SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549





Form
10-Q





(Mark
      One)þ
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT
      OF 1934For the Quarterly Period Ended
      March 31, 2008ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT
      OF 1934





For the
transition period from ______________ to ______________





Commission
File No. 000-26013





AURIGA
LABORATORIES, INC.


(Exact
name of small business issuer as specified in its charter)











DELAWARE
              (State
      or other jurisdiction of
              incorporation
      or organization)
            2834
              (Primary
      Standard Industrial
              Classification
      Code Number)
            84-1334687
              (I.R.S.
      Employer
              Identification
      No.)








5284
Adolfo Road


Camarillo,
CA 93012


(Address
of principal executive offices)


(805)
437-7200


(Registrant’s telephone number,
including area code)





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





Large
accelerated filer      Accelerated
filer  o


Non-accelerated
filer o Smaller
reporting company  þ





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


Yes  o      No  þ





The
number of shares of Common Stock, $0.001 par value, of the registrant
outstanding at May 12, 2008 was 79,536,557.





TABLE OF
CONTENTS





PART
      I.Item
      1. Financial Statements.
            3CONSOLIDATED
      BALANCE SHEETS
            3CONSOLIDATED
      STATEMENTS OF OPERATIONS
            5CONSOLIDATED
      STATEMENTS OF CASH FLOWS
            6NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
            8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
            30Item
      3. Quantitative and Qualitative Disclosures About Market
      Risks.
            44Item
      4. Controls and Procedures.
            44Item
      4T. Controls and Procedures
            44PART
      II.
            46Item
      1. Legal Proceedings.
            46Item
      1A. Risk Factors.
            47Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
            47Item
      3. Defaults Upon Senior Securities.
            47Item
      4. Submission of Matter to Vote of Security Holders.
            47Item
      5. Other Information.
            47Item
      6. Exhibits.
            47SIGNATURES
            49EXHIBIT
      INDEX
            49Certification
      of CEO Pursuant to Rule 15d-14(a)Certification
      of CFO Pursuant to Rule 15d-14(a)Certification
      of CEO Pursuant to Section 1350Certification
      of CFO Pursuant to Section 1350




































































FORWARD-LOOKING
STATEMENTS





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


1


negatives
of these words. These forward-looking statements present our estimates and
assumptions only as of the date of this Form 10-Q. 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.











2


PART
I




Item 1.
            Financial
      Statements.





AURIGA LABORATORIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


ASSETS
            
            As
      of
              MARCH
      31,
              2008
              (unaudited)
            
            As
      of
              DECEMBER
      31,
              2007Current
      assetsCash and cash equivalents
            
            $
            57,451
            
            $
            224,359Accounts receivable, net
      of allowances for doubtful accounts of $27,171 and $27,171,
      respectively
            
            
            911,969
            
            
            1,331,359Inventory, net
      of reserves of $1,069,449 and $699,078, respectively
            
            
            1,632,209
            
            
            1,623,662Prepaid expenses
            
            
            219,036
            
            
            305,823Total
      current assets
            
            
            2,820,665
            
            
            3,485,203Property
      and equipment, net
            
            
            66,259
            
            
            60,364Other
      assetsIntangibles, net
            
            
            1,524,343
            
            
            1,276,711Deposits
            
            
            99,911
            
            
            54,490Goodwill
            
            
            92,315
            
            
            92,315Total
      other assets
            
            
            1,716,569
            
            
            1,423,516Total
      assets
            
            $
            4,603,493
            
            $
            4,969,083LIABILITIES AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts payable
            
            $
            4,331,047
            
            $
            4,601,040Accrued expenses
            
            
            529,685
            
            
            888,166Sales
      return reserve
            
            
            3,922,036
            
            
            4,030,840Royalties payable
            
            
            676,063
            
            
            583,915Product licenses payable
            
            
            1,375,000
            
            
            1,300,000Accrued
      restructuring charges
            
            
            662,919
            
            
            723,185Convertible
      promissory notes, net of loan discounts of $293,983 and $0,
      respectively
            
            
            46,017
            
            
            --Senior secured promissory notes,
      net of loan discounts of $90,760 and $0,
      respectively
            
            
            659,240
            
            
            --Derivative
      liabilities
            
            
            304,042
            
            
            --Other liabilities
            
            
            17,690
            
            
            18,072Total
      current liabilities
            
            
            12,523,739
            
            
            12,145,218


3





Stockholders’
      deficitPreferred stock: $0.001 par value, 10,000,000 shares
      authorized; no shares issued and outstanding
            
            
            --
            
            
            --Common stock: $0.001 par value, 250,000,000 shares
      authorized; 71,567,911 and 60,229,064 shares issued and
      outstanding, respectively
            
            
            71,568
            
            
            60,229Additional paid-in capital
            
            
            29,810,469
            
            
            29,300,652Accumulated deficit
            
            
            (37,802,283)
            
            
            (36,537,016)Total
      stockholders' deficit
            
            
            (7,920,246)
            
            
            (7,176,135)Total liabilities and stockholders'
      deficit
            
            $
            4,603,493
            
            $
            4,969,083





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


4





AURIGA LABORATORIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS





THREE MONTHS
              ENDED
              MARCH
      31, 2008
              (unaudited)
            
            THREE MONTHS
              ENDED
              MARCH
      31, 2007
              (unaudited)Net
      revenueProducts
            
            $
            787,554
            
            $
            6,766,025Total
      net revenue
            
            
            787,554
            
            
            6,766,025Cost of goods soldMaterials and supplies
            
            
            206,041
            
            
            938,240Royalties
            
            
            92,148
            
            
            1,033,662Distribution
            
            
            88,506
            
            
            177,548Total
      cost of goods sold
            
            
            386,695
            
            
            2,149,451Gross profit
            
            
            400,859
            
            
            4,616,575Operating expensesSales, marketing and trade expenses
            
            
            764,600
            
            
            1,755,059General and administrative
      expenses
            
            
            844,429
            
            
            2,129,381Research and development expenses
            
            
            90,084
            
            
            622,288Total operating expenses
            
            
            1,699,113
            
            
            4,506,729Loss from operations
            
            
            (1,298,254)
            
            
            109,845Other income(expenses)Interest
      expense, net
            
            
            (8,475)
            
            
            (894,481)Gain
      on derivative liability
            
            
            62,353
            
            
            --Other income(expenses)
            
            
            (20,891)
            
            
            (191,744)Total other income(expenses)
            
            
            32,987
            
            
            (1,086,255)Loss before taxes
            
            
            (1,265,267)
            
            
            (976,410)Income taxes
            
            
            --
            
            
            --Net loss
            
            $
            (1,265,267)
            
            $
            (976,410)Net loss per common share, basic and diluted
            
            $
            (0.02)
            
            $
            (0.02)Weighted average number of common shares outstanding, basic and diluted
            
            
            65,929,381
            
            
            41,662,766





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





5


AURIGA LABORATORIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


THREE MONTHS ENDED
              MARCH
      31, 2008 (unaudited)
            
            THREE
      MONTHS ENDED
              MARCH
      31, 2007 (unaudited)Cash flows from operating activities:Net loss
            
            $
            (1,265,267)
            
            $
            (976,410)Adjustments to reconcile net loss to net cash
      flows
      provided by (used) by operating activities:Depreciation
            
            
            57,856
            
            
            156,772Non-cash expenses for equity instruments issued for compensation and
      services
            
            
            171,836
            
            
            1,757,620Amortization of notes payable discounts and finders' fees
            
            
            7,788
            
            
            860,156Sales returns and allowances
            
            
            (108,804)
            
            
            632,692Bad debt expense
            
            
            --
            
            
            --Restructuring  &
      asset impairment
            
            
            (60,266)
            
            
            --Changes in assets and liabilities:Restricted cash
            
            
            --
            
            
            75,560Receivables
            
            
            419,390
            
            
            (1,400,165)Inventory
            
            
            (8,547)
            
            
            (311,528)Prepaid expenses
            
            
            86,787
            
            
            (116,872)Deposits
            
            
            (23,421)
            
            
            --Derivative
      liabilities
            
            
            (62,353)
            
            
            --Accounts payable
            
            
            (88,472)
            
            
            (59,519)Accrued expenses
            
            
            (399,281)
            
            
            208,602Royalties payable
            
            
            92,148
            
            
            707,294Other
      liabilities
            
            
            (383)
            
            
            --Net cash used by operating activities:
            
            
            (1,180,989)
            
            
            1,534,202CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
            
            
            (11,383)
            
            
            (11,956)Payment of
      new lease deposit
            
            
            (22,000)
            
            
            --Payment of product licenses payable
            
            
            (40,000)
            
            
            --Net cash used by investing activities:
            
            
            (73,383)
            
            
            (11,956)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from stock sales
            
            
            112,464
            
            
            --Net proceeds from exercise of stock options
            
            
            --
            
            
            23,124Proceeds from stock subscriptions receivable
            
            
            --
            
            
            759,000Payments of bank notes payable
            
            
            --
            
            
            (62,272)Proceeds
      from convertible secured notes payable
            
            
            675,000
            
            
            (132,000)Proceeds
      from senior secured promissory notes payable
            
            
            300,000
            
            
            --Net cash provided by financing activities:
            
            
            1,087,464
            
            
            587,852Net increase
      (decrease) in cash
            
            
            (166,908)
            
            
            2,110,098Cash, beginning of period
            
            
            224,359
            
            
            259,580Cash, end of period
            
            $
            57,451
            
            $
            2,369,678


6





SUPPLEMENTAL CASH FLOW DISCLOSURES:Interest paid
            
            $
            --
            
            $
            34,325NON-CASH INVESTING AND FINANCINGIntangible acquired with stock
            
            $
            --
            
            
            32,500Common
      stock issued for product license
            
            $
            150,000
            
            
            --Reclassification
      of derivative liability from additional paid-in capital
            
            $
            (149,164)
            
            
            --Common
      stock issued in connection with warrant exchange
            
            $
            3,625
            
            
            --Derivative
      liability included in discount on convertible promissory notes at
      inception
            
            $
            217,231
            
            
            --Warrant
      issued in connection with senior secured promissory notes
            
            $
            19,500
            
            
            --Stock
      issued in exchange for short-term payables
            
            $
            216,520
            
            $
            --





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


7


AURIGA
LABORATORIES, INC. AND SUBSIDIARIES


CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2008 (Unaudited)





1.
            Company
      Overview and Basis of Presentation.





Auriga
Laboratories, Inc. (the “Company”) is a specialty pharmaceutical company with a
unique business model engaged in the licensing, development and
commercialization of prescription pharmaceutical products.  Our
products are focused in the respiratory and dermatology therapeutic categories
and are marketed to primary care physicians, pediatricians, dermatologists,
urologists, psychiatrists, and rheumatologists.  Our business model
leverages our established commercial presence and infrastructure, ongoing
product development, business development and established physician
relationships, to drive strong growth in demand for our core
products.  Our future success is very dependent on these ongoing
efforts.





Our
corporate strategy focuses on two primary objectives.  The first is
developing a diversified product portfolio and maintaining brand market
exclusivity through the acquisition of late stage drug candidates awaiting FDA
approval, the acquisition of proven brands, the introduction of line extensions,
reformulations, and the strategic development of our own
products.  The second is building and retaining an innovative,
nationwide sales and marketing model that drives revenue through a primarily
variable cost compensation structure.  The Company intends to leverage
its existing infrastructure for the launch of new products that will be
accretive to our existing product portfolio.





