**UNITED
      STATES 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,
                2007.**








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








**For
                the transition period from ____________ to
                ____________.**





**Commission
      File Number 000-26013**







**AURIGA
      LABORATORIES, INC.**


(Exact
      Name of Small Business Issuer as Specified in its Charter)





**Delaware**
            
            **84-1334687**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            ****(I.R.S.
                Employer Identification No.)








**10635
                Santa Monica Boulevard, Suite 120**
              **Los
                Angeles, CA**
            
            **90025**(Address
                of Principal Executive Offices)
            
            (Zip
                Code)




**(310)
      461-3600**


(Issuer's
      telephone number, including area code)





(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 o





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


Yes o No x




**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: 52,094,249 as of October 26,
      2007.





Transitional
      Small Business Disclosure Format (check
      one):      Yes o 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, 2007 (unaudited) and December 31,
                2006.
            3(b)
            Consolidated
                Statements of Operations for the Three Months Ended September 30,
                2007
                (unaudited)
              and
                September 30, 2006 (unaudited).
            4(c)
            Consolidated
                Statements of Operations for the Nine Months Ended September 30,
                2007
                (unaudited)
              and
                September 30, 2006 (unaudited).
            5(d)
            Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2007
                (unaudited)
              and
                September 30, 2006 (unaudited).
            6(e)
            Condensed
                Notes to Consolidated Financial Statements.
            7Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation.
            19Item
                3.
            Controls
                and Procedures.
            32Item
                3A(T).
            Controls
                and Procedures.
            32**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings.
            32Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds.
            32Item
                3.
            Defaults
                Upon Senior Securities.
            33Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            33Item
                5.
            Other
                Information.
            33Item
                6.
            Exhibits.
            34**SIGNATURES**




1





**FORWARD-LOOKING
      STATEMENTS**




This
      Quarterly Report on Form 10-QSB (“Form10-QSB”) 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.





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:




**·**
            our
                ability to identify, develop or obtain, and introduce new
                products;




**·**
              our
                    ability to successfully conduct clinical and preclinical trials
                    for our
                    new products;
 **·**
                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;
 **·**
                    our
                          ability to obtain required regulatory approvals to develop
                          and market our
                          product candidates;
 **·**
                      our
                            ability to execute our development plan on time and on
                            budget;
 **·**
                        fluctuations
                              in general economic
                              conditions;
 **·**
                          the
                                loss of customers or sales
                                weakness;
 **·**
                            our
                                  inability to achieve future sales levels or other
                                  operating
                                  results;
 **·**
                              the
                                    unavailability of funds for capital expenditures;
                                    and
 **·**
                                the
                                      risk of product liability
                                      claims.


**·**
            our
                  inability to recruit new territory
                  managers




**·**
              our
                    ability to continue to fund working capital
                    needs/requirements
 **·**
                our
                      ability to raise additional capital when
                      necessary


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
      Form 10-QSB. 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.





We
      caution readers not to place undue reliance on any such forward-looking
      statements. Should one or more of these risks or uncertainties materialize,
      or
      should underlying assumptions prove incorrect, actual outcomes will likely
      vary
      materially from those indicated. 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 refer to the section entitled
      “Risk Factors.”




2





**PART
                1.**
            **FINANCIAL
                INFORMATION**





**Item
                1.**
            **Financial
                Statements.**





**AURIGA
      LABORATORIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





ASSETS
            
            SEPTEMBER
                30, 2007(unaudited)
            
            DECEMBER 31, 2006CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            1,452,673
            
            $
            259,580Accounts
                receivable, net
            
            
            2,265,187
            
            
            969,962Inventory,
                net
            
            
            1,665,722
            
            
            426,417Prepaid
                expenses
            
            
            1,385,851
            
            
            756,378Total
                Current Assets
            
            
            6,769,433
            
            
            2,412,337PROPERTY
                AND EQUIPMENT, net
            
            
            371,613
            
            
            326,792OTHER
                ASSETSIntangibles,
                net
            
            
            7,435,580
            
            
            7,768,476Restricted
                cash
            
            
            --
            
            
            75,560Deposits
            
            
            51,324
            
            
            16,775Total
                Other Assets
            
            
            7,486,904
            
            
            7,860,811TOTAL
                ASSETS
            
            $
            14,627,950
            
            $
            10,599,940LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            4,365,329
            
            $
            1,742,441Accrued
                expenses
            
            
            4,276,156
            
            
            1,263,718Bank
                notes payable
            
            
            --
            
            
            62,272Royalties
                payable
            
            
            298,152
            
            
            326,308Product
                licenses payable
            
            
            1,300,000
            
            
            800,000Related-party
                convertible note
            
            
            --
            
            
            632,000Senior
                secured promissory notes (net of loan
                discountsof
                $0 and $1,006,396 as of September 30, 2007
                andDecember
                31, 2006, respectively)
            
            
            --
            
            
            1,462,354Deposit
                on stock subscriptions
            
            
            --
            
            
            --Other
                liabilities
            
            
            16,073
            
            
            --Total
                Current Liabilities
            
            
            10,255,710
            
            
            6,289,093LONG-TERM
                DEBTProduct
                licenses payable
            
            
            --
            
            
            750,000Total
                Long-Term Debt
            
            
            --
            
            
            750,000Total
                Liabilities
            
            
            10,255,710
            
            
            7,039,093STOCKHOLDERS'
                EQUITYPreferred
                stock: $0.001 par value, 10,000,000
                sharesauthorized;
                no shares issued and outstanding
            
            
            --
            
            
            --Common
                stock: $0.001 par value, 250,000,000 sharesauthorized;
                50,534,862 and 41,139,390 shares issuedand
                outstanding as of September 30, 2007 andDecember
                31, 2006, respectively
            
            
            50,534
            
            
            41,139Additional
                paid-in capital
            
            
            29,456,390
            
            
            18,382,385Accumulated
                deficit
            
            
            (25,134,684
            )
            
            (14,862,677
            )Total
                Stockholders' Equity
            
            
            4,372,240
            
            
            3,560,847TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            14,627,950
            
            $
            10,599,940





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




3




**AURIGA
      LABORATORIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




THREE MONTHS
            
            
            THREE MONTHSENDED
            
            
            ENDEDSEPTEMBER
                30,
            
            
            SEPTEMBER
                30,2007
            
            
            2006(unaudited)
            
            
            (unaudited)NET
                REVENUESProducts
            
            $
            333,719
            
            $
            1,791,342Total
                Net Revenues
            
            
            333,719
            
            
            1,791,342COST
                OF GOODS SOLDMaterials
                and supplies
            
            
            692,909
            
            
            297,948Royalties
            
            
            213,284
            
            
            206,707Distribution
            
            
            211,246
            
            
            70,945Total
                Cost of Goods Sold
            
            
            1,117,439
            
            
            575,600GROSS
                PROFIT
            
            
            (783,720
            )
            
            1,215,742OPERATING
                EXPENSESSales,
                marketing and trade expenses (includes non-cash equity instrument
                related
                expenses of $0 and $161,444 for the three months ended September
                30, 2007
                and 2006, respectively)
            
            
            2,305,957
            
            
            927,513General
                and administrative expenses (includes non-cash equity instrument
                related
                expenses of $0 and $2,201,278 for the three months ended September
                30,
                2007 and 2006, respectively.)
            
            
            3,897,795
            
            
            3,132,089Research
                and development expenses
            
            
            608,571
            
            
            397,291Restructuring
                charges
            
            
            206,552
            
            
            --Total
                Operating Expenses
            
            
            7,018,875
            
            
            4,456,893LOSS
                FROM OPERATIONS
            
            
            (7,802,595
            )
            
            (3,241,151
            )OTHER
                INCOME(EXPENSES)Interest
                expense
            
            
            (22,042
            )
            
            (236,272
            )Non-cash
                financing expense
            
            
            --
            
            
            --Other
                income(expenses)
            
            
            (235,755
            )
            
            (45,570
            )Total
                Other Income(Expenses)
            
            
            (257,797
            )
            
            (281,842
            )LOSS
                BEFORE TAXES
            
            
            (8,060,392
            )
            
            (3,522,993
            )INCOME
                TAXES
            
            
            --
            
            
            --NET
                LOSS
            
            $
            (8,060,392
            )
            $
            (3,522,993
            )NET
                LOSS PER COMMON SHARE, BASIC AND DILUTED
            
            $
            (0.18
            )
            $
            (0.10
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED
            
            
            45,077,982
            
            
            36,645,531




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




4




**AURIGA
      LABORATORIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**









NINE MONTHS
            
            NINE MONTHSENDED
            
            ENDEDSEPTEMBER
                30,
            
            SEPTEMBER
                30,2007
            
            2006(unaudited)
            
            (unaudited)NET
                REVENUESProducts
            
            $
            12,006,349
            
            $
            5,317,638Total
                Net Revenues
            
            
            12,006,349
            
            
            5,317,638COST
                OF GOODS SOLDMaterials
                and supplies
            
            
            2,241,711
            
            
            782,412Royalties
            
            
            1,297,643
            
            
            901,371Distribution
            
            
            694,548
            
            
            257,615Total
                Cost of Goods Sold
            
            
            4,233,902
            
            
            1,941,398GROSS
                PROFIT
            
            
            7,772,448
            
            
            3,376,240OPERATING
                EXPENSESSales,
                marketing and trade expenses (includes non-cash equity instrument
                related
                expenses of $364,017 and $161,444 for the nine months ended September
                30,
                2007 and 2006, respectively)
            
            
            5,686,031
            
            
            4,098,551General
                and administrative expenses (includes non-cash equity instrument
                related
                expenses of $1,904,659 and $3,414,849 for the nine months ended September
                30, 2007 and 2006, respectively.)
            
            
            8,455,305
            
            
            6,367,035Research
                and development expenses (includes non-cash equity instrument related
                expenses of $515,896 and $0 for the nine months ended September 30,
                2007
                and 2006, respectively)
            
            
            1,643,625
            
            
            818,375Restructuring
                charges
            
            
            206,552
            
            
            --Total
                Operating Expenses
            
            
            15,991,513
            
            
            11,283,961LOSS
                FROM OPERATIONS
            
            
            (8,219,065
            )
            
            (7,907,721
            )OTHER
                INCOME(EXPENSES)Interest
                expense
            
            
            (1,144,174
            )
            
            (340,544
            )Non-cash
                financing expense
            
            
            --
            
            
            (1,986,592
            )Other
                income(expenses)
            
            
            (908,969
            )
            
            (75,160
            )Total
                Other Income(Expenses)
            
            
            (2,053,143
            )
            
            (2,402,296
            )LOSS
                BEFORE TAXES
            
            
            (10,272,209
            )
            
            (10,310,017
            )INCOME
                TAXES
            
            
            --
            
            
            --NET
                LOSS
            
            $
            (10,272,209
            )
            $
            (10,340,017
            )NET
                LOSS PER COMMON SHARE, BASIC AND DILUTED
            
            $
            (0.24
            )
            $
            (0.30
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED
            
            
            43,612,343
            
            
            34,755,448




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





5




**AURIGA
      LABORATORIES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




NINE MONTHS 
                ENDED
              SEPTEMBER 30, 
                2007 (unaudited)
            
            NINE MONTHS
              ENDED
              SEPTEMBER 30, 
                2006 (unaudited)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (10,272,209
            )
            $
            (10,340,017
            )Adjustments
                to reconcile net loss to net cash flows:Provided
                by (used) by operating activities:Depreciation
            
            
            509,030
            
            
            111,117Non-cash
                expenses for equity instruments issued for compensation and
                services
            
            
            4,264,252
            
            
            5,562,885Amortization
                of notes payable discounts and finders' fees
            
            
            1,096,253
            
            
            259,071Sales
                returns and allowances
            
            
            3,280,517
            
            
            -Bad
                debt expense
            
            
            364,891
            
            
            364Changes
                in assets and liabilities:Restricted
                cash
            
            
            75,560
            
            
            (50,697
            )Receivables
            
            
            (1,595,694
            )
            
            687,642Inventory
            
            
            (1,140,398
            )
            
            458,765Prepaid
                expenses
            
            
            (548,583
            )
            
            (63,620
            )Deposits
            
            
            (34,549
            )
            
            (16,775
            )Accounts
                payable
            
            
            3,862,043
            
            
            973,104Accrued
                expenses
            
            
            126,963
            
            
            611,357Royalties
                payable
            
            
            (28,156
            )
            
            (307,058
            )Net
                cash used by operating activities:
            
            
            (40,080
            )
            
            (2,113,862
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of fixed assets
            
            
            (160,954
            )
            
            (225,059
            )Payment
                of product licenses payable
            
            
            (250,000
            )
            
            (1,500,000
            )Net
                cash used by investing activities:
            
            
            (410,954
            )
            
            (1,725,059
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from stock sales
            
            
            -
            
            
            2,178,686Net
                proceeds from exercise of stock options
            
            
            23,124
            
            
            -Proceeds
                from stock subscriptions receivable
            
            
            4,284,025
            
            
            600,127Proceeds
                from bank notes payable
            
            
            800,000
            
            
            386,039Payments
                of bank notes payable
            
            
            (862,272
            )
            
            (1,071,418
            )Proceeds
                from deposits on stock subscriptions
            
            
            -
            
            
            -Proceeds
                from senior secured promissory notes
            
            
            -
            
            
            2,000,000Proceeds
                from convertible secured notes payable
            
            
            -
            
            
            400,000Payments
                of convertible secured notes payable
            
            
            (132,000
            )
            
            -Purchase
                of treasury stock
            
            
            
            
            
            (22,500
            )Payments
                on related party loans
            
            
            (2,468,750
            )
            
            (150,000
            )Net
                cash provided by financing activities:
            
            
            1,644,127
            
            
            4,320,934Net
                increase in cash
            
            
            1,193,093
            
            
            482,013Cash,
                beginning of period
            
            
            259,580
            
            
            12,639Cash,
                end of period
            
            $
            1,452,673
            
            $
            494,652





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




6




**AURIGA
      LABORATORIES, INC. AND SUBSIDIARIES**





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2007 (Unaudited)**






**1.**
            **COMPANY
                OVERVIEW AND BASIS OF
                PRESENTATION.**





Auriga
      Laboratories, Inc. (the “Company”) is the first specialty pharmaceutical company
      building a nationwide commission-based sales model. The Company's business
      model
      combines driving revenues through a variable cost commission-based sales
      structure, acquisition of proven brand names, introduction of new brands, and
      a
      strategic development pipeline, all of which are designed to enhance the growing
      direct relationships with physicians nationwide.





