UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-KSB**





[X]
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the fiscal year endedDecember
                31, 2005[
                 ]
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACTFor
                the transition period from _________ to ________Commission
                file number000-33165





**Assured
                Pharmacy, Inc.**(Name
                of small business issuer in its
                charter)




Nevada
            98-0233878(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)17935
                Sky Park Circle, Suite F, Irvine, California
            92614(Address
                of principal executive offices)
            (Zip
                Code)Issuer’s
                telephone number:949-222-9971




Securities
                registered under Section 12(b) of the Exchange Act:Title
                of each class
            Name
                of each exchange on which registeredNone
            Not
                ApplicableSecurities
                registered under Section 12(g) of the Exchange Act:Common
                Stock, par value $0.001(Title
                of class)




Check
      whether the Issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act [ ]




Check
      whether the Issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act during the past 12 months (or for such
      shorter period that the registrant was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90 days. Yes [X]
      No [
      ]





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not
      contained in this form, and no disclosure will be contained, to the best of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB [ ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes [ ] No [X]





State
      issuer’s revenue for its most recent fiscal year. $3,836,737





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the average bid and asked price of
      such
      common equity, as of a specified date within the past 60 days. $21,726,962
      as of
      March 13, 2006.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date. 44,665,740 Common
      Shares as of March 16, 2006





Transitional
      Small Business Disclosure Format (Check One): Yes: __; No X




Table
          of Contents




**TABLE
      OF CONTENTS**








PagePART
                IItem
                1.
            Description
                of Business
            3Item
                2.
            Description
                of Property
            15Item
                3.
            Legal
                Proceedings
            16Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            18PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters
            20Item
                6.
            Management’s
                Discussion and Analysis or Plan of
                Operation
            24Item
                7.
            Financial
                Statements
            36Item
                8.
            Changes
                In and Disagreements With Accountants on Accounting and
                Financial Disclosure
            37Item
                8A.
            Controls
                and Procedures
            37Item
                8B.
            Other
                Information
            38PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons;
                Compliance With Section 16(a) of the Exchange Act
            38Item
                10.
            Executive
                Compensation
            41Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            43Item
                12.
            Certain
                Relationships and Related
                Transactions
            44Item
                13.
            Exhibits
            47Item
                14.
            Principal
                Accountant Fees and Services
            47





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            of Contents





**** **PART
      I**


**Item
      1. Description of Business**




**Business
      of Issuer**





We
      were
      organized as a Nevada corporation on October 22, 1999 under the name
      Surforama.com, Inc. and previously operated under the name eRXSYS, Inc. We
      changed our name to Assured Pharmacy, Inc. in October 2005. Since May 2003,
      we
      have been engaged in the business of establishing and operating pharmacies
      that
      specialize in dispensing highly regulated pain medication. We offer physicians
      the ability to reduce or eliminate the need for paper prescriptions by accessing
      our web-based technology to transmit prescriptions to our pharmacies from a
      wireless hand-held device or desktop computer. We do not provide physicians
      with
      any equipment because our technology is web-based.  We
      do
      provide physicians with training on how to utilize our web portal to
      electronically transmit prescriptions to our pharmacies. Physicians are not
      charged any fees or costs for transmitting prescriptions to our pharmacies
      or
      for any training they may receive on how to utilize our web portal. We generate
      revenue from the sale of prescription drugs.





We
      typically will not keep in inventory non-prescription drugs or health and beauty
      related products commonly available at retail pharmacies. The focus of our
      business is on dispensing highly regulated pain medication to patients for
      chronic pain management. We seek to establish and maintain relationships with
      physicians whose practice necessitates that they frequently prescribe medication
      to manage their patients’ chronic pain. We do not intend to sell
      over-the-counter medication or fill prescriptions unrelated to chronic pain
      management at our pharmacies. We will fill prescriptions that address any side
      effects experienced by individuals who have health conditions that require
      treatment for chronic pain.





Subsequent
      to the reporting period, we partnered with AnazaoHeath Corporation, a specialty
      compounding pharmacy, which will enable physicians to prescribe custom
      compounded drugs and have those prescriptions filled at our pharmacies. Pharmaceutical
      compounding is the combining, mixing, or altering of ingredients to create
      a
      customized medication for an individual patient in response to a licensed
      physician’s prescription. Physicians often prescribe compounded medications for
      reasons that include situations where there is not presently a commercially
      available drug to treat the unique health condition of an individual patient
      or
      to combine several medications the patient is taking to increase compliance. Custom
      compounded drugs can offer additional means of treating
      chronic pain. Our ability to fill prescriptions for custom
      compounded drugs will enable us to better service patients who require treatment
      for chronic pain management.




The
      majority of our business is derived from physicians who send prescriptions
      directly to our store electronically. We have limited “walk-in” prescriptions.
      Within the previous 90 days, 169 physicians have transmitted prescriptions
      to
      our pharmacies through our web portal. Currently, we generate reoccurring
      business from approximately 50 physicians and 22 of those physicians account
      for
      approximately 80% of all prescriptions filled at our pharmacies. The number
      of
      physicians that send reoccurring business to our pharmacies has increased from
      December 2004 when at that time we generated reoccurring business from
      approximately 41 physicians, but at





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that
      time
      10 physicians accounted for approximately 81% of all prescriptions.





On
      an
      ongoing basis, our management is evaluating our operations and seeking
      additional opportunities to expand our business. Our management determined
      that
      we could expand our business through developing arrangements with third party
      health plan providers to accept traditional co-payments and fill prescriptions
      for their members who rely upon overnight courier for delivery of their
      prescription. Our management believes that such arrangements will broaden our
      consumer base and enable us to access a particular niche of consumer that
      receives their prescriptions exclusively via courier as opposed to patronizing
      traditional retail pharmacy locations.





On
      January 3, 2006, we incorporated Assured Pharmacy Plus, Corp. (“Plus Corp.”) as
      a wholly-owned subsidiary to develop this opportunity. Subsequent to the
      reporting period, we entered into an arrangement with Affiliated Healthcare
      Administrators (“AHA”), a third party health plan administrator, to provide
      prescription service to their members. Under the arrangement with AHA, our
      pharmacies will provide prescription service to AHA members upon receipt of
      a
      traditional co-payment. Thereafter, we will process the prescription claim
      with
      AHA and receive the remaining balances due for their member’s prescription
      purchases. Plus Corp. will process claims relating to the prescription filled
      at
      our pharmacies for AHA members in exchange for an administration fee. Our
      management is contemplating expanding the operations of Plus Corp. by licensing
      the entity as a pharmacy that exclusively focuses on servicing the niche of
      consumers that are members of third party health plan administrators and receive
      their prescriptions exclusively via courier.





Also
      on
      January 3, 2006, we incorporated Assured Pharmacy DME, Corp. (“DME”) as a
      wholly-owned subsidiary for the purpose of facilitating and making available
      specialized medical equipment to our consumers. Our consumers who require
      treatment for chronic pain commonly require specialized medical equipment and/or
      rehabilitative equipment. As a result, our management has sought to develop
      referral relationships with suppliers of medical equipment in exchange for
      a
      referral fee. Subsequent to the reporting period, DME entered into an agreement
      with a supplier of specialized medical equipment to receive a referral fee
      based
      on the revenues generated by the supplier from the referrals of DME. In an
      attempt to strengthen this relationship and develop other referral
      relationships, DME intends to disseminate information to our pharmacies’
consumers making them aware of suppliers that can provide medical equipment
      for
      their specific needs.





***Safescript
      Pharmacies, Inc. (formerly known as RTIN Holdings, Inc.)
      License***





Our
      former CEO, Mr. David Parker, founded RxSystems, Inc. (“RxSystems”) in March
      2002. In March 2002, RxSystems acquired from Safescript Pharmacies, Inc. (the
      “Licensor”) the exclusive licensing rights to establish and operate pharmacies
      under the name “Safescript Pharmacies” throughout California, Oregon, Washington
      and Alaska. In May 2003, RxSystems assigned to us all of their rights under
      this
      exclusive license (the “License”). In exchange, we agreed to indemnify RxSystems
      for any claims with respect to the License against RxSystems in any amount
      now
      or in the future. Subsequent to this assignment, RxSystems, Inc. filed articles
      of dissolution with the Nevada Secretary of State. We also agreed to reimburse
      the former CEO





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$370,000
      for personal funds advanced to the Licensor to secure the License. These funds
      plus 5% interest per annum were due and payable in full to Mr. Parker on
      December 31, 2007. In a termination and settlement agreement entered into with
      Mr. Parker on February 1, 2005, Mr. Parker agreed to accept $10,000 cash,
      494,000 shares of our common stock, and warrants to purchase 1,300,000 shares
      of
      our common stock and release and discharge us from all liability associated
      with
      this debt.





At
      the
      time of the assignment we assumed a note payable to the Licensor of $3,176,615
      with monthly payments of $25,000 through December 1, 2004, with the remaining
      principal and accrued interest due on December 31, 2004. On June 30, 2003,
      the
      Licensor agreed to convert $2,000,000 of the note payable into 100,000 shares
      of
      convertible preferred stock which was then converted into 4,444,444 shares
      of
      our restricted common stock with an estimated fair value of $1,393,000. Due
      to
      the conversion of all of our issued and outstanding preferred shares, there
      are
      currently no preferred shares issued or outstanding. We remained obligated
      to
      make payments of $25,000 per month through December 1, 2004, with the remaining
      principal and interest due on December 31, 2004. As of June 30, 2005, monthly
      installments of $25,000 for the note payable to the Licensor were seventeen
      months in arrears and the last monthly installment was paid in January 2004.
      As
      of June 30, 2005, the current balance of the note payable to the Licensor was
      approximately $1,013,000.





The
      Licensor failed to provide us with essential services as set forth in the
      license agreement and this has forced us to terminate our use of all technology
      granted by the Licensor. On March 17, 2004, we filed a lawsuit in Nevada State
      Court against the Licensor seeking damages, declaratory relief, to rescind
      the
      License and to recover the consideration paid. On March 19, 2004, the Licensor
      filed for Chapter 11 bankruptcy protection. The litigation in Nevada State
      Court
      was stayed as a result of the Licensor filing for bankruptcy. We refiled
      substantially the same claim as an adversary proceeding in the Licensor’s
      bankruptcy case in the U.S. Bankruptcy court located in Tyler, Texas. In July
      2004, this case was transferred to the U.S. District Court for the Eastern
      District of Texas.




In
      February 2004, the Licensor announced that it had been notified that the
      Securities and Exchange Commission (the “SEC”) may commence an enforcement
      action against the Licensor and certain executive officers of the Licensor
      for
      alleged violation of the Securities Act of 1933, as amended (the “Securities
      Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
      On October 5, 2004, the SEC announced that it filed a civil action in the United
      States District Court for the Eastern District of Texas against the Licensor
      and
      its former officers and directors.





As
      of the
      reporting period ended March 31, 2004, management determined that the License
      was 100% impaired based on (a) the uncertainty of the Licensor’s ability to
      continue as a going concern, which creates substantial doubt about the
      Licensor’s ability to continue to support their e-prescribing technology,
      (b) our dispute with the Licensor, and (c) our implementation of other
      technologies at our first two pharmacies.





On
      June
      30, 2005, the United States Bankruptcy Court for the Eastern District of Texas
      approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
      between the
      Licensor





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and
      us.
      Under the terms of the Settlement Agreement, the
      Licensor retained
      100,000 shares of our common stock and returned the remaining 4,344,444 shares
      of common stock for cancellation. In addition, we issued to the Licensor 500,000
      additional shares of our common stock and agreed to dismiss the lawsuit pending
      in the U.S. District Court for the Eastern District of Texas located in with
      prejudice. The Settlement Agreement contained a mutual release which resulted
      in the
      Licensor releasing us from any liability with respect to the note payable to the
      Licensor in the
      amount of approximately $1,013,000.





On
      July
      11, 2005, a creditor of Safescript filed a motion with the District Court for
      reconsideration of its approval of the Settlement Agreement. On October 14,
      2005, the District Court denied the creditor’s motion. The creditor appealed the
      District Court’s approval of the Settlement Agreement. Due to a settlement
      between the Licensor and the creditor, the appeal was withdrawn finalizing
      our
      Settlement Agreement with the Licensor.





***License
      Agreement with Network Technology, Inc. ("RxNT")***





As
      a
      result of Safescript Pharmacies, Inc.’s failure to provide us with essential
      services as contracted, we entered into a technology license agreement
      (“Technology License”) with Network Technology, Inc. (“RxNT”) on March 15, 2004.
      The Technology License grants us the right to use RxNT’s e-prescribing
      technology under the brand name “Assured Script.” Upon execution of the
      Technology License agreement, we paid RxNT a licensing fee of $100,000 and
      are
      also responsible for paying RxNT a royalty equal to twenty five percent (25%)
      of
      the gross profit from sales of the “Assured Script” product, which refers to the
      licensed products and technology set forth in the Technology License and not
      prescription drug sales. Given that we are in the business of owning and
      operating pharmacies, management does not anticipate that we would make any
      sales of the “Assured Script” product resulting in a royalty payment to
      RxNT.





***Agreement
      with TPG Partners, L.L.C.***





On
      April
      24, 2003, we entered into an agreement with TPG Partners, L.L.C. (“TPG”) for the
      purpose of funding the establishment and operations of pharmacies. Under this
      agreement, TPG holds the right to fund on a joint venture basis fifty pharmacies
      that we establish. In exchange for contributing financing of $230,000 per
      pharmacy location, TPG will acquire a 49% ownership interest in each pharmacy
      established under this agreement and we will own the remaining 51%. Under the
      terms of the agreement with TPG, our contribution to establish pharmacies
      primarily consisted of the right to utilize our intellectual property rights
      and
      to provide sales and marketing services.





In
      June
      2003, Safescript of California, Inc. was incorporated to own and operate
      pharmacies that the parties may jointly establish under the agreement. In
      accordance with the terms of the agreement with TPG, we own 51% of Safescript
      and TPG owns the remaining 49%. Effective September 8, 2004, Safescript of
      California, Inc. filed amended articles of incorporation and changed its name
      to
      Assured Pharmacies, Inc. (“API”).





TPG
      has
      advanced a total of $448,000 for the establishment of our first pharmacy located
      in Santa Ana, California and our second pharmacy located in Riverside,
      California. No additional





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funds
      have been received from TPG since 2003. TPG is obligated to contribute an
      additional $12,000 to satisfy their full capital contribution. TPG is also
      obligated to contribute their proportionate share of the start-up costs in
      excess of their initial capital contribution of $230,000 per pharmacy. The
      parties’ agreement defined start-up costs as any costs associated with the
      opening of any open pharmacy location that accrue within ninety days following
      the opening of that particular pharmacy. TPG is obligated to contribute an
      additional $40,816 to satisfy its proportionate share of the start-up costs
      in
      excess of their initial capital contribution. Currently, only these two
      pharmacies are operated under the agreement with TPG.





***Agreement
      with TAPG, L.L.C.***





In
      February 2004, we entered into a joint venture agreement (the “Agreement”) with
      TAPG, L.L.C. ("TAPG"), a Louisiana limited liability company, and formed
      Safescript Northwest, Inc. ("Safescript Northwest"), a Louisiana corporation,
      for the purpose of establishing and operating up to five pharmacies. Effective
      August 19, 2004, Safescript Northwest changed its name to Assured Pharmacies
      Northwest, Inc. ("APN"). Since its inception, we have owned 75% of APN, while
      TAPG has owned the remaining 25%. The terms of the Agreement provide that TAPG
      will contribute start-up costs of $335,000 per pharmacy location established
      not
      to exceed five pharmacies. Under the terms of the agreement with TAPG, our
      contribution under the Agreement consists of the right to utilize our
      intellectual property rights and to provide sales and marketing
      services.





Between
      March and October 2004, we received from TAPG initial capital contributions
      of
      $854,213 for three pharmacies. This capital contribution funded the opening
      of a
      pharmacy in Kirkland, Washington in August 2004 and Portland, Oregon in
      September 2004. Currently, only these two pharmacies are opened and operated
      under the Agreement with TAPG. Included in these monies was a partial capital
      contribution of $190,000 for the establishment of another pharmacy located
      in
      Portland, Oregon. TAPG is obligated to contribute an additional $150,787 to
      satisfy their full capital contribution for this pharmacy. APN and we requested
      that TAPG provide the $150,787 balance of its full capital contribution. TAPG
      is
      also obligated to contribute their proportionate share of the start-up costs
      in
      excess of their initial capital contribution of $335,000 per pharmacy. The
      parties’ agreement defined start-up costs as any costs associated with the
      opening of any open pharmacy location that accrue within one hundred eighty
      days
      following the opening of that particular pharmacy. As of December 31, 2005,
      TAPG
      is obligated to contribute an additional $34,994 together with interest of
      $5,778 to satisfy its proportionate share of the start-up costs in excess of
      their initial capital contribution.





As
      of
      December 31, 2005, we advanced APN a total of $351,857 as an interest-free
      loan
      to sustain operations at both pharmacies held and operated by APN. On March
      6,
      2006, our interest-free loan of $351,857 was converted into 378 shares of APN
      capital stock. Following the conversion of this debt into equity, we maintain
      a
      94.8% ownership interest in APN and TAPG owns the remaining 5.2%
      interest.




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***Industry
      Overview***





According
      to the National Institute for Health Management, the $200 billion prescription
      drug market is the fastest-growing segment of the health care industry today,
      rising 17% or more a year since 1998. At the same time, the market has been
      plagued by several chronic and growing problems that underscore the need to
      modernize the way medications are prescribed and dispensed in the United States.
      These problems include, but are not limited to:





·
            Deaths
                and injuries due to illegible prescriptions. According to the Institute
                of
                Medicine, errors in reading hand-written drug prescriptions are reportedly
                responsible for over 7,000 deaths a year in the U.S., $77 billion
                in
                additional medical expenses, and rapidly escalating medical malpractice
                insurance costs. As a result, the Institute for Safe Medical Practices
                (ISMP), a non-profit medical research group, has called for the complete
                elimination of handwritten
                prescriptions.





·
            A
                study by the American Pain Society and the American Academy of Pain
                Management determined that an estimated 48 million suffer from chronic
                pain in the U.S. and this number is projected to continue
                growing.





·
            Too
                few qualified pharmacists. A recent study conducted by the United
                States
                Department of Health and Human Services confirmed that there is a
                growing
                shortage of trained and licensed
                pharmacists.





·
            Handwritten
                prescriptions are prone to counterfeiting. Unscrupulous patients
                can alter
                prescriptions in dose and/or quantity. Many patients falsely report
                lost
                prescriptions or just forge the prescription to visit multiple
                pharmacies.





***Market
      for Our Products and Services***





The
      target market we will serve in dispensing pharmaceutical products is patients
      who require medication for chronic pain management. Patients in this
      category are likely to require prescription medications more frequently and
      for
      longer periods of time than patients in most other medical categories.  In
      order to access this target market, we will seek to establish and maintain
      relationships with physicians whose practice necessitates that they frequently
      prescribe medication to manage their patients’ chronic pain. We do not pay
      physicians to transmit prescriptions to our pharmacies and physicians do not
      pay
      us to transmit prescriptions to our pharmacies. We generate our revenue from
      the
      sale of prescription drugs at our pharmacies.





Within
      the previous 90 days, approximately 169 physicians have transmitted
      prescriptions to our pharmacies through our web portal. Currently, we generate
      reoccurring business from approximately 50 physicians and 22 of those physicians
      account for approximately 80% of all prescriptions filled at our pharmacies.
      The
      number of physicians that send reoccurring business to our pharmacies has
      increased from December 2004 when at that time we generated reoccurring business
      from approximately 41 physicians, but at that time 10 of those physicians
      accounted for approximately 81% of all prescriptions. One physician’s practice
      accounted for greater than 10% of all prescription we received in
      2005.





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***Principal
      Suppliers***





We
      purchased 97% of our inventory of prescription drugs from one wholesale drug
      vendor during the year ended December 2005. During the same period of time,
      we
      purchased the remaining 3% of our inventory from 3 different wholesale drug
      vendors. Our management believes that the wholesale pharmaceutical and
      non-pharmaceutical distribution industry is highly competitive because of the
      consolidation of the pharmacy industry and the practice of certain large
      pharmacy chains to purchase directly from product manufacturers. Although
      management believes we could obtain the majority of our inventory through other
      distributors at competitive prices and upon competitive payment terms if our
      relationship with our primary wholesale drug vendor was terminated, there can
      be
      no assurance that the termination of such a relationship would not adversely
      affect us.





***Customers
      and Third-Party Payors***





In
      fiscal
      2005, nearly all of our pharmacy sales were to customers covered by health
      care
      insurance plans, which typically contract with a third-party payor such as
      an
      insurance company, a prescription benefit management company, a governmental
      agency, workers’ compensation, a private employer, a health maintenance
      organization or other managed care provider that agrees to pay for all or a
      portion of a customer's eligible prescription purchases.  Any significant
      loss of third-party payor business could have a material adverse effect on
      our
      business and results of operations.





***Competition***





We
      face
      intense competition with local, regional and national companies, including
      other
      drugstore chains, independently owned drugstores, supermarkets, mass
      merchandisers, discount stores, dollar stores, mail order pharmacies and drug
      importation. Competition in this industry is intense primarily because national
      pharmacies including Walgreens and CVS Pharmacy have expanded significantly
      and
      prescription drugs are now offered at a variety of retail establishments when
      traditionally prescription drugs were only provided at local pharmacies.
      Supermarkets and discount stores now maintain retail pharmacies onsite as a
      part
      of a business plan to provide consumers with all of their retail needs at one
      location. Retail pharmacies such as Walgreens, CVS Pharmacy, and Rite Aid use
      proprietary and/or commercialized paperless prescription technology in their
      pharmacy operations. However, these pharmacies are not focused or dedicated
      to
      physicians practicing in pain management. These retail pharmacies traditionally
      keep in inventory non-prescription drugs, or health and beauty related products
      such as walking canes, bandages and shampoo. Consumers are able to have their
      prescriptions filled at these retail pharmacies, but typical retail pharmacies
      either do not keep in inventory or keep limited amounts of Class 2 drugs in
      inventory. As a result, the time it takes for traditional retail pharmacies
      to
      fill a prescription for Class 2 drug is extended. Because of our pain management
      focus, we maintain an appropriate inventory level of Class 2 drugs to meet
      the
      needs of physicians that transmit prescription to our pharmacies and do not
      keep
      in inventory non-prescription drugs or health and beauty related products.
      We do
      not intend to sell over-the-counter medication or fill prescriptions unrelated
      to chronic pain management at our pharmacies. We will fill prescriptions that
      address any side effects experienced by individuals who have health





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conditions
      that require them to be treated for chronic pain.





Currently,
      Safescript Pharmacies, Inc. is the only company that our management is aware
      of
      that operates pharmacies in the United States that exclusively dispense
      pharmaceutical products to patients who require medication for chronic pain
      management while also providing technological support to physicians to enable
      them to e-prescribe medication for their patients to the pharmacy.





There
      are
      companies that are in the business of developing and manufacturing proprietary
      software and hardware that facilitate e-scripting. We are not in this business.
      We constantly seek and evaluate available technologies to integrate into our
      business model; as such, we do not consider ourselves a technology company
      because we do not develop, program, or manufacture proprietary hardware and/or
      software used by our pharmacies or by physicians that transmit prescriptions
      to
      our pharmacies.





***Patents,
      Licenses, Trademarks, Franchises, Concessions, Royalty Agreements, or Labor
      Contracts***





On
      March
      15, 2004, we entered into a technology license agreement (“Technology License”)
      with Network Technology, Inc. (“RxNT”). The Technology License grants us the
      right to use RxNT’s e-prescribing technology under the brand name “Assured
      Script.”





On
      November 9, 2004, we received trademark approval (registration number 2901258)
      by the United States Patent and Trademark Office for the “ *eRXSYS* ”
company
      logo. We changed our name to Assured Pharmacy, Inc. in October 2005 and no
      longer utilize the trademarked “ *eRXSYS* ”
logo.





State
      law
      requires pharmacies to apply to the State Board of Pharmacy to receive a license
      to operate. The application process to operate a pharmacy is substantially
      similar among different states. The application process for a license on average
      takes sixty days in the state of California. In addition, each pharmacy must
      employ a licensed pharmacist to serve as the Pharmacist in Charge (PIC). The
      PIC
      oversees personnel and reports on the operations at a specific pharmacy. State
      law regulates the number of employees and clerks that can work under the
      supervision of one PIC. Currently, we are licensed to operate four
      pharmacies.





***Research
      and Development***





We
      did
      not incur any research and development expenditures in the fiscal years ended
      December 31, 2005 or 2004.





***Existing
      and Probable Governmental Regulation***




Pharmacy
      operations are subject to significant governmental regulation on the federal
      and
      state level. Compliance with governmental regulation is essential to continued
      operations. Set forth below is a summary of the applicable federal and state
      governmental regulations impacting our operations.





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*Licensure
      Laws*





Each
      state’s board of pharmacy enforces laws and regulations governing pharmacists
      and pharmacies. Each of our pharmacies applied and received a license. Licensure
      requires strict compliance with state pharmacy standards. Although we believe
      our pharmacies are compliant, changes in pharmacy laws and differing
      interpretations regarding such laws could impact our level of compliance. A
      pharmacy’s failure to comply with applicable law and regulation could result in
      licensure revocation as well as the imposition of fines and
      penalties.





*Drug
      Enforcement Laws*





The
      United States Department of Justice enforces the Drug Enforcement Act through
      the Drug Enforcement Agency (DEA). The DEA strictly enforces regulations
      governing controlled substances. In addition to regulation by the DEA, we are
      subject to significant state regulation regarding controlled substances. Because
      our pharmacies’ operations focus on highly regulated pain medications, failure
      to adhere to DEA and state controlled substance requirements could jeopardize
      our ability to operate. While we believe we are in compliance with current
      DEA
      requirements, such requirements and interpretation of these requirements do
      change over time.