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
March 31,
2008, and the results of operations and cash flows for the three months ended
March 31, 2008 and 2007, 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
twelve month period ended December 31, 2007 and for the
twelve months ended December 31, 2006 contained in the Company's
Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission (“SEC”) on
April
15, 2008. The results of operations for the three months ended
March 31, 2008
are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.





Going
Concern:




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of
business.  The Company has incurred operating losses each year since
its inception and had an accumulated deficit of $37,802,283 as of March 31,
2008.  For the three months ended March 31, 2008 the Company incurred
a net loss of $1,265,267.  These factors, among others, indicate that
the Company may be unable to continue as a going concern for a reasonable period
of time.  The Company’s ability to continue as a going concern is
contingent upon its ability to meet its liquidity requirements.  If
the Company is unable to arrange for debt or equity financing on favorable terms
or at all the Company’s ability to continue as a going concern is
uncertain.  These financial statements do not give effect to any
adjustments to the amounts and classifications of assets and liabilities which
might be necessary should the Company be unable to continue as a going
concern.


8


Liquidity
and Capital Resources:




At March
31, 2008, the Company’s principal sources of liquidity were cash and cash
equivalents of $57,451 and collections of accounts receivable of $911,969 and
future revenue.  The Company expects that its sources of liquidity
will not be sufficient to fund operations for the remaining fiscal year without
additional funding.  Management expects that it may be necessary to arrange
for additional equity or debt financing to meet the Company’s liquidity
requirements.  Unless our product sales are greater than management
currently forecasts or there are other changes to the business plan, the Company
will need to arrange for additional financing within the next three months to
fund operating and capital needs.  This financing could take the form of
debt or equity.  Given the Company’s historical operating results and the
amount of our existing debt, as well as the other factors, the Company may not
be able to arrange for debt or equity financing from third parties on favorable
terms or at all.




The
Company’s cash requirements may vary materially from those now planned because
of changes in the Company’s operations including the failure to achieve expected
revenues, greater than expected expenses, market conditions, the failure to
timely realize the Company’s product development and acquisition goals, and
other adverse developments. These events could have a negative impact on the
Company’s available liquidity sources during the remaining 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.





FairValueofFinancialInstruments


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.





9


CashandCashEquivalents


The
Company considers all highly-liquid investments, with a maturity of three months
or less at the date of acquisition, to be cash equivalents. At March 31, 2008,
the Company had no cash equivalents.





RevenueRecognition


The
Company recognizes 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 the Company’s products is recorded net of
allowances. According to the terms of the Company’s sales contracts, a customer
may return product (i) if it is damaged, and/or (ii) within six months of
expiration or if it has expired in the last twelve months. The Company
calculates sales return allowances for product returns and contractual rebates
based upon current economic conditions and the underlying contractual terms as
product is sold.





AllowanceforDoubtfulAccounts


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





Sales
Deductions


The
Company provides volume rebates, 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 the
Company must in those circumstances record an estimate at the time of sale. The
estimates are based on historical experience with similar programs. Since the
Company has a relatively small customer base, customer specific historical
experience is often useful in determining the estimated level of deductions
expected to be refunded to the Company’s customers when sales incentives are
offered. If the Company over or under estimates the level of sales deductions,
there may be a material impact to the Company’s 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 threeyears from the date of
manufacture. The Company’s return policy allows product returns for products
within an eighteen-month window commencing six months prior to the expiration
date and ending twelve months after the expiration date. The Company’s return
policy conforms to industry standard practices. The Company believes that it has
sufficient data to accurately estimate future returns over the return time
period at the time of sale. The Company is required to estimate the level of
sales which will ultimately be returned pursuant to the Company’s return policy
and record a related reserve at the time of sale. These amounts are deducted
from gross revenues to determine net revenues. The Company’s estimates take into
consideration historical returns of a given product, product specific
information provided by the Company’s customers, and information obtained
regarding the levels of inventory being held by the Company’s customers,
estimated future filled prescription patterns. Management periodically reviews
the reserves established for returns and adjusts them based on actual experience
and any change in


10


management
estimates. If the Company over or under estimates the level of sales which will
ultimately be returned, there may be a material impact to our financial
statements.





InventoryObsolescence


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





AccountingforStockOptionsandWarrantsGrantedtoEmployeesandNon-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.





BasicandDilutedEarningsPerShare


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 all instruments convertible to common stock, including exercisable
stock options and warrants.  Diluted net loss per share is the same as
basic net loss per share for the three months ended March 31, 2008 and three
months ended March 31, 2007 as inclusion of the common stock equivalents would
be anti-dilutive.  The weighted average number of common shares
outstanding for the three months ended March 31, 2008 and 2007 was 65,929,381
and 41,662,766, respectively.  As of March 31, 2008 and 2007, the
Company had 31,911,498 and 25,958,703 common stock equivalents outstanding,
respectively.





RecentAccountingPronouncements


On March
19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. These enhanced disclosures will discuss (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an


11


entity’s
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. We have not determined the impact, if any
SFAS No. 161 will have on our consolidated financial
statements.





In
December 2007, the FASB issued SFAS No.141 (revised 2007), “Business
Combinations” (“SFAS 141R”) which replaces SFAS No. 141, “Business Combinations”
(“SFAS 141”). SFAS 141R establishes principles and requirements for recognizing
and measuring identifiable assets and goodwill acquired, liabilities assumed and
any noncontrolling interest in a business combination at their fair value at
acquisition date. SFAS 141R provides updated guidance and makes significant
amendments to previous guidance in SFAS 141 and other standards including the
treatment of acquisition related costs, business combinations achieved in stages
(referred to as a step acquisition), the treatment of gains from a bargain
purchase, the recognition of contingencies in business combinations, the
treatment of in-process research and development in a business combination as
well as the treatment of recognizable deferred tax benefits. SFAS 141R is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. The Company is currently
reviewing SFAS 141R and has not yet determined how the adoption of SFAS 141R
will impact its consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to
establish accounting and reporting standards for the noncontrolling interest
(minority interest) in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Early adoption is prohibited. The Company is currently
reviewing SFAS 160 and has not yet determined how the adoption of SFAS 160 will
impact its consolidated financial statements.





In
February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date
of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No.
157, for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008. The Company is currently assessing the impact of SFAS No. 157-2 on the
Company’s consolidated statement of financial condition and results of
operations








3.
            Accounts
      Receivable.





Accounts receivable as of
March 31, 2008
and December 31, 2007 was as follows:





March
      31,
              2008
            
            December 31, 2007Accounts receivable
            
            $
            939,140
            
            $
            1,358,530Less: allowance for doubtful accounts
            
            
            27,171
            
            
            27,171Accounts receivable, net
            
            $
            911,969
            
            $
            1,331,359





Bad debt expense was approximately
$0 and $0, respectively, for the three months ended
March 31, 2008 and 2007.


12





4.
            Inventory.





Inventory as of
March 31, 2008 and December 31, 2007
was as follows:





March
      31,
              2008
            
            December 31, 2007Product inventory
            
            $
            2,701,658
            
            $
            2,322,740Less: reserves
            
            
            1,069,449
            
            
            699,078Inventory, net
            
            $
            1,632,209
            
            $
            1,623,662





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
March 31, 2008:





GrossAmount
            
            Accumulated
              Amortization
            
            NetAmount
            
            ExpectedLifeLicensing rights/product lines
            
            $
            615,000
            
            $
            (505,997)
            
            $
            109,003
            
            
            2-15 yearsSupply/distribution agreements
            
            
            1,592,500
            
            
            (177,160)
            
            
            1,415,340
            
            
            15 yearsIntangibles,
      net
            
            $
            2,207,500
            
            $
            (683,157)
            
            $
            1,524,343





GrossAmount
            
            Accumulated
              Amortization
            
            NetAmountGoodwill
            
            
            92,315
            
            
            --
            
            
            92,315








The following table reflects the components of intangible assets of the Company as of
December 31, 2007:





Gross
      Amount
            
            Accumulated
      Amortization
            
            Impairment
            
            Net
      Amount
            Expected
      LifeLicensing
      rights/product lines
            $
            6,143,249
            $
            (503,968)
            $
            (5,055,749)
            $
            583,532
            2-15
      yearsSupply/distribution
      agreements
            
            1,777,500
            
            (159,321)
            
            (925,000)
            
            693,179
            15
      yearsGoodwill
            
            92,315
            
            
            
            
            
            92,315
            --Total
            $
            8,013,064
            $
            (663,289)
            $
            (5,980,749)
            $
            1,369,026
            --





For the three months ended
March 31, 2008
and 2007, amortization expense related to the
licensing rights of the Company was $2,029
and $121,901, respectively. For the three months ended
March 31, 2008
and 2007, amortization expense related to the
supply/distribution agreements of the Company was $23,839
and $0, respectively.  Management noted no events that would
require a revaluation of goodwill.


13





6.
            Notes
      Payable.





Related
Party Notes Payable





Related-Party Senior Secured
Promissory Note - AFC


On September 28, 2006, the Company
issued to Athlon Finance Corp. (“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 Laboratoires Carilène, a corporation existing
under the laws of France (See Note 14 – “Commitments and Contingencies,” for
further information about this matter). All amounts advanced under the AFC Note
were 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 required 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 the 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.





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. In 2006, the Company issued warrants to AFC to acquire
968,750 shares of common stock.  In connection with these warrants,
the Company recorded $676,509 as a loan discount to be amortized over the life
of the loan.  During the three months ended March 31, 2008 and 2007,
the Company recorded interest expense of $0 and $438,698, respectively related
to the loan discount.  As of March 31, 2008 and December 31, 2007, the
Company had expensed all of this loan discount as interest expense.





SFP is
the managing member of AFC. The Company’s former Chief Executive Officer, Philip
Pesin, is the beneficial owner of SFP.  Mr. Pesin 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.





On April
2, 2007, the Company paid to AFC $968,750 as payment in full of the AFC
Note.  The remaining unamortized discount of $348,348 was charged to
expense upon repayment.





Prospector
Capital


On
February 13, 2008, the Company issued to Prospector Capital Partners, LLC, a
Delaware limited liability company (“Prospector”) a Senior Secured Promissory
Note (the “Note”) in the principal amount of $750,000.  The Note is
due and payable on January 31, 2009.  The Note bears no
interest.  As consideration for the Note, the Company entered into a
Royalty Participation Agreement (the “Royalty Agreement”) with
Lender.





Under the
Royalty Agreement, the Company shall make royalty payments to Prospector of 7.5%
of “net sales,” as defined in the Royalty Agreement, on two
products:  (1) a dextroamphetamine sulfate oral solution subject of
that certain License Agreement between Outlook Pharmaceuticals, Inc. and the
Company, dated November 28, 2007, and (2) an acetaminophen/codeine
product


14


subject
of that certain Manufacturing and Supply Agreement between Mikart, Inc. and the
Company, dated October 29, 2007.  The Company is obligated to make
such royalty payments to Prospector until aggregate royalty payments equal
$6,000,000.





As
additional consideration for the Note, the Company issued to Prospector a
30-month warrant to acquire up to 500,000 shares of the Company’s common stock
at an exercise price of $0.039 per share.