The
      Company operates out of four divisions. The first is the Auriga Branded
      Prescriptions division which focuses on the respiratory, dermatology, oncology
      and psychiatry markets. The second is the Auriga Consumer Brands division which
      focuses initially on the respiratory over-the-counter market. The third is
      the
      Advanced Topical Solutions Pharmaceuticals division which is dedicated primarily
      to Dermatologists with a secondary focus on Gastroenterologists and Colon-Rectal
      Specialists. The fourth is the Stesso Pharmaceuticals division which will
      commence distribution of authorized generic versions of our branded products
      that are facing competition from generic or therapeutically equivalent products
      during 2007.





The
      Company's corporate strategy focuses on two primary objectives. The first is
      building an innovative, nationwide sales model that drives revenue through
      a
      variable cost, commission-only structure. The second is developing a diversified
      product portfolio by acquiring proven brands, the introduction of line
      extensions, reformulations, and the strategic development of our own
      products.





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 2007, and the results of operations and cash flows
      for
      the three months and nine months ended September 30, 2007 and 2006,
      respectively, 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 nine month transitional period ending December 31,
      2006 and from Inception to March 31, 2006 contained in the Company's Transition
      Report on Form 10-KSB filed with the Securities and Exchange Commission (“SEC”)
      on March 30, 2007. The results of operations for the three months and six months
      ended September 30, 2007 are not necessarily indicative of the results to be
      expected for any other interim period or for the full fiscal year.






**2.**
            **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.




7




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 three and nine months ended
      September 30, 2007 and September 30, 2006 as inclusion of the common stock
      equivalents would be anti-dilutive. A total of 27,567,954 and 21,336,958 shares
      of common stock issuable upon exercise of outstanding options and warrants
      were
      excluded from the calculation of common stock equivalents for the nine months
      ended September 30, 2007 and September 30, 2006, respectively.




Recent
      Accounting Pronouncements





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”), which permits entities to measure many financial instruments
      and certain other items at fair value that are not currently required to be
      measured at fair value. An entity would report unrealized gains and losses
      on
      items for which the fair value option has been elected in earnings at each
      subsequent reporting date. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. The decision about whether
      to elect the fair value option is applied instrument by instrument, with a
      few
      exceptions; the decision is irrevocable; and it is applied only to entire
      instruments and not to portions of instruments. The statement requires
      disclosures that facilitate comparisons (a) between entities that choose
      different measurement attributes for similar assets and liabilities and (b)
      between assets and liabilities in the financial statements of an entity that
      selects different measurement attributes for similar assets and liabilities.
      SFAS No. 159 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007. Early adoption is permitted as of the
      beginning of a fiscal year provided the entity also elects to apply the
      provisions of SFAS No. 157, “Fair Value Measurements, (“SFAS 157”). Upon
      implementation, an entity shall report the effect of the first remeasurement
      to
      fair value as a cumulative-effect adjustment to the opening balance of Retained
      Earnings. Since the provisions of SFAS 159 are applied prospectively, any
      potential impact will depend on the instruments selected for fair value
      measurement at the time of implementation. Management is evaluating the
      requirements of SFAS No. 159 and has not yet determined the impact on the
      Company's consolidated financial statements.




In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48 “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
      Statement No. 109” (“FIN 48”). FIN 48 clarified the accounting for uncertain
      income taxes recognized in an entity's financial statements in accordance with
      FASB Statement 109, “Accounting for Income Taxes” and prescribes a recognition
      threshold and measurement attributes for financial statement disclosure of
      tax
      positions taken or expected to be taken on a tax return. Under FIN 48, the
      impact of an uncertain income tax position on the income tax return must be
      recognized at the largest amount that is more-likely-than-not to be sustained
      upon audit by the relevant taxing authority. An uncertain income tax position
      will not be recognized if it has less than a 50% likelihood of being sustained.
      Additionally, FIN 48 provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. FIN 48 is effective for fiscal years beginning after December 15,
      2006. The Company adopted the provisions of FASB Interpretation No. 48 on
      January 1, 2007. The Company recognized no increase in the liability for
      unrecognized tax benefits as a result of the adoption of FIN 48.




8




**3.**
            **ACCOUNTS
                RECEIVABLE.**





Accounts
      receivable as of September 30, 2007 and December 31, 2006 was as
      follows:




**September 30,**
            
            
            **December 31,****2007**
            
            
            **2006**Accounts
                receivable
            
            $
            2,284,947
            
            $
            $
                990,149Less:
                allowance for doubtful accounts
            
            
            (19,760
            )
            
            (20,187
            )Accounts
                receivable, net
            
            $
            2,265,187
            
            $
            $
                969,962





Bad
      debt
      expense was approximately $64,423 and $0, respectively for the three months
      ended September 30, 2007 and 2006.








**4.**
            **INVENTORY.**





Inventory
      as of September 30, 2007 and December 31, 2006 was as follows:





**September
                30, 2007**
            
            **December
                31, 2006**Product
                inventory
            
            $
            1,897,146
            
            $
            571,516Less:
                reserves
            
            
            (231,424
            )
            
            (145,099
            )Inventory,
                net
            
            $
            1,665,722
            
            $
            426,417







**5.**
            **INTANGIBLE
                ASSETS.**




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,
      2007:





**Gross Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net
                Amount**
            
            **Expected Life**Licensing
                rights/product lines
            
            $
            6,170,749
            
            $
            (451,929
            )
            $
            5,718,820
            
            
            2-15
                yearsSupply/distribution
                agreements
            
            
            1,700,000
            
            
            (75,556
            )
            
            1,624,444
            
            
            15
                yearsGoodwill
            
            
            92,316
            
            
            --
            
            
            92,316
            
            
            --Total
            
            $
            7,963,065
            
            $
            (527,485
            )
            $
            7,435,580
            
            
            --





As
      of
      September 30, 2007 the intangible assets of the Company included $92,316 of
      goodwill. For the three months ended September 30, 2007 and 2006, amortization
      expense related to the intangible assets of the Company were $135,651 and
      $33,319, respectively. For the nine months ended September 30, 2007 and 2006,
      amortization expense related to the intangible assets of the Company were
      $527,485 and $33,319, respectively.





**6.**
            **NOTES
                PAYABLE.**





Bank
      Notes Payable





**Comerica
      Bank**





On
      May
      23, 2007, the Company entered into a Loan and Security Agreement with Comerica
      Bank. The Loan Agreement provided for a working capital line of credit of up
      to
      $2.0 million, based on 65% of eligible accounts receivable, secured by a first
      lien on substantially all of the assets of the Company, including intellectual
      property. The line of credit was repayable interest only monthly, with the
      principal due at the maturity date of May 31, 2008. The line of credit accrued
      interest at Comerica's Prime Rate plus 1.00%. The Company paid a $10,000
      origination fee in connection with the closing of the credit facility. The
      Loan
      Agreement included customary financial covenants. On
      September 27, 2007, by mutual agreement of the parties, the Loan Agreements
      were
      terminated. All collateral being held under the Loan & Security Agreement
      and related security interests were subsequently released. No further moneys
      are
      owed by the Company to Comerica under the Loan Agreement.




9




**Wells
      Fargo Bank**





The
      Company had a $75,000 short-term financing facility with Wells Fargo Bank which
      was paid in full and closed in the first quarter of 2007. As of December 31,
      2006, the outstanding balance under this facility was $62,272, and the annual
      interest rate was 13.0%.





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 was due and payable
      in full on May 15, 2007. Accrued interest on the SFP Note was 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
      was
      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.




On
      January 25, 2007, the Company and SFP executed a letter agreement amending
      the
      SFP Note. The letter agreement serves to amend the interest rate, establish
      a
      new repayment schedule, amend the seniority of the SFP Note such that it is
      now
      subordinate in right of payment to any and all other indebtedness of the Company
      senior in time to the issuance of the SFP Note, and amend the maturity date
      of
      the SFP Note by extending such date to October 15, 2007. On February 15, 2007,
      $132,000 of principal was paid to SFP. On April 12, 2007, SFP elected to convert
      the outstanding principal under the Senior Secured Convertible Note into common
      stock. The outstanding balance of $500,000 was converted at the stated
      conversion price of $1.388 per share. As a result, SFP was issued 360,230 shares
      of common stock.





For
      further information, see “Note 11 -- Related Party Transactions.”




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 and
      December 8, 2006. As amended, 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)
      May
      15, 2007. 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. As of June 30, 2007, the Company expensed $1,267,350 of this loan discount
      as interest expense, of which $219,350 was expensed during the three months
      ended June 30, 2007. The warrant provides LFC with “piggyback” registration
      rights with respect to shares of common stock acquired upon exercise of the
      warrant. As amended, the LFC Note requires the Company to make quarterly
      payments to LFC, commencing with the quarter ending December 31, 2006, equal
      to
      6.0% of gross sales by the Company (less customary deductions) of the Levall®
product line during the preceding quarter. This payment obligation continues
      in
      perpetuity. SFP is the managing member of LFC. The Company's CEO is the
      beneficial owner of SFP.





On
      April
      3, 2007, the Company paid to LFC $750,000 towards the outstanding balance of
      the
      LFC Note. The remaining balance of $750,000 was paid on May 15,
      2007.





For
      further information, see “Note 11 -- Related Party Transactions.”





Related-Party
      Senior Secured Promissory Note





On
      September 28, 2006, the Company issued to Aquoral Finance Corp. LLC (“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
      Laboratoires Carilène (See Note 18 to the Company's audited financial statements
      in the Current Report on Form 10-KSB filed with the SEC on March 30, 2007).
      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 AquoralTM product line during the preceding
      quarter for every $125,000 of outstanding funds advanced under the AFC Note.
      This payment obligation continues in perpetuity. SFP is the managing member
      of
      LFC. The Company's CEO is the beneficial owner of SFP.





On
      April
      2, 2007, the Company paid to AFC $968,750 as payment in full of the AFC
      Note.





For
      further information, see “Note 11 -- Related Party Transactions.”




10




**7.        
      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, 2007, 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, 2007, there were 50,534,862 shares of
      common stock issued and outstanding. The holders of shares of common stock
      are
      entitled to one vote for each share.





Private
      Placements





On
      April
      2, 2007, the Company initially sold in a private placement 1,600,000 Units
      at a
      price of $1.25 per Unit, for aggregate gross proceeds of $2,000,000. Each Unit
      was comprised of one share of our common stock and one common stock warrant.
      Each common stock warrant included in the Units entitles the holder to purchase
      one-fifth of a share of the company's common stock at an exercise price of
      $1.60
      per share through April 2, 2010. The Units were sold solely to accredited
      investors. During the second quarter of 2007, the Company extended the private
      placement to include over allotments. The Company sold an additional 1,000,000
      Units at a price of $1.25 per Unit, for aggregate gross proceeds of $1,250,000.
      The final subscription proceeds were received on July 27, 2007.





On
      August
      6, the Company entered into Stock Purchase Agreements, with four different,
      non-affiliated investors. Under the terms of the Agreement, in exchange for
      $1,250,000, the Company issued the investors a total of 1,000,000 shares of
      our
      common stock, and warrants, to purchase an additional 200,000 shares of common
      stock at an exercise price of $1.25 per share. The issuance was exempt from
      registration pursuant to Section 4(2) of the Securities Act of 1933, and the
      investors were accredited.





On
      September 26, 2007, the Company entered into Stock Purchase Agreements, with
      eight different, non-affiliated, investors. Under the terms of the Agreement,
      in
      exchange for $1,062,611, the Company issued the investors a total of 2,004,925
      shares of our common stock, and warrants, to purchase an additional 400,985
      shares of common stock at an exercise price of $0.53 per share. The issuance
      was
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933,
      and the investors were accredited.





**8.        
      EQUITY INCENTIVE PLANS.**





2006
      Equity Incentive Plan





In
      August
      2006, the Company's board of directors (“Board”) approved the Auriga
      Laboratories, Inc. 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. For the three and nine months ended
      September 30, 2007, the Company did not issue any shares of common stock or
      record any costs in connection with this plan. As of September 30, 2007, the
      Company has 9,263 shares available for issuance under the 2006 Equity Incentive
      Plan.





2007
      Equity Incentive Plan





On
      January 3, 2007, the Board approved and the Company filed a Form S-8
      registration statement that includes 2,000,000 shares to be registered under
      the
      Auriga Laboratories, Inc. 2007 Equity Incentive Plan. The number of shares
      of
      common stock is the maximum number of shares issuable upon the exercise of
      options or vesting or granting of other awards, which may be granted pursuant
      to
      this plan. The registration statement also covers such additional number of
      shares of common stock as may become issuable as a result of any future
      adjustments in accordance with the terms of the plan, and which result in an
      increase in the number of outstanding shares of common stock available for
      award
      thereunder. The value of each award is based upon the current fair market value
      of the common stock at the time of grant. For the three months ended September
      30, 2007, the Company issued 109,000 shares of common stock and recorded
      $116,038 in costs in connection with these issuances. For the nine months ended
      September 30, 2007, the Company issued 1,282,691 shares of common stock and
      recorded $1,280,069 in costs in connection with these issuances. As of September
      30, 2007, the Company had 587,408 shares available for issuance under the 2007
      Equity Incentive Plan.





**9.         STOCK
      OPTIONS.**





2005
      Stock Option Plan





Pursuant
      to the terms of the merger agreement between Auriga Laboratories, Inc. and
      Multi-Link Telecommunications, Inc., the Company assumed each outstanding option
      under the 2005 Stock Option 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.




11




The
      Company has granted stock options to officers, employees and consultants as
      follows:





Number of
              Shares
              Subject to
              Issuance
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life (in years)**Balance,
                March 31, 2006**
            
            
            5,554,547
            
            $
            0.60
            
            
            9.8Options
                granted
            
            
            410,188
            
            
            0.72Options
                cancelled
            
            
            (2,117,983
            )
            
            0.62Options
                exercised
            
            
            (15,007
            )
            
            0.42**Balance,
                December 31, 2006**
            
            
            3,831,745
            
            
            0.60
            
            
            9.2Options
                granted
            
            
            --
            
            
            --Options
                cancelled
            
            
            (365,156
            )
            
            0.75Options
                exercised
            
            
            (25,011
            )
            
            0.93**Balance,
                September 30, 2007**
            
            
            3,441,578
            
            $
            0.61
            
            
            8.4**Options
                exercisable (vested) at September 30, 2007**
            
            
            1,396,474
            
            $
            0.60
            
            
            8.4





During
      the three and nine months ended September 30, 2007, the Company did not issue
      any options under the 2005 Stock Option Plan. 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
      three and nine months ended September 30, 2007, compensation expense associated
      with stock options that vested during the period was $273,112 and $876,100,
      respectively.





