMMON STOCK HAS NOT BEEN ACTIVELY TRADED ON A PUBLIC MARKET.

For a
number of years, our common stock has traded only on a limited basis. Therefore, it is not
certain whether investor interest in our common stock will be sufficient to create or
sustain an active public trading market. If an active public trading market for shares of
our common stock does not develop, investors and the other recipients of our common stock
may have limited liquidity and may be forced to hold their shares for an indefinite period
of time.

BECAUSE
WE ARE SUBJECT TO THE PENNY STOCK RULES, SALE OF OUR COMMON STOCK BY INVESTORS MAY BE
DIFFICULT.

We
are subject to the SECs penny stock rules. Penny stocks generally are
equity securities with a price of less than $5.00. The penny stock rules require
broker-dealers to deliver a standardized risk disclosure document prepared by the SEC,
which provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer must also provide the purchaser with current
bid and offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson and monthly account statements showing the market value of each penny
stock held in the purchasers account. The bid and offer quotations and the
broker-dealer and salesperson compensation information must be given to the purchaser
orally or in writing prior to completing the transaction, and must be given to the
purchaser in writing before or with the purchasers confirmation.

In
addition, the penny stock rules require that prior to a transaction, the broker and/or
dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchasers written agreement to the
transaction. The penny stock rules are burdensome and may reduce purchases of any
offerings and reduce the trading activity for our common stock. As long as our common
stock is subject to the penny stock rules, the holders of our common stock may find it
more difficult to sell their securities.

OUR
COMMON STOCK PRICES COULD DECREASE IF A SUBSTANTIAL NUMBER OF SHARES ARE SOLD UNDER RULE
144.

A
substantial majority of our outstanding shares of common stock are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933 (the
Act). As restricted shares, these shares may be resold only pursuant to an
effective registration statement or under the requirements of Rule 144 or other applicable
exemption from registration under the Act and as required under applicable state
securities laws. Rule 144 provides in essence that a person who has held restricted
securities for a period of at least one year may, under certain conditions, sell every
three months, in brokerage transactions, a number of shares that does not exceed the
greater of one percent (1.0%) of a companys outstanding common stock or the average
weekly trading volume during the four calendar weeks prior to the sale. There is no limit
on the amount of restricted securities that may be sold by a non-affiliate after the
restricted securities have been held by the owner for a period of two years or more. If a
substantial number of shares of our common stock are sold under Rule 144 or other
exemption, it could cause the price of our common stock to go down.

41

---

OUR
PRINCIPAL STOCKHOLDERS HAVE THE ABILITY TO EXERT SIGNIFICANT CONTROL IN MATTERS REQUIRING
STOCKHOLDER VOTE AND COULD DELAY, DETER OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY.

Mr.
          Philip S. Pesin, our chairman and chief executive officer, owns approximately
          38% of our outstanding common stock and will be able to assert significant
          influence over the election of directors and other matters presented for a vote
          of stockholders. In addition, because we are incorporated in Delaware, Delaware
          corporate law provides that certain actions may be taken by consent action of
          stockholders holding a majority of the outstanding shares. In the event that the
          requisite approval of stockholders is obtained, dissenting or non-participating
          stockholders generally would be bound by such vote. Through such concentration
          of voting power, Mr. Pesin could delay, deter or prevent a change in control of
          our company or other business combinations that might otherwise be beneficial to
          our other stockholders. In deciding how to vote on such matters, Mr. Pesin may
          be influenced by interests that conflict with those of other stockholders.
          Investors who purchase our common stock should be willing to entrust all aspects
          of operational control to our current management team.

THE
CONVERSION OF OUTSTANDING DERIVATIVE SECURITIES COULD CAUSE INVESTORS OWNERSHIP TO
BE DILUTED AND MAY DECREASE THE VALUE OF THEIR INVESTMENT.

Outstanding
derivative securities and current and future obligations to issue our securities to
various parties may dilute the value of stockholders investment. As of September 30,
2006, we had options and warrants outstanding to purchase approximately 21,336,957 shares
of our common stock at prices ranging from $0.4248 to $2.55 per share. For the length of
time these warrants and options are outstanding, the holders of such warrants and options
will have an opportunity to profit from a rise in the market price of our common stock
without assuming the risks of ownership. This may have an adverse effect on the terms upon
which we can obtain additional capital. It should be expected that the holders of such
derivative securities would exercise or convert them at a time when we would be able to
obtain equity capital on terms more favorable than the exercise or conversion prices
provided by the warrants or options. There are no preemptive rights in connection with our
common stock.

WE
DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.

We do
not intend to pay any dividends in the foreseeable future. We do not plan on making any
cash distributions in the manner of a dividend or otherwise. Our board of directors
presently intends to follow a policy of retaining earnings, if any.