To secure
the Note, Prospector has been granted a first priority interest in all of the
assets of the Company pursuant to the terms and conditions of a Security
Agreement dated February 13, 2008. The Note allows prepayment at any time to
remove the security interest.  Prospector has agreed to subordinate
its security interests in the event the Company enters into a receivables line
of credit of up to $1.5M or a term loan of up to $1.0M.





The
complete terms and conditions of the foregoing transaction are memorialized by
the following documents:  Senior Secured Promissory Note, Security
Agreement, Auriga Laboratories, Inc. Common Stock Warrant, Senior Secured Note
and Warrant Purchase Agreement, and Royalty Participation
Agreement.





The
Company received proceeds of $675,000 on February 13, 2008 from the Prospector
Note.  The difference of $75,000 between proceeds received by the
Company and the face value of the Note was recorded as a debt
discount.  In addition, the warrant to acquire up to 500,000 shares of
the Company’s common stock at an exercise price of $0.039 per share was valued
at $19,500 at inception and was recorded as a debt discount.  The
warrant is considered a derivative liability as well.  Total discount
at inception attributable to this debt was $94,500.





During
the three months ended March 31, 2008, the Company recorded amortization of debt
discount of $3,740, as interest expense related to the Note.  During
the three months ended March 31, 2008, no payments of principal or interest were
made on this note.  As of March 31, 2008, the outstanding balance of
the note was $750,000, net of discounts of $90,731.





For
further information, see “Note 12 -- Related Party Transactions.”





Notes
Payable





JMJ
Financial


On
January 31, 2008, the Company entered into three promissory notes with JMJ
Financial. Two of the notes are convertible promissory notes, identified as
Document A-01152008 (“Convertible Note A”), and Document B-01152008
(“Convertible Note B”), and one note is a collateralized promissory note,
identified as C-01152008 (“Secured and Collateralized Promissory Note
C”).





Convertible Note A in the
principal amount of $240,000, has a maturity date of January 15, 2011, with a
one time interest charge of 12%, with principal and interest due on the maturity
date of the note.  Both interest and principal amounts can be
converted into voting common stock of the Company at sixty percent (60%) of the
average of the three (3) lowest closing bid prices of the Company’s common stock
in the twenty (20) trading days prior to the conversion.  Upon
prepayment, a prepayment penalty of 130% of the outstanding principal and
interest of the note will be charged.  The note is issued by the
Company to JMJ Financial.





The
Company received proceeds of $200,000 on February 11, 2008 from Convertible Note
A.  The difference of $40,000 between proceeds received by the Company
and the face value of


15


Convertible
Note A was recorded as a debt discount.  In addition, one-time
interest charge of $28,800 was recorded as a debt discount.  The
Company recorded a derivative liability of $129,231 which was recorded as a debt
discount.  Total discount at inception attributable to this debt was
$198,031.  The derivative liability was required because there is no
floor on the conversion price coupled with the Company’s inability to guarantee
that enough shares of its common stock are available to convert the note in
full.





During
the three months ended March 31, 2008, the Company recorded amortization of debt
discount of $3,804, as interest expense related to JMJ Convertible Note
A.  During the three months ended March 31, 2008, no payments of
principal or interest were made on this note.  As of March 31, 2008,
the outstanding balance of the note was $240,000, net of discounts of
$187,784.





Convertible Note B in the
principal amount of $1,800,000 has a maturity date of January 15, 2011, with a
one-time interest charge of 12% with principal and interest due on the maturity
date of the note.  Both interest and principal amounts can be
converted into voting common stock  of the Company at sixty-five
percent (65%) of the average of the three (3) lowest closing bid prices of the
Company’s common stock in the twenty (20) trading days prior to the
conversion.  Upon prepayment, a prepayment penalty of 130% of the
outstanding principal and interest of the note will be charged.  The
note is issued by the Company to JMJ Financial.





The
Company received proceeds of $100,000 on March 27, 2008 from Convertible Note
B.  The one-time interest charge of $12,000 was recorded as a debt
discount.  The Company recorded a derivative liability at inception of
$105,128 of which $88,000 was recorded as a debt discount and the remaining
$27,128 was recorded as interest expense.  Total discount at inception
attributable to this debt was $100,000.  The derivative liability was
required because there is no floor on the conversion price coupled with the
Company’s inability to guarantee that enough shares of its common stock are
available to convert the note in full.





During
the three months ended March 31, 2008, the Company recorded amortization of debt
discount of $244, as interest expense related to JMJ Convertible Note
B.  During the three months ended March 31, 2008, no payments of
principal or interest were made on this note.  As of March 31, 2008,
the outstanding balance of the note was $100,000, net of discounts of
$99,756.





Secured and Collateralized Promissory
Note C in the principal amount of $1,800,000 has a maturity date of
January 15, 2012, and one time interest charge of 12% with both principal and
interest due on the maturity date of the note.  This note is a full
recourse note with provisions for foreclosure rights on the collateral as
defined in the Collateral & Security Agreement.  This note is
issued by JMJ Financial to the Company.








7.           Derivative
Liabilities.





The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks.  However, certain other
financial instruments, such as the embedded conversion features of debt
instruments that are indexed to the Company's common stock, are classified as
liabilities when either (a) the holder possesses rights to net-cash settlement
or (b) physical or net share settlement is not within the control of the
Company.  In such instances, net-cash settlement is assumed for
financial accounting and reporting, even when the terms of the underlying
contracts do not provide for net-cash settlement.  Such financial
instruments are initially recorded at fair value and subsequently adjusted to
fair value at the close of each


16


reporting
period.  Fair value for option based derivative financial instruments
is determined using the Black-Scholes pricing model.





In
accordance with Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”),
conversion feature associated with convertible debt are not clearly and closely
related to the characteristics of such notes.  Upon funding of the JMJ
Financial Notes of February 11, 2008, the conversion feature qualified as an
embedded derivative instrument and, because they do not qualify for any scope
exception within SFAS 133, they were required by SFAS 133 to be accounted for
separately from the debt instrument and recorded as derivative financial
instruments.  In addition, since the Company cannot guarantee, due to
the lack of a floor conversion price, that adequate shares are available to
convert all of the debt to stock, a derivative liability is required for all
warrants as well.





During
the three months ended March 31, 2008, the Company recorded other income of
$62,353, related to the conversion features and warrants, to reflect the change
in fair value of the derivative liabilities.





At each
balance sheet date, the Company adjusts the derivative financial instruments to
estimated fair value and analyzes the instruments to determine their
classification as a liability or equity.  As of March 31, 2008, the
estimated fair value of the Company’s conversion feature derivative liabilities
was $213,846, as well as derivative liabilities related to warrants of
$90,196.





The
estimated fair value of the debt conversion feature was determined assuming
conversion of the debt on the inception date and the end of the reporting period
and comparing to the closing market price of the stock.  The
difference between the conversion price and closing market price of the stock is
the derivative liability.





The
warrants were valued using the Black-Scholes model at the inception date and the
end of the period.  The following assumptions were made to value the
warrants:





End
      of Period
            Inception
      DateMarch
      31, 2008
            February
      11, 2008Risk-free
      interest rate
            3.45%
            3.72%Expected
      dividend yield
            --
            --Expected
      lives
            1.1–9.4
      years
            1.2–9.5
      yearsExpected
      volatility
            202.93%
            334.35%





On
February 11, 2008, the inception date as well as funding date of the JMJ
Financial Notes, a reclassification from additional paid-in capital to
derivative liability was made with respect to the warrants in the amount of
$149,164.





8.           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 March 31, 2008 and December 31, 2007, there were no
shares of preferred stock issued or outstanding.


17


Common
Stock


The
Company is authorized to issue 250,000,000 shares of common stock, par value
$0.001 per share. As of March 31, 2008 and December 31, 2007, there were
71,567,911 and 60,229,064 shares of Common Stock issued and outstanding,
respectively.





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





Warrant Exchange
Offer


On
December 11, 2007, Philip Pesin, our former Chief Executive Officer, initiated a
Warrant Exchange Offer (the “Offer”) program (the “Program”), offered to holders
(“Warrantholders”) of certain Common Stock Purchase Warrants of the
Company.  Pursuant to the Offer, Warrantholders were offered the right
to (i) exercise their Warrants for cash at an amended purchase price of $0.11
per share, or (ii) exchange their Warrants to purchase common stock for a 1⁄4
fractional share of common stock. Warrantholders were required to notify the
Company of their election on or before December 28, 2007.  Mr. Pesin
presented the Program to the Board of Directors of the Company (hereinafter, the
“Board”) for approval on December 19, 2007.





Twenty-five
(25) Warrantholders submitted an election to the Company under the
Program.  Between January 11, 2008 and February 26, 2008, 2,533,719
shares of common stock were issued by the Company in exchange for surrendered
Warrants to purchase 10,134,876 shares of common stock, pursuant to the
Program.





9.
            Equity Incentive
      Plans.





2006 Equity Incentive
Plan


In August
2006, the Board approved the Company’s 2006 Equity Incentive Plan, pursuant to
which 1,500,000 shares of Common Stock were made available to be granted
thereunder. Awards issued under this plan could be issued to employees,
non-employee directors or consultants and advisors. Awards were 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 was 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 months ended March 31, 2008 and March 31, 2007, the Company did not issue
any shares of Common Stock under the 2006 Equity Incentive Plan and recorded no
expense in connection with shares issued under the plan.





As of
March 31, 2008, 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 included 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 value of each award was based upon the current fair market value
of the common stock at the time of grant.





For the
three months ended March 31, 2008 and March 31, 2007, the Company issued zero
and 967,191 shares of common stock and recorded $0 and $921,241, respectively,
in expenses in


18


connection
with shares issued under the plan.  As of March 31, 2008, the Company
had no shares available for issuance under the 2007 Equity Incentive
Plan.





2008 Omnibus Stock Grant and
Option Plan


On
November 16, 2007, the Board approved and the Company filed a Form S-8
registration statement that included 10,000,000 shares to be registered under
the Auriga Laboratories, Inc. Omnibus Stock Grant and Option Plan (the “2008
Plan”). The 2008 Plan was ratified and formally adopted by the Board on March
13, 2008.  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 the 2008 Plan.  Awards issued
under the 2008 Plan may be issued to employees of the Company or the Company’s
subsidiaries, non-employee directors, affiliates of non-employee directors,
directors of the Company’s subsidiaries, and consultants and advisors to the
Company and its subsidiaries.





For the
three months ended March 31, 2008 and March 31, 2007, the Company issued
1,707,317 and zero shares of common stock and recorded $78,870 and $0,
respectively, in costs in connection with these issuances. As of March 31, 2008,
the Company had 8,292,683 shares available for issuance under the 2008
Plan.





10.           Stock Options.





2005 Stock Option
Plan


Pursuant
to the terms of an Agreement and Plan of Merger (the “Merger Agreement”) between
the Company, then a privately held Delaware corporation, and Multi-Link
Telecommunications, Inc., a “shell” company organized under the laws of
Colorado, 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.





2006 Stock Option
Plan


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





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


19


Option
Plan (the “2007 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 could be granted pursuant to the 2007 Plan. The registration
statement also covered 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.