2006
      Stock Option Plan





In
      July
      2006, the stockholders of the Company approved the Auriga Laboratories, Inc.
      2006 Stock Option 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 Option 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 Option 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 Option 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 Option 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 Option 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.





The
      fair
      value per share of vested options during the three and nine months ended
      September 30, 2007 was calculated, according to the Black-Scholes pricing model.
      The value of options was calculated on the date of the grant using the following
      assumptions:








Three Months 
                Ended
              September 30, 2007
            
            Nine Months 
                Ended
              September 30, 2007Risk-free
                interest rate
            
            
            4.4
                to 5.1
            %
            
            4.4
                to 5.2
            %Expected
                dividend yield
            
            
            --
            
            
            --Expected
                lives
            
            
            10
                years
            
            
            10
                yearsExpected
                volatility
            
            
            110
                to 141
            %
            
            110
                to 185
            %




12




The
      Company has granted stock options to officers, employees and consultants as
      follows:





Number of
              Shares
              Subject to
              Issuance
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life (in years)**Balance,
                March 31, 2006**
            
            
            --
            
            $
            --Options
                granted
            
            
            4
                ,186,230
            
            
            1.40Options
                cancelled
            
            
            (457,500
            )
            
            2.32Options
                exercised
            
            
            --
            
            
            --**Balance,
                December 31, 2006**
            
            
            3,728,730
            
            
            1.29
            
            
            9.4Options
                granted
            
            
            4,800,000
            
            
            1.40Options
                cancelled
            
            
            (3,091,692
            )
            
            0.71Options
                exercised
            
            
            --
            
            
            --**Balance,
                September 30, 2007**
            
            
            5,437,038
            
            
            1.36
            
            
            9.4**Options
                exercisable (vested) at September 30, 2007**
            
            
            240,510
            
            
            1.28
            
            
            8.8





During
      the three and nine months ended September 30, 2007, 3,000,000 and 4,800,000,
      respectively, of stock options were granted under the 2006 Stock Option Plan
      to
      purchase shares of common stock. 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. As of September 30, 2007,
      there are 1,562,962 options available to be granted under this
      Plan.





For
      the
      three and nine months ended September 30, 2007, compensation expense associated
      with stock options that vested during the period was $755,488 and $863,726,
      respectively.





2007
      Stock Option Plan





On
      January 3, 2007, the Board approved and the Company filed a Form S-8
      registration statement that includes 7,000,000 shares to be registered under
      the
      Auriga Laboratories, Inc. 2007 Stock Option Plan. The number of shares of common
      stock is the maximum number of shares issuable upon the exercise of options
      or
      vesting or granting of other awards, which may be granted pursuant to this
      plan.
      This registration statement also covers such additional number of shares of
      common stock as may become issuable as a result of any future adjustments in
      accordance with the terms of the plan, and which result in an increase in the
      number of outstanding shares of common stock available for award
      thereunder.





The
      fair
      value per share of vested options during the three and nine months ended
      September 30, 2007 was calculated, according to the Black-Scholes pricing model.
      The value of options was calculated on the date of the grant using the following
      assumptions:








Three Months Ended
              September 30, 2007
            
            Nine Months Ended
              September 30, 2007Risk-free
                interest rate
            
            
            4.4
                to 5.1
            %
            
            4.4
              to 5.2
            %Expected
                dividend yield
            
            
            --
            
            
            --Expected
                lives
            
            
            10
                years
            
            
            10
              yearsExpected
                volatility
            
            
            110
                to 141
            %
            
            110
              to 185
            %




The
      Company has granted stock options to officers, employees and consultants as
      follows:





Number of
              Shares
              Subject to
              Issuance
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life (in years)**Balance,
                December 31, 2006**
            
            
            --
            
            $
            --Options
                granted
            
            
            8,147,000
            
            
            1.26Options
                cancelled
            
            
            (2,995,000
            )
            
            1.39Options
                exercised
            
            
            --
            
            
            --**Balance,
                September 30, 2007**
            
            
            5,152,000
            
            
            1.18
            
            
            9.6**Options
                exercisable (vested) at September 30, 2007**
            
            
            774,375
            
            
            0.95
            
            
            9.7




13




During
      the three and nine months ended September 30, 2007, options in the amounts
      of
      2,127,500 and 8,147,000, respectively, were granted under the 2007 Stock Option
      Plan to purchase shares of common stock. 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. As of September 30, 2007,
      there are 1,848,000 options available to be granted under this
      Plan.





For
      the
      three and nine months ended September 30, 2007, compensation expense associated
      with stock option vesting during the period was $548,220 and $851,207,
      respectively.





**10.**  **COMMON
      STOCK WARRANTS.**





During
      the three and nine months ended September 30, 2007, the Company issued 600,985
      and 920,985 warrants to acquire shares of common stock in connection with the
      private placements discussed in Note 7 - Capital Stock . As of September 30,
      2007, warrants to purchase up to 13,737,338 shares of common stock were
      outstanding, and warrants to purchase 13,407,708 shares of common stock were
      vested.





For
      the
      three and nine months ended September 30, 2007, compensation expense for
      services for warrants to purchase common stock using the Black Scholes Option
      Pricing Model was $653,227 and $1,724,835, respectively. The following
      assumptions were made to value the warrants: (i) risk-free interest rate between
      4.4 - 5.1% and 4.4 to 5.2%; (ii) expected lives of 10 years; and (iii) expected
      volatility of 110 - 141% and 110 - 185%, for the three and nine months ended
      September 30, 2007, respectively.





**11.**  **RELATED-PARTY
      TRANSACTIONS.**





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. Philip S. Pesin, 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.





On
      January 25, 2007, the Company and SFP executed a letter agreement amending
      the
      SFP Note. The letter agreement serves to:





**·**
            Amend
                the interest rate as follows:





**·**
            For
                the period from August 4, 2006 through February 14, 2007, the SFP
                Note
                shall bear interest at the annual rate of eight percent (8%);
                and





**·**
            For
                the period from February 15, 2007 through October 15, 2007, the SFP
                Note
                shall bear interest at the annual rate of ten percent
                (10%);






**·**
              Establish
                    the following repayment
                    schedule:


**·**
            One
                Hundred Thirty Two Thousand Dollars ($132,000) of principal was paid
                to
                SFP on February 15, 2007; and





**·**
            The
                remaining Five Hundred Thousand Dollars ($500,000) of principal shall
                be
                paid in equal monthly installments of One Hundred Thousand Dollars
                ($100,000) beginning on June 15, 2007 with the final payment due
                on
                October 15, 2007;






**·**
                Amend
                        the seniority of the SFP Note such that it is now subordinate
                        in right of
                        payment to any and all other indebtedness of the Company
                        senior in time to
                        the issuance of the SFP Note;
                        and
 **·**
                    Amend
                              the maturity date of the SFP Note by extending such
                              date to October 15,
                              2007.


On
      April
      12, 2007, SFP elected to convert the remaining outstanding principal under
      the
      SFP Note into common stock of the Company. The outstanding balance of $500,000
      was converted at the stated conversion price of $1.388 per share. As a result,
      SFP was issued 360,230 shares of common stock of the Company.




14




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 and
      December 8, 2006. As amended, 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)
      May
      15, 2007. 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. As of June 30, 2006, the Company expensed $1,267,350 of this loan discount
      as interest expense, of which $219,350 was expensed during the three months
      ended June 30, 2007. The warrant provides LFC with “piggyback” registration
      rights with respect to shares of common stock acquired upon exercise of the
      warrant. The LFC Note requires the Company to make quarterly payments to LFC,
      commencing with the quarter ending December 31, 2006, equal to 6.0% of gross
      sales by the Company (less customary deductions) of the Levall® product line
      during the preceding quarter. This payment obligation continues in
      perpetuity.





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. 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. On April 3,
      2007, the Company paid to LFC $750,000 towards the outstanding balance of the
      LFC Note. The remaining balance of $750,000 was paid on May 15,
      2007.





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 provided 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 were used to satisfy the Company's obligations under
      the distribution agreement with Carilène. 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
      AquoralTM 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 was 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 is *pari
      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 June 30,
      2007, the Company had issued warrants to acquire up to 968,750 shares of Common
      Stock. In connection with these warrants, the Company recorded $676,509 as
      a
      loan discount that was amortized over the life of the loan. As of June 30,
      2007,
      the Company had expensed all $676,509 of this loan discount as interest expense,
      of which $348,348 was expensed during the six months ended June 30,
      2007.




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.





On
      April
      2, 2007, the Company paid to AFC $968,750 as payment in full of the AFC
      Note.





The
      Company believes that all of the transactions set forth above were made on
      terms
      no less favorable to it than could have been obtained from unaffiliated third
      parties. The Company intends that all future transactions with affiliated
      persons be approved by a majority of the Board, including a majority of the
      independent and disinterested outside directors on the Board, and be on terms
      no
      less favorable to the Company than could be obtained from unaffiliated third
      parties.




15




**12.**  **CONCENTRATIONS.**




Customers





During
      the three months ended September 30, 2007 and 2006, two customers, each a
      wholesale distributor, accounted for a combined total of approximately 90%
      and
      45% of the Company's revenues, respectively. During the nine months ended
      September 30, 2007 and 2006, two customers, each a wholesale distributor,
      accounted for a combined total of approximately 90% and 73% of the Company's
      revenues, respectively. No other customer accounted for more than 10% of the
      Company's sales during the three and nine months ended September 30, 2007.
      The
      Company had two and three additional customers, exclusive of the ones referenced
      above, accounting for more than 10% of sales during the three and nine months
      ended September 30, 2006, respectively.





Suppliers





Some
      of
      the Company's products are currently sourced from single qualified suppliers
      or
      manufacturers. The Company has not established arrangements with the 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 any of the required ingredients for our products or the manufacture
      of such products, could have a material adverse effect on the Company's ability
      to manufacture our products or to obtain or maintain regulatory approval of
      such
      products.





**13.**  **COMMITMENTS
      AND CONTINGENCIES.**





Athlon
      Pharmaceuticals, Inc. License Agreement





On
      August
      31, 2006, the Company entered into a License Agreement with Athlon
      Pharmaceuticals, Inc. (“Athlon”) that sets forth the terms upon which the
      Company obtained the Levall® license from Athlon for the Levall® product line,
      together with all of Athlon's intellectual property related to Levall® and
      certain other tangible and intangible assets related to, or necessary for the
      continued development and marketing of, the Levall® product line. The Levall®
product line consists of various pharmaceutical products marketed by Athlon
      that
      provide relief from coughing, congestion and rhinitis associated with
      respiratory infections such as the common cold, influenza, bronchitis and
      sinusitis. The Levall® license permits the Company to make, sell, market,
      distribute, import and otherwise transfer the Levall® products on a worldwide
      basis. As consideration for the Levall® license, the Company agreed to pay
      Athlon $1.5 million in upfront fees and 2,500,000 shares of its restricted
      common stock. Additionally, the Company also agreed to pay Athlon a royalty
      payment equal to 50% of net sales up to $10,000,000 through the end of the
      first
      year following the closing date of the license agreement, with such rate to
      decrease to 20% for net sales in excess of $10,000,000. The royalty payments
      for
      the second and third years of the license agreement were equal to 35% of net
      sales and 25% of net sales, respectively. In addition, the license agreement
      provided for royalty payments equal to 8% of net sales for each year following
      the third year until such time as the aggregate royalty payments totaled
      $20,000,000, plus royalty payments equal to 1% of net sales for each year
      subsequent thereto.




On
      February 9, 2007, the Company filed a lawsuit against Athlon in the United
      States District Court for the Northern District of Georgia under the
      caption *Auriga Laboratories, Inc. v. Athlon Pharmaceuticals, Inc.* ,
      No. 1:07-CV-0308-CC (2007), regarding certain sales practices allegedly
      engaged in by Athlon regarding the Levall® products. On February 23, 2007, the
      Company entered into a settlement agreement with Athlon to settle this dispute.
      The settlement agreement provides that Athlon will refrain from certain
      allegedly unfair competitive practices, including making or distributing false,
      misleading, deceptive or disparaging statements, representations and/or writings
      regarding the Company and/or the Levall® products. Pursuant to the settlement
      agreement, the Company agreed to dismiss the litigation referred to above by
      filing a stipulation of dismissal with prejudice within five business days
      following the execution of the settlement agreement. The settlement agreement
      also contains certain customary terms, including releases by each of the parties
      for any and all claims each may have against the other through the date of
      the
      settlement agreement.




The
      letter agreement entered into with Athlon in connection with the settlement
      agreement amends the license agreement by reducing the period of time for which
      the Company is obligated to make royalty payments at the rate of 50% of net
      sales from the first year following the closing date of the license agreement
      to
      December 31, 2006. Furthermore, effective February 1, 2007, the royalty payment
      rate on all sales by the Company is reduced to 25% of net sales, until such
      time
      as the aggregate royalty payments total $10,000,000. Once aggregate royalty
      payments total $10,000,000, the Company will not be required to make any further
      royalty payments to Athlon, thus potentially reducing the total royalty payments
      required under the license agreement by approximately $10,000,000.




In
      addition, the letter agreement reduces the frequency of the Company's reporting
      and payment obligations. The license agreement previously required monthly
      reports and payments until such time as the aggregate royalty payments equaled
      or exceeded $10,000,000, with such reports and payments to be made on a
      quarterly basis thereafter. The license agreement now only requires quarterly
      reports and payments.





16




Employment
      Agreements





**Alan
      T. Roberts**





On
      March
      1, 2007 as part of an executive employment agreement with Alan T. Roberts,
      Chief
      Scientific Officer, the board of directors of the Company approved the issuance
      of a non-statutory stock option to purchase two hundred seventy-five thousand
      (275,000) shares of the Company's common stock under its 2007 Stock Option
      Plan.
      The agreement provides for an exercise price of $1.24 per share, which is equal
      to the closing price as reported on the OTC Bulletin Board on the date of grant.
      The option vests as follows: (a) one-forth (1/4) of the option is exercisable
      on
      the first anniversary of the date of grant; and (b) subject to the executive's
      continued employment by the Company, 1/48 th of the
      remaining number of shares of common stock subject to the option shall vest
      each
      month thereafter. The employment agreement also contains severance provisions
      and other covenants.