*Federal
      Health Programs*





As
      we
      grow, we believe that a significant amount of our revenues will be derived
      from
      governmental programs such as Medicaid. With the passage of the Medicare
      Modernization and Prescription Drug Act of 2003, we also believe that Medicare
      will become a significant source of funding.





*Medicare*





Medicare
      reimbursement is determined by the Centers for Medicare and Medicaid Services
      (“CMS”), an agency of the United States Department of Health and Human Services.
      CMS establishes reimbursement policy for services provided to Medicare
      beneficiaries in a manner consistent with the Social Security Act, as amended
      by
      Congress. CMS has not yet established the reimbursement methodology
      pursuant to which it will reimburse prescription drugs.





In
      order
      to participate in the Medicare program, each pharmacy must enroll as a
      participating supplier. There can be no assurance that our pharmacies will
      be
      able to obtain the necessary approvals to participate in the Medicare program,
      which could have a material adverse financial impact on us, our operations,
      and
      our investors.





*Medicaid*





Medicaid
      is a federal/state program that provides health coverage (including prescription
      drug coverage) to the needy. In order to participate in the Medicaid program,
      each pharmacy must enroll as a participating supplier. There can be no assurance
      that our pharmacies will be able to obtain the necessary approvals to
      participate in the Medicaid program, which could have a material adverse
      financial impact on us, our operations, and our investors. Each state’s Medicaid





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program
      is different, and some states impose limitations on the pharmacies that may
      serve the Medicaid population. We currently participate in Medicaid in Oregon
      and Washington. We submitted an application to participate in California’s
      Medicaid program, known as Medi-Cal and received a notice of approval on August
      22, 2005. We were assigned a unique provider identification number to enable
      our
      pharmacy in Riverside, California and other California locations that we may
      establish in the future, exclusive of locations in Orange County, to process
      claims through Medi-Cal.





The
      Medicaid program is administered and all benefits are processed by CalOptima
      exclusively in Orange County, California. All applications to participate in
      the
      Medicaid programs for pharmacies located in Orange County are processed by
      CalOptima. In 2002, CalOptima placed a moratorium on additional pharmacies
      in
      Orange County enrolling as a supplier of prescription drugs to customers who
      rely solely on Medicaid for health coverage. This moratorium remains in effect
      and impacts our location in Santa Ana, California. There can be no assurance
      that the moratorium will be lifted and we will be able to obtain the necessary
      approvals to participate in California’s Medicaid program in any respect in
      Orange County, California.





*Medicare
      and Medicaid Participation*





We
      received notice that CalOptima was accepting applications for pharmacies to
      participate in CalOptima specifically for claims by customers who rely on health
      coverage through both Medicaid and Medicare. We submitted an application to
      CalOptima for approval to participate in Orange County, California during the
      fourth quarter of the year ended December 31, 2005. We have not received a
      response to our application as of the filing date of this Annual Report and
      do
      not know when we will receive a response to our application.





*The
      Federal Health Care Programs Anti-Kickback Act*





Federal
      law prohibits the solicitation or receipt of remuneration in return for
      referrals and the offer or payment of remuneration to induce the referral of
      patients or the purchasing, leasing, ordering or arranging for any good,
      facility, service or item for which payment may be made under a “federal health
      care program” (defined as “any plan or program that provides health benefits,
      whether directly, through insurance, or otherwise, which is funded directly,
      in
      whole or in part, by the United States Government other than the Federal
      Employees Health Benefit Program”).





Because
      our business and operations involve providing health care services, we are
      subject to the Federal Health Care Programs Anti-Kickback Act (the “Act”). The
      Anti-Kickback Statute, codified in 42 U.S.C. § 1320a-7b(b), prohibits
      individuals and entities from knowingly and willfully soliciting, receiving,
      offering or paying any remuneration to other individuals and entities (directly
      or indirectly, overtly or covertly, in cash or in kind):





i.
            In
                return for referring an individual to a person for the furnishing
                or
                arranging for the furnishing of any item or service for which payment
                may
                be made under a federal or state health care program;
                or





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ii.
            In
                return for purchasing, leasing, ordering or arranging for or recommending
                purchasing, leasing, or ordering any good, facility, service or item
                for
                which payment may be made under a federal or state health care
                program.





There
      are
      both criminal and civil penalties for violating the Federal statute. Criminal
      sanctions include a fine not to exceed $25,000 or imprisonment up to five years
      or both, for each offense. In addition, monetary penalties for each offense
      may
      be increased to $250,000 for individuals and up to $500,000 for organizations.
      Civil penalties include fines of up to $50,000 for each violation, monetary
      damages up to three times the amount paid for referrals and/or exclusion from
      the Medicare program. Courts have broadly construed the Anti-Kickback statute
      to
      include virtually anything of value given to an individual or entity if one
      purpose of the remuneration is to influence the recipient’s reason or judgment
      relating to referrals.




The
      Department of Health and Human Service’s Office of Inspector General promulgated
      safe harbor regulations specifying payment practices that will not be considered
      to violate the statute. If a payment practice falls within one of the safe
      harbors, it will be immune from criminal prosecution and civil exclusion under
      the Act even if it fails to fall within another potentially applicable safe
      harbor. Significantly, failure to fall within any safe harbor does not
      necessarily mean that the payment arrangement violates the statute. Failure
      to
      comply with a safe harbor can mean one of three things: (1) the arrangement
      does
      not fall within the broad scope of the anti-fraud and abuse rules so there
      is no
      risk of prosecution; (2) the arrangement is a clear statutory violation and
      is
      subject to prosecution; or (3) the arrangement may violate the anti-fraud and
      abuse rules in a less serious manner, in which case there is no way to predict
      the degree of risk.





Our
      operations are subject to scrutiny under the Act. If our operations fail to
      comply with the Act, we could be criminally sanctioned. In addition, the right
      of any of our pharmacies to participate in governmental health plans could
      be
      terminated.





*Ethics
      in Patient Referrals Act*





The
      Ethics in Patient Referrals Act, 42 U.S.C. §1395nn, commonly referred to as
      Stark II (“Stark II”), prohibits physicians from referring or ordering certain
      Medicare or Medicaid reimbursable “designated health services” from any entity
      with which the physician or any immediate family member of the physician has
      a
      financial relationship. A financial relationship is generally defined as a
      compensation or ownership/investment interest. The purpose of the prohibition
      is
      to assure that physicians base their treatment decisions upon the needs of
      the
      patients and not upon any financial benefit that would inure to the physician
      as
      a result of the referral.





Prescription
      medications are classified as “designated health services” under Stark II.
      Physicians owning stock in our Company are not allowed to refer any Medicare
      or
      Medicaid patient to any of our pharmacies until and unless our Company’s
      capitalization exceeds $75,000,000. A referral made in violation of Stark II
      results in non-payment to the pharmacy and could result in the imposition of
      fines and penalties as well as termination of our participation in Medicare
      and
      Medicaid.




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*State
      Fraud and Abuse Laws*





States
      have generally adopted their own laws similar to the Act and Stark II. However,
      in some instances, state laws apply to all health care services, regardless
      of
      whether such services are payable by a government health plan. For example,
      in
      California, physicians and other practitioners are not permitted to own more
      than 10% of any entity that owns a pharmacy.




*HIPAA*





We
      are
      impacted by the Health Insurance Portability and Accountability Act of 1996
      (“HIPAA”), which mandates, among other things, the adoption of standards to
      enhance the efficiency and simplify the administration of the healthcare system.
      HIPAA requires the Department of Health and Human Services to adopt standards
      for electronic transactions and code sets for basic healthcare transactions
      such
      as payment and remittance advice (“transaction standards”); privacy of
      individually identifiable healthcare information (“privacy standards”); security
      and electronic signatures (“security standards”), as well as unique identifiers
      for providers, employers, health plans and individuals; and enforcement. We
      are
      required to comply with these standards and are subject to significant civil
      and
      criminal penalties for failure to do so.





Management
      believes that we are in material compliance with these standards. However,
      HIPAA's privacy and transaction standards only recently became effective, and
      the security standards became mandatory on April 21, 2005. Considering HIPAA's
      complexity, there can be no assurance that future changes will not occur.
      Changes in standards as well as changes in the interpretation of those standards
      could require us to incur significant costs to ensure compliance.





Management
      anticipates that federal and state governments will continue to review and
      assess alternate healthcare delivery systems, payment methodologies and
      operational requirements for pharmacies. Given the continuous debate regarding
      the cost of healthcare services, management cannot predict with any degree
      of
      certainty what additional healthcare initiatives, if any, will be implemented
      or
      the effect that any future legislation or regulation may have on
      us.





*OBRA
      1990*





Our
      business is subject to various other federal and state regulations. For example,
      pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA") and
      comparable state regulations, our pharmacists are required to offer counseling,
      without additional charge, to our customers about medication, dosage, delivery
      systems, common side effects and other information deemed significant by the
      pharmacists and may have a duty to warn customers regarding any potential
      adverse effects of a prescription drug if the warning could reduce or negate
      such effect.





California
      Senate Bill #151 was chaptered by the California Secretary of State on September
      17, 2003. This legislation tightens the regulations on prescribing prescription
      medication. The legislation allows for electronic prescribing of all
      prescription medication except Class 2 substances. Generally, Class 2 substances
      are drugs that exhibit a high potential for abuse or diversion. Class 2
      substances are required to be dispensed only against a hard copy prescription.
      This will not pose any operational problem for us because we currently generate
      a hard copy of





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the
      electronic prescription for all Class 2 prescriptions issued. Management
      believes that this legislation will create no undue burden or competitive
      disadvantage for us.





*Other
      Laws*





In
      recent
      years, an increasing number of legislative proposals have been introduced or
      proposed in Congress and in some state legislatures that would effect major
      changes in the healthcare system, either nationally or at the state level.
      The
      legislative initiatives include prescription drug benefit proposals for Medicare
      participants. Although we believe we are well positioned to respond to these
      developments, we cannot predict the outcome or effect of legislation resulting
      from these reform efforts.





***Compliance
      with Environmental Laws***





We
      did
      not incur any costs in connection with the compliance with any federal, state,
      or local environmental laws.





***Employees***





We
      currently have nineteen full-time employees in addition to three consultants.
      Our employees are not represented by labor unions or collective bargaining
      agreements. The classification of our full-time employees and consultant
      positions are broken down as follows:





**Characterization
                of**
              **Employee’s
                Duties**
            **Number
                of**
              **Employees**
            **Number
                of**
              **Consultants**Corporate
                Management / Officer
            3
            1Sales
            2
            2Technology
            1
            0Accounting
            3
            0Pharmacist
            4
            0Technicians
                / Pharmacy Support
            6
            0





**Item
      2. Description of Property**





We
      currently lease our executive offices and pharmacy locations. Our executive
      offices are located at 17935 Sky Park Circle, Suite F, Irvine, California 92614,
      2040 square feet.





We
      currently have four operating pharmacies. Our first pharmacy was opened on
      October 13, 2003 in Santa Ana, California. On June 10, 2004, we opened our
      second pharmacy in Riverside, California. These pharmacies were opened pursuant
      to a joint venture agreement entered into with TPG Partners, LLC.  We
      opened our third pharmacy in Kirkland, Washington on August 11, 2004. Our fourth
      pharmacy was opened in Portland, Oregon on September 21, 2004. The pharmacies
      located in Kirkland and Portland were opened pursuant to a joint venture
      agreement with TAPG LLC. The locations of our pharmacies are as
      follows:





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·
            2431
                N. Tustin Ave., Unit L, Santa Ana, California, 92705, 1,380 square
                feet


·
            7000
                Indiana, Ave., Suite 112, Riverside, California, 92506, 1,500 square
                feet


·
            12071
                124th Avenue NE, Kirkland, Washington, 98034, 1,400 square feet
                and


·
            3822
                S.E. Powell Blvd, Portland, Oregon, 97202, 1,585 square
                feet.





During
      the fiscal year ended December 31, 2004, we entered into leases relating to
      retail property located at 10196 SW Park Way, Portland, Oregon, 97225. Following
      our management’s decision to suspend the development of new pharmacies in the
      fourth quarter of 2004, we were unable to terminate our leases on this property
      and remain liable under the terms of the lease. There was a construction lien
      placed on this property in the amount of $38,950 as a result of our failure
      to
      compensate the builder that constructed the pharmacy on the premises. Our
      management negotiated a settlement to resolve this dispute. In accordance with
      the settlement, we paid the lessor approximately $23,000 in 2005 and will make
      additional payments to the lessor of approximately $16,000 by the end of the
      first quarter of 2006 to satisfy our obligations under the settlement.




Future
      store locations, when established, will be selected based on the following
      criteria: 1) proximity to the physician offices and medical facilities, 2)
      convenience of location, and 3) fast growing metropolitan areas with a
      population of at least 500,000. Retail pharmacies average approximately 1,500
      square feet and are leased from various property management companies.





**Item
      3. Legal Proceedings**





From
      time
      to time, we may be involved in various claims, lawsuits, and disputes with
      third
      parties, actions involving allegations of discrimination or breach of contract
      actions incidental to the normal operations of the business.





Providing
      pharmacy services entails an inherent risk of medical and professional
      malpractice liability. We may be named as a defendant in such lawsuits and
      thus
      become subject to the attendant risk of substantial damage awards. We believe
      that we have adequate professional and medical malpractice liability insurance
      coverage. There can be no assurance, however, that we will not be sued, that
      any
      such lawsuit will not exceed our insurance coverage, or that we will be able
      to
      maintain such coverage at acceptable costs and on favorable terms.





Other
      than as disclosed below, we are not currently involved in any litigation which
      we believe could have a material adverse effect on our financial position or
      results of operations.





*Safescript
      Pharmacies, Inc., a Texas corporation f/k/a RTIN Holdings,
      Inc.*





Safescript
      Pharmacies, Inc. (the “Licensor”), formerly known as RTIN Holdings, Inc., failed
      to provide us with essential services as set forth in the license agreement
      and
      this forced us to terminate our use of all technology granted by the Licensor.
      On March 17, 2004, we filed a lawsuit in Nevada State Court against the Licensor
      seeking damages, declaratory relief, to rescind





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the
      License and to recover the consideration paid. On March 19, 2004, the Licensor
      filed for Chapter 11 bankruptcy protection. The litigation in Nevada State
      Court
      was stayed as a result of the Licensor filing for bankruptcy. We refiled
      substantially the same claim as an adversary proceeding in the Licensor’s
      bankruptcy case in the U.S. Bankruptcy court located in Tyler, Texas. In July
      2004, this case was transferred to the U.S. District Court for the Eastern
      District of Texas located in Tyler, Texas.





On
      June
      30, 2005, the United States Bankruptcy Court for the Eastern District of Texas
      approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
      between the
      Licensor and us.
      Under the Terms of the Settlement Agreement, the
      Licensor retained
      100,000 shares of our common stock and returned the remaining 4,344,444 shares
      of common stock for cancellation. In addition, we issued to the Licensor 500,000
      additional shares of our common stock and agreed to dismiss the lawsuit pending
      in the U.S. District Court for the Eastern District of Texas with prejudice.
      The
      Settlement Agreement contained a mutual release which resulted in the
      Licensor releasing us from any liability with respect to the note payable due to the
      Licensor of
      approximately $1,013,000.





On
      July
      11, 2005, a creditor of Safescript filed a motion with the District Court for
      reconsideration of its approval of the Settlement Agreement. On October 14,
      2005, the District Court denied the creditor’s motion. The creditor appealed the
      District Court’s approval of the Settlement Agreement. Due to a settlement
      between the Licensor and the creditor, the appeal was withdrawn finalizing
      our
      Settlement Agreement with the Licensor.





*Sixth
      and Sprague Retail, LLC*





On
      or
      about May 16, 2005, a complaint was filed against us in the Superior Court
      of
      the State of Washington in and for the County of Pierce by Sixth
      and
      Sprague Retail, LLC (“Plaintiff”) as a result of our alleged breach of a lease
      agreement relating to property located at 2024
      6 th Avenue,
      Suite 13, Tacoma, Pierce County, Washington 98405. On August 4, 2005, a partial
      judgment was entered against us in the sum of $22,316 plus attorney’s fees in
      the sum of $650 and costs in the sum of $315, plus post-judgment interest at
      the
      rate of 12% per annum. It was further ordered that the Plaintiff was reserved
      the right to seek additional judgment amounts upon further application to the
      court. We are negotiating with the Plaintiff to resolve this
      dispute.





*Hahn
      & Bolson, LLP*





On
      August
      24, 2005, a complaint was filed against us in the Superior Court of California,
      County of Los Angeles by Hahn & Bolson, LLP (“Plaintiff”) seeking relief in
      the amount of $28,096 for non-payment of legal fees. On December 19, 2005,
      the
      parties settled this dispute and a Notice of Settlement and Stipulation for
      Entry of Judgment was filed with the court. Under the terms of the Stipulation
      for Entry of Judgment, we agreed to pay the total sum of $20,000 in monthly
      installments. The final monthly payment was made on March 15, 2006. In
      accordance with the terms set forth in the Stipulation for Entry of Judgment,
      Plaintiff will dismiss the complaint with prejudice.




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*Sheraton
      Operating Corporation d.b.a. The St. Regis Monarch Beach
      Report*





On
      December 2, 2005, Sheraton Operating Corporation d.b.a. The St. Regis Monarch
      Beach Report and Spa (“Plaintiff”) filed a complaint against us in the Superior
      Court of the State of California for the County of Orange, Limited Jurisdiction
      Harbor Justice Center, Laguna Hills Facility alleging breach of contract. The
      Plaintiff was seeking relief in the amount of $14,863 plus prejudgment interest
      at the rate of ten percent per annum from October 3, 2004. On January 23, 2006,
      the parties settled this dispute and a Stipulation for Entry of Judgment was
      executed. Under the terms of the Stipulation for Entry of Judgment, we paid
      $4,000 on February 6, 2006 and $4,000 on March 1, 2006. We have agreed to make
      two additional payments of $2,000 on or before April 1, 2006 and $2,000 on
      or
      before May 1, 2006. Plaintiff has agreed to dismiss this complaint and file
      notice of settlement no later than July 1, 2006.





*Jeffrey
      M. Howard d.b.a. Howard & Associates*





On
      January 19, 2006, a complaint was filed against us in the Superior Court of
      the
      State of California, County of Orange, Central Justice Center by Jeffrey M.
      Howard d.b.a. Howard & Associates and Edward C. Fisch (“Plaintiffs”)
      alleging breach of contract and related claims with regard to an attorney-client
      retainer agreement. The Plaintiffs were seeking damages in the amount of $37,004
      plus interest from December 6, 2005. On January 27, 2006, the parties settled
      this dispute and a Stipulation for Entry of Judgment was executed. Under the
      terms of the Stipulation for Entry of Judgment, we agreed to pay the principal
      sum of $35,000 in four monthly installments of $7,500 and a final monthly
      payment of $5,000 by May 30, 2006. Following our satisfaction of the terms
      set
      forth in the Stipulation for Entry of Judgment, the Plaintiffs will dismiss
      the
      complaint with prejudice.





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





On
      October 21, 2005, we held the annual meeting of our security holders. The
      meeting was called for the purpose of electing four directors, approving a
      name
      change to Assured Pharmacy, Inc., to confirm the appointment of Squar, Milner,
      Reehl & Williamson, LLP as auditor to examine our financial statements for
      the year ended December 31, 2005, and to transact any other items of business
      that may properly come before the meeting. The total number of shares of common
      stock outstanding at the record date, August 23, 2005, was 36,972,150 shares.
      The number of votes represented at this meeting was 19,998,756 shares, or 54.3%
      of shares eligible to vote.





Richard
      Falcone, James Manfredonia, Robert DelVecchio, and Haresh Sheth were elected
      as
      directors and the results were as follows:





*Votes
                Cast For*
            *Votes
                Cast Against*
            *Abstentions*19,998,756
            0
            0




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The
      proposal to change our name to Assured Pharmacy, Inc. was approved by the
      security holders and the results were as follows:





*Votes
                Cast For*
            *Votes
                Cast Against*
            *Abstentions*19,998,756
            0
            0





The
      security holders confirmed the appointment of Squar, Milner, Reehl &
Williamson, LLP as auditor to examine our financial statements for the year
      ended December 31, 2005 and the results were as follows:





*Votes
                Cast For*
            *Votes
                Cast Against*
            *Abstentions*19,998,756
            0
            0





No
      other
      matters were acted upon by our security holders at our annual meeting.




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**PART
      II**





**Item
      5. Market for Common Equity and Related Stockholder
      Matters**





**Market
      Information**





Our
      common stock is currently quoted on the OTC Bulletin Board (“OTCBB”), which is
      sponsored by the NASD. The OTCBB is a network of security dealers who buy and
      sell stock. The dealers are connected by a computer network that provides
      information on current "bids" and "asks", as well as volume information. Our
      shares are quoted on the OTCBB under the symbol “APHY.”





The
      following table sets forth the range of high and low bid quotations for our
      common stock for each of the periods indicated as reported by the OTCBB. These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not necessarily represent actual transactions.





Fiscal
                Year Ending December 31, 2005Quarter
                Ended
            
            High
                $
            
            Low
                $March
                31, 2005
            
            0.50
            
            0.28June
                30, 2005
            
            0.42
            
            0.28September
                30, 2005
            
            0.48
            
            0.33December
                31, 2005
            
            0.48
            
            0.34Fiscal
                Year Ended December 31, 2004Quarter
                Ended
            
            High
                $
            
            Low
                $March
                31, 2004
            
            0.64
            
            0.46June
                30, 2004
            
            0.65
            
            0.52September
                30, 2004
            
            0.599
            
            0.43December
                31, 2004
            
            0.60
            
            0.25





On
      March
      27, 2006, the last sales price of our common stock was $0.45




**Penny
      Stock**





The
      SEC
      has adopted rules that regulate broker-dealer practices in connection with
      transactions in penny stocks. Penny stocks are generally equity securities
      with
      a market price of less than $5.00, other than securities registered on certain
      national securities exchanges or quoted on the NASDAQ system, provided that
      current price and volume information with respect to transactions in such
      securities is provided by the exchange or system. The penny stock rules require
      a broker-dealer, prior to a transaction in a penny stock, to deliver a
      standardized risk disclosure document prepared by the SEC, that: (a) contains
      a
      description of the nature and level of risk in the market for penny stocks
      in
      both public offerings and secondary trading; (b) contains a description of
      the
      broker's or dealer's duties to the customer and of the rights and remedies
      available to the customer with respect to a violation of such duties or other
      requirements of the





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securities
      laws; (c) contains a brief, clear, narrative description of a dealer market,
      including bid and ask prices for penny stocks and the significance of the spread
      between the bid and ask price; (d) contains a toll-free telephone number for
      inquiries on disciplinary actions; (e) defines significant terms in the
      disclosure document or in the conduct of trading in penny stocks; and (f)
      contains such other information and is in such form, including language, type
      size and format, as the SEC shall require by rule or regulation.





The
      broker-dealer also must provide, prior to effecting any transaction in a penny
      stock, the customer with (a) bid and offer quotations for the penny stock;
      (b)
      the compensation of the broker-dealer and its salesperson in the transaction;
      (c) the number of shares to which such bid and ask prices apply, or other
      comparable information relating to the depth and liquidity of the market for
      such stock; and (d) a monthly account statement showing the market value of
      each
      penny stock held in the customer's account.





In
      addition, the penny stock rules require that prior to a transaction in a penny
      stock not otherwise exempt from those rules, the broker-dealer must make a
      special written determination that the penny stock is a suitable investment
      for
      the purchaser and receive the purchaser's written acknowledgment of the receipt
      of a risk disclosure statement, a written agreement as to transactions involving
      penny stocks, and a signed and dated copy of a written suitability
      statement.





These
      disclosure requirements may have the effect of reducing the trading activity
      for
      our common stock. Therefore, stockholders may have difficulty selling our
      securities.





**Holders
      of Our Common Stock**





As
      of
      December 31, 2005, we had approximately one hundred forty-four (144) holders
      of
      record of our common stock and several other stockholders hold shares in street
      name.





**Dividends**





There
      are
      no restrictions in our articles of incorporation or bylaws that restrict us
      from
      declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
      declaring dividends where, after giving effect to the distribution of the
      dividend:





1.
            We
                would not be able to pay our debts as they become due in the usual
                course
                of business; or





2.
            Our
                total assets would be less than the sum of our total liabilities,
                plus the
                amount that would be needed to satisfy the rights of shareholders
                who have
                preferential rights superior to those receiving the
                distribution.





**Recent
      Sales of Unregistered Securities**





The
      information set forth below relates to our issuances of securities without
      registration under the Securities Act during the reporting period which were
      not
      previously included in a Quarterly





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Report
      on
      Form 10-QSB or Current Report on Form 8-K during the reporting
      period.





During
      the fourth quarter of the fiscal year ended December 31, 2005, we issued 449,090
      shares of restricted common stock to four consultants for services rendered,
      valued at $175,872 (estimated to be the fair value based on the trading price
      on
      the issuance date). These shares were issued pursuant to Section 4(2) of the
      Securities Act. We did not engage in any general solicitation or advertising.
      We
      issued the stock certificates and affixed the appropriate legends to the
      restricted stock.




During
      the fourth quarter of the fiscal year ended December 31, 2005, we granted
      warrants to purchase 125,000 shares of our common stock, exercisable at $0.60
      per share for a period of two years from the date of issuance, to two
      consultants in exchange for services rendered. These warrants were issued
      pursuant to Section 4(2) of the Securities Act. We did not engage in any general
      solicitation or advertising.





During
      the fourth quarter of the fiscal year ended December 31, 2005, we granted
      options to purchase 1,700,000 shares of our common stock, exercisable at $0.60
      per share to a consultant in exchange for services rendered. These warrants
      become fully vested over three years (566,667 warrants fully vested on September
      29, 2005; 566,667 become fully vested on September 29, 2006; 566,666 become
      fully vested on September 29, 2007). These securities were issued pursuant
      to
      Section 4(2) of the Securities Act. We did not engage in any general
      solicitation or advertising.