2008 Omnibus Stock Grant and
Option Plan


On
November 16, 2007, the Board approved and the Company filed a Form S-8
registration statement that includes 10,000,000 shares to be registered under
the Auriga Laboratories, Inc. 2008 Omnibus Stock Grant and Option Plan (the
“2008 Plan”). The 2008 Plan was ratified and formally adopted by the Board on
March 13, 2008.  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.  Awards issued
under the 2008 Plan may be issued to employees of the Company or the Company’s
subsidiaries, non-employee directors or affiliates of non-employee directors of
the Company, directors of the Company’s subsidiaries, and consultants and
advisors to the Company and/or its subsidiaries.





The value
of options was calculated on the date of the grant using the following
assumptions:





March
      31, 2008
            March
      31, 2007Risk-free
      interest rate
            3.56-4.32%
            4.72-4.76%Expected
      dividend yield
            --
            --Expected
      lives
            10
      years
            10
      yearsExpected
      volatility
            130-260%
            97-184%








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





Options
      Outstanding
            
            Weighted
      Average Exercise Price
            Weighted
      Average Remaining Contractual Life (in years)
            
            Weighted
      Average Fair ValueBalance,
      December 31, 2007
            13,330,612
            $
            1.097
            
            $
            1.031Granted
            1,500,000
            
            0.030
            
            
            0.030Exercised
            --
            
            --
            
            
            --Cancelled
            6,240,469
            
            0.994
            
            
            8.72Balance,
      March 31, 2008
            8,590,143
            $
            0.985
            9.27
            $
            9.72





During
the three months ended March 31, 2008 and the three months ended March 31, 2007,
stock options granted under the Company’s Stock Option Plans to purchase
1,500,000 and 4,397,500 shares of common stock were issued to participants. The
options are exercisable any time at a price of $0.095 per share. The shares
issuable upon exercise of the options are subject to a repurchase right of the
Company in the event the grantee fails to meet certain vesting


20


requirements.
As of March 31, 2008 and December 31, 2007, there are 8,125,000 and 9,625,000
options available to be granted under the Company’s Stock Option
Plans.





For the
three months ended March 31, 2008 and three months ended March 31, 2007,
compensation expense associated with stock option vesting during the period was
$89,343 and $142,539, respectively.  The future expense related to
unvested options is $582,828 and $3,672,090.  During the three months
ended March 31, 2008, the Company calculated based on historical forfeitures and
applied to compensation expense, a forfeiture rate of 65.7%.





11.                      Common Stock Warrants.





Pursuant
to the terms of the Merger Agreement (see Note 10 – “Stock Options – 2005 Stock
Option Plan”), the Company assumed each outstanding warrant to purchase shares
of pre-Merger Auriga Common Stock, which warrants were exercisable for
approximately 30.01 shares of Common Stock, with the exercise price being
adjusted accordingly.





During
the three months ended March 31, 2008 and March 31, 2007, the Company issued
warrants to acquire a total of up to 500,000 and 0 shares of common
stock.  As of March 31, 2008 and December 31, 2007, warrants to
purchase up to 4,432,466 and 3,932,466 shares of common stock were outstanding,
and warrants to purchase 4,432,466 and 3,932,422 shares of common stock were
vested.





The
following assumptions were made to value the warrants:





March
      31, 2008
            March
      31, 2007Risk-free
      interest rate
            3.70%
            --Expected
      dividend yield
            --
            --Expected
      lives
            2.5
      years
            --Expected
      volatility
            276%
            --





For the
three months ended March 31, 2008 and the three months ended March 31, 2007,
compensation expense paid by issuance of  warrants to purchase common
stock was determined to be $19,500 and $542,995 using the Black Scholes Option
Pricing Model.





Additionally,
the Company recorded $19,500 and $0 in loan discount charges in connection with
warrants granted to purchase $19,500 and 0 shares of common stock associated
with the issuance by the Company of certain promissory notes (for more
information, please refer to Note 6 – “Notes Payable”).





12.                      Related Party Transactions.





Prospector
Capital


On
February 13, 2008, the Company issued to Prospector Capital Partners, LLC, a
Delaware limited liability company (“Prospector”) a Senior Secured Promissory
Note (the “Note”) in the principal amount of $750,000.  The Note is
due and payable on January 31, 2009.  The Note bears no
interest.  As consideration for the Note, the Company entered into a
Royalty Participation Agreement (the “Royalty Agreement”) with
Lender.





Prospector
is related to Chris Walton, a former director and a current shareholder of the
Company.


21


Under the
Royalty Agreement, the Company shall make royalty payments to Prospector of 7.5%
of “net sales,” as defined in the Royalty Agreement, on two
products:  (1) a dextroamphetamine sulfate oral solution subject of
that certain License Agreement between Outlook Pharmaceuticals, Inc. and the
Company, dated November 28, 2007, and (2) an acetaminophen/codeine product
subject of that certain Manufacturing and Supply Agreement between Mikart, Inc.
and the Company, dated October 29, 2007.  The Company is obligated to
make such royalty payments to Prospector until aggregate royalty payments equal
$6,000,000.





As
additional consideration for the Note, the Company issued to Prospector a
30-month warrant to acquire up to 500,000 shares of the Company’s common stock
at an exercise price of $0.039 per share.





To secure
the Note, Prospector has been granted a first priority interest in all of the
assets of the Company pursuant to the terms and conditions of a Security
Agreement dated February 13, 2008. The Note allows prepayment at any time to
remove the security interest.  Prospector has agreed to subordinate
its security interests in the event the Company enters into a receivables line
of credit of up to $1.5M or a term loan of up to $1.0M.





The
complete terms and conditions of the foregoing transaction are memorialized by
the following documents:  Senior Secured Promissory Note, Security
Agreement, Auriga Laboratories, Inc. Common Stock Warrant, Senior Secured Note
and Warrant Purchase Agreement, and Royalty Participation
Agreement.





The
Company received proceeds of $675,000 on February 13, 2008 from the Prospector
Note.  The difference of $75,000 between proceeds received was
recorded as a debt discount.  In addition, warrant to acquire up to
500,000 shares of the Company’s common stock at an exercise price of $0.039 per
share was valued at $19,500 at inception and was recorded as a debt
discount.  The warrant is considered a derivative liability as
well.  Total discount at inception attributable to this debt was
$94,500.





During
the three months ended March 31, 2008, the Company recorded amortization of debt
discount of $3,740, as interest expense related to Prospector
Note.  During the three months ended March 31, 2008, no payments of
principal or interest were made on this note.  As of March 31, 2008,
the outstanding balance of the note was $750,000, net of discounts of
$90,731.





Exchange of Warrants Held
byPhilipS.Pesin


On or
before December 28, 2007, Mr. Pesin exercised the right pursuant to the Warrant
Exchange Offer program of December 2007 (see Note 7 – “Capital Stock”), to
surrender Warrants to purchase 4,502,294 shares of common stock of the Company
in exchange for 1,125,574 shares (the “Shares”) of common stock of the
Company.  The Shares were issued on or about January 11, 2008. Mr.
Pesin filed a Form 4 disclosing his acquisition of such Shares on January 22,
2008.





Consulting Agreement with
Philip S. Pesin


Effective
January 15, 2008, Mr. Pesin resigned from his offices as Chief Executive Officer
and Chairman of the Board.  Effective January 28, 2008, the Company
entered into a consulting letter agreement (the “Consulting Agreement”) with Mr.
Pesin.  Under the Consulting Agreement,  Mr. Pesin is
required to serve as a consultant to the Company on matters such as strategy,
product and knowledge of the market. The Company is required to reimburse Mr.
Pesin at a rate of $20,000 per month, payable in cash or common stock of the
Company or a combination thereof, at the Company’s sole option. The term of the
Consulting Agreement is twelve (12) months.


22


DirectorRepurchase


On
December 15, 2005, we repurchased 1,500,000 shares of our common stock held by
Craig Collard, a former director, and his affiliates. The purchase price was
paid in the form of a $2,225,000 unsecured subordinated promissory note (the
“Collard Note”). The remaining loan principal was payable in annual installments
of $600,000, $750,000 and $750,000 due January 2, 2007, January 2, 2008 and
January 2, 2009, respectively. As a result of this transaction, we recorded
imputed loan interest in order to realize a 7.5% effective interest rate. The
remaining loan discount was realized as interest expense based upon the
outstanding principal. Interest accrues at a rate equal to 2% per annum on the
unpaid principal amount of the note. Interest was payable in arrears in cash by
us and included with each annual principal installment.





On
November 14, 2006, we entered into that certain royalty agreement with Mr.
Collard and his affiliates (the “Royalty Agreement”) in which Mr. Collard agreed
to cancel the Collard Note in exchange for the payment of royalties to Mr.
Collard at the rate of four percent of net sales of our Extendryl® product line.
The Royalty Agreement also provides: (i) for minimum quarterly payments to Mr.
Collard of $25,000 and a maximum annual payment to Mr. Collard of $500,000; and
(ii) that if the FDA takes any action to prohibit or restrict the sale of the
Extendryl® product line, and if such action results in a decrease in net sales
of the Extendryl®, such that the amount of sales required to meet the minimum
quarterly payment to Mr. Collard is unsatisfied, then, during such time as the
above conditions are in effect, we shall be obligated to continue to make the
minimum quarterly payment to Mr. Collard and shall be required to annually issue
to Mr. Collard that number of restricted shares of our common stock equal to
$100,000. The term of the Royalty Agreement expires upon aggregate payments to
Mr. Collard of $4,000,000; however, either party may terminate the Royalty
Agreement for cause.





We
believe that all of the transactions set forth above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
As of March 31, 2008, Mr. Collard is not a significant shareholder.





13.
Concentrations.





Customers


During
the three months ended March 31, 2008 and the three months ended March 31, 2007,
two customers, each a wholesale distributor, accounted for a combined total of
approximately 67.4% and 88.0% of the Company’s revenues,
respectively.  As of March 31, 2008 and December 31, 2007, the same
two customers accounted for 74% and 56% of total accounts
receivable.  One additional customer accounted for 12% of the
Company’s sales during the three months ended March 31, 2008. and less than 10%
for the three months ended  March 31, 2007.





Suppliers


Some of
the Company’s products are currently sourced from single qualified suppliers or
manufacturers. The Company has not established arrangements with alternative
suppliers for  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 its products or to obtain or maintain regulatory approval of such
products.


23


Credit
Risk


The
Company maintains its cash balances in a financial institution.  Cash
balances at the institutions are insured by the Federal Deposit Insurance
Corporation up to $100,000.  From time to time, the Company’s cash
balances may exceed the insured amount.  At March 31, 2008 and
December 31, 2007, the Company’s cash balance exceeded this insured amount by $0
and $124,359, respectively.





14.                      Commitments and
Contingencies.





Trade Vendor
Commitments


On
September 26, 2007, the board of directors approved the issuance of 2,933,475
shares of common stock in extinguishment of approximately $1.0 million of trade
commitments. The issuances are exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933. The vendor-investors are sophisticated investors
or have a pre-existing relationship with the Company.  Pursuant to the
agreement(s) with the vendors, the Company is obligated to compensate the
vendor(s) for any unsatisfied balance remaining after the sale of shares by such
vendor(s), depending upon the circumstances.  The Company recorded all
issued shares at actual amounts realized as reduction of trade payables and any
unsold shares at March 31, 2008 and December 31, 2007 were marked to market at
approximately $0.03 and $0.04 per share.  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.