**Philip
      S. Pesin**





On
      May 9,
      2007, the Company entered into an employment agreement (the “Agreement”) with
      its Chief Executive Officer and Chairman of the Board, Philip S. Pesin. On
      May
      9, 2007, the Agreement became effective and superseded Mr. Pesin's current
      employment agreement. The term of the Agreement is for two years, expiring
      on
      May 9, 2009. The Company has the option to extend the Agreement for an
      additional two-year period prior to the expiration of the initial term. Under
      the Agreement, Mr. Pesin's base salary is set at $425,000 annually, but is
      to be
      reviewed annually in accordance with the Company's executive compensation
      policies. In addition, Mr. Pesin is entitled to an annual bonus, payable
      quarterly, based on increases in the Company's market capitalization as follows:
      for every $1,000,000 increase in the Company's market capitalization, initially
      measured as of May 9, 2007, Mr. Pesin will be entitled to a $10,000
      bonus.





The
      Company may terminate Mr. Pesin's employment at any time with or without cause.
      If Mr. Pesin is terminated without cause or because of death or “disability” (as
      that term is defined in the agreement), he will be entitled to a lump-sum
      severance payment equal to his base salary for a period of twenty-four months
      following his termination, plus continued health benefits during such period.
      In
      addition, if the Company terminates Mr. Pesin without cause, then all
      outstanding options and warrants held by him will vest immediately. Mr. Pesin
      receives no benefits if he is terminated for cause. If Mr. Pesin resigns for
      “good cause” (as that term is defined in the agreement) or resigns following the
      Company's change in control, then he will be entitled to a lump-sum severance
      payment equal to his base salary for a period of twenty-four months following
      his termination, plus continued health benefits during such period. In addition,
      in such event, all outstanding options and warrants held by Mr. Pesin will
      vest
      immediately. Under the Agreement, Mr. Pesin is also entitled to earn long-term
      incentive awards and to participate in all other benefits plans and perquisites
      in which the Company's other executives and employees are eligible to
      participate, at the discretion of the Board. Mr. Pesin is also entitled to
      five
      weeks paid vacation per year and to reimbursement of certain expenses. The
      Agreement also provides for the grant to Mr. Pesin of a non statutory stock
      option to purchase 3,000,000 shares of the Company's common stock, with an
      exercise price of $1.57, which is the closing price of the common stock of
      the
      Company on the OTC Bulletin Board on May 9, 2007. The option vests as follows:
      (i) twenty-five percent of the option is exercisable on May 9, 2008; and (ii)
      subject to Mr. Pesin's continued service as the Company's Chief Executive
      Officer, 1/24th of the total number of shares of common stock subject to the
      option will vest each month thereafter.





**Frank
      R. Greico**





On
      September 1, 2007, the Company appointed Frank Greico as chief financial
      officer. Mr. Greico replaces Mr. Charles R. Bearchell. The Company entered
      into
      an employment agreement with Mr. Greico in connection with his appointment
      as
      chief financial officer. The Employment Agreement became effective on September
      1, 2007 and continues for a term of one year. Either party has the option of
      renewing the term for an additional year, if notice is provided 90 days prior
      to
      the expiration of the term. Under the Employment Agreement, Mr. Greico's base
      salary is set at $250,000 **.** In
      addition, Mr. Greico is entitled to an annual bonus, payable quarterly, based
      on
      increases in the Company's market capitalization as follows: for every
      $1,000,000 increase in the Company's market capitalization, initially measured
      as of September 1, 2007, Mr. Greico will be entitled to a $5,000 bonus. The
      first $100,000 of any quarterly bonus shall be paid in cash with any additional
      bonus over $100,000 payable in cash or registered Company common stock, at
      the
      Company's option. The Agreement also provides for the grant, subject to the
      approval of the Company's Board of Directors, to Mr. Greico of a non statutory
      stock option to purchase 1,400,000 shares of the Company's common stock, each
      share exercisable at the closing price of the Company's common stock on the
      OTC
      Bulletin Board on the date the option is granted by the Company's Board of
      Directors. The option vests as follows: (i) 400,000 shares subject to the option
      are vested on September 1, 2007, (ii) twenty-five percent of the remaining
      option shares are vested on September 1, 2008; and (ii) subject to Mr. Greico's
      continued service with the Company, 1/36 th of the
      total remaining options will vest each month after September 1,
      2008.




The
      Company may terminate Mr. Greico's employment at any time with or without cause.
      If Mr. Greico is terminated without cause, he will be entitled to severance
      pay
      equal to his base salary for a period of twelve months following his
      termination, plus continued health benefits during such period. In addition,
      if
      the Company terminates **** Mr.
      Greico without cause, then any outstanding, but unvested options shall vest.
      Mr.
      Greico receives no benefits if he is terminated for cause. Under the Agreement,
      Mr. Greico is also entitled to earn long-term incentive awards and to
      participate in all other benefits plans and perquisites in which the Company's
      other executives and employees are eligible to participate. Mr. Greico is also
      entitled to 5 weeks paid vacation per year and to reimbursement of certain
      expenses.




17




**Charles
      R. Bearchell**




On
      August
      27, 2008, Charles R. Bearchell's employment agreement with the Company dated
      November 8, 2006 was amended effective as of September 1, 2007. The Amended
      Agreement appointed Mr. Bearchell as the Company's Director of Financial
      Reporting. Under the Amended Agreement, Mr. Bearchell's base salary was set
      at
      $150,000 **.** The
      Company may terminate Mr. Bearchell's employment at any time with or without
      cause through December 31, 2007. If Mr. Bearchell is terminated without cause
      during the Term, he will be entitled to severance pay equal to his base salary
      through December 31, 2007. Mr. Bearchell receives no benefits if he is
      terminated for cause during the Term. After December 31, 2007, either party
      may
      terminate the Amended Agreement with or without cause. In connection with the
      entry into the Amended Agreement, the Company amended the non statutory stock
      option previously granted to Mr. Bearchell on November 8, 2006. The Amended
      Grant provides Mr. Bearchell with the option to purchase up to 50,000 shares
      of
      the Company's common stock, with each share exercisable at the previously
      granted exercise price. All shares subject to the option are fully
      vested.





Trade
      Vendor Commitments





On
      September 26, 2007, the board of directors approved the issuance of 2,933,475
      shares of common stock in exchange of $1,592,573 of trade commitments converted
      to equity. We have signed Conversion Notices from 17 different trade vendors
      representing $1,592,573 of trade vendor commitments. The issuances will be
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933,
      and the investors are sophisticated investors or have a pre-existing
      relationship with the Company. Pursuant to the Conversion Notices, the Company
      is obligated to cover any additional balance owed by either paying in cash
      or
      issuing additional stock, depending upon circumstances, if the proceeds from
      the
      stock do not cover the outstanding amounts owed. The Company recorded
      approximately a 50% contingency accrual as of September 30, 2007 in the amount
      of $600,107 as a contingent accounts payable to cover any potential shortfall
      that the Company would be obligated to repay. The maximum contingency exposure
      is $1,276,655, which represents 100% of the trade commitments converted to
      equity that is subject to the contingency. There is
      no defined termination date for this contingency.  The contingency will be
      terminated at such time when all of the stock subject to this contingent
      obligation has been sold.





**14.**  **RESTRUCTURING
      ACTIVITIES.**





During
      the quarter ended September 30, 2007, the Company decided to restructure its
      sales force. Until the summer of 2007, the Company utilized a “one-team”,
“all-products” approach with a maximum of 500 Territory Managers to optimize
      prescription growth while minimizing turnover of newly hired sales associates.
      During the third quarter ended September 30, 2007, the Company restructured
      its
      sales force in order to allow focused selling by multiple sales teams with
      each
      team selling a unique and ultimately less confusing group of products. Under
      the
      multiple team approach, the Company can ultimately grow to approximately 2,000
      full-time equivalent Territory Managers with its current product portfolio.
      The
      Company finalized all territory re-alignments in September 2007. As a result
      of
      these and other restructuring activities, the Company incurred $206,552 of
      restructuring charges in the quarter ended September 30, 2007 primarily related
      to employee separation payments in connection with related corporate and field
      management changes.





**15.**  **CHANGE
      IN MANAGEMENT ESTIMATE.**





The
      Company’s calculation of its product returns reserves is based on historical
      returns of a given product, product specific information provided by the
      Company’s customers, information obtained regarding the levels of inventory
      being held by the Company’s customers, as well as, estimated future filled
      prescription patterns. Management periodically reviews the reserves established
      for returns and adjusts them based on actual experience and any change in
      management estimates. During the quarter ended September 30, 2007, the Company
      recorded a product returns reserve charge of $4,946,005. This total includes
      a
      non-recurring charge of $1,296,376 related to certain Company products affected
      by the FDA’s recent federal register notices regarding timed-release guaifenesin
      and hydrocodone. The balance of the $4,946,005 total charge is primarily
      attributable to management’s estimate of future filled prescriptions of certain
      new products launched during 2007, prior to six months from their expiration
      date in accordance with the company’s return policy. These non-recurring reserve
      adjustments to third quarter’s gross revenue results in net revenue of $333,719
      and $12,006,349 for the three and nine months ended September 30, 2007,
      respectively. This does not affect the Company’s current policy of recording at
      least 17% of gross sales for its on-going returns reserve accrual. The Company
      reserves the greater of (i) 17% of gross revenues or (ii) the difference between
      gross sales, less sales discounts, and dollarized TRxs (“filled prescriptions”)
      according to Wolters Kluwer.





**16.**  **SUBSEQUENT
      EVENTS.**





On
      October 1, 2007 the Company terminated the Licensing and Distribution Agreement
      entered into with Laboratoires Carilène S.A.S a corporation existing under the
      laws of France, (“Supplier”) on June 6, 2007. Under the terms of the
      License Agreement, Supplier granted to the Company an exclusive license in
      the
      United States to sell, market, distribute, sublicense and exploit the lotion
      and
      shampoo products which incorporate Supplier's Silicium 44 ingredient. By letter
      dated October 1, 2007, the Company terminated the Licensing Agreement due to
      the
      fact that certain marketing claims were unsubstantiated by any clinical data
      or
      photos. As these misstatements were not able to be cured and were a basis for
      the Company’s entry into the Licensing Agreement, the Licensing Agreement was
      terminated on October 1, 2007.




18




On
      October 1, 2007, the Company executed a letter agreement with a third party
      manufacturer under which we issued 1,208,012 shares of common stock in exchange
      of $191,549 in outstanding debt currently owed to that manufacturer, and
      $472,851.25 of future open market purchase order commitments. The issuances
      were
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933,
      and the manufacturer has a pre-existing relationship with the
      Company.





On
      October 1, 2007, FDA announced its intention to take enforcement action against
      companies that market drug products, which have not received formal FDA
      approval, that contain hydrocodone.
      In accordance with the FDA’s enforcement action timeline for products containing
      dosing instructions for children under 6 years of age, Auriga has discontinued
      the manufacture and shipment of Levall ® 5.0
      Liquid by October 31, 2007. In addition, Auriga will cease shipment of
      Extendryl ® HC
      Extended Release Tablets, which is indicated for children 6 years of age and
      older, on or before November 26, 2007 in accordance with the previous FDA Final
      Rule regarding extended release guaifenesin products dated May 25, 2007. As
      stated in the *Questions
      and Answers About FDA’s Enforcement Action Regarding Unapproved Hydrocodone Drug
      Products* updated
      October 1, 2007, “[c]ompanies or others engaging in manufacturing or shipping
      these products may use these periods to wind down their activities. Unapproved
      formulations may still appear on pharmacy shelves for a period after these
      deadlines pass”; therefore, it is unnecessary to remove Levall 5.0 and/or
      Extendryl HC from prescription databases at this time.





On
      October 29, 2007, the Company executed a Manufacturing and Supply Agreement
      (“Manufacturing Agreement”) entered into with Mikart, Inc. (“Supplier”), a
      Georgia corporation. Under the terms of the Manufacturing Agreement, Supplier
      accepted appointment by the Company to manufacture Acetaminophen 650mg/Codeine
      60mg (“Product”) for commercial distribution by the Company. Supplier granted to
      the Company an exclusive, royalty free license to market and sell the Products.
      In consideration of such license, the Company agreed to deliver to Supplier
      the
      aggregate sum of $100,000 payable as follows: (i) $50,000 payable upon execution
      of Manufacturing Agreement and (ii) $50,000 payable within 60 days following
      the
      Company’s receipt of its first order of the Product. The Company agreed to
      purchase Product exclusively from Supplier and agreed to certain minimum annual
      batch quantities.





On
      October 30, 2007, the Company was made aware of a probable future FDA action
      regarding drug products containing tannate salts of active pharmaceutical
      ingredients. The Company believes that the FDA intends to take enforcement
      action against companies that market
      drug products, which have not received formal FDA approval, that contain tannates.
      At present, the FDA has not issued any Federal Register notice regarding
      tannates just yet, but the Company believes the action is imminent. The
      Company believes that Levall 12 and Zinx Cold Kit may be affected by this
      probable future FDA action.





On
      October 29, Laboratories Carilène S.A.S (“ Plaintiff”) filed a complaint in U.S.
      District Court, Southern District of New York against the Company (“Defendant”)
      for an unspecified amount of damages, alleging breach of contract. The Company
      is unable to predict the outcome and/or the financial or operating impact of
      this matter at this time.





On
      October 31, the Company (“ Plaintiff”) filed a complaint in U.S. District Court,
      Southern District of New York against Laboratories Carilène S.A.S (“Defendant”)
      for an unspecified amount of damages, alleging Defendant’s material breach and
      anticipatory repudiation of a license and supply agreement for Aquoral, used
      to
      treat dry mouth syndrome. The Company is unable to predict the outcome and/or
      the financial or operating impact of this matter at this time.





On
      November 2, 2007, the Company terminated its Chief Operating Officer and
      Secretary, Andrew Shales, effective November 5, 2007. Frank Greico, its Chief
      Financial Officer, replaced Mr. Shales as its Secretary, leaving the Chief
      Operating Officer position vacant.




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




Our
      Management’s Discussion and Analysis contains not only statements that are
      historical facts, but also statements that are forward-looking (within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934). Forward-looking statements are, by their
      very
      nature, uncertain and risky. These risks and uncertainties include
      international, national and local general economic and market conditions;
      demographic changes; our ability to sustain, manage, or forecast growth; our
      ability to successfully make and integrate acquisitions; raw material costs
      and
      availability; new product development and introduction; existing government
      regulations and changes in, or the failure to comply with, government
      regulations; adverse publicity; competition; the loss of significant customers
      or suppliers; fluctuations and difficulty in forecasting operating results;
      changes in business strategy or development plans; business disruptions; the
      ability to attract and retain qualified personnel; the ability to protect
      technology; and other risks that might be detailed from time to time in our
      filings with the Securities and Exchange Commission.