During
      the fourth quarter of the fiscal year ended December 31, 2005, we issued options
      to purchase 10,000 shares of our common stock, exercisable at $0.45 per share
      to
      an employee in exchange for services rendered and we issued options to purchase
      10,000 shares of our common stock, exercisable at $0.39 per share to an employee
      in exchange for services rendered. These options become fully vested over three
      years (10,000 fully vested on October 25, 2005; 10,000 become fully vested
      on
      October 25, 2006; 10,000 become fully vested on October 25, 2007). These
      securities were issued pursuant to Section 4(2) of the Securities Act of 1933.
      We did not engage in any general solicitation or advertising.





During
      the three months ended December 31, 2005, we sold 143,750 units at $0.80 per
      unit, or an aggregate of $115,000 in proceeds, to accredited investors in a
      private equity offering. Each unit is priced at $0.80 and consists of two shares
      of restricted common stock and one warrant to purchase one (1) share of
      restricted common stock at an exercise price of $0.60 exercisable for thirty
      six
      months after the close of the offering. These securities were issued pursuant
      to
      Rule 506 of Regulation D. We did not engage in any general solicitation or
      advertising.





Subsequent
      to the reporting period, we issued 200,000 shares of restricted common stock
      to
      one consultant for services rendered, valued at $90,000 (estimated to be the
      fair value based on the trading price on the issuance date). These shares were
      issued pursuant to Section 4(2) of the Securities Act of 1933. We did not engage
      in any general solicitation or advertising. We issued the stock certificates
      and
      affixed the appropriate legends to the restricted stock.




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**Securities
      Authorized for Issuance Under Equity Compensation Plans**





The
      following table provides information about our compensation plans under which
      shares of common stock may be issued upon the exercise of warrants or options
      as
      of December 31, 2005.





**Equity
      Compensation Plans as of December 31, 2005**





A
            B
            C**Plan
                Category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (A))**Equity
                compensation plans
              approved
                by security
              holders
            55,000
            $0.50
            5,465,613Equity
                compensation plans
              not
                approved by security
              holders
            7,820,000
            $0.60
            -Total
            7,875,000
            $0.60
            5,465,613





**Purchases
      of Equity Securities**





Neither
      we nor any of our “affiliated purchasers” purchased any of our equity securities
      during the reporting period.





On
      February 1, 2005, we entered into a Termination and Settlement Agreements with
      our former Chief Executive Officer, Mr. David Parker, and our former President,
      Mr. A.J. LaSota. Messrs. Parker and LaSota resigned from their positions as
      officers and directors. In accordance with the terms of these agreements,
      Messrs. Parker and LaSota returned to the corporate treasury 5,400,000 and
      429,353 shares of our common stock, respectively. Also on February 1, 2005,
      we
      entered into a Settlement Agreement with Ron Folse, our former Executive Vice
      President. In accordance with the terms of this agreement, Mr. Folse returned
      to
      the corporate treasury 429,353 shares of our common stock.




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**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation**





**Forward-Looking
      Statements**




Historical
      results and trends should not be taken as indicative of future operations.
      Management’s statements contained in this report that are not historical facts
      are forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Actual
      results may differ materially from those included in the forward-looking
      statements. The Company intends such forward-looking statements to be covered
      by
      the safe-harbor provisions for forward-looking statements contained in the
      Private Securities Litigation Reform Act of 1995, and is including this
      statement for purposes of complying with those safe-harbor provisions.
      Forward-looking statements, which are based on certain assumptions and describe
      future plans, strategies and expectations of management are generally
      identifiable by use of the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “project,” “prospects,” or similar expressions. The
      Company’s ability to predict results or the actual effect of future plans or
      strategies is inherently uncertain. Factors
      which could have a material adverse affect on the operations and future
      prospects of the Company on a consolidated basis include, but are not limited
      to: changes in economic conditions, legislative/regulatory changes, availability
      of capital, interest rates, competition, significant restructuring activities,
      and generally accepted accounting principles. These
      risks and uncertainties should be considered in evaluating forward-looking
      statements and undue reliance should not be placed on such statements. Further
      information concerning the Company and its business, including additional
      factors that could materially affect the Company’s financial results, is
      included herein and in the Company’s other filings with the SEC.





**Overview**





We
      currently have four operating pharmacies. Our first pharmacy was opened on
      October 13, 2003 in Orange County, California in the city of Santa Ana. On
      June
      10, 2004, we opened our second pharmacy location in Riverside, California.
      We
      opened our third pharmacy in Kirkland, Washington on August 11, 2004. Our fourth
      pharmacy was opened in Portland, Oregon on September 21, 2004.





We
      announced in our report for the quarter ended September 30, 2004 that we were
      suspending the development of new pharmacies for a period of sixty to ninety
      days in order to evaluate and potentially improve the operations of our four
      existing pharmacies. It was the belief of our board of directors and executive
      management that none of our four stores were operating at their full potential.
      The basis for this belief was primarily the reluctance of physicians to adopt
      our technology for electronically transmitting prescriptions and our failure
      to
      implement a successful marketing strategy to attract business. Since this
      announcement, management postponed activity related to the development of new
      locations. At the present time and following this period of evaluation, our
      management decided not to close any of our existing pharmacy locations. We
      are
      hopeful that we will resume the development of new pharmacies in the second
      quarter of 2006.





The
      primary catalyst for the decision to suspend the development of new pharmacies
      was substantially attributable to a lack of sufficient cash to fund the expenses
      associated with the





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development
      of new pharmacies. We have incurred significant expenditures in connection
      with
      purchases of inventory for our existing pharmacies. As sales increased, a time
      gap developed between inventory replenishing and collecting our accounts
      receivable. Nearly all of our pharmacy sales are to customers whose medications
      were covered by health benefit plans and other third party payors. As a result,
      we typically do not receive cash for our sales at the time of transactions
      and
      are dependent on health benefit plans to pay for all or a portion of our
      customers’ prescription purchases. There is a significant delay from the time of
      a customer’s purchase of medication to when we receive payment for the
      customer’s purchase from a health benefit plan or other third party payor. The
      delay from the point of a customer’s purchase to our receipt of payment has
      ranged between 60 and 20 days when calculated for a specific quarterly period.





Management
      evaluated various alternatives as it related to financing future inventory
      purchases in the early stages of our planned principal operations. Our
      management was successful in securing financing for inventory purposes on an
      interim basis. On or about December 21, 2004, we received a loan evidenced
      by a
      promissory note from Robert James, Inc., a company under the control of our
      current CEO Mr. Robert DelVecchio, for the purpose of purchasing inventory
      for
      our pharmacies. The promissory note was for a maximum of $150,000 and matured
      on
      the earlier of March 6, 2005 or the date that we were able to consummate an
      accounts receivable financing arrangement for our working capital. The
      outstanding principal amount of this promissory note bears interest at three
      percent (3%) per month. In consideration for this promissory note, we agreed
      to
      pay the lender an administrative fee of $1,500 and a financing fee of $2,100.
      In
      addition to these fees, we agreed to pay the lender by the fifth day of every
      month from January 2005 until the principal amount is repaid plus an
      administrative fee of $1,875 and a financing fee of $2,675. We paid the
      loan evidenced by the promissory note from Robert James, Inc. in full on
      February 21, 2005.





On
      February 23, 2005, we entered into an accounts receivable servicing agreement
      and line of credit agreement with Mosaic Financial Services, LLC (“Mosaic”). The
      monthly interest rate under this agreement is one and one quarter percent of
      the
      then LOC limit. These agreements enabled us to successfully secure financing
      for
      inventory purchases over an extended period of time. Under the terms of the
      line
      of credit agreement, the maximum amount that we could draw to purchase inventory
      was originally $500,000 and increased to $700,000. These agreements were for
      a
      term of one year with a provision to automatically renew for another one year
      period unless either party provided notice to the other of termination within
      180 days prior to the end of the effective term.





Mosaic
      provided notice to us of its intent to exercise its right under the line of
      credit agreement to convert the $700,000 previously advanced into shares of
      our
      common stock. On October 24, 2005, our board of directors authorized the
      issuance of 2,500,000 restricted shares of our common stock to Mosaic in
      accordance with the conversion right provided in the line of credit agreement.
      The issuance of these shares to Mosaic satisfied our obligations in full under
      the accounts receivable servicing agreement and the line of credit
      agreement.





On
      October 31, 2005, we entered into another one year line of credit agreement
      (“LOC”) with Mosaic enabling us to draw a maximum of $1,000,000 to purchase
      inventory. This LOC has a





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one
      time
      commitment fee equal to three percent of the initial amount of the LOC which
      has
      a monthly interest rate of 1.5% of the then LOC limit. These accrued
      finance charges will be deducted prior to any advances. Under the terms of
      the
      LOC, Mosaic has a right to convert all or a portion of the outstanding advances
      into shares of our common stock where the conversion price is based on the
      weighted average closing bid price for our common stock on the OTCBB (or such
      other equivalent market on which our common stock is quoted) as for the seven
      trading days immediately preceding the date the conversion right is exercised.
      The conversion price per share shall not be less than $0.40 or more than
      $0.80. This LOC is secured by substantially all of our
      assets.





Management
      previously cited our marketing practice as an area for improvement. Beginning
      in
      the first quarter of 2005, our management successfully implemented a new
      marketing strategy to dramatically expand our efforts to attract business.
      Our
      current marketing strategy has targeted physicians, new customers, and existing
      customers. With respect to new customers, we are offering a $10 coupon to be
      applied toward the customers first prescription filled at any of our pharmacies
      and a $5 gift card at any Starbucks location. With respect to our current
      customers, we commenced a promotion through direct mailing. We are offering
      our
      current customers a $10 coupon to be applied toward the purchase of prescription
      drugs for any prescription that is transferred to one of our pharmacies. In
      addition, we will hold a monthly drawing at each pharmacy for those customers
      that transferred a prescription and the winner will receive a $150 gift card.
      We
      also send notices to physicians informing them of our pharmacy operations.
      In an
      attempt to build more name recognition, we have created brochures and posters
      that are available in physicians’ waiting rooms.





The
      following table summarizes the number of prescriptions filled by our four
      pharmacies on a quarterly basis for the year ended December 31,
      2005:





Quarterly
                Period
            Total
                Number
              of
                Prescriptions
            Average
                Prescriptions
              Per
                WeekThree
                months ended March 31, 2005
            4,823
            371Three
                months ended June 30, 2005
            6,864
            528Three
                months ended September 30, 2005
            8,450
            650Three
                months ended December 31, 2005
            9,646
            742Totals
            29,783





We
      opened
      our third and fourth pharmacies in August and September of 2004. As a result,
      the fourth quarter for the fiscal years ended December 31, 2005 and 2004 are
      the
      only reporting periods for which we can compare the performance of all four
      of
      our pharmacies. For the three months ended December 31, 2005, our four
      pharmacies filled a total of 9,646 prescriptions for an average of 742
      prescriptions per week. For the three months ended December 31, 2004, our four
      pharmacies filled a total of 4,121 prescriptions for an average of 317
      prescriptions per week. Our management attributes this increase in our business
      primarily to our successful marketing efforts.





In
      an
      attempt to further expand our business and improve our marketing plan, we
      retained the marketing firm of Rainmaker & Sun Integrated Marketing, Inc.
      (“Rainmaker”). Rainmaker will assist us with marketing efforts including
      advertising, promotions, and the development of a fully





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integrated
      marketing plan. We anticipate that we will revamp our current marketing plan
      and
      implement new marketing efforts during the quarter ending June 30, 2006.





Additionally,
      our two pharmacy locations in California previously experienced difficulty
      in
      qualifying to participate in California’s Medicaid program, known as Medi-Cal.
      Medicaid is a federal/state program that provides health coverage, including
      prescription drug coverage to the needy. Each state’s Medicaid program is
      different, and some states impose limitations on the number of pharmacies that
      may serve the Medicaid population. In order to participate in Medicaid programs,
      each pharmacy must enroll as a participating provider. We submitted an
      application to the California Department of Health Services on December 14,
      2004. On June 8, 2005, the Medi-Cal Provider Relations Department rejected
      our
      application and issued a list of deficiencies to be addressed. On July 11,
      2005,
      we addressed all cited deficiencies and re-submitted our Medi-Cal application.
      We received a notice of approval on August 22, 2005. We were assigned a unique
      provider identification number to enable our pharmacy in Riverside, California
      and other California locations that we may establish in the future, exclusive
      of
      locations in Orange County, to process claims through Medi-Cal. We anticipate
      that this approval and our ability to process claims through Medi-Cal will
      increase sales at our California pharmacy located in Riverside.





The
      Medicaid program is administered and all benefits are processed by CalOptima
      exclusively in Orange County, California. All applications to participate in
      the
      Medicaid programs for pharmacies located in Orange County are processed by
      CalOptima. In 2002, CalOptima placed a moratorium on additional pharmacies
      in
      Orange County enrolling as a supplier of prescription drugs to customers who
      rely solely on Medicaid for health coverage. This moratorium remains in effect
      and impacts our location in Santa Ana, California.





During
      the quarter ended September 30, 2005, we received notice that CalOptima was
      accepting applications for pharmacies to participate in CalOptima specifically
      for claims by customers who rely on health coverage through both Medicaid and
      Medicare. Medicare is a health insurance program for people over the age of
      65
      or those under 65 with certain disabilities. We submitted an application to
      CalOptima for approval to supply customers who rely on health coverage through
      both Medicaid and Medicare in Orange County, California during the quarter
      ended
      September 30, 2005. We have not received a response to our application as of
      the
      filing date of this Annual Report and do not know when we will receive a
      response to our application.





Approval
      to participate as a supplier to CalOptima would increase the customer base
      at
      our California pharmacy location in Santa Ana even if such approval was limited
      to a classification of individuals that rely on both Medicaid and Medicare
      for
      health insurance coverage. There can be no assurance that the moratorium will
      be
      lifted and our pharmacies will be able to obtain the necessary approvals to
      participate in California’s Medicaid program in any respect in Orange County,
      California.





Similarly,
      some third party payors such as Health Net in California have also placed a
      moratorium on additional pharmacies which they will sanction as a supplier
      of
      medication to participants enrolled in the health benefit plans that they
      administer. The failure of government plans and other third party payors to
      approve additional pharmacies as suppliers of medication to





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participants
      enrolled in their health benefit plans could have a material adverse financial
      impact on us, and our operations.





**Results
      of Operations for the Years Ended December 31, 2005 and
      2004**





*Revenues*





On
      the
      accrual basis of accounting, our total revenue for the year ended December
      31,
      2005 was $3,836,736, as compared to $1,346,995 for the year ended December
      31,
      2004. Our revenues generated during the fiscal year ended December 31, 2005
      increased over each quarterly period. We generated revenue in the amount of
      $648,402 for the quarter ended March 31, 2005, $789,404 for quarter ended June
      30, 2005, $980,181 for the quarter ended September 30, 2005, and $1,418,750
      for
      the quarter ended December 31, 2005. We generated more revenue in the year
      ended
      December 31, 2005 than in any other fiscal year since our inception. Our
      management anticipates that our revenues generated will increase based upon
      future marketing efforts and the establishment of additional pharmacies in
      the
      current year.





During
      the year ended December 31, 2004, we established three additional
      pharmacies and had established a total of four pharmacies by the end of the
      fiscal year. Since this time, we have not established any additional pharmacies.
      The significant increase in our revenue from the prior fiscal year is primary
      attributable to generating revenue from four pharmacies for the entire reporting
      period.





*Cost
      of Sales*





The
      total
      cost of sales for the year ended December 31, 2005 was $3,120,958, as compared
      to $1,411,163 for the year ended December 31, 2004. The cost of sales consists
      primarily of the pharmaceuticals. During the year ended December 31, 2004,
      we
      established three additional pharmacies and had operations at a total of four
      pharmacies by the end of the fiscal year. Purchasing and replenishing our
      inventory supply for an increased number of pharmacies over the prior fiscal
      year resulting in a significant increase in our total cost of sales.





During
      the fiscal year ended December 31, 2005, we negotiated cost reductions and
      more
      favorable credit terms with our primary drug supplier. As a result, we incurred
      lower costs of sales on a per unit basis.





*Gross
      Profit*





Gross
      profit increased to $715,779, or approximately 19% of total revenue for the
      year
      ended December 31, 2005, as compared to a gross loss of $64,168, or
      approximately a gross loss of 37%of total revenue for the same reporting period
      in the prior year. We reported gross profit in each quarterly period during
      the
      fiscal year ended December 31, 2005 and our reported gross profits for the
      year
      ended December 31, 2005 is the highest amount and percentage of gross sales
      reported during any reporting period since our inception. The growth in gross
      profit is primarily attributable to increased sales of generic type drugs which
      have a lower cost and higher gross margin.





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*Operating
      Expenses*





We
      incurred total operating expenses of $6,633,595 for the year ended December
      31,
      2005, as compared to $8,197,168 for the year ended December 31, 2004. Our
      operating expenses for the year ended December 31, 2005 primarily consisted
      of
      salaries and related expenses of $3,574,137, consulting and other compensation
      of $1,579,524, and selling, general and administrative expenses of $1,286,053,
      and  restructuring charges of $193,881. Our operating expenses for the
      year ended December 31, 2004 consisted of salaries and related expenses of
      $1,401,017, consulting and other compensation of $2,206,171, selling, general
      and administrative expenses of $1,564,855, and $2,977,448 for the impairment
      of
      an intangible asset.





Our
      operating expenses incurred during the year ended December 31, 2004 were
      exclusively attributable to establishing our corporate infrastructure and
      establishing additional pharmacies. Our operating expenses incurred during
      the
      year ended December 31, 2005 were exclusively attributable to maintaining our
      corporate infrastructure and sustaining operations at our pharmacies. During
      the
      year ended December 31, 2004, we established three additional pharmacies and
      had
      operations at a total of four pharmacies by the end of the fiscal year. In
      the
      first quarter of 2004, we expensed $2,977,448 for the impairment of a license.
      The impairment of the license in the first quarter of 2004 was the primarily
      reason why our operating expenses were substantially higher in the year ended
      December 31, 2004 when compared to the fiscal year ended December 31,
      2005.





*Other
      Income and Expense*





As
      part
      of our ongoing business activities, our sales have continued to increase and
      we
      are now able to access financing for purchases of inventory through financing
      agreements entered into with Mosaic Financial Services, LLC (“Mosaic”) during
      the reporting period. We incurred interest expense of $131,539 during the year
      ended December 31, 2005 primarily as a result of the financing we received
      from
      Mosaic.




On
      June
      30, 2005, the United Stated Bankruptcy Court for the Eastern District of Texas
      approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
      between Safescript Pharmacies, Inc., a Texas corporation f/k/a RTIN Holdings,
      Inc. and Safe Med Systems, Inc., a Texas corporation (collectively,
“Safescript”), and us. The Settlement Agreement contained a mutual release which
      resulted in Safescript releasing us from any liability with respect to a note
      payable to Safescript of approximately $1,011,500. This amount is included
      in
      the forgiveness of debt reported in the year ended December 31, 2005.





*Net
      Loss*





Our
      net
      loss for the year ended December 31, 2005 was $4,797,092 and the loss for the
      year ended December 31, 2004 was $7,903,706. We previously projected that each
      store would be cash flow positive by the ninth month of operation; however,
      none
      of our operating pharmacies currently is or ever has been cash flow positive.
      Decreased net losses in 2005, as compared to the prior year, are primarily
      attributable to significant expenses related to the impairment of a license
      and
      establishment of additional pharmacies incurred during the fiscal year ended
      December 31,





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2004
      that
      were not incurred during the fiscal year ended December 31, 2005.





Our
      basic
      and diluted loss per common share for the year ended December 31, 2005 was
      $(0.11) and $(0.19) for the year ended December 31, 2004.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2005, we maintained $356,641 in cash which primarily resulted
      from
      funds raised in the private offering of common stock and receivables financing.
      As of December 31, 2005, we had current assets of $1,180,386 and current
      liabilities of $1,922,298. As a result, we had a working capital deficit of
      $741,912 as of December 31, 2005.





Our
      current liabilities as of December 31, 2005 consisted of accounts payable and
      accrued liabilities of $1,067,298, a line of credit in the amount of $200,000,
      notes payable of $425,000, and notes payable to related parties and stockholders
      of $230,000. Our line of credit was provided by Mosaic for the purpose of
      servicing our accounts receivable.





Operating
      activities used $2,733,677 in cash for the year ended December 31, 2005. Our
      net
      loss of $4,797,902 was the primary component of our negative operating cash
      flow; along with the forgiveness of debt of $1,011,522; and the joint venture
      minority interest in net loss of $275,835; offset by depreciation and
      amortization expenses of $108,136; the impairment of property and equipment
      related to restructuring of $193,881; and the issuance of common stock for
      services in the amount of $2,387,364, including options granted to our CEO
      valued at $1,950,000.





There
      were no investing activities during the year ended December 31,
      2005.





Cash
      flows provided by financing activities during the year ended December 31, 2005
      consisted of $1,511,784 of proceeds from the issuance of common stock; $900,000
      net advanced on the line of credit, ($700,000 of which was converted to our
      common stock in October 2005); and $170,000 of net advances by certain
      related parties and stockholders: proceeds from issuance of short term loans
      $425,000.





We
      primarily relied on equity capital and loan proceeds to fund our operations
      during the year ended December 31, 2005. During the reporting period, we
      sold
      securities to accredited investors. During the year
      ended December 31, 2005 ,
      we
      received proceeds of $1,511,784 from accredited investors and issued a total
      of
      3,820,000 shares of our common stock.




The
      underlying drivers that resulted in material changes and the specific inflows
      and outflows of cash in the year
      ended December 31, 2005 are
      as
      follows:





a.
            Our
                inventory level increased with the addition of more physicians. We
                continually track inventory usage and adjust inventory levels to
                market
                requirements.





b.
            We
                recorded a gain on forgiveness of debt related to a settlement agreement
                entered into with Safescript releasing us from of any liability with
                respect to a note payable due to Safescript of approximately $1,013,000.





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c.
            We
                fully utilized a $700,000 line of credit with Mosaic Financial Services,
                LLC (“Mosaic”) during the year ended December 31, 2005 and issued
                2,500,000 restricted shares of our common stock to Mosaic to retire
                the
                line of credit. On October 31, 2005, we entered into another line
                of
                credit agreement with Mosaic enabling us to draw a maximum of $1,000,000
                to purchase inventory.





d.
            We
                obtained financing from the issuance of common stock. Our management
                believes that additional issuance of stock and/or debt financing
                will be
                required to provide us with working capital and a positive cash flow
                in
                2006.





In
      order
      for us to finance operations and continue our growth plan, additional funding
      will be required from external sources. We intend to fund operations through
      increased sales and debt and/or equity financing arrangements, which may be
      insufficient to fund our capital expenditures, working capital, or other cash
      requirements for the year ending December 31, 2006. There can be no assurance
      that such additional financing will be available to us on acceptable terms,
      or
      at all.





**Off
      Balance Sheet Arrangements**





As
      of
      December 31, 2005, there were no off balance sheet arrangements.





**Going
      Concern**





The
      consolidated financial statements included elsewhere herein have been prepared
      assuming we will continue as a going concern, which contemplates, among other
      things, the realization of assets and satisfaction of liabilities in the normal
      course of business. As of December 31, 2005, we had an accumulated deficit
      of
      $15,233,538 largely due the establishing and sustaining operations at of our
      pharmacies.





We
      intend
      to fund operations through increased sales and debt and/or equity financing
      arrangements, which may be insufficient to fund our capital expenditures,
      working capital, or other cash requirements for the year ending December 31,
      2006. We plan to seek additional financing in a private equity offering to
      secure funding for our operations. There can be no assurance that such
      additional financing will be available to us on acceptable terms or at
      all.





These
      factors, among others, raise substantial doubt about our ability to continue
      as
      a going concern. The consolidated financial statements included elsewhere herein
      do not include any adjustments related to recoverability and classification
      of
      asset carrying amounts or the amount and classification of liabilities that
      might result should we be unable to continue as a going concern.





In
      response to these problems, management in coordination with our board of
      directors has taken the following actions:





·
            We
                suspended the
                development of new pharmaciesas
                a part of the restructuring activities that took place in the fourth
                calendar quarter of 2004 and the first quarter of 2005.




31
 Table
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·
            We
                are aggressively signing up new
                physicians.


·
            Weretained
                a marketing firm to implement a new marketing strategy to attract
                business.


·
            We
                are seeking investment capital through the public
                markets.





**Inflation**




Since
      the
      opening of our first pharmacy in October 2003, management believes that
      inflation has not had a material effect on our results of
      operations.





**Critical
      Accounting Policies**





In
      December 2001, the SEC requested that all registrants list their three to five
      most “critical accounting polices” in the Management Discussion and Analysis.
      The SEC indicated that a “critical accounting policy” is one which is both
      important to the portrayal of a company’s financial condition and results, and
      requires management’s most difficult, subjective or complex judgments, often as
      a result of the need to make estimates about the effect of matters that are
      inherently uncertain. We believe that the following accounting policies fit
      this
      definition.





**Inventories**





Inventories
      are stated at the lower of cost (first-in, first-out) or estimated market,
      and
      consist primarily of pharmaceutical drugs. Market is determined by comparison
      with recent sales or net realizable value. Net realizable value is based on
      management’s forecast for sales of our products or services in the ensuing years
      and/or consideration and analysis of changes in customer base, product mix,
      payor mix, third party insurance reimbursement levels or other issues that
      may
      impact the estimated net realizable value. Management regularly reviews
      inventory quantities on hand and records a reserve for shrinkage and
      slow-moving, damaged and expired inventory, which is measured as the difference
      between the inventory cost and the estimated market value based on management’s
      assumptions about market conditions and future demand for our products. Such
      reserve was insignificant to the accompanying consolidated financial statements.
      Should the demand for our products prove to be less than anticipated, the
      ultimate net realizable value of our inventories could be substantially less
      than reflected in the accompanying consolidated balance sheet.