LeaseCommitments


The
Company has various contractual obligations that are not required to be
recognized as liabilities such as lease commitments. The following table
summarizes payments due by period under the Company’s known lease commitments as
of March 31, 2008.





Total
            2008
            2009
            2010
            2011Georgia office lease
            $147,437
            $54,472
            $74,263
            $18,702
            $-Camarillo headquarters lease
            754,398
            198,000
            231,000
            278,718
            46,680Connecticut office lease
            14,842
            14,842
            -
            -
            -Total
            $916,617
            $267,314
            $305,263
            $297,420
            $46,680





We
entered into a new lease dated December 13, 2007, and moved our executive
offices and warehouse facilities in January 2008 to 5284 Adolfo Road, Camarillo,
California 93102. The approximately 19,496 square feet office and warehouse
space is leased until February 2011 at a monthly rental rate of approximately
$22,000 with increases up to $23,340. Our sales and marketing facilities are
located at 5555 Triangle Parkway, Norcross, Georgia. The approximately 6,200
square feet (“Suite 300”) was leased until October 31, 2008 at a base rent of
$8,749 per month, increasing annually with a rental cap of $9,560 per month. We
completed a formal termination of the lease for Suite 300 on April 1, 2008. We
entered into a new lease, commencing on April 1, 2008, for Suite 350 at the same
location, with a term of two (2) years, at a monthly base rental rate of $6,052,
with an annual base rental rate escalation to $6,234. We believe that our Camarillo,
California and Norcross, Georgia facilities are sufficient for our existing
activities and potential growth, and that the facilities are well maintained and
in good condition.


24


Possible FDA Action
Contingency





On
October 30, 2007, we were made aware of a possible 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 that contain
tannates that have not received formal FDA approval.  The Company is
not aware that the FDA has issued any Federal register notice regarding tannates
as of the date of this report; however, the Company believes the action is
imminent.  The Company believes that Levall 12 and Zinx Cold Kit may
be affected by the possible future FDA action. The financial statements at March
31, 2008 and December 31, 2007 do not include any adjustments related to this
possible action.





Product License and
Marketing Agreement Commitments





Cornerstone Sublicense
Agreement


The
Company is party to a license agreement with Cornerstone dated as of May 24,
2005 (the “Agreement”). Effective August 1, 2005, the Company agreed to pay
Cornerstone a royalty of 30% on net sales of the Extendryl® product line up to
$4,000,000, and a royalty of 8% on net sales in excess of $4,000,000. The annual
maximum royalty is capped at $1,700,000.





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





•30%
of net sales during the quarter ended September 30, 2006;





•10%
of net sales during the last quarter of 2006 and the first quarter of
2007;





•8% of
net sales during the second, third and fourth quarters of 2007;





•7% of
net sales during 2008; and





•5% of
net sales during 2009 and thereafter.





Athlon Pharmaceuticals, Inc.
License Agreement


On August
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® 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
license agreement originally provided that the Company would pay to Athlon a
royalty payment equal to 50% of net sales up to $10,000,000 through the end of
the first term year of the license agreement, decreasing to 20% on all net sales
in excess of $10,000,000. The royalty payments for the second and third term
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 the payment
of royalties equal to 8% of net sales for each year following the third term
year until such time as the aggregate royalty payments under the agreement
totaled $20,000,000, plus royalty payments equal to 1% of net sales for each
year subsequent to the time such aggregate royalty payments exceeded
$20,000,000.


25


On
February 23, 2007, the Company entered into a letter settlement agreement with
Athlon to settle a dispute between the parties. The letter agreement amends the
license agreement. 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 the Company
to make monthly reports and payments until such time as the aggregate royalty
payments made by the Company 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 the Company to make quarterly reports and
payments.





Carilène Distribution
Agreement


On
September 13, 2006, the Company and Laboratoires Carilène S.A.S., a corporation
existing under the laws of France (“Carilène”) entered into a Licensing and
Distribution Agreement that provides the Company with an exclusive license to
market, sell, distribute, sublicense, exploit and market, AquoralTM, an oral
artificial saliva product used to treat dry mouth sundrome, throughout the
United States. Carilène agreed to supply the Company with all of its
requirements for the product, and the Company agreed to buy inventory
exclusively from Carilène.





The
amount to be paid by the Company for the license and distribution rights
consisted of the following:





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





•
            $500,000
      payable 90 days following commercial launch of the
  product;





•
            $750,000
      payable in cash or Common Stock, as determined in the sole discretion of
      Carilène, upon the earlier of twelve months after the launch of the
      product or at the time that the Company generates total net sales of $5.0
      million; and





•
            5%
      of net sales of the AquoralTM product
line.





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





On October 1, 2007 the Company entered
into a separate license and distribution agreement with Carilène, under which
Carilène 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 Carilène's Silicium 44 ingredient. By letter dated October 1,
2007, the Company terminated the license 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 license agreement, the license agreement was terminated on October 1,
2007.





On
October 29, Laboratories Carilène S.A.S filed a complaint in U.S. District
Court, Southern District of New York against the Company for an unspecified
amount of damages, alleging


26


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 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 Carilène’s material breach and anticipatory
repudiation of the license and supply agreement for the Aquoral product. The
Company is unable to predict the outcome and/or the financial or operating
impact of this matter at this time.





OutlookPharmaceuticals, Inc.
License Agreement


Effective as of November 28, 2007, the
Company entered into an exclusive license from Outlook Pharmaceuticals, Inc., an
Ohio corporation, to make, distribute, commercialize, market and sell in the
United States a new product indicated for the treatment of ADHD.  In
consideration for the license, we are obligated to make payments to Outlook in
cash or common stock of the Company totaling $600,000, payable on certain
milestones reached in our commercialization of the product.  We are
also obligated to pay royalty payments to Outlook, with a royalty rate that
varies based upon aggregate net sales of the product.  On or about
February 28, 2008, we entered into a First Amendment to License Agreement with
Outlook, amending the payment terms and methods described above.  The
agreement is for a perpetual term.





Termination of Eby License
Agreement and Domain Name Agreement


Effective
March 20, 2008, the Company terminated its License Agreement  and
Domain Name Agreement with George Andrew Eby, III (“Eby”).  As
disclosed in the Company’s Form 8-K filed on December 6, 2006, on December 1,
2006, the Company entered into a license agreement with Eby for a worldwide,
sub-licensable right to make, use and sell Eby’s proprietary products,
technology and patents relating to the treatment of the common cold with zinc.
The License Agreement obligated the Company to pay a percentage of annual net
sales of the licensed product, as well as all derivative product created by the
Company based on such picensed product.





Termination ofEbyConsultingAgreement


Effective
March 20, 2008, the Company terminated its Consulting Agreement with George
Andrew Eby, III (“Eby”). As disclosed in the Company’s Form 8-K filed on
December 6, 2006, on December 1, 2006, the Company and Eby entered into a
consulting agreement. Eby was to provide the Company consulting services in the
field of research and development thereunder. In exchange for providing these
services, the Company agreed to compensate Eby in cash and common stock of the
Company. As a result of the termination, the Company has no further obligations
under this agreement.





Litigation





Various
Claims


The
Company, a current officer/director, and a former officer/director are involved
in several threatened legal proceedings including claims relating to breach of
employment agreement, retaliatory termination of employment (whistleblower) and
sexual harassment.  These claims are fairly recent, and we are
currently investigating each and every one of them.  Although we
believe that the Company and the individual officer/directors named have
meritorious defenses to the claims made in each of the threatened legal
proceedings and intend to contest each claim vigorously, an adverse resolution
of any of such claims may have a material adverse effect on our financial
position and on results of operations in the period in which the claims are
resolved.  We are not presently able to reasonably estimate potential
losses, if any, related to the claims.


27


Department of
Labor


On
January 18, 2008, the U.S. Department of Labor (“DOL”) served the Company with
notice that a complaint had been filed with the DOL alleging a violation of
Title VIII of the Sarbanes-Oxley Act of 2002 and Section 806 of the Corporate
and Criminal Fraud Accountability Act.  The Company responded to these
allegations and is currently conducting its own investigation relating to the
claims.  The Company executed a settlement agreement related to this
matter on May 1, 2008.





Although
the results of litigation, pending or threatened, and regulatory investigations
cannot be predicted with certainty, regardless of the outcome, such legal
actions can have a material adverse impact on the Company because of defense
costs, diversion of management resources and other factors.





Employment
Agreements





Frank R.
Greico


On September 1, 2007,
the Company appointed Frank Greico as Chief Financial
Officer. Mr. Greico replaced
Mr. Charles R. Bearchell. The Company entered into an employment agreement
(hereinbelow, the “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 in excess of $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, 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. 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,
1/36th 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 terminatesMr. 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.





Effective
November 5, 2007, Mr. Greico assumed the position of Secretary in addition to
Chief Financial Officer.  On January 23, 2008, Mr. Greico was appointed
Chief Executive Officer in addition to his role as Chief Financial Officer and
replaced as Corporate Secretary by Sharyn G. Alcaraz. Mr. Greico was also
elected to the Board as a Director on January 23, 2008.


28


On March
13, 2008, our Board adjusted Mr. Greico’s annual base salary to $350,000 for the
additional responsibilities incumbent in his assumption of the Chief Executive
Officer role.





Philip S.
Pesin


On May 9,
2007, the Company entered into an employment agreement (the “Agreement”) with
Philip S. Pesin for Mr. Pesin’s service to the Company as Chief Executive
Officer and Chairman of the Board, under terms and conditions disclosed in the
Company’s Form 8-K filed on evendate therewith.





On
January 15, 2008, Mr. Pesin resigned from his offices as Chairman of the Board
and Chief Executive Officer.  On or about January 28, 2008, the
Company entered into a consulting agreement with Mr. Pesin.  Under the
consulting agreement, Mr. Pesin will provide to the Company general guidance
regarding strategy, products, marketing, and other issues as required. The term
of the consulting agreement is through January 28, 2009, and the consulting fees
payable to Mr. Pesin under the agreement are $20,000 per month, payable in
common stock or cash at the Company’s sole discretion.





15.
Restructuring Activities.





In
September 2007 the Company determined that the current level of operations was
not sustainable based upon the less than anticipated underlying sell through of
its products and its financial position. The Company’s management and Board
agreed to a plan of restructuring to reduce operating expenses and conserve
cash.





Concurrent
with actions taken toward the aforementioned restructuring, notice was received
on October 1, 2007 that the FDA announced its intention to take enforcement
action against products without FDA approval that contain hydrocodone. This
action was evaluated in light of the returns received by the Company for the
products affected by the May 25, 2007 FDA action notice affecting products
containing guaifenesin. In October 2007, the Company’s three largest wholesalers
announced their decision to stop carrying some of these affected products and
requested the the Company accept returns for all affected units in inventory.
For the three months ended March 31, 2008 and the three months ended March 31,
2007, we received approximately $614,000 and $0, respectively, of returns
related to products affected by the FDA actions.





Primarily
related to these factors the Company further restructured the business to reduce
operating costs and conserve cash. All intangibles were reviewed for impairment
at December 31, 2007, based upon actual product demand and the FDA actions
taken. Total restructuring and asset impairment expense amounted to $0 for the
three months ended March 31, 2008 and $0 for the three months ended March 31,
2007. As of March 31, 2008 and December 31, 2007, the balance of accrued
restructuring is $662,919 and $723,185, respectively.