19




Although
      the forward-looking statements in this Quarterly Statement reflect the good
      faith judgment of our management, such statements can only be based on facts
      and
      factors currently known by them. Consequently, and because forward-looking
      statements are inherently subject to risks and uncertainties, the actual results
      and outcomes may differ materially from the results and outcomes discussed
      in
      the forward-looking statements. You are urged to carefully review and consider
      the various disclosures made by us in this report and in our other reports
      as we
      attempt to advise interested parties of the risks and factors that may affect
      our business, financial condition, and results of operations and
      prospects.




The
      following discussion and analysis of financial condition and results of
      operations of the Company is based upon, and should be read in conjunction
      with,
      its unaudited financial statements and related notes elsewhere in this Form
      10-QSB, which have been prepared in accordance with accounting principles
      generally accepted in the United States.




**OVERVIEW**





We
      are
      the first specialty pharmaceutical company building an industry changing
      commission-based sales model targeting over 2,000 filled territories by 2009.
      Our high-growth business model combines driving revenues through a variable
      cost
      commission-based sales structure, acquisition and development of FDA approved
      products, all of which are designed to enhance our growing direct relationships
      with physicians nationwide. Our current product portfolio includes 27 marketed
      products and 6 products in development covering various therapeutic
      categories.





Our
      innovative, commission-only sales force structure allows us to cover sales
      territories that traditionally would not be a focus for large pharmaceutical
      companies. As of October 31, 2007 we had 395 sales associates nationwide
      categorized as follows:






Full-time
                  equivalentsTrainees
              321Territory
                  Managers with less than 6 months tenure
              42Territory
                  Managers with 6 months or more tenure
              32Total
              395


We
      launched a diversified group of products during 2007 in order to provide the
      sales force with a sufficient product portfolio while allowing us to achieve
      top
      line sales revenue growth. Until the summer of 2007, we believed that utilizing
      a “one-team” approach with a maximum of 500 Territory Managers would optimize
      prescription sales while minimizing turnover of newly hired sales associates.
      Under the “one-team” approach, Territory Managers had the ability to sell all of
      our marketed products at their discretion. Many Territory Managers had
      difficulty prioritizing and effectively selling under the “one-team”
“all-products” approach. During the summer of 2007, we recognized an opportunity
      to restructure the sales force in order to allow focused selling by multiple
      sales teams with each team selling a unique and ultimately less confusing group
      of products. Additionally, the multiple team approach created long-term
      opportunities to significantly grow prescriptions while opening up the ability
      to integrate new product opportunities and sales teams. Under the multiple
      team
      approach, we believe we can ultimately grow its sales team to approximately
      2000
      full-time equivalent territory managers with our current product portfolio
      while
      permitting the introduction of part-time territory managers. We believe that
      by
      allowing part-time territory managers, we will be able to capitalize on a large
      pool of qualified candidates seeking part-time commission-only sales
      opportunities.





During
      the three months ended September 30, 2007, we began the implementation of the
      sales force restructuring, and in September 2007 we finalized all territory
      alignments. With the launch of “Auriga Base”, a proprietary recruiting and
      tracking database, and “Auriga University”, our proprietary online training
      program on September 1, 2007, we strengthened our ability to recruit and train
      our sales force. We also began the development of a proprietary
      commercialization platform to automate commission payouts to our Territory
      Managers with an anticipated completion during the 4 th Quarter
      of 2007.





In
      addition to the change to a multiple team approach and new territory alignments,
      significant changes were made to improve the quality of our Territory Managers
      and the retention of our top performers.





As
      of
      September 30, 2007, we employed 49 full-time corporate personnel.





We
      utilize third parties to manufacture and package inventories held for sale.
      Inventories consist of salable products held at our third party warehouse and
      are valued at the lower of cost or market using the first-in, first-out method.
      We provide valuation reserves for estimated obsolescence or unmarketable
      inventory in an amount equal to the difference between the cost of inventory
      and
      the estimated market value based upon assumptions about future demand and market
      conditions.





We
      schedule our inventory purchases to meet new product launch schedules and
      anticipated customer reorder demand. As a result, a miscalculation of customer
      demand or relatively small delays in the receipt of manufactured products could
      result in revenues being deferred or lost. We recognize revenue at the time
      of
      receipt by our customers, net of estimated allowances. Consequently, variations
      in the timing of revenue recognition could cause significant fluctuations in
      operating results from period to period and may result in unanticipated periodic
      earnings shortfalls or losses.




20




We
      estimate customer demand for our prescription products primarily through use
      of
      third party syndicated data sources which track prescriptions written by health
      care providers and dispensed by licensed pharmacies. The data represents
      extrapolations from information provided only by certain pharmacies and are
      estimates of historical demand levels. We observe trends from this data, and,
      coupled with certain proprietary information, prepare demand forecasts that
      are
      the basis for purchase orders for inventory from our third party manufacturers
      and suppliers. Our forecasts may fail to accurately anticipate ultimate customer
      demand for products. Overestimates of demand may result in excessive inventory
      production and underestimates may result in inadequate supply of our products
      in
      channels of distribution.





We
      sell
      our products primarily to major wholesalers and approximately 75% - 85% of
      our
      gross revenues are typically derived from two major drug wholesale concerns.
      While we attempt to estimate inventory levels of our products at our major
      wholesale customers by using historical prescription information and historical
      purchase patterns, this process is inherently imprecise. Rarely do wholesale
      customers provide us complete inventory levels at regional distribution centers,
      or within their national distribution systems. Based upon historically
      consistent purchasing patterns of our major wholesale customers, we believe
      our
      estimates of trade inventory levels of our products are reasonable, net of
      return allowances. We further believe that inventories of our products among
      wholesale customers, taken as a whole, are similar to those of other specialty
      pharmaceutical companies, and that our trade practices, which periodically
      involve volume discounts and early payment discounts, are typical of the
      industry.





We
      cannot
      control or significantly influence the purchasing patterns of our wholesale
      customers. They are highly sophisticated customers that purchase products in
      a
      manner consistent with their industry practices and, presumably, based upon
      their projected demand levels. Purchases by any given customer, during any
      given
      period, may be above or below actual prescription volumes of any of our products
      during the same period, resulting in fluctuations of product inventory in the
      distribution channel.








**OUR
      PROMOTED PRODUCTS**





Strength
            Primary
                Uses**Extendryl****®**SR
            Rx
            RespiratoryJR
            Rx
            RespiratoryDM
            Rx
            RespiratoryPSE
            Rx
            RespiratorySyrup
            Rx
            RespiratoryChewable
            Rx
            Respiratory**Levall****®**12
            Rx
            RespiratoryLiquid
            Rx
            RespiratoryG
            Rx
            Respiratory**Aquoral
                TM**
            Rx
            Xerostomia**Zinx
                TM**Cold
                Kit
            Rx
            RespiratoryCough
                Kit
            Rx
            RespiratoryAllergy
                Kit
            Rx
            RespiratoryKids
                Sneeze Kit
            Rx
            RespiratoryLozenges
            OTC
            Respiratory**Akurza
                TM**Cream
            Rx
            DermatologyLotion
            Rx
            Dermatology**Xyralid
                TM**RC
                Kit
            Rx
            DermatologyLP
                Kit
            Rx
            DermatologyCream
                Kit
            Rx
            Dermatology**Zytopic
                TM**
            Rx
            Dermatology**Coraz
                TM**
            Rx
            Dermatology








**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 April 1, 2006 to December 31, 2006 included in our
      Form
      10-KSB filed with the Securities and Exchange Commission on March 30,
      2007.




21




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 Transition Report on Form 10-KSB for the
      transition period from April 1, 2006 to December 31, 2006, filed with the
      Securities and Exchange Commission on March 30, 2007.





**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 return up to a specified
      maximum amount of product if it is damaged, within six months of expired or
      has
      expired in the last twelve months. 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.





**ALLOWANCE
      FOR DOUBTFUL ACCOUNTS**





We
      are
      required to estimate the level of accounts receivable recorded on our balance
      sheet which we assess will ultimately not be paid. Among other things, this
      assessment requires analysis of the financial strength of our customers which
      can be highly subjective. Our policy is to estimate bad debt expense based
      on
      prior experience supplemented by a periodic customer specific review when
      needed. If we over or under estimate the level of accounts receivable that
      will
      not be paid, there may be a material impact to our financial
      statements.





**SALES
      DEDUCTIONS**





We
      provide volume incentives, contractual price reductions with drug wholesalers,
      and certain other sales related deductions on a regular basis. The exact level
      of these deductions is not always immediately known and thus we must record
      an
      estimate at the time of sale. Our estimates are based on historical experience
      with similar programs, and since we have a relatively small customer base,
      customer specific historical experience is often useful in determining the
      estimated level of deductions expected to be refunded to our customers when
      sales incentives are offered. If we over or under estimate the level of sales
      deductions, there may be a material impact to our financial
      statements.





**PRODUCT
      RETURNS**





In
      the
      pharmaceutical industry, customers are normally granted the right to return
      product for a refund if the product has not been used prior to its expiration
      date which is typically two to three years from the date of manufacture. Our
      return policy allows product returns for products within an eighteen-month
      window from six months prior to the expiration date and up to twelve months
      after the expiration date. Our return policy conforms to industry standard
      practices. We believe that we have sufficient data to accurately estimate future
      returns over the return time period at the time of sale. We are required to
      estimate the level of sales which will ultimately be returned pursuant to our
      return policy and record a related reserve at the time of sale. These amounts
      are deducted from our gross sales to determine our net revenues. Our estimates
      take into consideration historical returns of a given product, product specific
      information provided by our customers and information obtained regarding the
      levels of inventory being held by our customers, as well as estimated future
      filled prescription patterns. Effective July 1, 2007 we reserve the greater
      of
      (i) 17% of gross revenues or (ii) the difference between gross sales, less
      sales
      discounts, and dollarized TRxs (“filled prescriptions”) according to Wolters
      Kluwer Health data. Management periodically reviews the reserves established
      for
      returns and adjusts them based on actual experience and any change in management
      estimates. If we over or under estimate the level of sales which will ultimately
      be returned, there may be a material impact to our financial
      statements.




22




**INVENTORY
      OBSOLESCENCE**





Our
      products have shelf lives ranging from 24 to 36 months. We must estimate
      the amount of inventory recorded on our balance sheet that will not be sold
      prior to expiration. This estimate requires analysis of forecasted demand for
      our products, our promotional focus, amounts of our products currently held
      by
      our customers and the impact on our products of competing products. If we over
      or under estimate the amount of inventory that will not be sold prior to
      expiration, there may be a material impact to our financial
      statements.





**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, legal, and other general corporate
      expenses such as rent, supplies, insurance, investor relations, and other
      general operating expenses. 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
      existing product lines. These expenses also include salaries and benefits,
      legal
      fees for patent reviews attributable to such development
      activities.





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND THREE MONTHS
      ENDED SEPTEMBER 30, 2006**





The
      following table provides a reconciliation of gross revenues to net revenues
      for
      the unaudited, three month periods ended September 30, 2007 and 2006 for
      purposes of providing additional disclosure and detail to our
      revenues:





**Reconciliation
                of Gross to Net Revenues**
            
            **Three
                months ended**
              **September
                30, 2007**
            
            **Three
                months ended**
              **September
                30, 2006**Gross
                revenues
            
            $
            6,112,731
            
            $
            1,913,510Less:
                Sales discounts
            
            
            (833,007
            )
            
            11,780Less:
                Sales returns reserve
            
            
            (4,946,005
            )
            
            (133,948
            )Net
                Revenues
            
            $
            333,719
            
            $
            1,791,342Dollarized
                prescription sales(1)
            
            $
            1,630,095
            
            $
            1,197,675





(1) As
      reported by Wolters Kluwer, a third party provider of prescription data. Wolters
      Kluwer projected gross prescription demand is calculated based on estimated
      retail sales value.





The
      following is a numerical summary of certain of our results of operations for
      the
      three months ended September 30, 2007 and September 30, 2006:




**Three
                months ended**
              **September
                30, 2007**
            
            **Three
                months ended**
              **September
                30, 2006**Net
                revenues
            
            $
            333,719
            
            $
            1,791,342Cost
                of goods sold
            
            
            1,117,439
            
            
            575,600Gross
                profit
            
            
            (783,720
            )
            
            1,215,742Operating
                expenses
            
            
            7,018,875
            
            
            4,456,893Income
                (loss) from operations
            
            
            (7,802,595
            )
            
            (3,241,151
            )Other
                expenses
            
            
            (257,797
            )
            
            (281,842
            )Net
                loss
            
            $
            (8,060,392
            )
            $
            (3,522,993
            )




23




**The
      following analysis and discussion pertains to our results of operations for
      the
      three months ended September 30, 2007, compared to our results of operations
      for
      the three months ended September 30, 2006.**




*Net
      Revenue* .
      Our net
      revenues for the three months ended September 30, 2007 decreased $1,457,623,
      or
      (81%), to $333,719, as compared to $1,791,342 for the three months ended
      September 30, 2006. As noted above, this significant decrease in our net
      revenues for the three months ended September 30, 2007 when compared to
      September 30, 2006, was not due to a decrease in gross revenues (which increased
      from $1,913,510 for the three months ended September 30, 2006, to $6,112,731
      for
      three months ended September 30, 2007), but instead was primarily due to an
      increased sales returns reserve. We began operations in April, 2005 and began
      actively selling and promoting the Extendryl ® line
      during the quarter ended September 30, 2005. We acquired the
      Levall ® product
      line during the quarter ended September 30, 2006 and that quarter’s net revenue
      includes one month of Levall ® revenue.  Extendryl ® and
      Levall ® were
      our
      only promoted product lines during the quarter ended September, 2006, as
      compared to, AquoralTM, ZinxTM, AkurzaTM, XyralidTM, Extendryl ® and
      Levall ® product
      lines during the current quarter ended September 30, 2007. The increase in
      sales
      discounts primarily reflects the incentives offered to wholesalers in connection
      with the sales of initial launch quantities of new products during the quarter.
      During the quarter ended September 30, 2007, we increased the product returns
      reserve by $4,946,005. This total includes a non-recurring accrual of $1,296,376
      related to certain of our products affected by the FDA’s recent federal register
      notices regarding timed-release guaifenesin and hydrocodone. The balance of
      the
      $4,946,005 total accrual is primarily attributable to management’s estimate of
      future filled prescriptions of certain new products launched during 2007, as
      compared to their lot expiration dates. These non-recurring reserve adjustments
      to third quarter’s gross revenue results in net revenue of $333,719 for the
      three months ended September 30, 2007. We reserve the greater of (i) 17% of
      gross revenues or (ii) the difference between gross sales, less sales discounts,
      and dollarized TRxs (“filled prescriptions”) according to Wolters Kluwer Health
      data.