Inventories
      are comprised of brand and generic pharmaceutical drugs. Brand drugs are
      purchased primarily from one wholesale vendor and generic drugs are purchased
      primarily from another wholesale vendor. Our pharmacies maintain a wide variety
      of different drug classes, known as Schedule II, Schedule III, and Schedule
      IV
      drugs, which vary in degrees of addictiveness. Schedule II drugs, considered
      narcotics by the DEA are the most addictive; hence, they are highly regulated
      by
      the DEA and are required to be segregated and secured in a separate cabinet.
      Schedule III and Schedule IV drugs are less addictive and are not regulated.
      Because our business model focuses on servicing pain management doctors and
      chronic pain patients, we carry in our inventory a larger amount of Schedule
      II
      drugs than most other pharmacies. The cost in acquiring Schedule II drugs is
      higher than Schedule III and IV drugs.




32
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**Long-Lived
      Assets**





In
      July
      2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
      144, *"Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      Of."* SFAS
      No.
      144 addresses financial accounting and reporting for the impairment or disposal
      of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed
      for impairment whenever events or changes in circumstances indicate that their
      carrying amount may not be recoverable. If the cost basis of a long-lived asset
      is greater than the projected future undiscounted net cash flows from such
      asset, an impairment loss is recognized. Impairment losses are calculated as
      the
      difference between the cost basis of an asset and its estimated fair value.
      SFAS
      No. 144 also requires companies to separately report discontinued operations,
      and extends that reporting to a component of an entity that either has been
      disposed of (by sale, abandonment or in a distribution to owners) or is
      classified as held for sale. Assets to be disposed of are reported at the lower
      of the carrying amount or the estimated fair value less costs to
      sell.





Our
      long-lived assets consist of computers, software, office furniture and
      equipment, and leasehold improvements on pharmacy build-outs which are
      depreciated with useful lives varying from 3 to 10 years. Leasehold improvements
      are depreciated over the shorter of the useful life or the remaining lease
      term,
      typically 5 years. We assess the impairment of these long-lived assets at least
      annually and make adjustment accordingly.





**Intangible
      Assets**





Statement
      of Financial Accounting standard (“SFAS”) No. 142, *"Goodwill
      and Other Intangible Assets",* which
      is
      effective for fiscal years beginning after December 15, 2001, addresses how
      intangible assets that are acquired individually or with a group of other assets
      should be accounted for upon their acquisition and after they have been
      initially recognized in the financial statements. SFAS No. 142 requires that
      goodwill and identifiable intangible assets that have indefinite lives not
      be
      amortized but rather be tested at least annually for impairment, and intangible
      assets that have finite useful lives be amortized over their estimated useful
      lives.


SFAS
      No.
      142 provides specific guidance for testing goodwill and intangible assets that
      will not be amortized for impairment. In addition, SFAS No. 142 expands the
      disclosure requirements about intangible assets in the years subsequent to
      their
      acquisition. Impairment losses for goodwill and indefinite-life intangible
      assets that arise due to the initial application of SFAS No. 142 are to be
      reported as a change in accounting principle.





**Revenue
      Recognition**





Through
      the end of the third quarter of 2005, we recognized revenue on a cash basis
      when
      we received payments from third-party insurance carriers or government agencies.
      The prices that we were paid for prescription drugs are agreed upon upfront;
      however, insurance carriers and/or governmental agencies can adjust the
      contractual price. As a result, we did not have a fixed price at the time of
      sale. For this reason, we recognized revenue on a cash basis.





Commencing
      retroactive to the fourth quarter of 2004, we began to recognize revenue on
      the
      accrual basis of accounting. Management determined that revenue met the
      recognition criteria





33
 Table
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for
      collectibility and determinable price primarily because the mix of business
      changed from green liens to conventional scripts. The price is determined in
      advance via software link with the provider and collectibility from providers,
      which are typically large insurance companies, is now reasonably assured. Prices
      will vary from provider to provider but in accordance with a contract. There
      might also be nominal “co-pay” for the script which is collected at time of
      delivery of the script (generally cash, check, or credit card). The co-pay
      also
      appears to meet revenue recognition criteria.





**Recently
      Issued Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which
      requires that the compensation cost relating to share-based payment transactions
      (including the cost of all employee stock options) be recognized in the
      financial statements. That cost will be measured based on the estimated fair
      value of the equity or liability instruments issued. SFAS No. 123-R covers
      a
      wide range of share-based compensation arrangements including share options,
      restricted share plans, performance-based awards, share appreciation rights,
      and
      employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, and
      supersedes APB Opinion No. 25. Small Business Issuers are required to apply
      SFAS
      No. 123-R in the first reporting period or fiscal years that begin after
      December 15, 2005. Thus, our consolidated financial statements will reflect
      an
      expense for (a) all share-based compensation arrangements granted after December
      31, 2005 and for any such arrangements that are modified, cancelled, or
      repurchased after that date, and (b) the portion of previous share-based awards
      for which the requisite service has not been rendered as of that date, based
      on
      the grant-date estimated fair value.





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,"
      which replaces APB Opinion No. 20 and FASB Statement No. 3. This pronouncement
      applies to all voluntary changes in accounting principle, and revises the
      requirements for accounting for and reporting a change in accounting principle.
      SFAS No. 154 requires retrospective application to prior periods' financial
      statements of a voluntary change in accounting principle, unless it is
      impracticable to do so. This pronouncement also requires that a change in the
      method of depreciation, amortization, or depletion for long-lived, non-financial
      assets be accounted for as a change in accounting estimate that is affected
      by a
      change in accounting principle. SFAS No. 154 retains many provisions of APB
      Opinion 20 without change, including those related to reporting a change in
      accounting estimate, a change in the reporting entity, and correction of an
      error. The pronouncement also carries forward the provisions of SFAS No. 3
      which
      govern reporting accounting changes in interim financial statements. SFAS No.
      154 is effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. The Statement does not change the
      transition provisions of any existing accounting pronouncements, including
      those
      that are in a transition phase as of the effective date of SFAS No.
      154.





In
      February 2006, the FASB issued SFAS No. 155 entitled “ *Accounting
      for Certain Hybrid Financial Instruments* ,”
an
      amendment of SFAS No. 133 (“ *Accounting
      for Derivative Instruments and Hedging Activities* ”)
      and
      SFAS No. 140 (“ *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* ”).
      In
      this context, a hybrid financial instrument refers to certain derivatives
      embedded in other financial instruments. SFAS No. 155 permits fair value
      re-measurement of any hybrid financial instrument which contains an





34
 Table
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embedded
      derivative that otherwise would require bifurcation under SFAS No. 133. SFAS
      No.
      155 also establishes a requirement to evaluate interests in securitized
      financial assets in order to identify interests that are either freestanding
      derivatives or “hybrids” which contain an embedded derivative requiring
      bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips
      are subject to SFAS No. 133, and provides that concentrations of credit risk
      in
      the form of subordination are not embedded derivatives. SFAS No. 155 amends
      SFAS
      No. 140 to eliminate the prohibition on a qualifying special-purpose entity
      from
      holding a derivative financial instrument that pertains to a beneficial interest
      other than another derivative. When SFAS No. 155 is adopted, any difference
      between the total carrying amount of the components of a bifurcated hybrid
      financial instrument and the fair value of the combined “hybrid” must be
      recognized as a cumulative-effect adjustment of beginning deficit/retained
      earnings.





SFAS
      No.
      155 is effective for all financial instruments acquired or issued after the
      beginning of an entity’s first fiscal year that begins after September 15, 2006.
      Earlier adoption is permitted only as of the beginning of a fiscal year,
      provided that the entity has not yet issued any annual or interim financial
      statements for such year. Restatement of prior periods is prohibited.





Management
      does not believe that SFAS No. 154 and No. 155 will have an impact on our
      consolidated financial statements.





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force), the American Institute of Certified Public Accountants,
      and
      the SEC did not or are not believed by management to have a material impact
      on
      our present or future consolidated financial statements included
      elsewhere herein.





35
 Table
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**Item
      7. Financial Statements**





Index
      to
      Financial Statements:







**Audited
                Financial Statements:**F-1
            Report
                of Independent Registered Public Accounting
                Firm;F-2
            Consolidated
                Balance Sheets as of December 31, 2005 and
                2004;F-3
            Consolidated
                Statements of Operations - Years Ended December
                31, 2005 and 2004;F-4
            Consolidated
                Statements of Stockholders’ Equity (Deficit) and
                Comprehensive Loss for the Years Ended December 31, 2005 and 2004;F-5
            Consolidated
                Statements of Cash Flows for the Years Ended
                December 31, 2005 and 2004;F-6
            Notes
                to Consolidated Financial
                Statements;





36
 Table
          of Contents





REPORT
      OF INDEPENDENT REGISTERED PUBLIC


ACCOUNTING
      FIRM











To
      the
      Board of Directors and Stockholders


Assured
      Pharmacy, Inc. (formerly known as eRXSYS, Inc.) and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheets as of December 31, 2005
      and
      2004 and the related consolidated statements of operations, stockholders’ equity
      (deficit) and cash flows of Assured Pharmacy, Inc. and Subsidiaries
      (collectively the “Company”), for the years then ended. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the consolidated
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Assured Pharmacy, Inc.
      and
      Subsidiaries as of December 31, 2005 and 2004, and the results of their
      operations and their cash flows for the years then ended in conformity with
      accounting principles generally accepted in the United States of
      America.





As
      discussed in Note 1, the accompanying 2004 financial statements have been
      restated to reflect adoption (in the fourth quarter of 2004) of the accrual
      basis of accounting for revenue. The Company previously reported revenue on
      the
      cash basis of accounting. Effective October 1, 2004, the Company recorded
      accounts receivable of approximately $182,000 with a corresponding increase
      in
      2004 sales. Net loss for the year ended December 31, 2004 decreased by
      approximately $108,000 with no significant change in basic and diluted loss
      per
      common share.





The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 1 to the
        consolidated financial statements, the Company had negative cash flow from
        operations of approximately $2.7 million in 2005, an accumulated deficit
        of
        approximately $15.2 million at December 31, 2005 and recurring losses from
        operations. These factors, among others, raise substantial doubt about the
        Company’s ability to continue as a going concern. Management’s plans regarding
        these matters are also described in Note 1. The accompanying consolidated
        financial statements do not include any adjustments that might result from
        the
        outcome of this uncertainty.
 
 
 /s/
        SQUAR, MILNER, REEHL & WILLIAMSON, LLP
 
 March
        20,
        2006
 Newport
        Beach, California





Table
                    of
                    Contents


ASSURED
        PHARMACY, INC. AND
        SUBSIDIARIES (formerly known as eRxsys, Inc.)
 CONSOLIDATED
        BALANCE
        SHEETS
 December
        31, 2005 and December 31,
        2004




**2005**
              
              **2004**
                **(As
                  Restated)****ASSETS****Current
                  Assets**Cash
              $
              356,641
              $
              86,325Accounts
                  receivable
              
              530,730
              
              182,427Inventories
              
              261,770
              
              158,009Prepaid
                  expenses and other assets
              
              31,245
              
              34,8121,180,386
              
              461,573**Property
                  and Equipment, net**
              
              440,970
              
              740,194$
              1,621,356
              $
              1,201,767**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current
                  Liabilities**Accounts
                  payable and accrued liabilities
              $
              1,067,298
              $
              830,692Line
                  of credit from a related party
              
              200,000
              
              -Notes
                  payable
              
              425,000
              
              -Notes
                  payable to related parties and stockholders
              
              230,000
              
              1,063,4651,922,298
              
              1,894,157**Notes
                  Payable to Related Party and Stockholders, net of current
                  portion**
              
              -
              
              370,000**Minority
                  Interest**
              
              492,418
              
              768,254**Commitments
                  and contingencies (Note 12)****Stockholders'
                  Deficit**Preferred
                  shares; par value $0.001 per share;
                authorized
                  5,000,000 shares; no preferred shares issued
                or
                  outstanding
              
              -
              
              -Common
                    shares; par value $0.001 per share;
                  70,000,000
                    shares authorized; 55,199,398 and 44,977,899
                  common
                    shares issued and outstanding at December 31, 2005 and 2004,
                    respectively
              
              55,199
              
              44,978Treasury
                  stock
              
              (10,858)
              
              -Additional
                  paid-in capital, net
              
              14,949,423
              
              8,778,024Deferred
                  compensation
              
              (553,587)
              
              (217,200)Accumulated
                  deficit
              
              (15,233,538)
              
              (10,436,446)Stockholders'
                  deficit
              
              (793,361)
              
              (1,830,644)$
              1,621,355
              $
              1,201,767






F-2                                                                                                                                                                        The
              accompanying
              notes are an integral part of the consolidated financial
              statements.
 Table
            of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES (formerly known as eRxsys, Inc.)
 CONSOLIDATED
          STATEMENTS OF
          OPERATIONS
 For
          the Years Ended December 31, 2005
          and December 31, 2004


**Years
                  Ended****December
                  31, 2005**
              
              **December
                  31, 2004**
                **(As
                  Restated)****GROSS
                  SALES**
              $
              3,836,737
              $
              1,346,995**COST
                  OF SALES**
              
              (3,120,958)
              
              (1,411,163)**GROSS
                  PROFIT**
              
              715,779
              
              (64,168)**OPERATING
                  EXPENSES**Salaries
                  and related
              
              3,574,137
              
              1,401,017Consulting
                  and other compensation
              
              1,579,524
              
              2,206,171Selling,
                  general and administrative
              
              1,286,053
              
              1,564,855Impairment
                  of intangible asset
              
              -
              
              2,977,448Restructuring
                  charges
              
              193,881
              
              47,677**TOTAL
                  OPERATING EXPENSES**
              
              6,633,595
              
              8,197,168**LOSS
                  FROM OPERATIONS**
              
              (5,917,816)
              
              (8,261,336)**OTHER
                  (EXPENSE) INCOME**Interest
                  expense
              
              (131,539)
              
              (92,468)Other
                  expense
              
              (35,094)
              
              (12,289)Gain
                  on forgiveness of debt
              
              1,011,522
              
              -**TOTAL
                  OTHER INCOME (EXPENSE)**
              
              844,889
              
              (104,757)**LOSS
                  BEFORE MINORITY INTEREST**
              
              (5,072,927)
              
              (8,366,093)**MINORITY
                  INTEREST**
              
              275,835
              
              462,387**NET
                  LOSS**
              $
              (4,797,092)
              $
              (7,903,706)Basic
                  and diluted loss per common share
              $
              (0.12)
              $
              (0.19)Basic
                  and diluted weighted average number of common
                shares
                  outstanding
              
              40,961,989
              
              41,112,800


F-3                                                                                                                                                                        The
                accompanying
                notes are an integral part of the consolidated financial
                statements.
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES (formerly known as eRxsys, Inc.)
 CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS'
          EQUITY (DEFICIT)
 For
          the Years Ended December 31, 2005 and December
          31,
          2004


**Common
                  Stock**
              
              **Treasury
                  Stock**
              
              **Additional**
              
              
              
              
              
              **Total**
                  **Stockholders'****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Paid
                  I**n**Capital**
              
              **Deferred**
                **Compensation**
              
              **(Accumulated)(Deficit)**
              
              **(Deficit)**
                **Equity****Balance,
                  December 31, 2003**
              
              35,974,521
              
              $
              35,975
              
              
              -
              
              
              -
              
              $
              5,195,097
              
              $
              (792,400)
              
              $
              (2,532,740)
              
              $
              1,905,933Issuance
                  of common stock in connection with a private placement
              
              7,391,750
              
              
              7,392
              
              
              -
              
              
              -
              
              
              2,642,760
              
              
              -
              
              
              -
              
              
              2,650,152Issuance
                  of common stock for services rendered
              
              1,611,628
              
              
              1,611
              
              
              -
              
              
              -
              
              
              706,167
              
              
              -
              
              
              -
              
              
              707,778Fair
                  value of warrants issued to consultants
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              234,000
              
              
              -
              
              
              -
              
              
              234,000Amortization
                  of deferred consulting fees
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              575,200
              
              
              -
              
              
              575,200Net
                  loss (as restated)
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,903,706)
              
              
              (7,903,706)**Balance,
                  December 31, 2004 (As Restated)**
              
              44,977,899
              
              
              44,978
              
              
              -
              
              
              -
              
              
              8,778,024
              
              
              (217,200)
              
              
              (10,436,446)
              
              
              (1,830,644)Issuance
                  of common stock in connection with a private placement
              
              3,820,000
              
              
              3,820
              
              
              -
              
              
              -
              
              
              1,507,964
              
              
              -
              
              
              -
              
              
              1,511,784Issuance
                  of common stock for services rendered
              
              2,907,499
              
              
              2,907
              
              
              -
              
              
              -
              
              
              883,955
              
              
              (449,498)
              
              
              -
              
              
              437,364Fair
                  value of warrants & options for deferred compensation
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              530,000
              
              
              (530,000)
              
              
              -
              
              
              -Issuance
                  of common stock for debt conversion
              
              2,500,000
              
              
              2,500
              
              
              -
              
              
              -
              
              
              697,500
              
              
              -
              
              
              -
              
              
              700,000Issuance
                  of stock to former CEO for debt settlement
              
              494,000
              
              
              494
              
              
              -
              
              
              -
              
              
              118,466
              
              
              -
              
              
              -
              
              
              118,960Issuance
                  of warrants to former CEO for debt settlement
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              329,000
              
              
              -
              
              
              -
              
              
              329,000Issuance
                  of common stock options for services to CEO
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,950,000
              
              
              -
              
              
              -
              
              
              1,950,000Issuance
                  of common stock to RTIN in connection with debt settlement
              
              500,000
              
              
              500
              
              
              -
              
              
              -
              
              
              148,000
              
              
              -
              
              
              -
              
              
              148,500Stock
                  returned to the Company by RTIN and former officer and directors
              
              -
              
              
              -
              
              
              (10,858,658)
              
              
              (10,858)
              
              
              6,514
              
              
              -
              
              
              -
              
              
              (4,344)Amortization
                  of deferred consulting fees
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              643,111
              
              
              -
              
              
              643,111Net
                  loss
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,797,092)
              
              
              (4,797,092)**Balance,
                  December 31, 2005**
              
              55,199,398
              
              $
              55,199
              
              
              (10,858,658)
              
              $
              (10,858)
              
              $
              14,949,423
              
              $
              (553,587)
              
              $
              (15,233,538)
              
              
              (793,361)






F-4                                                                                                                                                                        The
              accompanying
              notes are an integral part of the consolidated financial
              statements.
 Table
            of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES (formerly known as eRxsys, Inc.)
 CONSOLIDATED
          STATEMENTS OF CASH
          FLOWS
 For
          the Years Ended December 31, 2005 and
          December 31, 2004


**Years
                        Ended****2005**
                    
                    **2004**
                      **(As
                        Restated)**CASH
                        FLOWS FROM OPERATING ACTIVITIES:Net
                        (loss)
                    $
                    (4,797,092)
                    
                    $
                    (7,903,706)Adjustments
                        to reconcile net loss to net cash
                      used
                        in operating activities:Depreciation
                        and amortization of property and equipment
                    
                    108,136
                    
                    
                    50,448Impairment
                        of property and equipment related to restructuring
                    
                    193,881
                    
                    
                    -Amortization
                        of deferred consulting fee
                    
                    643,111
                    
                    
                    575,200Loss
                        on settlement of debt
                    
                    87,960
                    
                    
                    -Gain
                        on forgiveness of debt
                    
                    (1,011,522)
                    
                    
                    -Impairment
                        of intangible asset
                    
                    -
                    
                    
                    2,977,448Minority
                        interest in net loss of Joint Venture
                    
                    (275,835)
                    
                    
                    (462,387)Issuance
                        of common stock for services and options to CEO
                    
                    2,387,364
                    
                    
                    932,401Changes
                        in operating assets and liabilities:Accounts
                        receivable
                    
                    (348,303)
                    
                    
                    (182,427)Inventories
                    
                    (103,761)
                    
                    
                    (119,961)Prepaid
                        expenses and other current assets
                    
                    3,567
                    
                    
                    (3,136Accounts
                        payable and accrued liabilities
                    
                    378,817
                    
                    
                    718,651Related
                        party payable
                    
                    -
                    
                    
                    (14,797)Net
                        cash used in operating activities
                    
                    (2,733,677)
                    
                    
                    (3,432,266)CASH
                        FLOWS FROM INVESTING ACTIVITIES:Purchases
                        of property and equipment
                    
                    (2,791)
                    
                    
                    (719,872)Net
                        cash used in investing activities
                    
                    (2,791)
                    
                    
                    (719,872)CASH
                        FLOWS FROM FINANCING ACTIVITIES:Proceeds
                        from line of credit
                    
                    2,035,365
                    
                    
                    -Proceeds
                        from the issuance of notes payable to related parties and
                        shareholders
                    
                    305,000
                    
                    
                    159,409Proceeds
                        from the issuance of short term loans
                    
                    425,000Principal
                        repayments on line of credit
                    
                    (1,135,365)
                    
                    
                    -Principal
                        repayments on notes payable
                    
                    -
                    
                    
                    (15,000)Principal
                        repayments on notes payable to related parties and
                        shareholders
                    
                    (135,000)
                    
                    
                    (130,131)Proceeds
                        from issuance of common stock for cash
                    
                    1,511,784
                    
                    
                    2,650,030Issuance
                        of common stock in connection with issuance of notes
                        payable
                    
                    -
                    
                    
                    9,500Minority
                        interest
                    
                    -
                    
                    
                    854,213Net
                        cash provided by financing activities
                    
                    3,006,784
                    
                    
                    3,528,021Net
                        increase (decrease) in cash
                    
                    270,316
                    
                    
                    (624,117)Cash
                        at beginning of year
                    
                    86,325
                    
                    
                    710,442Cash
                        at end of year
                    $
                    356,641
                    
                    $
                    86,325Supplemental
                        disclosure of cash flow information-
                        Cash
                          paid during the year for:Interest
                    $
                    131,539
                    
                    $
                    92,468Income
                        taxes
                    $
                    -
                    
                    $
                    4,912
   See
              the accompanying notes for disclosures about
              non-cash investing and financing activities.
   F-5                                                                                                                                                                        The
                  accompanying
                  notes are an integral part of the consolidated financial
                  statements.
 Table
                of Contents
 ASSURED
                  PHARMACY, INC. AND
                  SUBSIDIARIES
 (formerly
                  known as eRxsys,
                  Inc.)
 NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 December
                  31, 2005 and December 31,
                  2004




**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION**





***Business***





Assured
      Pharmacy, Inc. was organized as a Nevada corporation on October 22, 1999 under
      the name Surforama.com, Inc. and previously operated under the name eRXSYS,
      Inc.
      In August 2002, Assured Pharmacy, Inc. reorganized its operations and became engaged
      i n
      the
      business of operating pharmacies that specialize in dispensing highly regulated
      pain medication. Assured Pharmacy, Inc. offers physicians the ability to reduce
      or eliminate the need for paper prescriptions by accessing web-based technology
      to transmit prescriptions to its pharmacies from a wireless hand-held device
      or
      desktop computer. Because the focus is on physicians whose practice necessitates
      that they frequently prescribe medication to manage their patients’ chronic
      pain, non-prescription drugs, or health and beauty related products such as
      walking canes, bandages and shampoo are not typically kept in inventory.
      Revenues during the fiscal year ended December 31, 2005 were generated
      exclusively from the sale of prescription drugs. The majority of the business
      is
      derived from physicians who transmit prescriptions directly to our store
      electronically. “Walk-in” prescriptions from other physicians are
      limited.





In
      April
      2003, Assured Pharmacy, Inc. entered into a joint venture agreement (“Joint
      Venture”) with TPG Partners, L.L.C. (“TPG”) to establish and operate pharmacies.
      In June 2003, Safescript of California, Inc. (“Safescript”) was incorporated to
      own and operate pharmacies that the parties may jointly establish under the
      Joint Venture. Assured Pharmacy Inc. owns 51% of the Joint Venture with TPG
      owning the remaining 49%. Effective September 8, 2004, Safescript filed amended
      articles of incorporation and changed its name to Assured Pharmacies, Inc.
      (“API”).





Pursuant
      to the terms of the Joint Venture, TPG is obligated to contribute start-up
      costs
      of $230,000 per pharmacy location to establish up to fifty pharmacies. In June
      and July 2003, TPG advanced $230,000 and $218,000, respectively, for a total
      of
      $448,000. This capital contribution funded the opening of our first two
      pharmacies in Santa Ana, California in October 2003 and in Riverside, California
      in June 2004. No additional funds have been received from TPG since 2003. TPG
      remains obligated to contribute an additional $12,000 to satisfy their full
      capital contribution. TPG is also obligated to contribute their proportionate
      share of the start-up costs in excess of their initial capital contribution
      of
      $230,000 per pharmacy. The Joint Venture defines start-up costs as any costs
      associated with the opening of any open pharmacy location that accrue within
      the
      ninety-day period following the opening of that particular pharmacy. TPG is
      obligated to contribute an additional $44,572 to satisfy its proportionate
      share
      of the start-up costs in excess of their initial capital contribution.




Page
            F-6
 Table
          of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION** (continued)





***Business*** (continued)





In
      February 2004, Assured Pharmacy, Inc. entered into an agreement (the
“Agreement”) with TAPG, L.L.C. ("TAPG"), a Louisiana limited liability company,
      and formed Safescript Northwest, Inc., a Louisiana corporation. Effective August
      19, 2004, Safescript Northwest, Inc. changed its name to Assured Pharmacies
      Northwest, Inc. ("APN"). Since its inception, Assured Pharmacy, Inc. has owned
      75% of APN, while TAPG has owned the remaining 25%.