The below
table summarizes the cash payments related to restructuring and asset impairment
charges for the three months ended March 31, 2008 and the three months ended
March 31, 2007.


29





Three
      months ended
              March
      31, 2008Facilities leases
            $
            28,027Employee severance
            
            32,239Total
            $
            56,462





The below table summarizes the balances of restructuring and impairment expenses accrued
but unpaid as of March 31, 2008
and December 31, 2007.





As of
              March
      31, 2008
            
            As of
              December 31, 2007Facilities leases
            $
            472,587
            $
            548,408Employee severance
            
            190,332
            
            174,777Total
            $
            662,919
            $
            723,185








16.                      Change
in Management Estimate.





There
were no changes in management estimates during the three months ended March 31,
2008.





17.                      Subsequent Events.





Lease Commitment for Georgia
Office


On April
1, 2008,
we completed a formal termination of the lease for Suite 300
for our sales and marketing facilities located at 5555 Triangle Parkway,
Norcross,
Georgia. We entered into a new lease, commencing on April 1, 2008, for Suite 350
in the same
premises, with a term of two (2) years, at a monthly base rental rate of $6,052, with an annual base rental rate escalation to $6,234.





Threatened Action from
Department of Labor


On
January 18, 2008, the U.S. Department of Labor (“DOL”) served the Company with
notice that a complaint had been filed with the DOL alleging a violation of
Title VIII of the Sarbanes-Oxley Act of 2002 and Section 806 of the Corporate
and Criminal Fraud Accountability Act.  The Company has responded to
these allegations and is currently conducting its own investigation relating to
the claims.  The Company executed a settlement agreement related to
this matter on May 1, 2008.





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





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


30


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.





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-Q, which have been prepared in accordance with accounting principles
generally accepted in the United States.





Overview





Background





We are a
specialty pharmaceutical company founded in 2005, headquartered in Camarillo,
California.  The Company is engaged in the commercialization and
licensing of pharmaceutical products.  We are building an extensive
portfolio of prescription brands targeting high growth therapeutic categories in
the respiratory, dermatology and psychiatry markets.  The Company’s
high-growth business model combines driving revenues through acquisition of
proven FDA-approved brand-name products, introduction of new brands, and
development of a strategic business development pipeline, all of which are
designed to enhance our growing direct relationships with physicians
nationwide.  The Company operates under a primarily variable cost
commission-based sales structure.  Our current product portfolio
includes 26marketed products and 5
products in development covering various therapeutic categories.





The
Company’s solution addresses the currently unfilled demand for commercialization
of late stage mid-size products with a high probability for success which are
well aligned with our current therapeutic category focus.  These
opportunities are often ignored by big pharmaceutical companies but are
accretive to our business model due to our efficient organizational structure
and relative acquisition cost. Our strategic partners recognize the benefits we
provide in time-to- commercialization through our efficient sales force
training,





We
launched a diversified group of products during 2007 in order to provide our
sales force with a sufficient product portfolio while allowing us to achieve top
line sales revenue growth.





The
Company deploys two field sales teams:  one in primary care and one in
dermatology.  We believe that the team approach allows our field sales
team Territory Managers to focus on primary care and the dermatology physicians
which are the core of our focus going forward.  Prior to December
2007, all of our field sales representatives were commission-only “territory
managers.”  In December 2007, we announced an opportunity for our
Territory Managers to achieve Senior Territory Manager (“STM”) status commencing
in February 2008.  Based upon achievement of both quantitative and
qualitative factors, the STM status represents a career path


31


of
advancement from independent contractor to full time employment status.As of March 2008,
21 of our field sales representatives had been offered and accepted employment
as STMs.  This STM opportunity has significantly improved the
Company’s ability to retain and reward its top performers as well as motivate
others to greater achievement.  Through refinement of our territory
and product alignments among the teams, we have identified opportunities for
additions to our sales force at both the Territory Manager and STM levels that
will drive incremental sales in previously uncovered or undercovered markets
with high opportunity for growth.





During
the three months ended March 31, 2008, we completed a transition to our
proprietary commercialization platform that calculates commission payouts to our
Territory Managers based upon sell through to pharmacies, and reduced the two
month lag from sale to commission payout to only one month.  This
significantly reducedthe cost of data and
commission processing costs and aligned our field sales team more effectively
with actual revenue generated in their territories.





As of
March 31, 2008, we had 136 Territory Managers plus 22 Senior Territory Managers
for a total of 158 field sales representatives nationwide.





As of
March 31, 2008, we employed 24 full-time corporate personnel.  As of
May 5, 2008, we employed 22 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 warehouses 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 of product 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.





We
estimate customer demand for our prescription products primarily through use of
third party syndicated data sources and our wholesaler distributor channel
partners which track units sold to pharmacies and prescriptions written by
health care providers and dispensed by licensed pharmacies. The data represent
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 65% - 90% 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


32


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 are listed in the table below.





Strength
            Primary
      UsesExtendryl®SR
            Rx
            RespiratoryJR
            Rx
            RespiratoryDM
            Rx
            RespiratoryPSE
            Rx
            RespiratorySyrup
            Rx
            RespiratoryChewable
            Rx
            RespiratoryGCP
            Rx
            RespiratoryPEM
            Rx
            RespiratoryLevall®12
            Rx
            RespiratoryLiquid
            Rx
            RespiratoryG
            Rx
            RespiratoryAquoral
TM
            Rx
            XerostomiaZinx
      TMCold
      Kit
            Rx
            RespiratoryCough
      Kit
            Rx
            RespiratoryAllergy
      Kit
            Rx
            RespiratoryKids
      Sneeze Kit
            Rx
            RespiratoryLozenges
            OTC
            RespiratoryAkurza
      TMCream
            Rx
            DermatologyLotion
            Rx
            DermatologyXyralid
      TMRC
      Kit
            Rx
            DermatologyLP
      Kit
            Rx
            DermatologyCream
      Kit
            Rx
            DermatologyZytopic
TM
            Rx
            DermatologyCoraz TM
            Rx
            DermatologyBrezeTM
            Rx
            DermatologyLiquaddTM
            Rx
            ADHDKeflexTM
            Rx
            Antibiotic





33


Going
Concern:




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of
business.  The Company has incurred operating losses each year since
its inception and had an accumulated deficit of $37,802,283 as of March 31,
2008.  For the three months ended March 31, 2008 the Company incurred
a net loss of $1,265,267.  These factors, among others, indicate that
the Company may be unable to continue as a going concern for a reasonable period
of time.  The Company’s ability to continue as a going concern is
contingent upon its ability to meet its liquidity requirements.  If
the Company is unable to arrange for debt or equity financing on favorable terms
or at all the Company’s ability to continue as a going concern is
uncertain.  These financial statements do not give effect to any
adjustments to the amounts and classifications of assets and liabilities which
might be necessary should the Company be unable to continue as a going
concern.




Liquidity
and Capital Resources:




At March
31, 2008, the Company’s principal sources of liquidity were cash and cash
equivalents of $57,451 and collections of accounts receivable of $911,969 and
future revenue..  The Company expects that its sources of liquidity will
not be sufficient to fund operations for the remaining fiscal year without
additional funding.  Management expects that it may be necessary to arrange
for additional equity or debt financing to meet the Company’s liquidity
requirements.  Unless our product sales are greater than management
currently forecasts or there are other changes to the business plan, the Company
will need to arrange for additional financing within the next three months to
fund operating and capital needs.  This financing could take the form of
debt or equity.  Given the Company’s historical operating results and the
amount of our existing debt, as well as the other factors, the Company may not
be able to arrange for debt or equity financing from third parties on favorable
terms or at all.




The
Company’s cash requirements may vary materially from those now planned because
of changes in the Company’s operations including the failure to achieve expected
revenues, greater than expected expenses, market conditions, the failure to
timely realize the Company’s product development and acquisition goals, and
other adverse developments. These events could have a negative impact on the
Company’s available liquidity sources during the remaining fiscal
year.





Critical Accounting Policies and Estimates





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 accounting principles generally accepted in the
United States and with applicable SEC rules and regulations. 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 affectingrevenues, 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


34


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-Q. 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 Form 10-KSB for the fiscal year ended
December 31, 2007, filed with the Securities and Exchange Commission on April
15, 2008.





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 product at any time if
it is damaged, and/or within six months of expiration or if it 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


35


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.  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.





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: (i) cost of
goods sold, including royalties; (ii) sales, marketing and trade expenses; (iii)
general and administrative expenses; and (iv) research and development. Cost of
goods sold includes the direct costs associated with materials and supplies,
royalties, warehousing and distribution. Sales, marketing and trade expenses
include salaries for sales and marketing staff, commissions, advertising and
promotional expenses, samples used by the sales force, market research and
travel expenses. We expect to continue to increase marketing and development
efforts in the future and, as a result, expect this class of expenses to
continue to increase. General and administrative expenses include salaries and
benefits for our executives, business development, human resources, finance,
information technology staffing and general operating expenses. General
operating expenses include overall corporate expenses, such as rent, supplies,
and corporate financial promotion activities. Based on our plans for future
growth, we expect our general and administrative costs to increase significantly
in the future. Research and development expenses include research into
development of proprietary patents, partnerships with third parties in
developing proprietary drug delivery technologies, development of line
extensions to our existing product lines, and activities related to regulatory
compliance for our product lines. These expenses also include salaries and
benefits, legal fees for patent reviews and scientific advisory board stipends
attributable to such development activities. Expenses in this area are likely to
increase significantly as we develop new and existing products and
technologies.





36


RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND THREE MONTHS ENDED
MARCH 31, 2007





The
following table provides a reconciliation of gross revenues to net revenues for
the unaudited, three month periods ended March 31, 2008 and 2007 for purposes of
providing additional disclosure and detail to our revenues:





Reconciliation
      of Gross to Net Revenues
            
            Three months ended
              March
      31, 2008
            
            Three months ended
              March
      31, 2007Gross revenues
            
            $
            1,450,673
            
            $
            8,899,223Less: Sales discounts
            
            
            23,137
            
            
            1,262,308Less: Sales returns reserve
            
            
            639,982
            
            
            870,890Net Revenues
            
            $
            787,554
            
            $
            6,766,025





The
following is a numerical summary of certain of our results of operations for the
three months ended March 31, 2008 and March 31, 2007:





Three months ended
              March
      31, 2008
            
            Three months ended
              March
      31, 2007Net revenues
            
            $
            787,554
            
            $
            6,766,025Cost of goods sold
            
            
            386,695
            
            
            2,149,451Gross profit
            
            
            400,859
            
            
            4,616,575Operating expenses
            
            
            1,699,113
            
            
            4,506,729Income (loss) from operations
            
            
            (1,298,254)
            
            
            109,845Other
      income (expense)
            
            
            32,987
            
            
            (1,086,255)Net loss
            
            $
            (1,265,267)
            
            $
            (976,410)








The
following analysis and discussion pertains to our results of operations for the
three months ended March 31, 2008, compared to our results of operations for the
three months ended March 31, 2007.