**Promoted
      Products - Overview**


Change
                in total dispensed prescriptions for the three months ended September
                30,
                2007 compared to the three months ended September 30, 2006(a)
            Percentage
                change in total dispensed prescriptions for the three months ended
                September 30, 2007 compared to the three months ended September 30,
                2006(a)**Extendryl****®**SR
            605
            10.8%JR
            1,825
            28.5%DM
            876
            27.5%PSE
            389
            23.8%Syrup(k)
            (285)
            (10.4%)Chewable
            (571)
            (14.3%)**Levall****®**12(k)
            (6,444)
            (78.0%)Liquid
            255
            128.1%G(l)
            (4,354)
            (32.9%)**Aquoral
                TM**(b)
            N/A
            N/A**Zinx
                TM**Cold
                Kit(c)
                (j)
            N/A
            N/ACough
                Kit(c)
                (j)
            N/A
            N/AAllergy
                Kit(c)
                (j)
            N/A
            N/AKids
                Sneeze Kit(c)
                (j)
            N/A
            N/A**Akurza
                TM**Cream(d)
                (h)
            N/A
            N/ALotion(d)
                (h)
            N/A
            N/A**Xyralid
                TM**RC
                Kit(e)
                (i)
            N/A
            N/ALP
                Kit(e)
                (j)
            N/A
            N/ACream
                Kit(e)
            N/A
            N/A**Zytopic
                TM**(f)
            N/A
            N/A**Coraz
                TM**(g)
            N/A
            N/A





(a)
            Source:
                Wolters Kluwer Health Prescription Services
                data.





(b)
            Aquoral
                was launched in March 2007 and therefore a full period of comparable
                data
                is not available.





(c)
            Zinx
                products were launched in March 2007 and therefore a full period
                of
                comparable data is not available.





(d)
            Akurza
                products were launched in May 2007 and therefore a full period of
                comparable data is not available.




24




(e)
            Xyralid
                products were launched in July 2007 and therefore a full period of
                comparable data is not available.





(f)
            Zytopic
                was launched in October 2007 and therefore a full period of comparable
                data is not available.





(g)
            Coraz
                was launched in October 2007 and therefore a full period of comparable
                data is not available.





(h)
            Promotion
                with samples began in June 2007.





(i)
            Promotion
                with samples began in August 2007.





(j)
            Promotion
                with samples began in October 2007.





(k)
            Promotion
                with samples began in October 2007 due to
                reformulation.





(l)
            Limited
                distribution January 2007 through June 2007 resulting from product
                backorder status.








*Cost
      of Goods Sold* .
      Cost of
      goods, which includes materials, royalties, and distribution costs for the
      three
      months ended September 30, 2007 increased $541,839, or 94%, to $1,117,439,
      as
      compared to $575,600 for the three months ended September 30, 2006. This
      increase in cost of goods sold was a result of increased sales volume to the
      wholesalers, exclusive of the sales returns reserve, during the current quarter;
      partially offset by the change in the product mix reflecting favorable royalty
      terms.





*Sales,
      Marketing and Trade Expenses* .
      Sales,
      marketing and trade expenses for the three months ended September 30, 2007
      increased $1,378,444, or 149%, to $2,305,957, as compared to $927,513 for the
      three months ended September 30, 2006. The
      increase is primarily comprised of $164,418 of sales representative training
      and
      on line training system costs, $177,458 for the company’s national sales
      meeting, $206,552 of restructuring costs and $736,569 of inside sales and
      marketing people costs.





We
      incurred $208,402 of sales force commission expense during the three months
      ended September 30, 2007, as compared to $1,450 for the three months ended
      September 30, 2006. We initially implemented the commission-only sales force
      during the three months ended September 30, 2006. We anticipate that the
      commission expense will continue to increase as we expand our nationwide
      presence.




*General
      and Administrative Expense* .
      General
      and administrative expenses for the three months ended September 30, 2007
      increased $765,706, or 24%, to $3,897,795, as compared to $3,132,089 for the
      three months ended September 30, 2006. Increased general and administrative
      expenses were primarily related to additional corporate personnel and their
      related salary, benefits, non-cash stock option expense, and the related
      recruitment costs.





*Research
      and Development Expense* .
      Research and development expenses increased $211,280, or 53%, to $608,571 for
      the three months ended September 30, 2007, as compared to $397,291 for the
      three
      months ended September 30, 2006. This increase was primarily related to
      additional corporate personnel and their related salary, benefits, non-cash
      stock option expense, and the related recruitment costs. and also our increased
      investment in development projects.





*Restructuring
      Charges.* During
      the quarter ended September 30, 2007, we decided to restructure our sales force.
      Until the summer of 2007, we believed that utilizing a “one-team”,
“all-products” approach with a maximum of 500 Territory Managers would optimize
      prescription growth while minimizing turnover of newly hired sales associates.
      During the third quarter ended September 30, 2007, we recognized an opportunity
      to restructure its sales force in order to allow focused selling by multiple
      sales teams with each team selling a unique and ultimately less confusing group
      of products. Under the multiple team approach, we can ultimately grow to
      approximately 2,000 full-time equivalent Territory Managers with our current
      product portfolio. We finalized all territory re-alignments in September 2007.
      As a result of these and other restructuring activities, we incurred $206,552
      of
      restructuring charges in the quarter ended September 30, 2007 related to
      employee separation payments in connection with related corporate and field
      management changes.





*Interest
      Expense* .
      Interest expense decreased $214,230 to $22,042 for the three months ended
      September 30, 2007, as compared to $236,272 for the three months ended September
      30, 2006. The interest expense incurred during the three months ended September
      30, 2007 is related to the bank working capital line of credit that was paid
      off
      and closed during the current quarter. The interest expense incurred during
      the
      three months ended September 30, 2006 primarily comprised of non-cash, discount
      amortization on two senior secured promissory notes and were paid off completely
      in April 2007. As of April 2007, we no longer had any long-term debt and as
      of
      September 30, 2007 we no longer have any debt.





*Other
      Expenses.* Other
      expenses increased $190,185 to $235,755 for the three months ended September
      30,
      2007, as compared to $45,570 for the three months ended September 30, 2006.
      The
      increase in other expenses is primarily attributed to increased early payment
      discounts based on increased sales volume.




25




*Net
      Loss.* For the
      three months ended September 30, 2007, we had a net loss of $8,060,392, compared
      to $3,522,993, for the three months ended September 30, 2006. As noted above,
      our net loss is primarily a result of an increased sales return reserve, which
      decreased our net revenue, as well as increases in our operating expenses for
      the three months ended September 30, 2007.




**RESULTS
      OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND NINE MONTHS
      ENDED
      SEPTEMBER 30, 2006**





The
      following table provides a reconciliation of gross revenues to net revenues
      for
      the unaudited, nine month periods ended September 30, 2007 and 2006 for purposes
      of providing additional disclosure and detail to our revenues:








**Reconciliation
                of Gross to Net Revenues**
            
            **Nine
                months ended**
              **September
                30, 2007**
            
            **Nine
                months ended**
              **September
                30, 2006**Gross
                revenues
            
            $
            22,233,284
            
            $
            5,669,850Less:
                sales discounts
            
            
            (3,182,413
            )
            
            (84,885
            )Less:
                sales returns reserve
            
            
            (7,044,521
            )
            
            (267,327
            )Net
                revenues
            
            $
            12,006,349
            
            $
            5,317,638Dollarized
                prescription sales(1)
            
            $
            6,060,180
            
            $
            2,450,985




(1) As
      reported by Wolters Kluwer, a third party provider of prescription data. Wolters
      Kluwer projected gross prescription demand is calculated based on estimated
      retail sales value.





The
      following is a numerical summary of certain of our results of operations for
      the
      nine months ended September 30, 2007 and September 30, 2006:




**Nine
                months ended**
              **September
                30, 2007**
            
            **Nine
                months ended**
              **September
                30, 2006**Net
                revenues
            
            $
            12,006,349
            
            $
            5,317,638Cost
                of goods sold
            
            
            4,233,902
            
            
            1,941,398Gross
                profit
            
            
            7,772,448
            
            
            3,376,240Operating
                expenses
            
            
            15,991,513
            
            
            11,283,961Income
                (loss) from operations
            
            
            (8,219,065
            )
            
            (7,907,721
            )Other
                expenses
            
            
            (908,969
            )
            
            (2,402,296
            )Net
                loss
            
            $
            (10,272,209
            )
            $
            (10,310,017
            )







**The
      following analysis and discussion pertains to our results of operations for
      the
      nine months ended September 30, 2007, compared to our results of operations
      for
      the nine months ended September 30, 2006.**




*Net
      Revenue* .
      Our net
      revenues for the nine months ended September 30, 2007 increased $6,688,711,
      or
      126%, to $12,006,349, as compared to $5,317,638 for the three months ended
      September 30, 2006. The increase in our net revenues for the nine months ended
      September 30, 2007 when compared to September 30, 2006, includes an increase
      in
      gross revenues (from $22,233,284 for the nine months ended September 30, 2006
      to
      $5,669,850 for the nine months ended September 30, 2007), as well as a
      significant increase in sales discounts and sales returns reserve. We began
      operations in April, 2005 and began actively selling and promoting the
      Extendryl ® line
      during the quarter ended September 30, 2005. We acquired the
      Levall ® product
      line during the nine months ended September 30, 2006 and the prior year nine
      months net revenue includes one month of Levall ® revenue.  Extendryl ® and
      Levall ® were
      our
      only promoted product lines during the nine months ended September 30, 2006,
      as
      compared to, AquoralTM, ZinxTM, AkurzaTM, XyralidTM, Extendryl ® and
      Levall ® product
      lines during the nine months ended September 30, 2007. The increase in sales
      discounts primarily reflects the incentives offered to wholesalers in connection
      with the sales of initial launch quantities of new products during the year.
      During the nine months ended September 30, 2007, we increased the product
      returns reserve by $7,044,521. This total includes a non-recurring accrual
      of
      $1,296,376 during the current quarter, related to certain of our products
      affected by the FDA’s recent federal register notices regarding timed-release
      guaifenesin and hydrocodone. The balance of the third quarter accrual is
      primarily attributable to management’s estimate of future filled prescriptions
      of certain new products launched during 2007 as compared to their lot expiration
      dates. These non-recurring reserve adjustments to third quarter’s gross revenue
      results in net revenue of $12,006,349 for the nine months ended September 30,
      2007. We reserves the greater of (i) 17% of gross revenues or (ii) the
      difference between gross sales, less sales discounts, and dollarized TRxs
      (“filled prescriptions”) according to Wolters Kluwer Health data.




26





**Promoted
      Products - Overview**


Change
                in total dispensed prescriptions for the nine months ended September
                30,
                2007 compared to the nine months ended September 30, 2006(a)
            Percentage
                change in total dispensed prescriptions for the nine months ended
                September 30, 2007 compared to the nine months ended September 30,
                2006(a)**Extendryl****®**SR
            1,517
            7.3%JR
            13,981
            86.0%DM
            9,319
            123.8%PSE
            4,660
            109.1%Syrup(k)
            (3,454)
            (28.5%)Chewable
            (3,105)
            (19.9%)**Levall****®**12(k)
            (45,180)
            (78.5%)Liquid
            1,007
            412.7%G(l)
            5,500
            14.8%**Aquoral
                TM**(b)
            N/A
            N/A**Zinx
                TM**Cold
                Kit(c)
                (j)
            N/A
            N/ACough
                Kit(c)
                (j)
            N/A
            N/AAllergy
                Kit(c)
                (j)
            N/A
            N/AKids
                Sneeze Kit(c)
                (j)
            N/A
            N/A**Akurza
                TM**Cream(d)
                (h)
            N/A
            N/ALotion(d)
                (h)
            N/A
            N/A**Xyralid
                TM**RC
                Kit(e)
                (i)
            N/A
            N/ALP
                Kit(e)
                (j)
            N/A
            N/ACream
                Kit(e)
            N/A
            N/A**Zytopic
                TM**(f)
            N/A
            N/A**Coraz
                TM**(g)
            N/A
            N/A





(a)
            Source:
                Wolters Kluwer Health Prescription Services
                data.





(b)
            Aquoral
                was launched in March 2007 and therefore a full period of comparable
                data
                is not available.





(c)
            Zinx
                products were launched in March 2007 and therefore a full period
                of
                comparable data is not available.





(d)
            Akurza
                products were launched in May 2007 and therefore a full period of
                comparable data is not available.





(e)
            Xyralid
                products were launched in July 2007 and therefore a full period of
                comparable data is not available.





(f)
            Zytopic
                was launched in October 2007 and therefore a full period of comparable
                data is not available.





(g)
            Coraz
                was launched in October 2007 and therefore a full period of comparable
                data is not available.





(h)
            Promotion
                with samples began in June 2007.





(i)
            Promotion
                with samples began in August 2007.





(j)
            Promotion
                with samples began in October 2007.





(k)
            Promotion
                with samples began in October 2007 due to
                reformulation.





(l)
            Limited
                distribution January 2007 through June 2007 resulting from product
                backorder status.




27




*Cost
      of Goods Sold* .
      Cost of
      goods, which includes materials, royalties, and distribution costs for the
      nine
      months ended September 30, 2007 increased $2,292,504, or 118%, to $4,233,902,
      as
      compared to $1,941,398 for the nine months ended September 30, 2006. This
      increase in cost of goods sold was a result of increased sales volume to the
      wholesalers during the nine months ended September 30, 2007; partially offset
      by
      the change in the product mix reflecting favorable royalty terms.





*Sales,
      Marketing and Trade Expenses* .
      Sales,
      marketing and trade expenses for the nine months ended September 30, 2007
      increased $1,587,480, or 39%, to $5,686,031, as compared to $4,098,551 for
      the
      nine months ended September 30, 2006. The increase in sales, marketing and
      trade
      expenses were primarily related to additional corporate personnel and their
      related salary, benefits, and non-cash stock option expense. Also, we incurred
      a
      significant amount of sales force related expenses such as recruitment, $311,065
      for training and the development of the new on-line training modules, $177,457
      for the national sales meeting which took place in July 2007, and $676,839
      for
      the cost of samples and sample distribution to target physicians during the
      nine
      months ended September 30, 2007.





We
      incurred $526,419 of sales force commission expense during the nine months
      ended
      September 30, 2007, as compared to $1,450 for the nine months ended September
      30, 2006. We initially implemented the commission-only sales force during the
      three months ended September 30, 2006. We anticipate that the commission expense
      will continue to increase as we expand our nationwide presence.