The
      Agreement provides that TAPG will contribute start-up costs in the amount of
      $335,000 per pharmacy location established not to exceed five pharmacies.
      Assured Pharmacy, Inc.’s contribution under the Agreement consists of granting
      the right to utilize its intellectual property rights and to provide sales
      and
      marketing services. Between March and October 2004, APN received from TAPG
      start-up funds in the amount of $854,213 as its capital contribution for three
      pharmacies. This capital contribution funded the opening of two pharmacies
      in
      Kirkland, Washington in August 2004 and Portland, Oregon in September 2004.
      Included in these monies was a partial capital contribution in the amount of
      $190,000 for the establishment of another pharmacy located in Portland, Oregon.
      TAPG remains obligated to contribute an additional $145,000 to satisfy their
      full contribution. Assured Pharmacy, Inc. and APN requested that TAPG provide
      the $150,787 balance of its full capital contribution. TAPG is also obligated
      to
      contribute their proportionate share of the start-up costs in excess of their
      initial capital contribution of $335,000 per pharmacy. The Agreement defines
      start-up costs as any costs associated with the opening of any open pharmacy
      location that accrue within one hundred eighty days following the opening of
      that particular pharmacy. As of December 31, 2005, TAPG is obligated to
      contribute an additional $34,994 together with interest in the amount of $5,778
      to satisfy its proportionate share of the start-up costs in excess of their
      initial capital contribution.





As
      of
      December 31, 2005, Assured Pharmacy, Inc. had advanced APN $351,857 as an
      interest-free loan to sustain operations at both pharmacies operated by APN.
      On
      March 6, 2006, such loan was converted into 378 shares of APN capital stock.
      Following the conversion of this debt into equity, Assured Pharmacy, Inc.
      increased their ownership interest in APN to 94.8%. TAPG owns the remaining
      5.2%
      interest.





On
      October 21, 2005, eRXSYS, Inc. held its annual meeting of shareholders. The
      shareholders approved an amendment to the articles of incorporation to complete
      a name change from eRXSYS, Inc. to Assured Pharmacy, Inc. Assured Pharmacy,
      Inc., API and APN are hereinafter collectively referred to as the “Company”. The
      Company’s common stock is quoted on the Over-the-Counter Bulletin Board (the
“OTCBB”) under the symbol “APHY.”


Page
            F-7
 Table
          of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION** (continued)





***Restatement***





The
      accompanying financial statements for the year ended December 31, 2004 have
      been
      restated to reflect a change (retroactive to the fourth quarter of 2004) in
      revenue recognition from cash basis of accounting to the accrual basis of
      accounting. The Company previously reported revenue on the cash basis because
      sales (prescriptions) were filled for workers compensation related claims
      (commonly called “green liens”), and had to undergo an adjudication process.
      There was no fixed determinable price for the prescription nor was
      collectibility assured. During the fourth quarter of 2004, new management
      abandoned the green lien line of business in favor of conventional prescription
      sales to patients covered by large health insurance providers, with
      predetermined prices under contractual arrangements and assured collectibility.
      After further review, management determined that the Company met revenue
      recognition criteria during the fourth quarter of 2004, and accordingly, the
      Company has restated its December 31, 2004 financial statements to reflect
      accounts receivable of approximately $182,000 and a corresponding increase
      in
      sales for the year then ended. The quarters ended March 31, 2005, June 30,
      2005,
      and September 30, 2005 were also affected by such change in revenue recognition
      (see Note 13 for significant 2005 fourth quarter adjustments impacting those
      quarters). The net loss for the year ended December 31, 2004 decreased by
      approximately $108,000 with no significant change in basic and diluted loss
      per
      common share.





***Going
      Concern Considerations***





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern, which contemplates, among other
      things, the realization of assets and satisfaction of liabilities in the
      ordinary course of business.
      As of December 31, 2005, the Company had an accumulated deficit of approximately
      $15.2 million, recurring losses from operations and negative cash flow from
      operating activities of approximately $2.7 million for the year then ended.





The
      Company intends to fund operations through increased sales and debt and/or
      equity financing arrangements, which may be insufficient to fund its capital
      expenditures, working capital or other cash requirements for the year ending
      December 31, 2006. The Company will be required to seek additional funds to
      finance its immediate and long-term operations. The successful outcome of future
      financing activities cannot be determined at this
      time
      and there is no assurance that, if achieved, the Company will have sufficient
      funds to execute its intended business plan or generate positive operating
      results.




Page
            F-8
 Table
          of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION** (continued)





***Going
      Concern Consideration*** (continued)





These
      factors, among others, raise substantial doubt about the Company’s ability to
      continue as a going concern. The accompanying consolidated financial statements
      do not include any adjustments related to recoverability and classification
      of
      asset carrying amounts or the amount and classification of liabilities that
      might result should the Company be unable to continue as a going
      concern.





In
      response to these problems, management has taken the following actions:





·
            The
                Company suspended the development of new pharmacies as part of the
                restructuring activities that took place in the fourth quarter of
                2004 and
                the first quarter of 2005 (See Note 9 for additional
                information)




·
            The
                Company is aggressively signing up new
                physicians.




·
            The
                Company is seeking investment capital through the public
                markets.




·
            The
                Company retained a marketing firm to implement a new marketing strategy
                to
                attract business.





**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





The
      summary of significant accounting policies presented below is designed to assist
      in understanding the Company's consolidated financial statements. Such financial
      statements and accompanying notes are the representations of the Company’s
      management, who is responsible for their integrity and objectivity. These
      accounting policies conform to accounting principles generally accepted in
      the
      United States of America (“GAAP") in all material respects, and have been
      consistently applied in preparing the accompanying consolidated financial
      statements.





***Principles
      of Consolidation***





The
      consolidated financial statements for the year ended December 31, 2005 include
      the accounts of Assured Pharmacy, Inc., the Company’s 75% ownership interest in
      APN, and the Company’s 51% ownership interest in API. In accordance with the
      respective joint venture agreements, the minority partners do not have
      participation rights that allow them to block decisions proposed by the Company.
      The minority joint venturers have given the Company the ability to control
      all
      daily operations and management of the joint venture; therefore, the Company
      has
      consolidated the joint ventures in its financial statements with distributions
      made proportionately to the minority joint venturers. All significant
      inter-company accounts and transactions have been eliminated in
      consolidation.




Page
              F-9
 Table
            of Contents
 ASSURED
              PHARMACY, INC. AND
              SUBSIDIARIES
 (formerly
              known as eRxsys,
              Inc.)
 NOTES
              TO CONSOLIDATED FINANCIAL
              STATEMENTS
 December
              31, 2005 and December 31,
              2004







**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Use
      of Estimates***





The
      preparation of financial statements in conformity with GAAP requires management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Significant estimates made by management include
      revenue recognition, current and deferred income taxes, the deferred tax asset
      valuation allowance, and realization of inventories and long-lived assets.
      Actual results could materially differ from these estimates.





***Risks
      and Uncertainties***





The
      Company operates in a highly competitive industry that is subject to intense
      competition. The Company has a limited operating history since it has finished
      only its third year of operations and has not yet generated significant gross
      profit. As a new operating entity, the Company faces risks and uncertainties
      relating to its ability to successfully implement its business strategy. Among
      other things, these risks include the ability to develop and sustain revenue
      growth; managing expanding operations; competition; attracting, retaining and
      motivating qualified personnel; maintaining and developing new strategic
      relationships; and the ability to anticipate and adapt to the changing markets
      and any changes in government regulations.





Therefore,
      the Company may be subject to the risks of delays in obtaining (or failing
      to
      obtain) regulatory clearance and other uncertainties, including financial,
      operational, technological, regulatory and other risks associated with an
      emerging business, including the risk of business failure.





The
      Company’s leased pharmacies are subject to licensing and regulation by the
      health, sanitation, safety, building and fire agencies in the state or
      municipality where located. Difficulties or failures in obtaining or maintaining
      the required licensing and/or approvals could prevent the continued operation
      of
      such pharmacies. Management believes that the Company is operating in compliance
      with all applicable laws and regulations.




Page
            F-10
 Table
          of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Risks
      and Uncertainties*** **** (continued)





The
      Company purchased 97% of its inventory of prescription drugs from one wholesale
      vendor during the year ended December 31, 2005. Management believes that the
      wholesale pharmaceutical and non-pharmaceutical distribution industry is highly
      competitive because of consolidation in the industry and the practice of certain
      large pharmacy chains to purchase directly from product manufacturers. Although
      management believes we could obtain the majority of our inventory from other
      distributors at competitive prices and upon competitive payment terms if our
      relationship with our primary wholesale drug vendor was terminated, there can
      be
      no assurance that the termination of such relationship would not adversely
      affect us.





***Governmental
      Regulations***





The
      pharmacy business is subject to extensive and often changing federal, state
      and
      local regulations, and our pharmacies are required to be licensed in the states
      in which they are located or do business. While management continuously monitors
      the effects of regulatory activity on the Company’s operations and we currently
      have a pharmacy license for each pharmacy the Company operates, the failure
      to
      obtain or renew any regulatory approvals or licenses could adversely affect
      the
      continued operations of the Company’s business.





The
      Company is also subject to federal and state laws that prohibit certain types
      of
      direct and indirect payments between healthcare providers. These laws, commonly
      known as the fraud and abuse laws, prohibit payments intended to induce or
      encourage the referral of patients to, or the recommendation of, a particular
      provider of products and/or services. Violation of these laws can result in
      a
      loss of licensure, civil and criminal penalties and exclusion from various
      federal and state healthcare programs. The Company expends considerable
      resources in connection with compliance efforts. Management believes that the
      Company is in compliance with federal and state regulations applicable to its
      business.




Page
            F-11
 Table
          of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Governmental
      Regulations*** **(continued)**





The
      Company is also impacted by the Health Insurance Portability and Accountability
      Act of 1996 ("HIPAA"), which mandates, among other things, the adoption of
      standards to enhance the efficiency and simplify the administration of the
      healthcare system. HIPAA requires the Department of Health and Human Services
      to
      adopt standards for electronic transactions and code sets for basic healthcare
      transactions such as payment and remittance advice ("transaction standards");
      privacy of individually identifiable healthcare information ("privacy
      standards"); security and electronic signatures ("security standards"), as
      wells
      as unique identifiers for providers, employers, health plans and individuals;
      and enforcement. The Company is required to comply with these standards and
      is
      subject to significant civil and criminal penalties for failure to do so.
      Management believes the Company is in compliance with these standards. There
      can
      be no assurance, however, that future changes will not occur which the Company
      may not be, or may have to incur significant costs to be, in compliance with
      new
      standards or regulations. Management anticipates that federal and state
      governments will continue to review and assess alternate healthcare delivery
      systems, payment methodologies and operational requirements for pharmacies.
      Given the continuous debate regarding the cost of healthcare services,
      management cannot predict with any degree of certainty what additional
      healthcare initiatives, if any, will be implemented or the effect any future
      legislation or regulation will have on the Company.





***Cash
      and Cash Equivalents***





The
      Company considers all highly liquid investments with an original maturity of
      three months or less, when purchased, to be cash equivalents.




*Concentrations*


The
      financial instrument that potentially exposes the Company to a concentration
      of
      credit risk principally consists of cash. The Company deposits its cash with
      high credit financial institutions. The Company had approximately $231,000
      in
      excess of the Federal Deposit Insurance Corporation insured limit of $100,000
      as
      of December 31, 2005.




During
      the year ended December 31, 2005, substantially all of the Company's inventory
      was purchased from one wholesale drug vendor.




***Allowance
      for Doubtful Accounts Receivable***





The
      Company’s receivables are from reputable insurance companies. However,
      management periodically reviews the collectibility of accounts receivable and
      provides an allowance for doubtful accounts receivable as management deems
      necessary. Management concluded that there was no need for such an allowance
      as
      of December 31, 2005 or 2004.




Page
            F-12
 Table
          of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Inventories***





Inventories
      are stated at the lower of cost (first-in, first-out) or estimated market,
      and
      consist primarily of pharmaceutical drugs. Market is determined by comparison
      with recent sales or net realizable value. Net realizable value is based on
      management’s forecasts for sales of the Company’s products or services in the
      ensuing years and/or consideration and analysis of changes in customer base,
      product mix, payor mix, third party insurance reimbursement levels or other
      issues that may impact the estimated net realizable value. Management regularly
      reviews inventory quantities on hand and records a reserve for shrinkage and
      slow-moving, damaged and expired inventory, which is measured as the difference
      between the inventory cost and the estimated market value based on management’s
      assumptions about market conditions and future demand for the Company’s
      products. Such reserve was insignificant to the accompanying consolidated
      financial statements. In the event that demand for the Company’s products proves
      to be significantly less than anticipated, the ultimate net realizable value
      of
      the Company’s inventories could be substantially less than reflected in the
      accompanying consolidated balance sheet.





***Property
      and Equipment***





Property
      and equipment are stated at cost, and are being depreciated using the
      straight-line method over the estimated useful lives of the related assets,
      which generally range between three and five years. Leasehold improvements
      are
      amortized on a straight-line basis over the shorter of the estimated useful
      lives of the assets or the remaining lease terms. Maintenance and repairs are
      charged to expense as incurred. Significant renewals and betterments are
      capitalized. At the time of retirement, other disposition of property and
      equipment or termination of a lease, the cost and accumulated depreciation
      or
      amortization are removed from the accounts and any resulting gain or loss is
      reflected in results of operations.




Page
            F-13
 Table
          of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Goodwill
      and Intangible Assets***





Statement
      of Financial Accounting standard (“SFAS”) No. 142, *"Goodwill
      and Other Intangible Assets",* which is
      effective for fiscal years beginning after December 15, 2001, addresses how
      intangible assets that are acquired individually or with a group of other assets
      should be accounted for upon their acquisition and after they have been
      initially recognized in the financial statements. SFAS No. 142 requires that
      goodwill and identifiable intangible assets that have indefinite lives not
      be
      amortized but rather be tested at least annually for impairment, and intangible
      assets that have finite useful lives be amortized over their estimated useful
      lives. SFAS No. 142 provides specific guidance for testing intangible assets
      that will not be amortized for impairment. In addition, SFAS No. 142 expands
      the
      disclosure requirements about intangible assets in the years subsequent to
      their
      acquisition.





For
      additional information, see the discussion in
      “Long-Lived Assets” immediately below.





***Long-Lived
      Assets***





****** In
      July
      2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, *"Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      Of."* SFAS No.
      144 addresses financial accounting and reporting for the impairment or disposal
      of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed
      for impairment whenever events or changes in circumstances indicate that their
      carrying amount may not be recoverable. If the cost basis of a long-lived asset
      is greater than the projected future undiscounted net cash flows from such
      asset, an impairment loss is recognized. Impairment losses are calculated as
      the
      difference between the cost basis of an asset and its estimated fair value.
      SFAS
      No. 144 also requires companies to separately report discontinued operations,
      and extends that reporting to a component of an entity that either has been
      disposed of (by sale, abandonment or in a distribution to owners) or is
      classified as held for sale. Assets to be disposed of are reported at the lower
      of the carrying amount or the estimated fair value less costs to sell.





In
      March
      2004, management determined that the license underlying the license agreement
      entered into with Safescript Pharmacies, Inc. was 100% impaired (see Note
      4).




Page
                F-14
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Business
      Combinations*** ****





SFAS
      No.
      141, *"Business
      Combinations,"* which is
      effective for transactions initiated after June 30, 2001, eliminates the pooling
      of interest method of accounting for business combinations and requires that
      all
      business combinations occurring after July 1, 2001 be accounted for using the
      purchase method. The adoption of SFAS No. 141 did not have an impact on the
      Company’s consolidated financial statements.





Emerging
      Issues Task Force ("EITF") No. 98-3, " *Determining
      Whether a Nonmonetary Transaction Involves Receipt of a Productive Asset or
      of a
      Business,* "
      defines
      the elements necessary to evaluate whether a business has been received in
      a
      nonmonetary exchange transaction. EITF 98-3 defines a business as a
      self-sustaining integrated set of activities and assets conducted and managed
      for the purpose of providing a return to investors. A business consists of
      (a)
      inputs, (b) processing applied to those inputs, and (c) resulting outputs that
      are used to generate revenues. Pursuant to EITF 98-3, since the acquisition
      of
      certain assets (See Note 4) did not have all the required elements to be
      considered the purchase of a business, the Company recorded the transaction
      as
      an asset purchase.





***Revenue
      Recognition***





The
      Company generates revenue from prescription drug sales which primarily are
      reimbursed by healthcare insurance carriers and government agencies. As more
      fully explained in Note 1, the Company previously reported revenue on the cash
      basis of accounting because sales (prescriptions) were filled for workers
      compensation related claims (commonly called “green liens”) and had to undergo
      an adjudication process. There was no fixed determinable price for the
      prescription nor was collectibility assured. During the fourth quarter of 2004,
      new management abandoned the green lien line of business in favor of
      conventional prescription sales to patients covered by large health insurance
      providers, with predetermined prices under contractual arrangements and assured
      collectibility. Accordingly, the Company recognizes revenue at the time the
      prescription is filled and picked up by the customer. Customer returns are
      immaterial.




Page
                F-15
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Advertising***





The
      Company expenses the cost of advertising when incurred. Advertising costs for
      the years ended December 31, 2005 and December 31, 2004 were immaterial to
      the
      consolidated financial statements, and are included in selling, general and
      administrative expenses in the accompanying consolidated statements of
      operations.





***Exit
      and Disposal Activities***




The
      Company accounts for expenses related to non-discretionary restructuring
      activities (including workforce reductions) in accordance with SFAS No. 146,
      “Accounting for Costs Associated with Exit and Disposal Activities.”  GAAP
      prohibits the recognition of an exit-activity liability until (a) certain
      criteria (which demonstrate that it is reasonably probable that a present
      obligation to others has been incurred) are met, and (b) the fair value of
      such
      liability can be reasonably estimated.  The Company recorded a
      restructuring charge of approximately $194,000 and $48,000 for the years ended
      December 31, 2005 and 2004, respectively.  See Note 9 for additional
      information.





***Stock-Based
      Compensation***





The
      Company accounts for stock-based compensation issued to employees using the
      intrinsic value based method as prescribed by Accounting Principles Board
      (“APB”) Opinion No. 25, *"Accounting
      for Stock issued to Employees"* and
      related interpretations. Under the intrinsic value based method, compensation
      expense is the excess, if any, of the fair value of the stock at the grant
      date
      or other measurement date over the amount an employee must pay to acquire the
      stock. Compensation expense is recognized over the applicable service period,
      which is usually the vesting period.





SFAS
      No.
      123, *"Accounting
      for Stock-Based Compensation,"* if fully
      adopted, changes the method of accounting for employee stock-based compensation
      to the fair value based method. For stock options and warrants, fair value
      is
      estimated using an option pricing model that takes into account the stock price
      at the grant date, the exercise price, the


expected
      life of the option or warrant, stock volatility and the annual rate of quarterly
      dividends. Compensation expense is recognized over the applicable service
      period, which is usually the vesting period.




Page
                F-16
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Stock-Based
      Compensation*** (continued)





The
      adoption of the accounting methodology of SFAS No. 123 is optional and the
      Company has elected to account for stock-based compensation issued to employees
      using APB No. 25; however, pro forma disclosures, as if the Company had adopted
      the cost recognition requirement of SFAS No. 123, are required to be presented.
      For stock-based compensation issued to non-employees, the Company uses the
      fair
      value method of accounting under the provisions of SFAS No. 123.





FASB
      Interpretation No. 44 ("FIN 44"), *"Accounting
      for Certain Transactions Involving Stock Compensation, an Interpretation of
      APB
      25,"* clarifies
      the application of APB No. 25 for (a) the definition of employee for purpose
      of
      applying APB No. 25, (b) the criteria for determining whether a stock option
      plan qualifies as a non-compensatory plan, (c) the accounting consequence of
      various modifications to the terms of a previously fixed stock option or award,
      and (d) the accounting for an exchange of stock compensation awards in a
      business combination. Management believes that the Company accounts for
      transactions involving stock compensation in accordance with FIN
      44.





SFAS
      No.
      148, " *Accounting
      for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
      No. 123* ,"
      was
      issued in December 2002 and is effective for fiscal years ended after December
      15, 2002. SFAS No. 148 provides alternative methods of transition for a
      voluntary change to the fair value based method of accounting for stock-based
      employee compensation. In addition, SFAS No. 148 amends the disclosure
      requirements of SFAS No. 123 to require prominent disclosure in both annual
      and
      interim financial statements about the method of accounting for stock-based
      employee compensation and the effect of the method used on reported results.
      At
      December 31, 2004 the Company has one stock-based employee compensation plan
      which is described more fully in Note 8. The following table illustrates the
      effect on net loss and loss per common share for the years ended December 31,
      2005 and 2004, as if the Company had applied the fair value recognition
      provisions of SFAS No. 123 for all of its stock-based employee compensation
      plans.




Page
                F-17
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Stock-Based
      Compensation*** (continued)





**2005**
            
            **2004**
              **(As
                Restated)**Net
                (loss) as reported
            $
            (4,797,092)
            
            $
            (7,903,706)Stock
                based compensation, net of tax
            
            (2,600)
            
            
            (8,550)Pro
                forma net (loss)
            $
            (4,799,692)
            
            $
            (7,912,256)Basic
                and diluted (loss) per common share:As
                reported
            $
            (0.12)
            
            $
            (0.19)Pro
                forma
            $
            (0.12)
            
            $
            (0.19)




The
      assumptions used in the Black Scholes option pricing
      model for the years ended December 31, 2005 and 2004 were as
      follows:





**2005**
            
            **2004**Discount
                rate
            
            4.1%
            
            
            5%Volatility
            
            140%
            
            
            130%Expected
                life (years)
            
            3.0
            
            
            3.0Expected
                dividend yield
            
            -
            
            
            -





The
      above
      proforma effects of applying SFAS 123 are not necessarily representative of
      the
      impact on the results of operations for future years.





***Basic
      and Diluted Loss per Common Share***





The
      Company computes loss per common share using SFAS No. 128 “ *Earnings
      Per Share* ”.
      Basic
      loss per share is computed by dividing net loss applicable to common
      shareholders by the weighted average number of common shares outstanding for
      the
      reporting period. Diluted loss per share reflects the potential dilution that
      could occur if securities or other contracts, such as stock options and warrants
      to issue common stock, were exercised or converted into common stock. Because
      the Company has incurred net losses and there are no dilutive potential common
      shares, basic and diluted loss per common share are the same. There were
      14,780,875 warrants and options convertible into one share of the Company’s
      common stock issued and outstanding as of December 31, 2005.




Page
                F-18
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Income
      Taxes***





The
      Company accounts for income taxes under the provisions of SFAS No. 109,
      " *Accounting
      for Income Taxes"* . 
      SFAS No. 109 requires recognition of deferred tax liabilities and assets for
      the
      expected future tax consequences of events that have been included in the
      financial statements or income tax returns.  Under this method deferred tax
      liabilities and assets are determined based on the difference between the
      financial statement and tax bases of assets and liabilities using enacted tax
      rates for the year in which the differences are expected to reverse (See Note
      10).





***Fair
      Values of Financial Instruments***





SFAS
      No.
      107 “ *Disclosures
      About Fair Value of Financial Instruments* ”
      requires disclosure of fair value information about financial instruments when
      it is practicable to estimate that value. Management believes that the carrying
      amounts of the Company’s financial instruments, consisting primarily of cash,
      accounts receivable, and accounts payable and accrued liabilities approximated
      their fair values at December 31, 2005 and 2005, due to their short-term nature.





Management
      also believes that
      the
      December 31, 2005 and 2004 interest rate associated with the notes payable
      approximates the market interest rate for this type of debt instrument and
      as
      such, the carrying amount of the notes payable approximates its fair
      value.




In
        the
        opinion of management, the fair value of transactions with related parties
        can
        not be estimated without incurring excessive costs; for that reason, the
        company
        has not provided such disclosure. However, other information about related-party
        liabilities (such as the carrying amount, the interest rate, and the maturity
        date) is provided where applicable elsewhere in these notes to the consolidated
        financial statements.


***Reclassifications***





Certain
      amounts presented in the 2004 consolidated financial statements have been
      reclassified to conform to the current year’s presentation. Such
      reclassifications have no effect on previously reported results of
      operations.




Page
                F-19
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Significant
      Recently Issued Accounting Pronouncements*** ****





In
      December 2004, the FASB issued SFAS No. 123-R, " *Share-Based
      Payment* ,"
      which
      requires that the compensation cost relating to share-based payment transactions
      (including the cost of all employee stock options) be recognized in the
      financial statements. That cost will be measured based on the estimated fair
      value of the equity or liability instruments issued. SFAS No. 123-R covers
      a
      wide range of share-based compensation arrangements including share options,
      restricted share plans, performance-based awards, share appreciation rights,
      and
      employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, and
      supersedes APB Opinion No. 25. Small Business Issuers are required to apply
      SFAS
      No. 123-R in the first interim or annual reporting period that begins on or
      after December 15, 2005. Thus, the Company's consolidated financial statements
      will reflect an expense for (a) all share-based compensation arrangements
      granted after December 31, 2005 and for any such arrangements that are modified,
      cancelled, or repurchased after that date, and (b) the portion of previous
      share-based awards for which the requisite service has not been rendered as
      of
      that date, based on the grant-date estimated fair value. Management is
      evaluating the effect 123-R will have on its future consolidated financial
      statements.





In
      May
      2005, the FASB issued SFAS No. 154, " *Accounting
      Changes and Error Corrections* ,"
      which
      replaces APB Opinion No. 20 and FASB Statement No. 3. This pronouncement applies
      to all voluntary changes in accounting principle, and revises the requirements
      for accounting for and reporting a change in accounting principle. SFAS No.
      154
      requires retrospective application to prior periods' financial statements of
      a
      voluntary change in accounting principle, unless it is impracticable to do
      so.
      This pronouncement also requires that a change in the method of depreciation,
      amortization, or depletion for long-lived, non-financial assets be accounted
      for
      as a change in accounting estimate that is affected by a change in accounting
      principle.