NetRevenue. Our net revenues for
the three months ended March 31, 2008 decreased $5,978,471 or (88.4%), to
$787,554, as compared to $6,766,025 for the three months ended March 31, 2007.
As noted above, this significant decrease in our net revenues for the three
months ended March 31, 2008 when compared to March 31, 2007, was primarily due
to a decrease in gross revenues (which decreased from $8,899,223 for the three
months ended March 31, 2007, to $1,450,673 for the three months ended March 31,
2008), and due to an increase in sales discounts and sales returns reserve as a
percentage of gross revenue from 24% to 46%.  During the three months
ended March 31, 2008, we actively sold and promoted the following
product lines,
AquoralTM, ZinxTM, AkurzaTM, XyralidTM, Extendryl®,
Levall®, BrezeTM
and KeflexTM as compared to the three months ended March 31, 2007 when we
actively sold and marketed the AquoralTM , Extendryl® and
Levall® product
lines. During the quarter ended March 31, 2008, we
recorded an addition to the product returns reserve of $639,982 and
charged approximately $747,000 of actual returns against the
reserve.


37








Promoted Products - Overview


Extendryl®SRJRDMPSESyrup (k)ChewableLevall®12 (k)LiquidG (l)AquoralTM (b)ZinxTMCold Kit (c) (j)Cough Kit (c) (j)Allergy Kit (c) (j)Kids Sneeze Kit (c) (j)Akurza TMCream (d) (h)Lotion (d) (h)Xyralid TMRC Kit (e) (i)LP Kit (e) (j)Cream Kit (e)ZytopicTM (f)CorazTM (g)BrezeTM(m)KeflexTM(n)





(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


38




(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.





(m)
            Breze
      was launched to wholesalers in March 2008 and will be promoted to
      physicians and pharmacies in the second quarter of fiscal year
      2008.





(n)
            Keflex
      co-promotion began in late February
2008.





CostofGoodsSold. Cost of goods, which
includes materials, royalties, and distribution costs for the three months ended
March 31, 2008 decreased $1,762,756, or 82.0%, to $386,695, as compared to
$2,149,451 for the three months ended March 31, 2007. This decrease in cost of
goods sold was a result of decreased sales volume to the wholesalers, the higher
sales returns reserve as a percent of gross revenue, and lower distribution
costs during the current quarter.





Sales,MarketingandTradeExpenses. Sales, marketing
and trade expenses for the three months ended March 31, 2008 decreased $990,459,
or 56.4%, to $764,600, as compared to $1,755,059 for the three months ended
March 31, 2007. The decreased sales, marketing and trade expenses were primarily
related to reduced corporate personnel and their related salary, benefits, and
non-cash stock option expense.





We
incurred $126,384 of sales force commission expense during the three months
ended March 31, 2008. We anticipate that the commission expense will continue to
increase as we expand our nationwide presence.





GeneralandAdministrativeExpenses. General and administrative
expenses for the three months ended March 31, 2008 decreased $1,284,952, or
60.3%, to $844,429, as compared to $2,129,381 for the three months ended March
31, 2007. Decreased general and administrative expenses were primarily related
to reduced corporate personnel and their related salary, benefits, non-cash
stock option expense.





ResearchandDevelopmentExpenses. Research and development
expenses decreased $532,204, or 85.5%, to $90,084 for the three months ended
March 31, 2008, as compared to $622,288 for the three months ended March 31,
2007. This decrease was primarily related to reduced research and development
personnel and their related salary, benefits, non-cash stock option
expense.





RestructuringCharges. In September
2007 the Company determined that the current level of operations was not
sustainable based upon the less than anticipated underlying sell through of its
products and balance sheet.  The Company’s management Board agreed to a
plan of restructuring to reduce operating expenses and conserve
cash.


39


Concurrent
with actions taken toward the aforementioned restructuring, notice was received
on October 1, 2007 that the FDA announced its intention to take enforcement
action against products without FDA approval that contain
hydrocodone.   This action was evaluated in light of the returns
received by the Company for the products affected by the May 25, 2007 FDA action
affecting products containing guaifenesin.  During October 2007, the
Company’s three largest wholesalers announced their decision to stop carrying
some of these affected products and requested that the Company accept returns
for all units in inventory.  For the three months ended March
31, 2008 and the three months ended March 31,
2007, we received approximately $614,000 and $0, respectively,
of returns related to products affected by the FDA actions. .





Primarily
related to these factors the Company further restructured the business to reduce
operating costs and conserve cash. All intangibles were reviewed for impairment
at December 31, 2007 based upon actual product demand and the FDA actions
taken.  During the three months ended March 31, 2008 and 2007, the
Company did not incur any restructuring expenses.  During the three
months ended March 31, 2008 and 2007 the Company paid $60,266 and $0 of accrued
restructuring expenses.





Interest Expense. Interest
expense decreased $886,006 to $8,475, 99% for the three months ended March
31, 2008, as compared to $894,481
for the three months ended March 31, 2007. The
decreased
interest expense incurred during the three months ended
March 31, 2008 is primarily related to the amortization of
discount on notes payable outstanding which were paid off if 2007. The
Company incurred no
interest expense incurred during the three months ended
March 31, 2007.





OtherIncome (Expense). Other income
increased $233,206 or 89% to income of $42,462
for the three months ended March
31, 2008, as compared to other expense of $191,744
for the three months ended March 31, 2007. The
increase in other income for the three months ended March 31, 2008
is primarily attributed to income from derivative liabilities
and, to a lesser degree,
decreased early payment discounts based on
decreased sales volume.





Derivative
Liability.  The Company incurred derivative liability income
during the three months ended March 31, 2008 of $62,353 compared to $0 for the
three months ended March 31, 2007, an increase of $62,353 or
100%.  The components of the gain on derivative liability for the
three months ended March 31, 2008 and 2007 was $3,385 and $0 related to the JMJ
Note conversion feature and $58,968 and $0 related to warrants issued by the
Company, respectively.





Net Loss.  For the
three months ended March 31, 2008, the Company incurred a net loss of
$1,265,267, compared to a loss of $976,410 for the three months ended March 31,
2007, an increase of $288,857 or 29.6%.  As noted above, our increased
net loss is primarily a result decreased gross revenues and the increase in our
sales return reserve as a percentage of revenues, which decreased our net
revenue, partially offset by decreases  in our operating expenses for
the three months ended March 31, 2008.


40





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 March 31, 2008, we had cash and
cash equivalents on hand of approximately $57,451, a working capital position of
negative $9,399,032 and no long-term debt. Exclusive of the sales returns
reserve, our working capital position was a negative $5,476,996.





Related Party Notes
Payable





Prospector
Capital


On
February 13, 2008, the Company issued to Prospector Capital Partners, LLC, a
Delaware limited liability company (“Prospector”) a Senior Secured Promissory
Note (the “Note”) in the principal amount of $750,000.  The Note is
due and payable on January 31, 2009.  The Note bears no
interest.  As consideration for the Note, the Company entered into a
Royalty Participation Agreement (the “Royalty Agreement”) with
Lender.





Under the
Royalty Agreement, the Company shall make royalty payments to Prospector of 7.5%
of “net sales,” as defined in the Royalty Agreement, on two
products:  (1) a dextroamphetamine sulfate oral solution subject of
that certain License Agreement between Outlook Pharmaceuticals, Inc. and the
Company, dated November 28, 2007, and (2) an acetaminophen/codeine product
subject of that certain Manufacturing and Supply Agreement between Mikart, Inc.
and the Company, dated October 29, 2007.  The Company is obligated to
make such royalty payments to Prospector until aggregate royalty payments equal
$6,000,000.





As
additional consideration for the Note, the Company issued to Prospector a
30-month warrant to acquire up to 500,000 shares of the Company’s common stock
at an exercise price of $0.039 per share.





To secure
the Note, Prospector has been granted a first priority interest in all of the
assets of the Company pursuant to the terms and conditions of a Security
Agreement dated February 13, 2008. The Note allows prepayment at any time to
remove the security interest.  Prospector has agreed to subordinate
its security interests in the event the Company enters into a receivables line
of credit of up to $1.5M or a term loan of up to $1.0M.





The
complete terms and conditions of the foregoing transaction are memorialized by
the following documents:  Senior Secured Promissory Note, Security
Agreement, Auriga Laboratories, Inc. Common Stock Warrant, Senior Secured Note
and Warrant Purchase Agreement, and Royalty Participation
Agreement.





The
Company received proceeds of $675,000 on February 13, 2008 from the Prospector
Note.  The difference of $75,000 between proceeds received was
recorded as a debt discount.  In addition, warrant to acquire up to
500,000 shares of the Company’s common stock at an exercise price of $0.039 per
share was valued at $19,500 at inception and was recorded as a debt
discount.  The warrant is considered a derivative liability as
well.  Total discount at inception attributable to this debt was
$94,500.


41


During
the three months ended March 31, 2008, the Company recorded amortization of debt
discount of $3,740, as interest expense related to Prospector
Note.  During the three months ended March 31, 2008, no payments of
principal or interest were made on this note.  As of March 31, 2008,
the outstanding balance of the note was $750,000, net of discounts of
$90,731.





SFP Note


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





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 a
more detailed discussion on this matter, please refer to the “Risk Factors –
Risks Related to our Business” and “Transactions with Related Persons” included
in our Form 10-KSB for the fiscal year ended December 31, 2007, filed with the
Securities and Exchange Commission on April 15, 2008.





LFC Note


On August
29, 2006, we issued to Levall Finance Corp. LLC (“LFC”) a senior secured
promissory note (the “LFC Note”) in the principal amount of $1.5 million. The
LFC Note was amended on September 28, 2006 and again on December 8, 2006. The
LFC Note was 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 1,500,000 fully paid and non-assessable shares of our
common stock at an exercise price of $1.92. The LFC Note was secured by a
first-priority perfected security interest in all of our assets. The first
priority security interest provided by us contained terms that were pro-rata to
the senior secured note, dated September 28, 2006, issued by us to Aquoral
Finance Corp. LLC (“AFC”) and was senior in right of payment to any and all of
our other indebtedness. We were permitted to prepay all or any portion of the
LFC Note at any time without premium or penalty. As a condition to the foregoing
transaction, we and SFP were required to enter into a subordination agreement
with LFC pursuant to which SFP agreed that all amounts owed to it by us would be
subordinated to amounts owed to LFC. SFP is the managing member of LFC. Mr.
Pesin, the Company’s former Chief Executive Officer and Chairman of the Board,
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 our
affiliates.





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 a
more detailed discussion on this matter, please refer to the “Risk Factors –
Risks Related to our Business” and “Transactions with Related Persons” included
in our Form 10-KSB for the fiscal year ended December 31, 2007, filed with the
Securities and Exchange Commission on April 15, 2008.


42


AFC Note


On
September 28, 2006, we 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. All amounts advanced under the AFC Note were due and
payable in full on the earlier to occur of: (i) theclosing
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 required us to make quarterly payments to AFC
commencing with the quarter ending March 31, 2007, equal to 0.5% of the gross
sales by us (less customary deductions) of our AquoralTM product during the
preceding quarter for every $125,000 of outstanding funds advanced under the AFC
Note. This payment obligation continues in perpetuity. The AFC Note was secured
by a first-priority security interest in all of our assets, and was senior in
right of payment to any and all of our other indebtedness, except that the AFC
Note contained rights and obligations that are pro rata to the LFC Note. As
additional consideration, we agreed that, concurrent with each advance made by
AFC under the AFC Note, we would issue to AFC a five-year warrant to acquire one
share of our common stock, at an exercise price of $1.50 per share, for each one
dollar so advanced. Each warrant includes “piggyback” registration rights with
respect to shares of common stock acquired upon exercise of such warrant. As of
December 31, 2006, the Company issued warrants to AFC to acquire up to 968,750
shares of common stock. SFP is the managing member of AFC. Mr. Pesin, the
Company’s former Chief Executive Officer and Chairman of the Board, 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.