*General
      and Administrative Expense* .
      General
      and administrative expenses for the nine months ended September 30, 2007
      increased $2,088,270, or 33%, to $8,455,305, as compared to $6,367,035 for
      the
      nine months ended September 30, 2006. Increased general and administrative
      expenses were primarily due to $1,336,746 of increased costs related to
      additional corporate personnel and their related salary, benefits, non-cash
      stock option expense, and the related recruitment costs. Total general and
      administrative expenses as a percentage of net revenues decreased from 120%
      for
      the nine months ended September 30, 2006 to 70% for the nine months ended
      September 30, 2007, despite the non-recurring adjustment to net revenue during
      the current nine month period ended September 30, 2007.





*Research
      and Development Expense* .
      Research and development expenses increased $825,250, or 101%, to $1,643,625
      for
      the nine months ended September 30, 2007, as compared to $818,375 for the nine
      months ended September 30, 2006. This increase was primarily related to
      additional corporate personnel and their related salary, benefits, non-cash
      stock option expense, and the related recruitment costs. and also 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 $803,630 to $1,144,174 for the nine months ended
      September 30, 2007, as compared to $340,544 for the nine months ended September
      30, 2006. The interest expense is primarily comprised of non-cash, discount
      amortization on two senior secured promissory notes 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 for a convertible secured
      note and the bank working capital line of credit that was paid off and closed
      during the nine months ended September 30, 2007. As of April 2007, we no longer
      have any long-term debt, and as of September 30, 2007 we no longer have any
      debt.





*Other
      Expenses.* Other
      Expenses increased $833,809 to $908,969 for the nine months ended September
      30,
      2007, as compared to $75,160 for the nine months ended September 30, 2006.
      The
      increase in other expenses is primarily attributed to bad debt expense of
      approximately $300,000 and increased early payment discounts based on increased
      sales volume.




*Net
      Loss.* For the
      nine months ended September 30, 2007, we had a net loss of $10,272,209, compared
      to $10,340,017, for the nine months ended September 30, 2006. As noted above,
      our net loss is primarily a result of increased sales discounts and sales return
      reserve, which decreased our net revenue, as well as increases in our operating
      expenses for the nine months ended September 30, 2007.





**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 historically 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, 2007, we had
      cash
      and cash equivalents on hand of approximately $1,452,673, a working capital
      position of negative $3,486,276 and no debt. Exclusive of the sales returns
      reserve, our working capital position was a negative $139,906.





On
      April
      2, 2007, we sold in a private placement 1,600,000 Units at a price of $1.25
      per
      Unit, for aggregate gross proceeds of $2,000,000. Each Unit was comprised of
      one
      share of our common stock and one common stock warrant. Each common stock
      warrant included in the Units entitles the holder to purchase one-fifth of
      a
      share of our common stock at an exercise price of $1.60 per share through April
      2, 2010. The Units were sold solely to accredited investors. During June 2007,
      we extended the private placement to include additional investors. We sold
      an
      additional 1,000,000 Units at a price of $1.25 per Unit, for aggregate gross
      proceeds of $1,250,000. The final subscription proceeds were received on July
      27, 2007.




28




On
      May
      23, 2007, we entered into a Loan and Security Agreement with Comerica Bank.
      The
      Loan Agreement provided for a working capital line of credit of up to $2.0
      million, based on 65% of eligible accounts receivable, secured by a first lien
      on substantially all of our assets, including intellectual property. The line
      of
      credit was repayable interest only monthly, with the principal due at the
      maturity date of May 31, 2008. The line of credit accrued interest at Comerica's
      Prime Rate plus 1.00%. We paid a $10,000 origination fee in connection with
      the
      closing of the credit facility. The Loan Agreement included customary financial
      covenants. On
      September 27, 2007, by mutual agreement of the parties, the Loan Agreements
      were
      terminated. All collateral being held under the Loan & Security Agreement
      and related security interests were subsequently terminated. No further moneys
      are owed by us to Comerica under the Loan Agreement.





On
      August
      6, we entered into Stock Purchase Agreements, with four different,
      non-affiliated investors. Under the terms of the Agreement, in exchange for
      $1,250,000, we issued the investors a total of 1,000,000 shares of our common
      stock, and warrants, to purchase an additional 200,000 shares of our common
      stock at an exercise price of $1.25 per share. The issuance was exempt from
      registration pursuant to Section 4(2) of the Securities Act of 1933, and the
      investors were accredited.





On
      September 26, 2007, we entered into Stock Purchase Agreements, with eight
      different, non-affiliated, Investors. Under the terms of the Agreement, in
      exchange for $1,062,611, we issued the Investors a total of 2,004,925 shares
      of
      our common stock, and Warrants, to purchase an additional 400,985 shares of
      our
      common stock at an exercise price of $0.53 per share. The issuance was exempt
      from registration pursuant to Section 4(2) of the Securities Act of 1933, and
      the investors were accredited.





On
      September 26, 2007, the Board of Directors approved the issuance of 2,933,475
      shares of common stock in exchange of $1,592,573.07 of trade commitments
      converted to equity. We have signed Conversion Notices from 17 different trade
      vendors representing $1,592,573.07 of trade vendor commitments. The issuances
      will be exempt from registration pursuant to Section 4(2)of the Securities
      Act
      of 1933, and the investors are sophisticated investors or have a pre-existing
      relationship with us. Pursuant to the Conversion Notices, we are obligated
      to
      cover any additional balance owed by either paying in cash or issuing additional
      stock, depending upon circumstances, if the proceeds from the stock do not
      cover
      the outstanding amounts owed.





On
      October 1, 2007, we executed a letter agreement with a third party manufacturer
      under which we issued 1,208,012 shares of common stock in exchange of $191,549
      in outstanding debt we currently owe the manufacturer, and $472,851.25 of future
      open market purchase order commitments. The issuances were exempt from
      registration pursuant to Section 4(2) of the Securities Act of 1933, and the
      manufacturer has a pre-existing relationship with the Company





On
      a
      going forward basis, management plans to continue to focus on our existing
      AquoralTM, ZinxTM, AkurzaTM, XyralidTM, ZytopicTM, CorazTM, Extendryl®, and Levall®
product lines and continue to acquire proven brand name products. We may need to
      continue to raise additional equity or debt financing to adequately fund our
      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 pursue these strategies,
      there can be no assurances that we will ever attain profitability. The
      accompanying consolidated financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.





Our
      cash
      and cash equivalents were approximately $1,452,673 on September 30, 2007,
      compared to $259,580 at December 31, 2006. Net cash used in operating activities
      for the nine months ended September 30, 2007 was $40,080. This use of cash
      was
      primarily the result of a net loss of $10,272,209 and net working capital
      changes of $717,186 offset by $9,514,943 of non-cash items. The major factors
      affecting the uses of net working capital were increases to accounts receivable
      of $1,595,694, inventory of $1,140,398, and prepaid expenses of $548,583,
      partially by an increase to accounts payable of $3,862,043.





Net
      cash
      used in investing activities for the nine months ended September 30, 2007 was
      $410,954. The uses of cash were for purchases of fixed assets and a progress
      payment for a product licenses payable.





Net
      cash
      provided by financing activities for the nine months ended September 30, 2007
      was $1,644,127. The cash provided was primarily from $4,284,025 from proceeds
      on
      stock subscriptions from the private placement offerings to qualified investors
      that closed during the nine months ended September 30, 2007 and $800,000 from
      a
      bank line payable. This was partially offset by the payment of $2,468,750 on
      related-party loans, payments of $862,272 on two bank lines payable, and
      payments of $132,000 on a convertible secured notes payable.





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.
      Our 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 us, and (ii) $232,000 represents an accrued bonus that was owed by us to
      our
      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. On January 25, 2007, we executed a letter agreement
      with SFP amending the SFP Note. The letter agreement serves to amend the
      interest rate, establish a new repayment schedule, amend the seniority of the
      SFP Note such that it is now subordinate in right of payment to any and all
      other indebtedness of ours senior in time to the issuance of the SFP Note,
      and
      amend the maturity date of the SFP Note by extending such date to October 15,
      2007. On February 15, 2007 $132,000 of principal was paid to SFP. On April
      12,
      2007, SFP elected to convert the outstanding principal under the Senior Secured
      Convertible Note into common stock. The outstanding balance of $500,000 was
      converted at the stated conversion price of $1.388 per share. As a result,
      SFP
      was issued 360,230 shares of common stock.




29




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
      proceeds of which were used to complete the licensing agreement for the Levall®
product line. The LFC Note was amended on September 28, 2006 and December 8,
      2006. As amended, 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) May 15, 2007. In lieu of interest
      payments, we 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, we recorded $1,267,350 as a loan discount, which
      will be amortized over the life of the loan. As of June 30, 2006, we expensed
      $1,267,350 of this loan discount as interest expense, of which $219,350 was
      expensed during the three months ended June 30 31, 2007. The warrant provides
      LFC with “piggyback” registration rights with respect to shares of common stock
      acquired upon exercise of the warrant. The LFC Note requires us to make
      quarterly payments to LFC, commencing with the quarter ending December 31,
      2006,
      equal to 6.0% of gross sales by us (less customary deductions) of the Levall®
product line during the preceding quarter. This payment obligation continues
      in
      perpetuity. On April 3, 2007, we paid to LFC $750,000 towards the outstanding
      balance of the LFC Note. The remaining balance of $750,000 was paid on May
      15,
      2007.





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. The proceeds from
      the
      AFC Note will be used to satisfy our obligations under the distribution
      agreement with Carilène. 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 its recently acquired AquoralTM 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 our assets and is senior in right
      of
      payment to any and all of our other indebtedness, except that the AFC Note
      is *pari
      passu* with our
      $1.5 million obligation to LFC. As additional consideration, we agreed that,
      concurrent with each advance made by AFC under the AFC Note, we 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 June 30, 2007, we had issued
      warrants to acquire up to 968,750 shares of Common Stock. In connection with
      these warrants, we recorded $676,509 as a loan discount that will be amortized
      over the life of the loan. As of June 30, 2007, we had expensed all $676,509
      of
      this loan discount as interest expense, of which $348,348 was expensed during
      the first three months of this fiscal year. SFP is the managing member of AFC.
      Our 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
      our
      affiliates. Our affiliates may make additional contributions to AFC to fund
      a
      portion of future advances under the AFC Note. On April 2, 2007, we paid to
      AFC
      $968,750 as payment in full of the AFC Note.





**RISK
      FACTORS - RISKS RELATED TO OUR BUSINESS**




The
      following risk factors are some of our primary risks and/or are new risk factors
      since we filed our Transition Report on Form 10-KSB for the transition period
      from April 1, 2006 to December 31, 2006 filed with the Commission on March
      30,
      2007. These risk factors should be read in conjunction with our risk factors
      listed in our Transition Report.





***Some
      of our specialty pharmaceutical products are not the subject of FDA-approved
      new
      drug applications.***





New
      drugs
      must be the subject of an FDA approved NDA or ANDA demonstrating safety and
      effectiveness before they may be marketed in the United States. 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 its 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.





Several
      of our products are marketed in the United States 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. The 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 an NDA or ANDA for other drugs in the same class of drugs in order
      to
      continue marketing them in the United States. 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.




30




***FDA
      has announced its intention to take enforcement action regarding timed-release
      guaifenesin.***




On
      May
      25, 2007, FDA announced its intention to take enforcement action against
      companies that market drug products, which have not received formal FDA
      approval, in a timed-release dosage form that contain guaifenesin. In a May
      29,
      2007 Federal Register notice, the agency stated that the enforcement policy
      applies to any drug product in a timed-released form that contains guiaifenesin.
      See 72 Fed. Reg 29517. The Federal Register notice stated that products that
      have an NDC number and are listed with the agency may continue to be
      manufactured until August 27, 2007. The Federal Register notice also states
      that, on or before November 26, 2007, affected products should not be introduced
      into interstate commerce. Auriga will comply with the FDA notice and will
      discontinue manufacture of Extendryl® G Extended Release Tablets, Extendryl® HC
      Extended Release Tablets, and ZinxTM Congestion Kit products by August 27, 2007.
      Auriga will cease shipping these affected products into interstate commerce
      by
      November 26, 2007. Auriga believes that the FDA enforcement action regarding
      the
      shipment of affected products into interstate commerce applies only to
      manufacturers, and does not extend to distributors who may continue to ship
      these products to exhaust existing inventory after November 26, 2007. In
      addition, Auriga believes that FDA's action is limited to guaifenesin products
      in timed-release or extended-release form. In the FDA's May 25, 2007 guidance
      document entitled, “Questions and Answers about FDA's Enforcement Action Against
      Unapproved Timed-Release Guaifenesin Products, FDA noted that, “Immediate
      release guaifenesin products are unaffected by today's action and will remain
      on
      the market.” Therefore, Auriga believes that only Extendryl® G, Extendryl® HC,
      and ZinxTM Congestion Kit are affected by FDA's recent action.





***FDA
      has announced its intention to take enforcement action regarding
      hydrocodone.***





On
      October 1, 2007, FDA announced its intention to take enforcement action against
      companies that market drug products, which have not received formal FDA
      approval, that contain hydrocodone.
      In accordance with the FDA’s enforcement action timeline for products containing
      dosing instructions for children under 6 years of age, Auriga has discontinued
      the manufacture and shipment of Levall ® 5.0
      Liquid by October 31, 2007. In addition, Auriga will cease shipment of
      Extendryl ® HC
      Extended Release Tablets, which is indicated for children 6 years of age and
      older, on or before November 26, 2007 in accordance with the previous FDA Final
      Rule regarding extended release guaifenesin products dated May 25, 2007. As
      stated in the *Questions
      and Answers About FDA’s Enforcement Action Regarding Unapproved Hydrocodone Drug
      Products* updated
      October 1, 2007, “[c]ompanies or others engaging in manufacturing or shipping
      these products may use these periods to wind down their activities. Unapproved
      formulations may still appear on pharmacy shelves for a period after these
      deadlines pass”; therefore, it is unnecessary to remove Levall 5.0 and/or
      Extendryl HC from prescription databases at this time.