Page
              F-20
 Table
            of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Significant
      Recently Issued Accounting Pronouncements*** **** (continued)





SFAS
      No.
      154 retains many provisions of APB Opinion 20 without change, including those
      related to reporting a change in accounting estimate, a change in the reporting
      entity, and correction of an error. The pronouncement also carries forward
      the
      provisions of SFAS No. 3 which govern reporting accounting changes in interim
      financial statements. SFAS No. 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      The Statement does not change the transition provisions of any existing
      accounting pronouncements, including those that are in a transition phase as
      of
      the effective date of SFAS No. 154.





In
      February 2006, the FASB issued SFAS No. 155 entitled “ *Accounting
      for Certain Hybrid Financial Instruments* ,”
an
      amendment of SFAS No. 133 (“ *Accounting
      for Derivative Instruments and Hedging Activities* ”)
      and
      SFAS No. 140 (“ *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* ”).
      In
      this context, a hybrid financial instrument refers to certain derivatives
      embedded in other financial instruments. SFAS No. 155 permits fair value
      re-measurement of any hybrid financial instrument which contains an embedded
      derivative that otherwise would require bifurcation under SFAS No. 133. SFAS
      No.
      155 also establishes a requirement to evaluate interests in securitized
      financial assets in order to identify interests that are either freestanding
      derivatives or “hybrids” which contain an embedded derivative requiring
      bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips
      are subject to SFAS No. 133, and provides that concentrations of credit risk
      in
      the form of subordination are not embedded derivatives. SFAS No. 155 amends
      SFAS
      No. 140 to eliminate the prohibition on a qualifying special-purpose entity
      from
      holding a derivative financial instrument that pertains to a beneficial interest
      other than another derivative. When SFAS No. 155 is adopted, any difference
      between the total carrying amount of the components of a bifurcated hybrid
      financial instrument and the fair value of the combined “hybrid” must be
      recognized as a cumulative-effect adjustment of beginning deficit/retained
      earnings.





SFAS
      No.
      155 is effective for all financial instruments acquired or issued after the
      beginning of an entity’s first fiscal year that begins after September 15, 2006.
      Earlier adoption is permitted only as of the beginning of a fiscal year,
      provided that the entity has not yet issued any annual or interim financial
      statements for such year. Restatement of prior periods is prohibited.





Management
      does not believe that SFAS No. 154 and No. 155 will have an impact on its
      consolidated financial statements.




Page
                F-21
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Recently
      Issued Accounting Pronouncements*** **** (continued)





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force), the American Institute of Certified Public Accountants,
      and
      the Securities and Exchange Commission (the “SEC”) did not or are not believed
      by management to have a material impact on the Company's present or future
      consolidated financial statements.





**3.**  **PROPERTY
      AND EQUIPMENT**





Property
      and equipment consisted of the following as of December 31:





**2005**
            
            **2004**Furniture
                and equipment
            $
            17,212
            
            $
            41,961Computer
                equipment and information systems
            
            299,099
            
            
            296,816Leasehold
                improvements
            
            285,344
            
            
            454,475601,655
            
            
            793,252Less
                accumulated depreciation and amortization
            
            (160,685)
            
            
            (53,058)$
            440,970
            
            $
            740,194




**4.**  **INTANGIBLE
      ASSETS**





In
      2003,
      the Company acquired the rights to an exclusive license ("License") to operate
      Safescript Pharmacies in California, Oregon, Washington, and Alaska from
      Safescript Pharmacies, Inc., formerly known as RTIN Holdings, Inc., (the
      "Licensor"). In connection with this transaction, the Company assumed a note
      payable to the Licensor (see Note 7), executed a new note payable with its
      former Chief Executive Officer (see Note 7) and paid $37,000 in
      cash.





As
      of
      March 31, 2004, management determined that the License was 100% impaired based
      on (a) the uncertainty of the Licensor’s ability to continue as a going concern,
      which created substantial doubt about the Licensor’s ability to support their
      e-prescribing technology; (the Licensor eventually filed for bankruptcy - see
      Note 12); (b) the Company’s dispute with the Licensor, and (c) the Company’s
      implementation of new technology at its first two pharmacies. Accordingly,
      the
      Company impaired the entire intangible asset of approximately $3 million in
      the
      accompanying consolidated statements of operations.




Page
                F-22
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**4.**  **INTANGIBLE
      ASSETS** (continued)





On
      March
      12, 2004 **,** the
      Company entered into a technology license agreement ("Technology License")
      with
      Network Technology, Inc. ("RxNT"). The Technology License grants the Company
      the
      right to use RxNT’s e-prescribing technology under the Company’s brand name
      "Assured Script". Pursuant to the Technology License agreement, the Company
      paid
      RxNT $50,000 at the execution of the agreement and $50,000 at the launch of
      the
      Company’s branded pharmacy. As of December 31, 2004, the Company paid $100,000
      which was recorded in property and equipment.




**5.**  **LINE
      OF CREDIT FROM A RELATED PARTY**





In
      February 2005, the Company entered into an accounts receivable servicing
      agreement and a line of credit agreement with Mosaic Financial Services, Inc.
      (the “Lender” or “Mosaic”). This agreement provided the Company financing for
      inventory purchases over an extended period of time. Under the terms of the
      line
      of credit agreement, the Company was able to draw a maximum of $500,000 to
      purchase inventory. On July 1, 2005, the line of credit limit was increased
      to
      $700,000. These agreements were for a one-year term with a provision to
      automatically renew unless either party provided notice of termination within
      180 days prior to the end of the term. The line of credit had a monthly interest
      rate of 1.25% of the then line of credit limit. The line of credit was secured
      by substantially all of the Company's existing and future assets.





Pursuant
      to the above agreement, the Lender had a continuing right during the term to
      convert all or a portion of the outstanding obligations into a number of shares
      of the Company’s common stock determined at a conversion price equal to 80% of
      the volume weighted average price of the Company’s common stock as quoted by
      Bloomberg, LP for the seven trading day weighted average closing bid price
      for
      the common stock on the OTCBB (or such other equivalent market on which the
      common stock is then quoted) calculated as of the trading day immediately
      preceding the date the conversion right is exercised. The conversion price
      per
      share shall not be less than $0.25 or more than $0.75. The Lender is only
      entitled to piggyback registration rights upon exercise of this conversion
      right, and the Company is not contractually liable for any registration rights
      penalties.





On
      October 24, 2005, the Company authorized the issuance of 2,500,000 restricted
      common shares at $0.28 per share to Mosaic in order to convert their entire
      outstanding balance of $700,000 into common stock in accordance with the
      conversion right in the line of credit agreement. The issuance of these shares
      to Mosaic satisfied in full the Company’s obligations under such agreement.
      These shares were issued pursuant to Section 4(2) of the Securities Act of
      1933,
      as amended (the “Securities Act”).




Page
                F-23
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**5.**  **LINE
      OF CREDIT** (continued)





On
      October 31, 2005, the Company entered into a new line of credit agreement for
      $1,000,000 with Mosaic. This line has a one-time commitment fee equal to 3%
      of
      the initial amount of the line of credit. The agreement has a monthly interest
      rate of 1.5% of the then line of credit limit. The line of credit is secured
      by
      the Company’s open accounts receivable due from all customers and substantially
      all other assets of the Company. The outstanding balance under this line of
      credit was $200,000 as of December 31, 2005.





Pursuant
      to the October 2005 agreement, Mosaic has a continuing right during the term
      to
      convert all or a portion of the outstanding obligations into a number of shares
      of the Company’s common stock determined at a conversion price equal to the
      rolling seven trading day weighted average closing bid price for the common
      stock on the OTCBB (or such other equivalent market on which the common stock
      is
      then quoted) calculated as of the trading day immediately preceding the date
      the
      conversion right is exercised. The conversion price per share shall not be
      less
      than $0.40 or more than $0.80. Mosaic is only entitled to piggyback registration
      rights upon exercise of this conversion right, and the Company is not
      contractually liable for any registration rights penalties.





The
      group
      financial officer of Mosaic Capital Advisors, LLC which is the parent company
      of
      Mosaic has been a member of the Company’s board of directors since September
      2005.




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





On
      October 25, 2005, the Company entered into a loan agreement with Malaton
      Investment Corporation S.A. (“Malaton”). Under the terms of the agreement, the
      Company received $250,000 for a twelve month term which can be extended for
      an
      additional twelve months by mutual consent. On the date of funding, the Company
      paid the lender a one time commitment fee equal to 3% of the initial loan
      amount. The loan has an interest rate of 15% per annum to be paid in monthly
      installments. The outstanding balance under this loan was $250,000 as of
      December 31, 2005.





Pursuant
      to the terms of this agreement, Malaton has a continuing right during the term
      to convert all or a portion of the then outstanding obligation into a number
      of
      shares of the Company’s common stock determined at a conversion price equal to
      the rolling seven trading day weighted average closing bid price for the common
      stock on the OTCBB (or such other equivalent market on which the common stock
      is
      then quoted) calculated as of the trading day immediately preceding the date
      the
      conversion right is exercised. The conversion price per share shall not be
      less
      than $0.40 or more than $0.80. Malaton is only entitled to piggyback
      registration rights upon exercise of this conversion right, and the Company
      is
      not contractually liable for any registration rights penalties.




Page
                F-24
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**6.**  **NOTES
      PAYABLE** (continued)





On
      December 21, 2005, the Company entered into a loan agreement with Kenido
      Holdings, Inc. (“Kenido”). Under the terms of the agreement, the Company
      received $175,000 for a twelve month term which can be extended for an
      additional twelve months by mutual consent. On the date of funding, the Company
      paid the lender a one time commitment fee equal to 3% of the initial loan
      amount. The loan has an interest rate of 15% per annum to be paid in monthly
      installments. The outstanding balance under this loan was $175,000 as of
      December 31, 2005.





Pursuant
      to the terms of this agreement, the Kenido has a continuing right during the
      term to convert all or a portion of the then outstanding obligation into a
      number of shares of the Company’s common stock determined at a conversion price
      equal to the rolling seven trading day weighted average closing bid price for
      the common stock on the OTCBB (or such other equivalent market on which the
      common stock is then quoted) calculated as of the trading day immediately
      preceding the date the conversion right is exercised. The conversion price
      per
      share shall not be less than $0.40 or more than $0.80. Kenido is only entitled
      to piggyback registration rights upon exercise of this conversion right, and
      the
      Company is not contractually liable for any registration rights
      penalties.




**7.**  **NOTES
      PAYABLE TO RELATED PARTIES AND STOCKHOLDERS**





***Licensor
      Note***





In
      May
      2003, the Company assumed a note payable from Safescript Pharmacies, Inc. (the
      “Licensor”) of approximately $3,177,000 in connection with acquisition of a
      License (see Note 4), of which $2,000,000 was converted into 4,444,444 shares
      of
      the Company’s restricted common stock at $0.45 per share. The remaining balance
      of approximately $1,177,000 was payable in monthly installments of $25,000
      including interest at 5% per annum with a balloon payment of approximately
      $802,000 due in December 2004. This note was secured by the License.





Due
      to
      the Company’s dispute with the Licensor (see Note 12), the Company ceased making
      monthly installment payments. The outstanding balance of the note was
      approximately $1,013,000 as of December 31, 2004. On
      June
      30, 2005, the United States Bankruptcy Court for the Eastern District of Texas
      approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
      between the Company and the Licensor. Under the terms of the Settlement
      Agreement, the Licensor retained 100,000 shares of the Company’s common stock
      and returned the remaining 4,344,444 shares of common stock for cancellation.
      In
      addition, we issued the Licensor 500,000 additional shares of Company common
      stock and agreed to dismiss the lawsuit then pending in the U.S. District Court
      for the Eastern District of Texas with prejudice.




Page
                F-25
 Table
              of Contents
 ASSURED
                  PHARMACY, INC. AND
                  SUBSIDIARIES
 (formerly
                  known as eRxsys,
                  Inc.)
 NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
 December
                  31, 2005 and December 31,
                  2004


**7.** **NOTES
          PAYABLE TO RELATED PARTIES AND STOCKHOLDERS** (continued)





***Licensor
      Note*** ** (continued)





The
      Settlement Agreement contained a mutual release which resulted in the Licensor
      releasing the Company from any liability with respect to the note payable due
      to
      the Licensor in the amount of approximately $1,013,000. For financial reporting
      purposes, the Company has treated the 500,000 shares to the Licensor as
      constructively issued as of June 30, 2005. Accordingly,
      the Company recorded for the quarter ended June 30, 2005, a credit to common
      stock for $500; a credit to additional paid in capital for $148,000 (the
      estimated fair value of the stock based on the trading price on the settlement
      date); and a gain on settlement of debt of approximately $1,012,000 in the
      accompanying consolidated statements of operations. Based on FASB No. 145 and
      APB No. 30, management concluded that such gain is not considered extraordinary
      and is presented as a component of loss from continuing operations.





***Parker
      Note***





In
      December 2003, the Company entered into a note payable with Mr. Parker, its
      former Chief Executive Officer (“former CEO”) for $370,000 in connection with
      the acquisition of the License (see Note 4). This note accrued interest at
      a
      fixed rate of 5% per annum. The note was secured by the License and was to
      mature on December 31, 2007. The outstanding balance of the note was $370,000
      as
      of December 31, 2005.





In
      a
      termination and settlement agreement entered into with the former CEO on
      February 1, 2005, the former CEO agreed to accept $10,000 cash, 494,000 shares
      of restricted common stock and warrants (fully vested and immediately
      exercisable, five year life, at a price range of $0.75 to $1.25 per share)
      to
      purchase 1,300,000 shares of the Company’s common stock and discharge the
      Company from all liability associated with this debt. During the quarter ended
      September 30, 2005, the Company paid the $10,000. Accordingly, the Company
      recorded a credit to common stock for $494; a credit to additional paid in
      capital for $118,006 (the estimated fair value of the stock based on the trading
      price on the settlement date); a credit to additional paid in capital for
      $329,000 (the estimated fair value of the warrants based on the Black-Scholes
      pricing model on the settlement date), and a $87,960 loss on settlement of
      debt,
      thereby extinguishing this liability.




Page
              F-26
 Table
            of Contents
 ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004
   **7.** **NOTES
        PAYABLE TO RELATED PARTIES AND STOCKHOLDERS** (continued)





***TAPG
      Note***





In
      January 2005, the Company entered into an agreement with TAPG to advance
      $270,000 to the Company in connection with establishing pharmacies in the
      Northwestern United States (see Note 1). The note was to be funded by TAPG
      in
      monthly installments of $45,000 up to a maximum of $270,000. The note accrues
      interest at a fixed rate of 7% per annum, and is secured by the assets of the
      Northwestern pharmacies of APN. However, the Company received only $40,000
      during the year ended December 31, 2005. The note matured in January 2006 and
      was not extended. The Company repaid $10,000 in March 2005 and management
      intends to repay the remaining balance in 2006. As of December 31, 2005, the
      remaining balance due to TAPG for monies advanced under this agreement and
      accrued interest amounted to $40,000 and 1,901, respectively.





***Robert
      James, Inc. Note***





In
      December 2004, the Company received a loan evidenced by a promissory note from
      Robert James, Inc., an entity under the control of our current CEO Mr. Robert
      DelVecchio, for the purpose of purchasing inventory for our pharmacies. The
      promissory note was for a maximum of $150,000, and matured on the earlier of
      March 6, 2005 or the date that we were able to consummate an accounts receivable
      factoring arrangement for our working capital. The outstanding principal amount
      of this promissory note bore interest at 3% per month, with monthly financing
      and administrative fees until repaid. The outstanding balance of this note
      was
      $50,000 as of December 31, 2004. The Company drew an additional $75,000 in
      early
      2005. On February 21, 2005, the Company paid the outstanding balance of $125,000
      in full including all accrued interest and related fees.





***Other
      Stockholders’ Notes***





During
      the first quarter of 2005, the Company entered into four ninety-day
      notes payable to three stockholders. Three of the notes totaling $190,000 are
      unsecured and have a fixed interest rate of 3% per annum. The remaining note
      in
      the amount of $50,000 is unsecured and has a fixed interest rate of 7.5% per
      annum. On August 15, 2005, the Company repaid the balance of the $50,000 note
      together with accrued interest of $1,350. Also, during the quarter ended
      September 30, 2005, the Company extended the maturity date of the remaining
      three notes payable to January 31, 2006. The Company was able to further extend
      the maturity date of these three notes from January 31, 2006 to January 31,
      2007
      (see Note 14). These notes accrued interest in the amount of approximately
      $6,700 through December 31, 2005.




Page
                F-27
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**8.**  **EQUITY
      TRANSACTIONS**





***Common
      Stock***





During
      the one-month transition period ended December 31, 2003, the Company issued
      1,544,149 shares of restricted common stock to consultants for services rendered
      valued at approximately $664,000 (estimated to be the fair value based on the
      trading price on the issuance date).




During
      the year ended December 31, 2004, the Company issued 500,000 shares of
      restricted common stock to an investment banker for services
      valued  at approximately $280,000 (estimated to be the fair value
      based on the trading price on the issuance date) included in consulting and
      other compensation in the accompanying consolidated statement of operations.





During
      the year ended December 31, 2004, in connection with the extension of a
      consulting agreement with the investment banker, the Company issued 150,000
      shares of restricted common stock, with warrants to purchase 350,000 shares
      of
      the Company’s common stock, exercisable at $0.60 per share for a period of five
      years from the date of issuance, to the investment banker for services
      rendered. The 150,000 shares of restricted common stock were valued at
      approximately $70,500 (estimated to be the fair value based on the trading
      price
      on the issuance date) and the 350,000 warrants were valued at approximately
      $196,000 (estimated to be the fair value based on the Black-Scholes pricing
      model on the issuance date). Such expense was included in consulting and other
      compensation in the accompanying consolidated statement of operations.
      Subsequent to December 31, 2004, the investment banking firm’s president was
      appointed as the Company’s CEO.




During
      the year ended December 31, 2004, the Company issued 716,625 shares of
      restricted common stock to consultants for services rendered valued at
      approximately $268,400 (estimated to be the fair value based on the trading
      price on the issuance date).





During
      the year ended December 31, 2004, the Company issued 20,000 shares of restricted
      common stock in connection with notes payable issued to certain shareholders
      and
      third parties valued at approximately $9,500 (estimated to be fair value based
      on the trading price on the issuance date).




Page
                F-28
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**8.**  **EQUITY
      TRANSACTIONS** (continued)





***Common
      Stock*** ** (continued)





During
      the year ended December 31, 2004, the Company completed its offering of common
      stock to accredited investors through a private placement. The Company offered
      a
      maximum of 4,375,000 units at a price of $0.80 per unit, with a minimum offering
      of 625,000 units. Each unit consisted of two shares of restricted common stock
      and one warrant to purchase one share of restricted common stock at an exercise
      price of $0.60 per share exercisable for twenty-four months after June 17,
      2004.
      The Company agreed to commence the registration process with the SEC for the
      common stock issued and the common stock underlying the warrants within ninety
      days after the (June 17, 2004) termination of this offering. If the average
      closing price of the Company’s common stock on the OTCBB for the thirty
      consecutive trading days following the effectiveness of the registration
      statement is equal to or greater than $1.20, the Company has the right to call
      the warrants at the exercise price within fifteen business days of such
      occurrence. During the three months ended June 30, 2004, the Company issued
      7,391,750 shares of its restricted common stock in connection with the private
      placement. The Company received proceeds of approximately $2,650,000, net of
      broker/dealer commission, legal fees, and Blue Sky fees related to the private
      placement of $306,548 which were recorded in additional paid-in capital in
      the
      accompanying consolidated balance sheet.





On
      December 15, 2004, the Company filed the registration statement described in
      the
      preceding paragraph (the “Registration Statement”) with the SEC. The Company has
      since filed two amendments to the Registration Statement and has recently
      received comments on the amendment that was filed in January 2006 from the
      SEC.
      However, pending the filing of the Company’s December 31, 2005 Form 10-KSB, the
      Company had not amended the Registration Statement as of March 20, 2006. Thus,
      as of that date, the Registration Statement had not been declared
      effective.





In
      March
      2005, the Company issued 124,997 shares of restricted common stock to four
      consultants in connection with services rendered valued at $33,249 (estimated
      to
      be the fair value based on the trading price on the issuance date). These
      securities were issued pursuant to Section
      4(2) of the Securities Act.





During
      the quarter ended March 31, 2005, the Company issued 100,000 shares of its
      common stock to directors of the Company in consideration for their services
      rendered during the March 31, 2005 quarter. Such shares were valued at $38,000
      (estimated to be the fair value based on the trading price on the issuance
      date). These securities were issued pursuant to Section 4(2) of the Securities
      Act.




Page
                F-29
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**8.**  **EQUITY
      TRANSACTIONS**





***Common
      Stock*** (continued)





In
      a
      termination and settlement agreement entered into with the Company’s former CEO
      on February 1, 2005, the Company agreed to issue the former CEO 494,000 shares
      of restricted common stock (see Note 7). The former CEO also agreed to return
      5,400,000 shares of the Company’s common stock to treasury. In termination and
      settlement agreements with two other officers, they agreed to return 1,114,214
      shares of the Company’s common stock to treasury.





During
      the quarter ended June 30, 2005, the Company commenced a private equity offering
      to accredited investors and sold 910,000 units at $0.80 per unit, for an
      aggregate of approximately $712,000 in net proceeds. Each unit is priced at
      $0.80 and consists of two shares of restricted common stock and one warrant
      to
      purchase one share of restricted common stock at an exercise price of $0.60
      exercisable for thirty-six months after the close of the offering. These
      securities were issued pursuant to Rule 506 of Regulation D.





During
      the quarter ended June 30, 2005, the Company issued 168,412 shares of restricted
      common stock to consultants in connection with services rendered valued at
      $49,042 (estimated to be the fair value based on the trading price on the
      issuance date). These securities were issued pursuant to Section
      4(2) of the Securities Act.





Under
      the
      terms of the Settlement Agreement (see Note 7), the Licensor retained 100,000
      shares of the Company’s common stock and returned the remaining 4,344,444 shares
      of common stock for cancellation. Accordingly, the Company recorded a debit
      to
      treasury stock for $4,344. In addition, the Company agreed to issue the Licensor
      500,000 additional shares of its common stock. These
      securities were issued pursuant to Section
      4(2) of the Securities Act.





During
      the quarter ended September 30, 2005, the Company sold 856,250 units at $0.80
      per unit, or an aggregate of $685,000 in proceeds, to accredited investors
      in a
      private equity offering. Each unit was priced at $0.80 and consisted of two
      shares of restricted common stock and one warrant to purchase one share of
      restricted common stock at an exercise price of $0.60 exercisable for thirty-six
      months after the close of the offering. These securities were issued pursuant
      to
      Rule 506 of Regulation D.





During
      the quarter ended September 30, 2005 the Company issued 165,000 shares of
      restricted common stock to a consultant for services rendered, valued at $46,200
      (estimated to be the fair value based on the trading price on the issuance
      date). This security was issued pursuant to Section 4(2) of the Securities
      Act.




Page
                F-30
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**8.**  **EQUITY
      TRANSACTIONS**





***Common
      Stock*** (continued)





During
      the quarter ended September 30, 2005, the Company issued 1,150,000 shares of
      restricted common stock to consultants in connection with one-year service
      agreements. Such stock was valued at $334,500 (estimated to be the fair value
      based on the trading price on the issuance date). As a result of these
      transactions, the Company recorded a debit to deferred compensation of
      $334,500 and a credit to common stock and additional paid-in capital of $1,150
      and $333,350, respectively. The Company is amortizing such deferred compensation
      over the life of the consulting contracts. These securities were issued pursuant
      to Section 4(2) of the Securities Act.





In
      August
      2005, the Company issued 500,000 shares of its common stock to directors of
      the
      Company in consideration for services rendered during the September 30, 2005
      quarter. These shares were valued at $140,000 (estimated to be the fair value
      based on the trading price on the issuance date). These securities were issued
      pursuant to Section 4(2) of the Securities Act.





Also,
      in
      August 2005, the Company issued 250,000 shares of restricted common stock for
      a
      performance-based bonus earned by an officer of the Company valued at $70,000
      (estimated to be the fair value based on the trading price on the issuance
      date). The Company also granted options to purchase 250,000 shares of the
      Company’s common stock exercisable one-third per year for a period of three
      years from the date of issuance at a price of $0.60 per share. These securities
      were issued pursuant to Section 4(2) of the Securities Act.





During
      the quarter ended December 31, 2005, the Company sold 143,750 units at $0.80
      per
      unit, or an aggregate of $115,000 in proceeds, to accredited investors in a
      private equity offering. Each unit was priced at $0.80 and consisted of two
      shares of restricted common stock and one warrant to purchase one share of
      restricted common stock at an exercise price of $0.60 exercisable for thirty-six
      months after the close of the offering. These securities were issued pursuant
      to
      Rule 506 of Regulation D.




Page
                F-31
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**8.**  **EQUITY
      TRANSACTIONS**





***Common
      Stock*** (continued)





During
      the quarter ended September 30, 2005, the Company issued 169,090 shares of
      restricted common stock to a consultant for services rendered, valued at $60,872
      (estimated to be the fair value based on the trading price on the issuance
      date). These securities were issued pursuant to Section 4(2) of the Securities
      Act.





During
      the quarter ended September 30, 2005, the Company issued 280,000 shares of
      restricted common stock to two consultants in connection with one-year service
      agreements, valued at $115,000 (estimated to be the fair value based on the
      trading price on the issuance date). As a result of these transactions, the
      Company recorded a debit to deferred compensation of $115,000 and a credit
      to
      common stock and additional paid in capital of $280 and $114,720, respectively.
      The Company is amortizing such deferred compensation over one year. These
      securities were issued pursuant to Section 4(2) of the Securities
      Act.





***Warrants***





During
      the year ended December 31, 2004, in connection with the June 2004 private
      placement described above, the Company issued 3,695,875 warrants to purchase
      one
      share of restricted common stock at an exercise price of $0.60 exercisable
      for
      twenty-four months from June 17, 2004.