WE
HAVE THE RIGHT TO ISSUE ADDITIONAL COMMON STOCK AND PREFERRED STOCK WITHOUT THE
CONSENT OF SHAREHOLDERS. THIS WOULD HAVE THE EFFECT OF DILUTING INVESTORS OWNERSHIP
AND COULD DECREASE THE VALUE OF THEIR INVESTMENT.

We
have additional authorized but unissued shares of our common stock that may be later
issued by our management for any purpose without the consent or vote of the stockholders
that would dilute stockholders percentage ownership of our company.

In
addition, our articles of incorporation authorize the issuance of shares of preferred
stock, the rights, preferences, designations and limitations of which may be set by the
board of directors. Our articles of incorporation have authorized issuance of up to
5,000,000 shares of preferred stock in the discretion of our board of directors, of which
1,200,000 shares have been designated as Series A convertible stock. The remaining
3,800,000 shares of authorized but undesignated preferred stock may be issued upon filing
of amended articles of incorporation and the payment of required fees; no further
shareholder action is required. If issued, the rights, preferences, designations and
limitations of such preferred stock would be set by our board of directors and could
operate to the disadvantage of the outstanding common stock. Such terms could include,
among others, preferences as to dividends and distributions on liquidation.

42

---

IT
IS POSSIBLE THAT THERE ARE CLAIMS OF WHICH WE ARE UNAWARE THAT MAY COME TO LIGHT IN THE
FUTURE AND COST US CONSIDERABLE TIME, EFFORT AND EXPENSE TO RESOLVE.

We
were formed by virtue of a merger of a privately-held operational company with a
non-operational publicly-traded company. While the publicly-traded company had not been
operational for several years prior to the acquisition of Auriga Laboratories, Inc., the
privately-held operational company, it is possible that a claim, whether colorable
or not, may be asserted against us in the future with respect to matters arising prior to
the merger. There can be no assurance that some person will not devise a claim and attempt
to assert it against us in the hopes of obtaining some monetary benefit. Resolving such a
claim, including by making a monetary payment, may cost us considerable time, effort and
expense. Any of these may impair managements implementation of our business plan
with the consequence of a loss of opportunity.

EVOLVING
REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES
AND CONTINUING UNCERTAINTY.

Changing
laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and the rules of various
stock exchanges, are creating uncertainty for public companies. As a result of these new
rules, we will incur additional costs associated with our public company reporting
requirements. In addition, these new rules could make it more difficult or more costly for
us to obtain certain types of insurance, including director and officer liability
insurance, which could make it difficult for us to attract and retain qualified persons to
serve on our board of directors.

We
are presently evaluating and monitoring developments with respect to new and proposed
rules and cannot predict or estimate the amount of the additional costs we may incur or
the timing of such costs. These new or changed laws, regulations and standards are subject
to varying interpretations, in many cases due to their lack of specificity and, as a
result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices.

We
are committed to maintaining high standards of corporate governance and public disclosure.
As a result, we intend to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and administrative expenses
and a diversion of management time and attention from revenue-generating activities to
compliance activities. If our efforts to comply with new or changed laws, regulations and
standards differ from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, regulatory authorities may initiate legal proceedings
against us and we may be adversely affected.

|Item 3. | Controls and Procedures.
|------- | ------------------------

We
carried out an evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Form 10-QSB. Based upon that
evaluation, our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to material
information relating to us that is required to be included in our periodic reports filed
with the SEC.

43

---

During
the quarter ended September 30, 2006, there was no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

|PART 2. | OTHER INFORMATION
|------- | -----------------

|Item 1. | Legal Proceedings.
|------- | ------------------

| | None.
| | -----

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

| | None.
| | -----

|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

| | None.
| | -----

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

| | None.
| | -----

|Item 5. | Other Information.
|------- | ------------------

| | None.
| | -----

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

| | The
following exhibits are attached hereto and filed herewith:
| | --------------------------------------------------------------

|ExhibitNumber | Description
of Exhibit
|------------- | ----------------------

|2.1 | Agreement
and Plan of Merger, dated as of May 19, 2006, by and between Multi-Link Telecommunications,
Inc.and Multi-Link Merger Co. (1)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|4.1 | The
Registrants 2006 Equity Incentive Plan. (2)
|--- | ------------------------------------------------

|4.2 | The
Registrants 2006 Stock Option Plan. (2)
|--- | --------------------------------------------

|10.1 | Employment
Agreement, dated July 11, 2006, by and between the Registrant and Andrew Shales. (3)
|---- | -----------------------------------------------------------------------------------------------

|10.2 | Indemnification
Agreement, dated July 11, 2006, by and between the Registrant and Andrew Shales. (3)
|---- | ----------------------------------------------------------------------------------------------------

|10.3 | Non-Qualified
Stock Option Notice and Agreement in favor of Andrew Shales, dated as of July 6, 2006.
(3)
|---- | --------------------------------------------------------------------------------------------------------

|10.4 | Form
of Indemnification Agreement, by and between the Registrant and Brian P. Alleman. (4)
|---- | ------------------------------------------------------------------------------------------

|10.5 | Warrant
issued by the Registrant to Brian P. Alleman on July 6, 2006. (4)
|---- | -------------------------------------------------------------------------