***The
      FDA is likely to take action regarding tannates.***





On
      October 30, 2007, we were made aware of a probable future FDA action regarding
      drug products containing tannate salts of active pharmaceutical ingredients.
      The
      Company believes that the FDA intends to take enforcement action against
      companies that market
      drug products, which have not received formal FDA approval, that contain tannates.
      The Company is not aware that the FDA has issued any Federal Register notice
      regarding tannates just yet, but the Company believes the action is
      imminent. The
      Company believes that Levall 12 and Zinx Cold Kit may be affected by this
      probable future FDA action





***We
      have incurred significant operating and net losses since our
      inception.***





We
      have
      incurred significant operating and net losses and have historically 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, 2007, we
      had cash and cash equivalents on hand of approximately $1,452,673, a negative
      working capital position of $3,486,277 and $0 debt.  The working capital
      position at September 30, 2007 exclusive of the sales returns reserve was a
      negative $139,906. On a going forward basis, management plans to continue to
      focus on our existing AquoralTM, ZinxTM, AkurzaTM, XyralidTM, Extendryl®, Levall®,
      ZytopicTM, and CorazTM product lines and continue to acquire proven brand name
      products.  We may need to continue to raise additional equity or debt
      financing to adequately fund our 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 pursue these strategies, there can be no assurances that we
      will
      ever attain profitability.  The financial statements included herein do not
      include any adjustments that might result from the outcome of this
      uncertainty.




31




***Our
      independent auditor’s report contains a going concern qualification which means
      there is substantial doubt about our ability to continue as a going
      concern.***





Our
      independent registered public accounting firm has concluded that we have
      suffered recurring losses from operations and have a working capital deficiency
      that raises substantial doubt about our ability to continue as a going concern.
      Additionally, 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, 2007, we
      had
      cash and cash equivalents on hand of $1,452,673 and a negative working capital
      position of $3,486,277 and no debt. On
      a
      going forward basis, management plans to continue to focus on our existing
      AquoralTM, ZinxTM, AkurzaTM, XyralidTM, Extendryl®, Levall®, ZytopicTM, and CorazTM
product lines and continue to acquire proven brand name products. We
      have
      successfully raised capital in the form of promissory notes and the sale of
      securities, and , the proceeds of which were used for payments related to new
      license rights and working capital. We may need to continue to raise additional
      equity or debt financing to adequately fund our 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 pursue these strategies, there can be no assurances that we
      will
      ever attain profitability. The financial statements included herein do not
      include any adjustments that might result from the outcome of this
      uncertainty.





**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.





During
      the three and nine months and quarter ended September 30, 2007, there were
      no
      changes in our internal controls over financial reporting that materially
      affected, or are reasonably likely to materially affect, our internal controls
      over financial reporting.





**Item
                3A(T)**
            **Controls
                and Procedures.**


We
      are
      not required to furnish the information required by this item until we report
      on
      our fiscal year ending December 31, 2007.




**PART
                2.**
            **OTHER
                INFORMATION**








**Item
                1.**
            **Legal
                Proceedings.**





In
      the
      ordinary course of business, we may be from time to time involved in various
      pending or threatened legal actions. The litigation process is inherently
      uncertain and it is possible that the resolution of such matters might have
      a
      material adverse effect upon our financial condition and/or results of
      operations. However, in the opinion of our management, matters currently pending
      or threatened against us are not expected to have a material adverse effect
      on
      our financial position or results of operations .








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





On
      August
      6, we entered into Stock Purchase Agreements, with four different,
      non-affiliated investors. Under the terms of the Agreement, in exchange for
      $1,250,000, we issued the investors a total of 1,000,000 shares of our common
      stock, and warrants, to purchase an additional 200,000 shares of our common
      stock at an exercise price of $1.25 per share. The issuance was exempt from
      registration pursuant to Section 4(2) of the Securities Act of 1933, and the
      investors were accredited.





On
      September 26, 2007, we entered into Stock Purchase Agreements, with eight
      different, non-affiliated, Investors. Under the terms of the Agreement, in
      exchange for $1,062,611, we issued the Investors a total of 2,004,925 shares
      of
      our common stock, and Warrants, to purchase an additional 400,985 shares of
      our
      common stock at an exercise price of $0.53 per share. The issuance was exempt
      from registration pursuant to Section 4(2) of the Securities Act of 1933, and
      the investors were accredited.





On
      September 26, 2007, our Board of Directors approved the issuance of 2,933,475
      shares of common stock in exchange of $1,592,573.07 of trade commitments
      converted to equity. We have signed Conversion Notices from 17 different trade
      vendors representing $1,592,573.07 of trade vendor commitments. The issuances
      will be exempt from registration pursuant to Section 4(2)of the Securities
      Act
      of 1933, and the investors are sophisticated investors or have a pre-existing
      relationship with the Company.





32





**Item
                3.**
            **Defaults
                Upon Senior Securities.**




There
      have been no events which are required to be reported under this
      Item.




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





There
      have been no events which are required to be reported under this
      Item.




**Item
                5.**
            **Other
                Information.**





Termination
      of Agreement with River's Edge Pharmaceuticals LLC





On
      July
      17, 2007, we terminated our agreement with River's Edge Pharmaceuticals LLC
      (“River's Edge”). As disclosed in our Form 8-K filed on October 23, 2006, on
      October 18, 2006, we entered into that certain Agreement For Authorized Generic
      and Acquisition of Dermatology Products (the “Distribution Agreement”) with
      River’s Edge. The Distribution Agreement provided that River's Edge would market
      and distribute authorized generic equivalents of certain branded pharmaceutical
      products manufactured and distributed by us (the “Authorized Generics”), and
      receive a percentage of the net sales of Authorized Generics. River's Edge
      had
      obligations under the Distribution Agreement with respect to the development
      of
      certain single source dermatology pharmaceutical formulations (the “DERM
      Product(s)”). We retained ownership of the intellectual property related to the
      DERM products.





We
      terminated the Distribution Agreement because River's Edge failed to perform
      its
      obligations under the Distribution Agreement. As a result of the termination,
      River's Edge will cease marketing the Authorized Generics and we will have
      no
      further obligations.





Termination
      of Agreement with Pharmelle LLC





On
      July
      17, 2007, we terminated our agreement with Pharmelle LLC (“Pharmelle”). As
      disclosed in our Form 8-K filed on October 26, 2006, on October 20, 2006, we
      entered into that certain Co-Promotion Agreement (the “Co-Promote Agreement”)
      with Pharmelle. The Co-Promote Agreement provided for the exclusive appointment
      of Pharmelle in the United States as the co-promotor and marketer of our AQUORAL
      xerostomia (dry mouth) product (the “Product”). The Product was to be marketed
      by Pharmelle and its sales force to doctors who treat conditions of the
      urogenital systems (“Specialists”). For its promotion and marketing services,
      the Co-Promote Agreement provided that Pharmelle would receive, for each quarter
      occurring while the Agreement was in effect, a percentage of net sales made
      during such quarterly period.





We
      terminated the Co-Promote Agreement because Pharmelle failed to perform its
      obligations under the Co-Promote Agreement. As a result of the termination,
      Pharmelle will cease promoting the Products and the Company will have no further
      obligations.





Mikart
      Manufacturing and Supply Agreement





On
      October 29, 2007, we entered into a Manufacturing and Supply Agreement
      (“Manufacturing Agreement”) with Mikart, Inc. (“Supplier”), a Georgia
      corporation. Under the terms of the Manufacturing Agreement, Supplier accepted
      appointment by us to manufacture Acetaminophen 650mg/Codeine 60mg (“Product”)
      for commercial distribution by the Company. Supplier granted us an exclusive,
      royalty free license to market and sell the Products. In consideration of such
      license, we agreed to deliver to Supplier the aggregate sum of $100,000 payable
      as follows: (i) $50,000 payable upon execution of Manufacturing Agreement and
      (ii) $50,000 payable within 60 days following our receipt of the first order
      of
      the Product. We agreed to purchase Product exclusively from Supplier and agreed
      to certain minimum annual batch quantities.





Laboratories
      Carilène S.A.S litigation





On
      October 29, Laboratories Carilène S.A.S filed a complaint in U.S. District
      Court, Southern District of New York against us for an unspecified amount of
      damages, alleging breach of contract. We are unable to predict the outcome
      and/or the financial or operating impact of this matter at this
      time.





On
      October 31, we filed a complaint in U.S. District Court, Southern District
      of
      New York against Laboratories Carilène S.A.S for an unspecified amount of
      damages, alleging their material breach and anticipatory repudiation of a
      license and supply agreement for Aquoral, a unique product used to treat dry
      mouth syndrome. We are unable to predict the outcome and/or the financial or
      operating impact of this matter at this time.





33




Departure
      and Appointment of Principal Officer





On
      November 2, 2007, we terminated our Chief Operating Officer and Secretary,
      Andrew Shales, effective November 5, 2007. Frank Greico, our Chief Financial
      Officer, replaced Mr. Shales as our Secretary, leaving the Chief Operating
      Officer position vacant.








**Item
                6.**
            **Exhibits.**




The
      following exhibits are attached hereto and filed herewith:





**Exhibit**
              **Number**
            
            **Description
                of Exhibit**10.1
            
            Auriga
                Laboratories, Inc. Offer Letter to Elliot M. Maza dated May 4, 2007
                (accepted by Mr. Maza on May 8, 2007). (1)10.2
            
            Indemnification
                Agreement entered into between Auriga Laboratories, Inc. and Elliot
                M.
                Maza dated May 8, 2007. (2)10.3
            
            Auriga
                Laboratories, Inc. Nonstatutory Stock Option granted to Elliot M.
                Maza on
                May 4, 2007. (3)10.4
            
            Executive
                Employment Agreement entered into between Auriga Laboratories, Inc.
                and
                Philip S. Pesin dated May 9, 2007. (4)10.5
            
            Auriga
                Laboratories, Inc. Nonstatutory Stock Option granted to Philip S.
                Pesin on
                May 9, 2007. (5)10.6
            
            License
                Agreement dated as of May 17, 2007 by and between the Company and
                Ellevan LLC. (6)10.7
            
            Loan
                and Security Agreement dated as of May 23, 2007 by and between
                Comerica Bank and the Registrant and its subsidiaries, Auriga Operations,
                Inc., Stesso Pharmaceuticals LLC, and Auriga Pharmaceuticals LLC.
                (7)10.8
            
            Form
                of Intellectual Property Security Agreement dated as of May 23, 2007
                by and between Comerica Bank and the Registrant and its subsidiaries,
                Auriga Operations, Inc., Stesso Pharmaceuticals LLC, and Auriga
                Pharmaceuticals LLC. (8)10.9
            
            Form
                of Unconditional Guaranty dated as of May 23, 2007 by and between
                Comerica Bank and the Registrant and its subsidiaries, Auriga Operations,
                Inc., Stesso Pharmaceuticals LLC, and Auriga Pharmaceuticals LLC.
                (9)10.10
            
            Form
                of Third Party Security Agreement dated as of May 23, 2007 by and
                between Comerica Bank and the Registrant and its subsidiaries, Auriga
                Operations, Inc., Stesso Pharmaceuticals LLC, and Auriga Pharmaceuticals
                LLC. (10)10.11
            
            Form
                of Stock Option Agreement for Directors and Executive Officers under
                the
                2007 Stock Option Plan. (11)10.12
            
            Auriga
                Laboratories, Inc. Offer Letter to Leonhard Dreimann dated June 22,
                2007 (accepted by Mr. Dreimann on June 22, 2007).
                (12)10.13
            
            Form
                of Indemnification Agreement for New Directors. (13)10.14
            
            Form
                of Auriga Laboratories, Inc. Nonstatutory Stock Option granted to
                New
                Directors. (14)10.15
            
            Auriga
                Laboratories, Inc. Offer Letter to Thomas Heck dated June 22, 2007
                (accepted by Mr. Heck on June 22, 2007). (15)10.16
            
            Licensing
                and Distribution Agreement dated June 6, 2007 by and between the
                Company
                and Laboratoires Carilene S.A.S#




34




**Exhibit**
              **Number**
            
            **Description
                of Exhibit**31.1
            
            Certification
                of the Registrant's Principal Executive Officer pursuant to Rules
                13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
                as
                amended. #31.2
            
            Certification
                of the Registrant's Principal Financial Officer pursuant to Rules
                13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
                as
                amended. #


32.1
            
            Certification
                of the Registrant's Principal Executive Officer pursuant to 18 U.S.C.
§
                1350. #32.2
            
            Certification
                of the Registrant's Principal Financial Officer pursuant to 18 U.S.C.
§
                1350. #


____________





#
            Filed
                herewith.*
            Unless
                otherwise indicated below, the Commission file number to the exhibits
                are
                No. 000-26013.(1)
            Incorporated
                herein by reference to Exhibit 10.1 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                9,
                2007, reporting an event dated May 4, 2007.(2)
            Incorporated
                herein by reference to Exhibit 10.2 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                9,
                2007, reporting an event dated May 4, 2007.(3)
            Incorporated
                herein by reference to Exhibit 10.3 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                9,
                2007, reporting an event dated May 4, 2007.(4)
            Incorporated
                herein by reference to Exhibit 10.4 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                9,
                2007, reporting an event dated May 9, 2007.(5)
            Incorporated
                herein by reference to Exhibit 10.5 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                9,
                2007, reporting an event dated May 9, 2007.(6)
            Incorporated
                herein by reference to Exhibit 10.1 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                24,
                2007, reporting an event dated May 21, 2007.(7)
            Incorporated
                herein by reference to Exhibit 10.1 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                29,
                2007, reporting an event dated May 23, 2007.(8)
            Incorporated
                herein by reference to Exhibit 10.2 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                29,
                2007, reporting an event dated May 23, 2007.(9)
            Incorporated
                herein by reference to Exhibit 10.3 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                29,
                2007, reporting an event dated May 23, 2007.(10)
            Incorporated
                herein by reference to Exhibit 10.4 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on May
                29,
                2007, reporting an event dated May 23, 2007.(11)
            Incorporated
                herein by reference to Exhibit 10.1 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on June
                5,
                2007.(12)
            Incorporated
                herein by reference to Exhibit 10.1 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on June
                26,
                2007, reporting an event dated June 22, 2007.(13)
            Incorporated
                herein by reference to Exhibit 10.2 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on June
                26,
                2007, reporting an event dated June 22,
                2007.




35




(14)
            Incorporated
                herein by reference to Exhibit 10.3 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on June
                26,
                2007, reporting an event dated June 22, 2007.(15)
            Incorporated
                herein by reference to Exhibit 10.4 of the Registrant's Current Report
                on
                Form 8-K, filed with the Securities and Exchange Commission on June
                26,
                2007, reporting an event dated June 22,
                2007.










**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
              9, 2007
            By:
            /s/ Philip
              S.
              PesinPhilip
                S. PesinChief
                Executive Officer and
              Chairman
                of the Board of Directors
              (Principal
                Executive Officer)




Date: November
                9, 2007
              By:
              /s/ Frank
                R.
                GreicoFrank
                    R. GreicoChief
                    Financial Officer
                  (Principal
                    Accounting and Financial
                    Officer)


36