During
      the year ended December 31, 2004, the Company issued warrants to purchase
      100,000 shares of its common stock, exercisable at $0.60 per share for a period
      of five years from the date of issuance, to a consultant.  The warrants are
      valued at approximately $56,000 (estimated to be the fair value based on the
      Black-Scholes pricing model on the issuance date). Such expense is included
      in
      consulting and other compensation in the accompanying consolidated statement
      of
      operations.





During
      the year ended December 31, 2004, in connection with the extension of a
      consulting agreement with an investment banker, the Company issued 150,000
      shares of restricted common stock, with warrants to purchase 350,000 shares
      of
      the Company’s common stock, exercisable at $0.60 per share for a period of five
      years from the date of issuance, to the investment banker for services
      rendered. The 350,000 warrants were valued at approximately $196,000 (estimated
      to be the fair value based on the Black-Scholes pricing model on the issuance
      date). The Company recorded such amount as consulting expense which is included
      in consulting and other compensation in the accompanying consolidated statements
      of operations.




Page
                F-32
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**8.**  **EQUITY
      TRANSACTIONS** (continued)





***Warrants*** ** (continued)





During
      the quarter ended December 31, 2005, the Company issued warrants to purchase
      125,000 shares of its common stock to consultants for services. Such warrants
      were valued at $31,250 (estimated to be the fair value based on the
      Black-Scholes pricing model on the issuance date). The Company recorded such
      amount as consulting expense which is included in consulting and other
      compensation in the accompanying consolidated statements of
      operations.





During
      the year ended December 31, 2005, in connection with a private placement, the
      Company issued warrants to purchase 1,910,000 shares of the Company’s restricted
      common stock at an exercise price of $0.60 exercisable for thirty-six months
      after October 2005.





The
      following tables summarize information concerning outstanding warrants as of
      December 31, 2005:





**Number
                of Warrants**
            
            **Weighted-Average
                Exercise Price**Warrants
                outstanding and exercisable atJanuary
                1, 2004
            
            -
            
            
            -Granted
            
            4,145,875
            
            $
            0.60Cancelled
                or forfeited
            
            -
            
            
            -Warrants
                outstanding and exercisable atDecember
                31, 2004
            
            4,145,875
            
            $
            0.60Granted
            
            3,335,000
            
            $
            0.60Cancelled
                or forfeited
            
            -
            
            
            -Warrants
              outstanding
              and exercisable atDecember
                31, 2005
            
            7,480,875
            
            $
            0.60





No
      warrants were issued prior to January 1, 2004.





**Outstanding**
            
            **Exercisable****Range
                of**
              **Exercise**
              **Price**
            
            **Number
                of Shares**
            **Weighted-Average
                Exercise**
              **Price**
            **Weighted-Average
                Remaining**
              **Life
                (Years)**
            
            **Number**
              **of
                Shares**
            **Weighted-Average
                Exercise**
              **Price**
            **Weighted-Average
                Remaining**
              **Life
                (Years)**$0.60
            
            7,480,875
            $1.01
            3.5
            
            7,480,875
            $1.01
            3.5




Page
                F-33
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**8.**  **EQUITY
      TRANSACTIONS** (continued)





***Stock
      Options***





During
      the year ended November 30, 2003, the Company’s Board of Directors approved an
      Incentive Stock Option Plan ("ISOP") to grant options to its key personnel.
      There are two types of options that can be granted under the ISOP: i) options
      intended to qualify as incentive stock options under Section 422 of the Internal
      Revenue Code ("Qualified Stock Options"), and ii) options not specifically
      qualified for favorable income tax treatment under the Internal Revenue Code
      ("Non-Qualified Stock Options"). The ISOP is administered by the Company’s board
      of directors or the compensation committee (the "Administrator"). The Company
      is
      authorized to grant qualified stock options to any of its employees or
      directors.




The
      purchase price for the shares subject to any option shall be determined by
      the
      Administrator at the time of the grant, but shall not be less than 85% of the
      fair market value per share of the Company’s common stock on the grant date.
      Except as described below, the purchase price for the shares subject to any
      Qualified Stock Option shall not be less than 100% of fair market value per
      share of common stock on the grant date. In the case of any Qualified Stock
      Option granted to an employee who owns stock possessing more than 10% of the
      total combined voting power of all classes of stock of the Company or any of
      its
      subsidiaries, the option price shall not be less than 110% of the fair market
      value per share of the Company’s common stock on the grant date.





No
      option
      is exercisable after the expiration of the earliest of: (a) ten years after
      the
      option is granted, (b) three months after the optionee’s employment with the
      Company and its subsidiaries terminates, or a non-employee director or
      consultant ceases to provide services to the Company, if such termination or
      cessation is for any reason other than disability or death, or (c) one year
      after the optionee’s employment with the Company and its subsidiaries
      terminates, or a non-employee director or consultant ceases to provide services
      to the Company, if such termination or cessation is a result of death or
      disability; provided, however, that the agreement for any option may provide
      for
      shorter periods in each of the foregoing instances.





The
      Administrator has the right to set the period within which each option shall
      vest or be exercisable and to accelerate such time frames; however, each option
      shall be exercisable at the rate of at least 20% per year from the grant date.
      Unless otherwise provided by the Administrator, options will not be subject
      to
      any vesting requirements.




Page
                F-34
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**8.**  **EQUITY
      TRANSACTIONS** (continued)





***Stock
      Options*** ** (continued)





For
      the
      year ended December 31, 2004, under the ISOP, the Company granted options to
      purchase 165,000 shares of common stock to employees. The stock options have
      an
      exercise price of $0.50 per share and vest one-third each consecutive year
      following the date of grant. Such stock options expire on the earlier of three
      years after vesting or ninety days after termination of employment with the
      Company. 110,000 options were cancelled during the year ended December 31,
      2004.





In
      September 2005, the Company entered into an employment agreement with its Chief
      Executive Officer, Robert DelVecchio. Pursuant to the terms of such agreement,
      the Company granted options to Mr. DelVecchio to purchase 5,000,000 shares
      of
      our common stock for a period of ten years from the date of issuance and
      exercisable at a price of $0.60 per share. These options became fully vested
      and
      exercisable upon issuance, with a fair value of $1,950,000 (using Black Scholes
      to estimate the fair value upon date of issuance). Such expense is included
      in
      salaries and related in the accompanying consolidated statement of operations.
      These options were issued pursuant to Section 4(2) of the Securities Act. The
      Board of Directors issued such options to Mr. DelVecchio for his past services
      to the Company other than as an employee or director. Therefore, these options
      have been accounted for under SFAS No. 123.





In,
      2005,
      the Company granted 1,965,000 options to purchase its common stock to
      consultants in connection with three service agreements. Such options were
      valued at $498,750 (estimated to be the fair value based on the Black-Scholes
      pricing model on the issuance date), and are amortized over the lives of the
      service agreements. The president of Janus Financial Services, Inc., an entity
      that received $1.7 million of the above options has been a member of the
      Company’s board of directors since September 2005. The Company recorded such
      amount as a debit to deferred compensation and a credit to additional paid
      in
      capital. The options have an exercise price of $0.60 per share and have
      contractual lives that range from two to three years.




Page
              F-35
 Table
            of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**8.**  **EQUITY
      TRANSACTIONS** (continued)





***Stock
      Options*** ** (continued)





In
      addition, under the ISOP, the Company granted options to purchase 280,000 shares
      of common stock to employees. The stock options have exercise prices that range
      from $0.39 to $0.60 per share and vest one-third each consecutive year following
      the date of grant. Such stock options expire on the earlier of three years
      after
      vesting or ninety days after termination of employment with the Company.





The
      following tables summarize information concerning outstanding stock options
      as
      of December 31, 2005:





**Number
                of Options**
            
            **Weighted-**
              **Average**
              **Exercise
                Price**Options
                outstanding and exercisable atJanuary
                1, 2004
            
            -
            
            
            -Granted
            
            165,000
            
            $
            0.50Cancelled
                or forfeited
            
            (110,000)
            
            $
            0.50Options
              outstanding
              and exercisable atDecember
                31, 2004
            
            55,000
            
            $
            0.42Granted
            
            7,245,000
            
            $
            0.59Cancelled
                or forfeited
            
            -
            
            
            -Options
              outstanding
              and exercisable atDecember
                31, 2005
            
            7,300,000
            
            $
            0.60








**Outstanding**
            
            **Exercisable****Range
                of**
              **Exercise**
              **Price**
            
            **Number**
              **of
                Shares**
            **Weighted-Average
                Exercise**
              **Price**
            **Weighted-Average
                Remaining**
              **Life
                (Years)**
            
            **Number**
              **of
                Shares**
            **Weighted-Average
                Exercise**
              **Price**
            **Weighted-Average
                Remaining**
              **Life
                (Years)**$0.45
                - $0.60
            
            7,300,000
            $0.60
            7.4
            
            6,265,000
            $0.60
            7.4




Page
                F-36
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**9.**  **RESTRUCTURING
      COSTS**





Because
      the Company’s revenue and operating margin had not grown in line with
      management’s original expectations, the Company adopted a non-discretionary
      restructuring plan that resulted in a workforce reduction and other cost
      reductions (collectively, the “Restructuring”) intended to strengthen the
      Company’s future operating performance. The Company implemented the
      Restructuring during the fourth quarter of 2004 through the first quarter of
      2005.  The Company’s total expense related to this Restructuring was
      approximately $242,000, $48,000 of which was recognized in 2004 and $194,000
      in
      the first quarter of 2005. No restructuring costs have been incurred since
      March
      31, 2005.





The
      Restructuring charge recognized in the first quarter of 2005 was comprised
      primarily of fixed asset write-offs from the termination of construction work
      for the regional office in Fort Worth, Texas and the pharmacy in Santa Monica,
      California. The Company accounts for the costs associated with exiting an
      activity, including costs associated with a reduction of its workforce, in
      accordance with SFAS No. 146.




Page
                F-37
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**10.**  **INCOME
      TAXE** S





A
      reconciliation of income taxes computed at the U.S. Federal Statutory income
      tax
      rate to the provision for income taxes is as follows:





**2005**
            
            **2004**U.S.
                Federal Statutory tax at 34%
            $
            (1,725,000)
            
            $
            (2,907,000)State
                Taxes, net of federal benefit
            
            (305,000)
            
            
            (513,000)Valuation
              Allowance
            
            2,035,000
            
            
            3,420,000Provision
                for income taxes
            $
            5,000
            
            $
            -





The
      net
      deferred income tax asset (liability) consists of the following at December
      31,
      2005 and December 31, 2004:





**2005**
            
            **2004**Net
                Operating Losses
            $
            4,980,000
            
            $
            2,904,000Depreciable
                Assets
            
            1,150,000
            
            
            1,191,000DDeferred
                Tax Assets
            
            6,130,000
            
            
            4,095,000Valuation
                Allowance
            
            (6,130,000)
            
            
            (4,095,000)$
            -
            
            $
            -





Based
      upon the net operating losses incurred since inception, management has
      determined that it is more likely than not that the deferred tax assets as
      of
      December 31, 2005 and 2004 will not be recognized. Consequently, the Company
      has
      established a valuation allowance against the entire deferred tax
      assets.





As
      of
      December 31, 2005, the Company has federal and state net operating losses of
      approximately $12.5 million that begin to expire in 2023 and 2010 for federal
      and state purposes, respectively.





The
      utilization of some or all of the Company’s net operating losses may be severely
      restricted now or in the future by a significant change in ownership as defined
      under the provisions of Section 382 of the Internal Revenue Code of 1986, as
      amended. In addition, utilization of the Company’s California net operating
      losses for the years beginning in 2002 and 2003 has been suspended under state
      law.




Page
                F-38
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**11.**  **LOSS
      PER COMMON SHARE**





The
      following is a reconciliation of the numerators and denominators of the basic
      and diluted loss per common share computations for the years ended December
      31,
      2005 and 2004:





**Year
                Ended December 31, 2005**
            
            **Year
                Ended December 31, 2004**
              **(As
                Restated)**Numerator
              for basic
              and diluted lossper
                common share:Net
                loss charged to common stockholders
            $
            (4,797,092)
            
            $
            (7,903,706)Denominator
              for
              basic and diluted lossper
                common share:Weighted
                average number of shares outstanding
            
            40,961,989
            
            
            41,112,800Basic
                and diluted loss per common share
            $
            (0.12)
            
            $
            (0.19)




**12.**  **COMMITMENTS
      AND CONTINGENCIES**





***Operating
      Leases***





The
      Company occupies buildings and retail space under operating lease agreements
      expiring on various dates through June 2009 with monthly payments ranging from
      approximately $1,400 to $2,600. Certain leases include future rental escalations
      and renewal options.




Page
              F-39
 Table
            of Contents
 ASSURED
              PHARMACY, INC. AND
              SUBSIDIARIES
 (formerly
              known as eRxsys,
              Inc.)
 NOTES
              TO CONSOLIDATED FINANCIAL
              STATEMENTS
 December
              31, 2005 and December 31,
              2004


**12.**  **COMMITMENTS
      AND CONTINGENCIES** (continued)





***Operating
      Leases*** (continued)





As
      of
      December 31, 2005, future minimum payments under operating leases approximated
      the following for the years ending December 31, 2005 and
      thereafter:





2006
            
            151,1342007
            
            155,1012008
            
            134,2092009
            
            49,070Thereafter
            
            -$489,514





Total
      rent expense for the years ended December 31, 2005 and 2004 was approximately
      $141,000 and $217,000 and is included in selling, general, and administrative
      expenses in the accompanying consolidated statements of operations.





***Legal
      Matters***





Safescript
      Pharmacies, Inc. (formerly known as RTIN Holdings, Inc.) failed to provide
      the
      Company with essential services as set forth in the license agreement that
      they
      entered into; this forced the Company to terminate its use of all technology
      granted under the license agreement entered into with Safescript Pharmacies,
      Inc. On March 17, 2004, the Company filed a lawsuit in Nevada State Court
      against Safescript Pharmacies, Inc. seeking damages, declaratory relief, to
      rescind the License and to recover the consideration paid. On March 19, 2004,
      Safescript Pharmacies, Inc. filed for Chapter 11 bankruptcy protection. The
      litigation in Nevada State Court was stayed due to Safescript Pharmacies, Inc.
      filing for bankruptcy. The Company re-filed substantially the same claim as
      an
      adversary proceeding in Safescript Pharmacies, Inc.’s bankruptcy case, which was
      pending in the U.S. Bankruptcy Court located in Tyler, Texas. In July 2004,
      this
      case was transferred to the U.S. District Court for the Eastern District of
      Texas located in Tyler, Texas.





On
      June
      30, 2005, the United Stated Bankruptcy Court for the Eastern District of Texas
      (“District Court”) approved the Settlement Agreement between Safescript
      Pharmacies, Inc., a Texas corporation and Safe Med Systems, Inc., a Texas
      corporation (collectively, “Safescript”), and the Company. Under the terms of
      the Settlement Agreement, Safescript retained 100,000 shares of Company common
      stock and returned the remaining 4,344,444 shares of common stock for
      cancellation (see Note 7). In addition, the Company agreed to issue Safescript
      500,000 additional shares of its common stock and dismiss the lawsuit then
      pending in the District Court with prejudice.




Page
                F-40
 Table
              of Contents


ASSURED
            PHARMACY, INC. AND
            SUBSIDIARIES
 (formerly
            known as eRxsys,
            Inc.)
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 December
            31, 2005 and December 31,
            2004


**12.**  **COMMITMENTS
      AND CONTINGENCIES** (continued)





***Legal
      Matters*** (continued)





The
      Settlement Agreement contained a mutual release which resulted in Safescript
      releasing the Company from any liability with respect to the note payable due
      to
      Safescript in the amount of approximately $1,013,000 (see Note 7).





On
      July
      11, 2005, a creditor of Safescript filed a motion with the District Court for
      reconsideration of its approval of the Settlement Agreement. On October 14,
      2005, the District Court denied the creditor’s motion. The creditor appealed the
      District Court’s approval of the Settlement Agreement. Due to a settlement
      between the Licensor and the creditor, the appeal was withdrawn finalizing
      the
      Company’s Settlement Agreement with the Licensor.





From
      time
      to time, the Company may be involved in various claims, lawsuits, disputes
      with
      third parties, actions involving allegations of discrimination or breach of
      contract actions incidental to the normal operations of the business. Other
      than
      as disclosed herein, the Company is not currently involved in any litigation
      which it believes could have a material adverse effect on its financial position
      or results of operations.




**13.**  **SIGNIFICANT
      FOURTH QUARTER ADJUSTMENTS**





During
      the fourth quarter of 2005, the Company recorded certain adjustments (as
      described below) which affected the previously reported results of operations
      for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.
      The
      Company recorded an adjustment to accrue for credit sales that the Company
      did
      not record in previous quarters since the Company was using the cash basis
      to
      record revenues until management changed to the accrual basis of accounting
      for
      revenue for reasons explained in the “Restatement” section of Note
      1.   The Company also recorded additional revenues that were not
      recorded during the three quarters ended March 31, 2005, June 30, 2005 and
      September 30, 2005.




Page
              F-41
 Table
            of Contents
 ASSURED
                PHARMACY, INC. AND
                SUBSIDIARIES
 (formerly
                known as eRxsys,
                Inc.)
 NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS
 December
                31, 2005 and December 31,
                2004


**13.**  **SIGNIFICANT
      FOURTH QUARTER ADJUSTMENTS** (continued)





The
      following table illustrates the impact of the above adjustments on net income
      or
      loss as previously reported:





**Quarter
                Ended**
              **March
                31, 2005**
            
            **Quarter
                Ended**
              **June
                30, 2005**
            
            **Quarter
                Ended September 30, 2005**Net
                (loss) income, as previously reported
            $
            (1,103,898)
            
            $
            90,484
            
            $
            (2,835,877)Adjustment
                to accrue credit sales
            
            8,717
            
            
            93,022
            
            
            117,783Adjustment
                to record unrecorded revenues
            
            12,132
            
            
            23,222
            
            
            27,943Change
                in minority interest due to the above adjustments
            
            (7,203)
            
            
            (40,159)
            
            
            (50,345)Net
                (loss) income, as restated
            $
            (1,090,252)
            
            $
            166,569
            
            $
            (2,740,496)





The
      above
      adjustments did not have a material effect on the previously reported quarterly
      income or loss per common share.




**14.**  **SUBSEQUENT
      EVENTS (UNAUDITED)**





***Newly
      Formed Entities***





On
      January 3, 2006, the Company incorporated Assured Pharmacy Plus, Corp. (“Plus
      Corp.”) as a wholly-owned subsidiary to develop arrangements with third party
      health plan providers to accept traditional co-payments and fill prescriptions
      for their members who rely upon overnight courier for delivery of their
      prescription.





On
      January 3, 2006, the Company also incorporated Assured Pharmacy DME, Corp.
      (“DME”) as a wholly-owned subsidiary for the purpose of facilitating and making
      available specialized medical equipment to our consumers.





***Notes
      Payable to Stockholders***





On
      January 5, 2006, the Company entered into agreements with three related party
      shareholders to extend their promissory notes that were due January 2006, to
      January 31, 2007.




Page
                F-42
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**14.**  **SUBSEQUENT
      EVENTS (UNAUDITED)** (continued)





***Consulting
      Agreements***





On
      January 17, 2006, the Company entered into a one year consulting agreement
      with
      Insights Consultants Corporation (ICC). ICC will receive 400,000 shares of
      the
      Company’s common stock in exchange for advice and assistance in developing and
      implementing plans and materials for presenting the Company and its business
      plans and personnel to the financial community. Two hundred thousand shares
      were
      issued upon execution of this agreement and two hundred thousand will be issued
      in six months. The stock was valued at $180,000 (estimated to be the fair value
      based upon the trading price on the date of issuance).





On
      January 21, 2006, the Company entered into a loan agreement with VVPH Inc.
      Under
      the terms of the agreement, the Company received $400,000 for a twelve month
      term which can be extended for an additional twelve month period by mutual
      consent. On the date of funding, the Company paid the lender a one time
      commitment fee equal to 3% of the initial amount of the loan. The loan has
      an
      interest rate of 15% per annum to be paid in monthly installments. Pursuant
      to
      the terms of this agreement, VVPH has a continuing right to convert all or
      a
      portion of the then outstanding amount of the obligations into a number of
      shares of the Company’s common stock determined at a conversion price equal to
      the rolling seven trading day weighted average closing bid price for the common
      stock on the OTCBB. The conversion price per share shall not be less than $0.40
      or more than $0.80.





In
      January 2006, the Company engaged Wall Street Consultants Group (“WSCG”) to
      provide consulting pertaining to identifying and communicating information
      about
      the Company to new investors. Under the terms of the agreement, WSCG will
      provide these services for a period of six months in exchange for a fee of
      125,000 shares of the Company’s restricted common stock. Such shares were valued
      at approximately $62,000 (estimated to be the fair value based upon the trading
      price on the date of issuance).




Page
                F-43
 Table
              of Contents


ASSURED
          PHARMACY, INC. AND
          SUBSIDIARIES
 (formerly
          known as eRxsys,
          Inc.)
 NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS
 December
          31, 2005 and December 31,
          2004




**14.**  **SUBSEQUENT
      EVENTS (UNAUDITED)** (continued)





***Acquisition
      of Additional Interest in APN***





In
      February 2004, the Company entered into a joint venture agreement (the
“Agreement”) with TAPG, L.L.C. ("TAPG"), a Louisiana limited liability company,
      and formed Safescript Northwest, Inc. ("Safescript Northwest"), a Louisiana
      corporation, for the purpose of establishing and operating up to five
      pharmacies. Effective August 19, 2004, Safescript Northwest changed its name
      to
      Assured Pharmacies Northwest, Inc. ("APN"). Since its inception, the Company
      has
      owned 75% of APN, while TAPG has owned the remaining 25%. As of December 31,
      2005, the Company advanced APN a total of $351,857 as an interest-free loan
      to
      sustain operations at both pharmacies operated by APN. On March 6, 2006, the
      interest-free loan of $351,857 was converted into 378 shares of APN’s common
      stock. Following the conversion of this debt into equity, the Company has
      increased its ownership interest in APN to 94.8%. TAPG now owns the remaining
      5.2% interest.




Page
                F-44
 Table
              of Contents





**Item
      8. Changes In and Disagreements with Accountants on Accounting and Financial****Disclosure**





No
      events
      occurred requiring disclosure under Item 304(b) of Regulation S-B.





**Item
      8A. Controls and Procedures**





We
      carried out an evaluation of the effectiveness of the design and operation
      of
      our disclosure controls and procedures (as defined in Exchange Act Rules
      13a-15(e) and 15d-15(e)) as of December 31, 2005. This evaluation was carried
      out under the supervision and with the participation of our Chief Executive
      Officer and Chief Financial Officer, Mr. Robert DelVecchio. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that, as of December 31, 2005, our disclosure controls and procedures are of
      limited effectiveness. There have been no significant changes in our internal
      controls over financial reporting during the quarter ended December 31, 2005
      that have materially affected or are reasonably likely to materially affect
      such
      controls.





Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our reports filed or
      submitted under the Exchange Act are recorded, processed, summarized and
      reported, within the time periods specified in the SEC's rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed in
      our
      reports filed under the Exchange Act is accumulated and communicated to
      management, including our Chief Executive Officer and Chief Financial Officer,
      to allow timely decisions regarding required disclosure.





Limitations
      on the Effectiveness of Internal Controls





Our
      management does not expect that our disclosure controls and procedures or our
      internal control over financial reporting will necessarily prevent all fraud
      and
      material error. Our disclosure controls and procedures are designed to provide
      reasonable assurance of achieving our objectives and our Chief Executive Officer
      and Chief Financial Officer concluded that our disclosure controls and
      procedures are effective at that reasonable assurance level. Further, the design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their costs. Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of fraud,
      if any, within the Company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty, and
      that
      breakdowns can occur because of simple error or mistake. Additionally, controls
      can be circumvented by the individual acts of some persons, by collusion of
      two
      or more people, or by management override of the internal control. The design
      of
      any system of controls also is based in part upon certain assumptions about
      the
      likelihood of future events, and there can be no assurance that any design
      will
      succeed in achieving its stated goals under all potential future conditions.
      Over time, control may become inadequate because of changes in conditions,
      or
      the degree of compliance with the policies or procedures may deteriorate.





37
 Table
            of Contents





**Item
      8B. Other information**





None.





**PART
      III**





**Item
      9. Directors, Executive Officers, Promoters and Control Persons; Compliance
      with****Section
      16(a) of the Exchange Act**





The
      following information sets forth the names of our current directors and
      executive officers, their ages and their present positions with the Company.




Name
            Age
            Position(s)
              and Office(s) HeldRobert
              DelVecchio
            41
            Chief
              Executive Officer, Chief Financial Officer, & DirectorRichard
              Falcone
            52
            DirectorJames
              Manfredonia
            44
            DirectorHaresh
              Sheth
            55
            DirectorJohn
              Eric Mutter
            45
            Chief
              Operating Officer




Set
      forth
      below is a brief description of the background and business experience of each
      of our current executive officers and directors.





**Robert
      DelVecchio.** On
      February 3, 2005, our board of directors appointed Mr. Robert DelVecchio to
      serve as Chief Executive Officer. Mr. DelVecchio was appointed as our Chief
      Financial Officer and as a member of the board of directors on March 31, 2005.
      Since 1995, Mr. DelVecchio has acted as Chief Executive Officer and President
      of
      Brockington Securities, Inc., a broker-dealer who is a member of the National
      Association of Securities Dealers.




**Richard
      Falcone.** Mr.
      Falcone was appointed as a member of our board of directors in July 2004. Since
      2001, Mr. Falcone has served as Chief Financial Officer of The A Consulting
      Team, Inc., an IT service company. Mr. Falcone has served as Chief Financial
      Officer of Netgrocer.com. In 1990, Mr. Falcone joined Bed Bath & Beyond,
      Inc. as its Chief Financial Officer. In 1983, Mr. Falcone joined Tiffany &
Co. and served as Manager of Audit, Director of Financial Control, and Director
      of International Finance and Operations. Mr. Falcone has also worked at
      PriceWaterhouseCoopers & Co., an international public accounting
      firm.