44

---

|10.6 | Letter
Agreement, dated July 26, 2006, by and between the Registrant and Athlon Pharmaceuticals,
Inc. (5)
|---- | ---------------------------------------------------------------------------------------------------------

|10.7 | Senior
Secured Convertible Note, dated as of August 4, 2006, issued by the Registrant in favor
of Sorrento Financial Partners, LLC. (6)
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|10.8 | License
Agreement, dated as of August 19, 2006, by and between the Registrant and Athlon
Pharmaceuticals, Inc. (7)
|---- | ------------------------------------------------------------------------------------------------------------------

|10.9 | Amended
and Restated License Agreement, dated as of August 19, 2006, by and between the
Registrant and Athlon Pharmaceuticals, Inc. (8)
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|10.10 | Senior
Secured Promissory Note, dated as of August 29, 2006, issued by the Registrant in
               favor of Levall Finance Corp. LLC.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------

|10.11 | Amended
and Restated License Agreement, dated as of September 6, 2006, by and between the
Registrant and Cornerstone BioPharma, Ltd. (9)
|----- | ----------------------------------------------------------------------------------------------------------------------------------------

|10.12 | The
Registrants Form of Common Stock Purchase Warrant. (10)
|----- | ------------------------------------------------------------

|10.13 | License
Agreement, dated as of September 13, 2006, by and between the Registrant and Laboratoires
Carilène S.A.S.
|----- | -----------------------------------------------------------------------------------------------------------------

|10.14 | Senior
Secured Promissory Note, dated as of September 28, 2006, issued by the Registrant in
favor of  Aquoral Finance Corp. LLC, including form of common stock purchase warrant.
(11)
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 | Letter
Agreement, dated as of September 28, 2006, by and between the Registrant and Levall
Finance Corp. LLC amending that certain Senior Secured Promissory Note dated as of
August 29, 2006.
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 | Form
of Indemnification Agreement, by and between the Registrant and Steve Glover. (12)
|----- | ---------------------------------------------------------------------------------------

|10.17 | Common
Stock Warrant granted by the Registrant to Steve Glover on September 22, 2006. (12)
|----- | ------------------------------------------------------------------------------------------

|31.1 | Certification
of Principal Executive Officer Pursuant toss.302 of the Sarbanes-Oxley Act of 2002.
|---- | -------------------------------------------------------------------------------------------------

|31.2 | Certification
of Principal Financial Officer Pursuant toss.302 of the Sarbanes-Oxley Act of 2002.
|---- | -------------------------------------------------------------------------------------------------

|32.1 | Certification
of Principal Executive Officer Pursuant to 18 U.S.C.ss.1350 andss.906 of the
Sarbanes-Oxley Act of 2002.
|---- | ----------------------------------------------------------------------------------------------------------------------

|32.2 | Certification
of Principal Financial Officer Pursuant to 18 U.S.C.ss.1350 andss.906 of the
Sarbanes-Oxley Act of 2002.
|---- | ----------------------------------------------------------------------------------------------------------------------

|(1) | Incorporated
by reference to the Registrants Definitive Proxy Statement on                Form
DEF 14A, filed with the Securities and Exchange Commission on June
               6, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference to the Registrants Registration Statement on                Form S-8,
filed with the Securities and Exchange Commission on August                25, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on July 12, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on July 21, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on August 1,                2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on August 8,                2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on August 22,                2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on September 1,                2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on September 7,                2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
filed with the Securities and Exchange Commission on September 12,                2006.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
dated September 29, 2006 and filed with the Securities and Exchange
               Commission on October 2, 2006.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated
herein by reference to the Registrants Current Report on Form                8-K,
dated October 9, 2006 and filed with the Securities and Exchange Commission
               on October 19, 2006.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

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# SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

|                        |                          
|----------------------- | -------------------------
|                        | AURIGA LABORATORIES, INC.
|Date: November 13, 2006 | By: /s/ Philip S. Pesin  
|                        | Philip S. Pesin          
|                        | Chief Executive Officer  

46