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





For a
more detailed discussion on this matter, please refer to the “Risk Factors –
Risks Related to our Business” and “transactions with Related Persons” included
in our Form 10-KSB for the fiscal year ended December 31, 2007, filed with the
Securities and Exchange Commission on April 15, 2008.





Equity
Financing





Dutchess Private Equities
Fund, Ltd.


On
December 17, 2007, the Company entered into an Investment Agreement with
Dutchess Private Equities Fund, Ltd. (“Dutchess”). Pursuant to this Agreement,
Dutchess committed to purchase up to $2,500,000 of our common stock over the
course of thirty-six (36) months. The amount we are entitled to request from
each purchase (“Puts”) is equal to, at our election, up to either (i) $250,000
or (ii) 200% of the average daily volume (U.S. market only) of the common stock
for the ten (10) trading days prior to the applicable Put Notice Date,
multiplied by the average of the three (3) daily closing bid prices immediately
preceding the put date. The put date shall be the date that Dutchess receives a
put notice of a draw down by us. The purchase price shall be set at ninety-three
percent (93%) of the lowest closing best bid price of our common stock during
the pricing period. The pricing period shall be the five (5) consecutive trading
days immediately after the put notice date. There are put restrictions applied
on days between the put date and the closing date with respect to that
particular put. During this time, we shall not be entitled to deliver another
put notice.





Pursuant
to a Registration Rights Agreement entered into consecutively with the
Investment Agreement, we filed a registration statement with the Securities and
Exchange Commission (“SEC”) covering 15,000,000 shares of the common stock
underlying the Investment Agreement within 15 days after the closing date. We
have an ongoing obligation to register additional shares of our common stock as
necessary underlying the draw downs.


43


Item 3. Quantitative and Qualitative Disclosures About Market
Risk





We are
not required to furnish the information required by this item pursuant to
amendment to 17 CFR Part 210, §229.305, adopted by the Securities and Exchange
Commission on November 15, 2007.





Item
4. 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-Q. 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 months ended March 31, 2008, 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
4A(T). Controls and Procedures.





As of the
end of the first quarter of fiscal 2008, the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and procedures, as such term
is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act
of 1934, as amended (the “Exchange Act”). Based on that evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of March 31, 2008
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms due to the material weakness identified as part of our annual report on
internal control over financial reporting as disclosed in the Annual Report on
Form 10-K for the 12 months ended December 31, 2007 and summarized
below.





As
discussed in our Annual Report on Form 10-KSSB for the year ended December 31,
2007, management’s assessment determined that several of the Company’s
procedures require additional documentation; sufficient testing was not
conducted and further segregation of duties needs to be put in
place.  It is our belief that those control procedures are being
performed; however documentation of their execution is not yet
available.  We are implementing additional documentation procedures in
order to address this weakness.  Our management also determined this
deficiency as reported in our Annual Report on Form 10-KSB for the year ended
December 31, 2007 continued through the period covered by this Form 10-Q. Our
Annual Report on Form 10-KSB as of December 31, 2007 did not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in the Annual Report on Form 10-KSB
as of December 31, 2007.


44


Other
than as described above, there have not been any other changes in our internal
control over financial reporting as of the quarter ended March 31, 2008 that has
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


45


PART
II – OTHER INFORMATION





Item
1.                 Legal
Proceedings.





Pending
Litigation





Gardena Hospital,
L.P.   On February 2, 2008, Gardena Hospital, L.P., et. al., filed a complaint
against the Company in the Los Angeles County Superior Court, State of
California claiming breach of Lease Agreement and seeking damages of
approximately $500,000.  The complaint alleges breach of a lease
relating to the former space for our executive offices located in West Los
Angeles, California.  Settlement negotiations are currently being
conducted. Although we believe that Auriga has meritorious defenses to this
action, we are not presently able to reasonably estimate potential losses, if
any, related to this lawsuit.





Laboratoires Carilène
S.A.S.   On October 29, 2007, Laboratoires Carilène S.A.S.
filed a complaint against the Company in the United States District Court for
the Southern District of New York, claiming breach of License Agreement and
seeks damages of $1,800,000.  In its answer, the Company has denied
all material allegations in the complaint and has asserted counter-claims
against Carilene for breach of such License Agreement.  We are
currently engaged in settlement negotiations.  If a settlement is
reached the action will be dismissed.  If not, the action will
proceed, with potential liability and legal costs for the Company. Any large
award against the Company will have a material adverse effect on the Company’s
financial position and its business.





Threatened
Litigation





Various
Claims.    The Company, a current officer/director,
and a former officer/director are involved in several threatened legal
proceedings including claims relating to breach of employment agreement,
retaliatory termination of employment (whistleblower) and sexual
harassment.  These claims are fairly recent, and we are currently
investigating each and every one of them.  Although we believe that
Auriga and the individual officer/directors named have meritorious defenses to
the claims made in each of the threatened legal proceedings and intend to
contest each claim vigorously, an adverse resolution of any of such claims may
have a material adverse effect on our financial position and on results of
operation in the period in which the claims are resolved.  We are not
presently able to reasonably estimate potential losses, if any, related to the
claims.





Threatened Regulatory
Action





Department of
Labor.On January 18, 2008, the U.S. Department of Labor
(“DOL”) served the Company with notice that a claim had been filed with the DOL
alleging a violation of Title VIII of the Sarbanes-Oxley Act of 2002 and Section
806 of the Corporate and Criminal Fraud Accountability Act.  The
Company responded to these allegations by conducting its own investigation
relating to the claims.  The Company executed a settlement agreement
related to this matter on May 1, 2008.





Although
the results of litigation, pending or threatened, and regulatory investigations
cannot be predicted with certainty, regardless of the outcome, such legal
actions can have a material adverse impact on the Company because of defense
costs, diversion of management resources and other factors.


46





Item
1A. Risk Factors.





There
have been no material changes in risk factors as previously disclosed in our
Form 10-KSB filed with the Securities and Exchange Commission on April 15,
2008.





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





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 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 vendors are sophisticated investors or have a pre-existing relationship
with the Company.





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 Agreements
with George Andrew Eby, III





Effective
March 20, 2008, the Company terminated its License Agreement, Domain Name
Agreement and Consulting Agreement with George Andrew Eby, III
(“Eby”).





For
detailed information on this matter, please refer to Notes to Consolidated
Financial Statements, Note 13, “Commitments and Contingencies” – “Product License and
Marketing Agreement Commitments,” included in this Form 10-Q.





Departure and Appointment of
Directors and Principal Officers





Effective
January 15, 2008, Philip S. Pesin resigned from his positions as Chief Executive
Office and Chairman of the Board. On January 23, 2008, the Board named Frank R.
Greico Chief Executive Officer in addition to his office as Chief Financial
Officer. Mr. Greico was also appointed a Director. Mr. Greico relinquished his
office as Corporate Secretary, the Board naming Sharyn G. Alcaraz to the
office.





On
January 23, 2008, the Board named Elliot M. Maza Chairman to replace Mr. Pesin
in that role.


47


Consulting Agreement with
Philip S. Pesin





Effective
January 15, 2008, Mr. Pesin resigned from his offices as Chief Executive Officer
and Chairman of the Board.  Effective January 28, 2008, the Company
entered into a consulting letter agreement with Mr. Pesin.





For
detailed information on this matter, please refer to Notes to Consolidated
Financial Statements, Note 12, “Related Party Transactions,” included in this
Form 10-Q








48


ITEM
6                      Exhibits





(a)           Exhibits





Exhibit
              Number
            
            Description of Exhibit10.1
            
            Standard
      Office Lease entered into between Auriga Laboratories, Inc. and Camarillo
      Office Partners I LLC, dated December 14, 2007, effective February 15,
      2008(1)10.2
            
            Investment
      Agreement entered into between Auriga Laboratories, Inc. and Dutchess
      Private Equities Fund, Ltd., dated December 17, 2007, effective February
      11, 2008. (2)10.3
            
            Registration
      Rights Agreement entered into between Auriga Laboratories, Inc. and
      Dutchess Private Equities Fund, Ltd., dated December 17,
      2007. (3)10.4
            
            Rescission
      Agreement entered into between Auriga Laboratories, Inc. and Stesso
      Pharmaceuticals, LLC, dated January 23, 2008. (4)10.5
            
            Convertible
      Promissory Note $240,000 Plus Interest Due & Payable, issued to JMJ
      Financial by Auriga Laboratories, Inc., executed January 31,
      2008. (5)10.6
            
            Convertible
      Promissory Note $1,800,000 Plus Interest Due & Payable, issued to JMJ
      Financial by Auriga Laboratories, Inc., executed January 31,
      2008. (6)10.7
            
            Secured
      & Collateralized Promissory Note $1,800,000 Plus Interest Due &
      Payable, issued to Auriga Laboratories, Inc. by JMJ Financial, executed
      January 31, 2008. (7)10.8
            
            Senior
      Secured Promissory Note, issued to Prospector Capital Partners, LLC by
      Auriga Laboratories, Inc., dated February 13,
    2008. (8)10.9
            
            Security
      Agreement entered into between Auriga Laboratories, Inc. and Prospector
      Capital Partners, LLC, dated February 13,
2008. (9)10.10
            
            Auriga
      Laboratories, Inc. Common Stock Warrant Issued to Prospector Capital
      Partners, LLC, dated February 13, 2008. (10)10.11
            
            Senior
      Secured Note and Warrant Purchase Agreement, entered into between Auriga
      Laboratories, Inc. and Prospector Capital Partners, LLC, dated February
      13, 2008. (11)10.12
            
            Royalty
      Participation Agreement entered into between Auriga Laboratories, Inc. and
      Prospector Capital Partners, LLC, dated February 13,
      2008. (12)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 10.3 of the Registrant's Current Report on
      Form 8-K, filed with the Securities and Exchange Commission on December
      19, 2007, reporting an event dated December 14, 2007.(2)
            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 December
      19, 2007, reporting an event dated December 14, 2007.(3)
            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 December
      19, 2007, reporting an event dated December 14, 2007.(4)
            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 January 14,
      2008, reporting an event dated January 24, 2008.(5)
            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 February
      13, 2008, reporting an event dated January 31, 2008.(6)
            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 February
      13, 2008, reporting an event dated January 31, 2008.(7)
            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 February
      13, 2008, reporting an event dated January 31, 2008.(8)
            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 February
      19, 2008, reporting an event dated February 13, 2008.(9)
            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 February
      19, 2008, reporting an event dated February 13, 2008.(10)
            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 February
      19, 2008, reporting an event dated February 13, 2008.(11)
            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 February
      19, 2008, reporting an event dated February 13, 2008.(12)
            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 February
      19, 2008, reporting an event dated February 13, 2008.











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.Dated:                      May
      19, 2008
            /s/ Frank R. GreicoBy:           Frank
      R. GreicoIts:Chief
      Executive Officer and Chief Financial Officer (Principal Accounting and
      Financial  Officer)











49