**James
      Manfredonia.** Mr.
      Manfredonia was appointed as a member of our board of directors in June 2004.
      Since 2002, Mr. Manfredonia has served as manager of listed equity trading
      and
      New York Stock Exchange operations at Bear Stearns. Mr. Manfredonia currently
      serves as the Chairman of the New York Stock Exchange Upstairs Traders Advisory
      Committee and as a member of the Market Performance Committee of the New York
      Stock Exchange. Prior to joining Bear Stearns, Mr. Manfredonia worked for ten
      years at Merrill Lynch where he managed the listed trading desk with additional
      responsibilities for NASDAQ, portfolio trading, sales





38
 Table
            of Contents





trading,
      and NYSE staff. Mr. Manfredonia was the founding general partner of Blair
      Manfredonia Limited Partners, a hedge fund/broker-dealer. Mr. Manfredonia has
      also worked at Lehman Brothers, Salomon Brothers, and Drexel
      Burnham.





**Haresh
      Sheth.** Mr.
      Sheth
      was appointed as a member of our board of directors in September 2005. Mr.
      Sheth
      is a graduate of West Virginia University where he earned an engineering degree.
      Since 1991, Mr. Sheth has acted as President of Janus Finance Corporation,
      an
      asset based finance company. Mr. Sheth joined Mosaic Capital Advisors LLC in
      2004 as their group financial officer.





**John
      Eric Mutter** .
      Mr.
      Mutter was appointed to serve as Chief Operating Officer on May 11, 2005. Since
      January 2004, Mr. Mutter has acted as a consultant to Assured Pharmacy, Inc.
      providing technology and information systems support. From 2000 to 2003, Mr.
      Mutter performed similar responsibilities for the MedEx Systems Inc. designing,
      implementing and managing a digital prescribing infrastructure for Pegasus
      Pharmacies. Prior to these positions, Mr. Mutter has held numerous field
      engineering and technology positions with Alpha Microsystems, Tomba
      Communications, Neosoft Inc., Checkpoint Systems, and Southwest Communications.





**Term
      of Office**





Our
      directors are appointed for a one-year term to hold office until the next annual
      meeting of our shareholders or until removed from office in accordance with
      our
      bylaws.





Our
      executive officers are appointed by our board of directors and hold office
      until
      removed by the board.





**Significant
      Employees**





We
      have
      no significant employees other than our directors and executive
      officers.





**Family
      Relationships**





There
      are
      no family relationships between or among the directors, executive officers
      or
      persons nominated or chosen by us to become directors or executive
      officers.





**Involvement
      in Certain Legal Proceedings**





To
      the
      best of our knowledge, during the past five years, none of the following
      occurred with respect to a present or former director, executive officer, or
      employee: (1) any bankruptcy petition filed by or against any business of which
      such person was a general partner or executive officer either at the time of
      the
      bankruptcy or within two years prior to that time; (2) any conviction in a
      criminal proceeding or being subject to a pending criminal proceeding (excluding
      traffic violations and other minor offenses); (3) being subject to any order,
      judgment or decree, not subsequently reversed, suspended or vacated, of any
      court of competent jurisdiction, permanently or temporarily enjoining, barring,
      suspending or otherwise





39
 Table
            of Contents





limiting
      his or her involvement in any type of business, securities or banking
      activities; and (4) being found by a court of competent jurisdiction (in a
      civil
      action), the SEC or the Commodities Futures Trading Commission to have violated
      a federal or state securities or commodities law, and the judgment has not
      been
      reversed, suspended or vacated.





**Audit
      Committee**





We
      do not
      have a separately-designated standing audit committee. The entire board of
      directors performs the functions of an audit committee, but no written charter
      governs the actions of the board of directors when performing the functions
      of
      what would generally be performed by an audit committee. The board of directors
      approves the selection of our independent accountants and meets and interacts
      with the independent accountants to discuss issues related to financial
      reporting. In addition, the board of directors reviews the scope and results
      of
      the audit with the independent accountants, reviews with management and the
      independent accountants our annual operating results, considers the adequacy
      of
      our internal accounting procedures and considers other auditing and accounting
      matters including fees to be paid to the independent auditor and the performance
      of the independent auditor.





Richard
      Falcone is an audit committee financial expert and is independent, as the term
      is used in Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.





For
      the
      fiscal year ending December 31, 2005, the board of directors:





1.
            Reviewed
                and discussed the audited financial statements with management,
                and





2.
            Reviewed
                and discussed the written disclosures and the letter from our independent
                auditors on the matters relating to the auditor's
                independence.





Based
      upon the board of directors’ review and discussion of the matters above, the
      board of directors authorized inclusion of the audited financial statements
      for
      the year ended December 31, 2005 to be included in this Annual Report on Form
      10-KSB and filed with the SEC.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our directors and executive officers and
      persons who beneficially own more than ten percent of a registered class of
      the
      Company’s equity securities to file with the SEC initial reports of ownership
      and reports of changes in ownership of common stock and other equity securities
      of the Company. Officers, directors and greater than ten percent beneficial
      shareholders are required by SEC regulations to furnish us with copies of all
      Section 16(a) forms they file. To the best of our knowledge based solely on
      a
      review of Forms 3, 4, and 5 (and any amendments thereof) received by us during
      or with respect to the year ended December 31, 2005, the following persons
      have
      failed to file, on a timely basis, the identified reports required by Section
      16(a) of the Exchange Act during fiscal year ended December 31, 2005:





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Name
                  and principal position
              Number
                  of
                late
                  reports
              Transactions
                  not
                timely
                  reported
              Known
                  failures to
                file
                  a required formRobert
                  DelVecchio
              0
              0
              0Richard
                  Falcone
              1
              1
              0James
                  Manfredonia
              1
              1
              0Haresh
                  Sheth
              1
              1
              0John
                  Eric Mutter
              1
              1
              0




**Code
      of Ethics Disclosure**





As
      of
      December 31, 2005, we have not adopted a Code of Ethics for Financial
      Executives, which include our principal executive officer, principal financial
      officer, principal accounting officer or controller, or persons performing
      similar functions. We have begun the process of drafting a code of ethics which
      will be filed with the SEC upon its adoption by the board of directors.





**Item
      10. Executive Compensation**





The
      table
      below summarizes all compensation awarded to, earned by, or paid to our current
      executive officers for each of the last three completed fiscal
      years.





Annual
                Compensation
            Long
                Term CompensationName
            Title
            Year
            Salary
              ($)
            Bonus
              ($)
            Other
                AnnualCompensation
              ($)
            Restricted
                Stock
              Awarded
              ($)
            Options/
              SARs
              (#)
            LTIP
              Payouts
              ($)
            All
                Other
              Compensation
              ($)Robert
              DelVecchio
            CEO,
                CFO
            2005
              2004
              2003
            23,000
              n/a
              n/a
            0
              n/a
              n/a
            0
              n/a
              n/a
            0
              n/a
              n/a
            5,000,000
              n/a
              n/a
            0
              n/a
              n/a
            0
              n/a
              n/aJohn
                Eric Mutter
            COO
            2005
              2004
              2003
            185,000
              n/a
              n/a
            0
              n/a
              n/a
            0
              n/a
              n/a
            70,000
              n/a
              n/a
            250,000
              n/a
              n/a
            0
              n/a
              n/a
            0
              n/a
              n/aDavid
                Parker1
            Former
                CEO
            2005
              2004
              2003
            15,175
              129,082
              33,923
            0
              0
              0
            0
              0
              144,0002
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0A.J.
              LaSota3
            Former
              President
            2005
              2004
              2003
            8,890
              108,940
              29,400
            0
              0
              0
            0
              0
              129,6004
            0
              0
              0
            0
              0
              0
            0
              0
              0
            0
              0
              0





1
            On
                February 1, 2005, we received the resignation of David Parker. Under
                the
                terms of a settlement and termination agreement, Mr. Parker returned
                to
                the corporate treasury 5,400,000 shares of our common
                stock.


2
            David
                Parker was issued 300,000 shares of restricted common stock valued
                at
                $144,000 on the issuance date.


3
            On
                February 1, 2005, we received the resignation of A.J. LaSota. Under
                the
                terms of a settlement and termination agreement, Mr. LaSota returned
                to
                the corporate treasury 684,861 shares of our common
                stock.


4
            A.J.
                LaSota was issued 270,000 shares of restricted common stock valued
                at
                $129,600 on the issuance date.





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**Compensation
      to Directors**





Only
      our
      outside directors receive compensation for their services as directors. We
      have
      compensated our outside directors for their service on the board of directors
      as
      follows:





Outside
                Director
            Year
            Shares
                of Common
              Stock
                ReceivedRichard
                Falcone
            2005
              2004
            300,000
              50,000James
                Manfredonia
            2005
              2004
            300,000
              50,000Annette
                McEvoy(1)
            2005
              2004
            25,000
              50,000Geoffrey
                S. Carroll(2)
            2005
              2004
            25,000
              50,000





1
            On
                February 16, 2005, Annette McEvoy resigned as a member of our board
                of
                directors


2
            On
                February 11, 2005, Geoffrey Carroll resigned as a member of our board
                of
                directors.





Other
      than as set forth above, our outside directors currently receive $1,500 for
      attending any board of director’s meeting in-person, $1,500 for any speaking
      engagement on our behalf, and reimbursement for reasonable expenses incurred
      in
      attending board or committee meetings.





**Summary
      of Options Grants**





The
      following table sets forth the individual grants of stock options made by the
      company during the year ended December 31, 2005, for the named executive
      officers:





OPTION
                / SAR GRANTS IN LAST FISCAL YEARName
            Number
                of
              securities
              underlying
              options
                / SARs
              granted
                (#)
            Percent
                of total
              options
                / SARs
              granted
                to
              employees
                in
              fiscal
                year
            Exercise
                or
              Base
                price
              ($
                /Sh)
            Expiration
                dateRobert
                DelVecchio
            5,000,000
            95.2%
            $0.60
            September
                30, 2015John
                Eric Mutter
            83,333
            1.58%
            $0.60
            August
                29, 2008John
                Eric Mutter
            83,333
            1.58%
            $0.60
            August
                29, 2009John
                Eric Mutter
            83,334
            1.58%
            $0.60
            August
                29, 2010





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**Item
      11. Security Ownership of Certain Beneficial Owners and Management and Related****Stockholder
      Matters**





The
      following table sets forth, as of March 16, 2006, the beneficial ownership
      of
      our common stock by each executive officer and director, by each person known
      by
      us to beneficially own more than 5% of our common stock and by the executive
      officers and directors as a group. Except as otherwise indicated, all shares
      are
      owned directly and the percentage shown is based on 44,665,740 shares of common
      stock issued and outstanding on March 16, 2006.





**Title
                of class**
            **Name
                and address**
              **of
                beneficial owner****(1)**
            **Amount
                of**
              **beneficial
                ownership**
            **Percent**
              **of
                class*****Executive
                Officers & Directors:**Common
            Robert
                DelVecchio
              17935
                Sky Park Circle, Suite F
              Irvine,
                California 92614
            970,860
                shares(2)
            14.2%(3)Common
            James
                Manfredonia
              17935
                Sky Park Circle, Suite F
              Irvine,
                California 92614
            350,000
                shares
            0.8%Common
            Richard
                Falcone
              17935
                Sky Park Circle, Suite F
              Irvine,
                California 92614
            350,000
                shares
            0.8%Common
            Haresh
                Sheth
              17935
                Sky Park Circle, Suite F
              Irvine,
                California 92614
            0
                shares
            1.3%(4)Common
            John
                Eric Mutter
              17935
                Sky Park Circle, Suite F
              Irvine,
                California 92614
            325,000
                shares
            0.7%**Total
                of All Directors and Executive Officers:**
            1,995,860
                shares
            17.8%**More
                Than 5% Beneficial Owners:**Common
            Mosaic
                Financial Services, LLC
              545
                Fifth Avenue, Suite 709
              New
                York, NY 10017
            2,500,000
                shares
            5.6%





(1)
            As
                used in this table, "beneficial ownership" means the sole or shared
                power
                to vote, or to direct the voting of, a security, or the sole or shared
                investment power with respect to a security (i.e., the power to dispose
                of, or to direct the disposition of, a security). In addition, for
                purposes of this table, a person is deemed, as of any date, to have
                "beneficial ownership" of any security that such person has the right
                to
                acquire within 60 days after such
                date.


(2)
            Mr.
                DelVecchio is the indirect beneficial owner of 970,860 shares held
                by
                Brockington Securities, Inc.


(3)
            Included
                in the calculation of beneficial ownership for Mr. DelVecchio are
                350,000
                warrants which are exercisable within 60 days. Brockington Securities,
                Inc. holds warrants to purchase 350,000 shares of common stock at
                the
                exercise price of $0.60 per share. These warrants are immediately
                exercisable and expire on June 17, 2009. Mr. DelVecchio is the indirect
                beneficial owner of the warrants held by Brockington Securities,
                Inc. Also
                included in the calculation of beneficial ownership for Mr. DelVecchio
                are
                options to purchase 5,000,000 shares of common stock at an exercise
                price
                of $0.60 per share. These





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options
                are immediately exercisable and were granted to Mr. DelVecchio pursuant
                to
                the terms of an employment agreement executed in September 2005.




(4)
            Mr.
                Sheth maintains a 24% voting interest and 25% economic interest in
                Mosaic
                Capital Advisors, LLC (“MCA”). MCA is the investment advisor to Mosaic
                Partners Fund and Mosaic Partners Fund LP. As of the date reported
                above,
                Mosaic Partners Fund held 387,500 shares of the Company’s common stock and
                Mosaic Partners Fund LP held 1,050,000 shares of the Company’s common
                stock. Mosaic Financial Services, LLC is a wholly-owned subsidiary
                of MCA.
                Pursuant to Rule 13d-4 of the Securities and Exchange Act of 1934,
                Mr.
                Sheth disclaims beneficial ownership over the shares held by Mosaic
                Partners Fund, Mosaic Partners Fund LP, and Mosaic Financial Services,
                LLC. Mr. Sheth is also the President of Janus Financial Services,
                Inc.
                Pursuant to the terms of a consulting agreement, Janus Financial
                Services,
                Inc. hold warrants to purchase 566,667 shares of common stock at
                an
                exercise price of $0.60 per share. These warrants are immediately
                exercisable and expire on September 29, 2017. These warrants are
                included
                in the calculation of beneficial ownership for Mr. Sheth.





**Item
      12. Certain Relationships and Related
      Transactions**





Except
      as
      disclosed below, none of our directors or executive officers, nor any proposed
      nominee for election as a director, nor any person who beneficially owns,
      directly or indirectly, shares carrying more than 5% of the voting rights
      attached to all of our outstanding shares, nor any members of the immediate
      family (including spouse, parents, children, siblings, and in-laws) of any
      of
      the foregoing persons has any material interest, direct or indirect, in any
      transaction during the last two years or in any presently proposed transaction
      which, in either case, has or will materially affect us.





1.
            Our
                former CEO, David Parker, founded RxSystems, Inc. (“RxSystems”) in March
                2002. In March 2002, RxSystems acquired from the Safescript Pharmacies,
                Inc. (formerly known as RTIN Holdings, Inc.) the exclusive licensing
                rights to establish and operate pharmacies under the name “Safescript
                Pharmacies” throughout California, Oregon, Washington and Alaska. On March
                27, 2003, RxSystems assigned to us all of its rights under this exclusive
                license. We agreed to reimburse Mr. Parker $370,000 for personal
                funds
                advanced to secure the License. These funds plus five percent interest
                per
                annum were due and payable in full on December 31, 2007. In a termination
                and settlement agreement entered into with Mr. Parker on February
                1, 2005,
                Mr. Parker agreed to accept $10,000 cash and 494,000 shares of our
                common
                stock and release and discharge us from all liability associated
                with this
                debt. The price per share for the issued shares was approximately
                $0.80
                and the market price on February 1, 2005 was $0.30 per
                share.





2.
            On
                November 27, 2003, we entered into an agreement with David Parker
                to
                cancel debt owed to him and reported in our consolidated financial
                statements as “Advances due to a shareholder.” Initially, Mr. Parker
                agreed to release and discharge us from all liability associated
                with this
                debt and we agreed to transfer, assign, and convey all of our rights
                under
                the exclusive license granted by Safescript Pharmacies, Inc. solely
                for
                the consolidated statistical metropolitan area of Fresno, California.
                As a
                part of this agreement, we agreed to continue to make all payments
                under
                the license agreement, including those owed on the Fresno market,
                until
                the existing obligation to Safescript Pharmacies, Inc. for this license
                regarding the consolidated statistical metropolitan area of Fresno,
                California was fully paid. This agreement was amended on February
                16,
                2004. As a result of this amendment to the agreement, Mr. Parker
                received
                220,429 shares of our common stock and forever discharged





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us
                from all liability associated with this debt. Mr. Parker also relinquished
                to us all of his rights under the exclusive license granted by Safescript
                Pharmacies, Inc. solely for the consolidated statistical metropolitan
                area
                of Fresno, California. The price per share for the issued shares
                was
                approximately $0.64 and the market price on February 16, 2004 was
                $0.60
                per share.





3.
            On
                April 24, 2003, we entered into a joint venture agreement with TPG
                for the
                purpose of funding the establishment and operations of pharmacies.
                Ron
                Folse, our former Executive Vice President, and A.J. LaSota, our
                former
                President and Director each own approximately 19% of TPG. On March
                5,
                2004, Mr. Folse and Mr. LaSota resigned from all positions of authority
                in
                TPG.





4.
            On
                January 26, 2004, we entered into an agreement with Brockington
                Securities, Inc. (“Brockington”) to act as our financial advisor,
                investment banker, and placement agent. Our current CEO, Mr. Robert
                DelVecchio, is the President and CEO of Brockington. Pursuant to
                this
                agreement, Brockington received 500,000 shares of our common stock.
                The
                price per share for the issued shares was approximately $0.56 and
                the
                market price on January 26, 2004 was $0.64 per share. On June 18,
                2004,
                our board of directors approved an extension for an additional term
                of
                eighteen months to the agreement entered into with Brockington. Pursuant
                to the terms of this extension, Brockington received an additional
                150,000
                shares of our common stock and warrants to purchase 350,000 shares
                of our
                common stock exercisable for a period of five years from the date
                of
                issuance at the price of $0.60 per share. In connection with the
                aforementioned extension, Brockington was granted certain “piggy-back”
                registration rights relating to the equity instruments issued in
                June
                2004. The price per share for the issued shares was approximately
                $0.47
                and the market price on June 18, 2004 was $0.62 per
                share.





5.
            On
                June 17, 2004, we completed an exempt offering to accredited investors
                pursuant to Rule 506 of Regulation D under the Securities Act and
                Brockington acted as placement agent for this offering. Upon closing
                of
                this offering, Brockington received a commission of $295,670 and
                reimbursed expenses of $8,000.





6.
            In
                December 2004, we received a loan from Robert James, Inc. (the “Lender”),
                a company under the control of Mr. DelVecchio, evidenced by a promissory
                note (“Note”) for the purpose of purchasing inventory for our pharmacies.
                This Note is for a maximum of $150,000 and matured on the earlier
                of March
                6, 2005 or the date that we were able to consummate an accounts receivable
                factoring arrangement for our working capital. The outstanding principal
                amount of this Note bears interest at a rate of three percent per
                month.
                In consideration of this Note, we agreed to pay the Lender an
                administrative fee of $1,500 and a financing fee of $2,100. In addition
                to
                these fees, we agreed to pay the Lender by the fifth day of every
                month
                from January 2005 until the principal amount is repaid plus an
                administrative fee of $1,875 and a financing fee of $2,675. On February
                13, 2005, the loan was paid in
                full.





7.
            On
                February 1, 2005, we entered into a Termination and Settlement Agreements
                with Mr. David Parker and Mr. A.J. LaSota. Mr. Parker and Mr. LaSota
                resigned from their positions





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7.
            as
                  officers and directors. In accordance with the terms of these agreements,
                  Mr. Parker and Mr. LaSota returned to the corporate treasury 5,400,000
                  and
                  429,353 shares of our common stock, respectively. Also on February
                  1,
                  2005, we entered into a Settlement Agreement with Ron Folse, our
                  former
                  Executive Vice President. In accordance with the terms of this
                  agreement,
                  Mr. Folse returned to the corporate treasury 429,353 shares of
                  our common
                  stock.




8.
            On
                February 23, 2005, we entered into an accounts receivable servicing
                agreement and line of credit agreement with Mosaic Financial Services,
                LLC
                (“Mosaic”). The monthly interest rate under this agreement is equal to one
                and one quarter percent of the maximum amount of the credit line.
                This
                agreement allows us to secure financing for inventory purchases over
                an
                extended period of time. Under the terms of the line of credit agreement,
                the maximum amount that can be drawn to purchase inventory increased
                on
                July 1, 2005 from $500,000 to $700,000. This agreement was for a
                term of
                one year with a provision to automatically renew for another one
                year
                period unless either party provides notice to the other of termination
                within 180 days prior to the end of the effective term.


Mosaic
                  provided notice to us of its intent to exercise its right under
                  the line
                  of credit agreement to convert the $700,000 previously advanced
                  into
                  shares of our common stock. On October 24, 2005, our board of directors
                  authorized the issuance of 2,500,000 shares of our restricted common
                  stock
                  to Mosaic in accordance with the conversion right provided in the
                  line of
                  credit agreement. The price per share for the issued shares was
                  $0.28 and
                  the market price on October 24, 2005 was $0.39 per share. The issuance
                  of
                  these shares to Mosaic satisfied our obligations in full under
                  the
                  accounts receivable servicing agreement and line of credit
                  agreement.
                
                On
                  October 31, 2005, we entered into another line of credit agreement
                  (“LOC”)
                  with Mosaic enabling us to draw a maximum of $1,000,000 to purchase
                  inventory. This LOC has a one time commitment fee equal to three
                  percent
                  of the initial amount of the LOC which has a monthly interest rate of
                  1.5% of the then LOC limit. These accrued finance charges will
                  be deducted
                  prior to any advances. Under the terms of the LOC, Mosaic has a
                  right to
                  convert all or a portion of the outstanding advances into shares
                  of our
                  common stock where the conversion price is based on the weighted
                  average
                  closing bid price for our common stock on the OTCBB (or such other
                  equivalent market on which our common stock is quoted) as for the
                  seven
                  trading days immediately preceding the date the conversion right
                  is
                  exercised. The conversion price shall not be less than $0.40 nor
                  more than
                  $0.80. Our management anticipates that this LOC will adequately
                  finance
                  inventory purchases for our existing pharmacies over the next twelve
                  months.  This LOC is secured by substantially all of our
                  assets.
                
                Mosaic
                  is a wholly-owned subsidiary of Mosaic Capital Advisors LLC. Mr.
                  Haresh
                  Sheth who is a member of our board of directors acts as group financial
                  officer to Mosaic Capital Advisors LLC. Mr. Sheth was appointed
                  to our
                  board of directors in September
                  2005.




9.
            During
                the quarterly period ended September 30, 2005, we entered into a
                consulting agreement with Janus Financial Services, Inc. (“Janus”).
                Pursuant to the terms of the consulting agreement, we agreed to pay
                Janus
                a monthly consulting fee in the amount of





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$10,000
                for a period of two years. Under the terms of the consulting agreement,
                we
                also issued Janus options to purchase 1,700,000 shares of our common
                stock
                exercisable at $0.60 per share. These options become fully vested
                over
                three years (566,667 options fully vest on September 29, 2005; 566,667
                become fully vested on September 29, 2006; and 566,666 become fully
                vested
                on September 29, 2007) and are exercisable until September 29, 2017.
                Mr.
                Haresh Sheth who is a member of our board of directors also acts
                as
                President to Janus Financial Services,
                Inc.




**Item
      13. Exhibits**





Exhibit
                Number
            Description3.1
            Articles
                of Incorporation, as amended(1)3.2
            By-laws,
                as amended(1)31.1
            Certification
                of Chief Executive Officer pursuant to
                Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to
                Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
                to
                Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer and Chief
                Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002




1
            Previously
                  included as an exhibit to the registration statement filed on Form
                  SB-2 on
                  December 15, 2004.




**Item
      14. Principal Accountant Fees and Services**





**Audit
      Fees**





The
      aggregate fees billed and unbilled by our auditors for professional services
      rendered in connection with a review of the financial statements included in
      our
      quarterly reports on Form 10-QSB and the audit of our annual consolidated
      financial statements for the fiscal years ended December 31, 2005 and December
      31, 2004 were approximately $117,000 and $91,000 respectively.





**Audit-Related
      Fees**





Our
      auditors did bill additional fees of $33,000 during the fiscal year ended
      December 31, 2005 for assurance and related services that are reasonably related
      to the performance of the audit and review of our Form SB-2 filing with the
      SEC.




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**Tax
      Fees**





The
      aggregate fees billed and unbilled by our auditors for professional services
      for
      tax compliance, tax advice, and tax planning were $13,000 and $20,000 for the
      fiscal years ended December 31, 2005 and 2004.





**All
      Other Fees**





The
      aggregate fees billed by our auditors for all other non-audit services, such
      as
      attending meetings and other miscellaneous financial consulting, for the fiscal
      years ended December 31, 2005 and 2004 were $5,000 and $6,000
      respectively.




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**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.







**Assured Pharmacy,
                Inc.**By:
            /s/ Robert DelVecchioRobert
                DelVecchio
              Chief
                Executive Officer and Chief Financial Officer
              March
                31, 2006




In
      accordance with the requirements of the Securities Act of 1933, this
      registration statement was signed by the following persons in the capacities
      and
      on the date stated:





By:
            /s/ Robert DelVecchioRobert
                DelVecchio
              Director
              March
                31, 2006




By:
            /s/ James Manfredonia
            
            By:
            /s/ Haresh ShethJames
                Manfredonia
              Director
              March
                31, 2006
            
            
            Haresh
                Sheth
              Director
              March
                31, 2006