UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   __________

                                   FORM 10-KSB

(Mark One)

|X|                  ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 2005

|_|             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the transition period from ___ to ___
                        Commission File Number: 000-30997

                                  ASTRALIS LTD.
                 (Name of Small Business Issuer in its Charter)

             Delaware                                    84-1508866
   ----------------------------             ------------------------------------
   (State or other jurisdiction             (I.R.S. Employer Identification No.)
of incorporation or organization)

75 Passaic Avenue, Fairfield, New Jersey                                07004
----------------------------------------                              ----------
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (973) 227-7168

           Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                                        Name of Each Exchange
                                                            on Which Registered

       None.                                                        None.
       -----                                                        -----

           Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $.0001 per share
                    ----------------------------------------
                                (Title of Class)

Check whether the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. Yes |_| No |X|

Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 ("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 |_|


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<PAGE>

Check mark if no disclosure of delinquent filers pursuant to Item 405 of
Regulations S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in a 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. |_|

Issuer's revenue for the year ended December 31, 2005: $0

As of March 31, 2006, the aggregate market value of the voting and nonvoting
common stock held by nonaffiliates of the registrant was approximately
$3,457,486.

As of March 31, 2006, there were 91,454,873 shares of the issuer's common stock
outstanding.


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<PAGE>

                                     PART I

Item 1. Description of Business

General

            Astralis, Ltd. ("Astralis", "we", "us", "our", or the "Company") is
a development stage biotechnology company engaged primarily in the research and
development of treatments for immune system disorders and skin diseases, such as
psoriasis and psoriatic and rheumatoid arthritis. The Company's initial product
candidate, Psoraxine(R), is a protein extract used for the treatment of the skin
disease psoriasis.

      Currently, the Company is engaged in the following activities to further
its development efforts of its initial product candidate:

      o     Ongoing research and development of Psoraxine(R);

      o     Recommencing clinical trials to obtain the approval of the United
            States Food and Drug Administration for the marketing of
            Psoraxine(R); and

      o     Developing technology underlying Psoraxine(R) for the treatment of
            indications other than psoriasis, such as arthritis, eczema,
            seborrheic dermatitis and leishmaniasis.

      The Company was originally incorporated under the laws of the State of
Colorado in 1999 under the name Hercules Development Group, Inc. We subsequently
changed our name to Astralis Pharmaceuticals Ltd. and, in November 2001,
reincorporated under the laws of the State of Delaware under our present name.
Our main office is located at 75 Passaic Avenue, Fairfield, New Jersey 07004.

Recent Developments

      Blue Cedar March 2006 Private Placement

      On March 31, 2006, the Company closed a private placement of securities
from which it received proceeds of $250,000. In connection with this private
placement, the Company issued to Blue Cedar Limited ("Blue Cedar"), an
accredited investor and currently a stockholder of the Company, (i) a
convertible promissory note in the principal amount of $250,000, convertible
into shares of the Company's common stock at $0.09 per share, and (ii) a warrant
to purchase 2,777,778 shares of common stock. Lipworth Capital Limited acted as
the placement agent in connection with the private placement. The securities
offered and sold in this private placement were sold in reliance on an exemption
from the registration requirements under Regulation D of the Securities Act of
1933, as amended (the "Securities Act").

      Departure of Directors and Principal Officer

      On December 11, 2005, Steven Fulda, a member of the Board of Directors and
Audit Committee of the Company, announced his resignation from the Board and
Audit Committee, effective December 30, 2005. Mr. Fulda's announcement did not
reference a disagreement with the Company on any matter relating to the
Company's operations. In addition, on April 19, 2006 Fabien Pictet announced
that he will be resigning as a member of the Board of Directors of the Company.
Mr. Pictet has not yet announced an effective date of his resignation, nor did
his announcement reference a disagreement with the Company on any matter
relating to the Company's operations.


      On January 25, 2006, James Sharpe resigned as a member of the Board of
Directors, Chief Executive Officer and President of the Company, pursuant to a
Separation Agreement and General Release, by and between the Company and Mr.
Sharpe ("Separation Agreement"). Mr. Sharpe, whose resignation was effective as
of December 31, 2005, did not resign due to a disagreement with the Company on
any matter relating to the Company's operations. Michael Garone, the Company's
Chief Financial Officer, currently is serving as the Company's interim President
until the Company's Board of Directors elects a new Chief Executive Officer and
President to replace Mr. Sharpe.


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<PAGE>

      Limited Working Capital

      As of April 15, 2006 we have $277,705 in available cash and accounts
payable of $65,067. Based on our current plans, we believe the Company has
sufficient funds to meet our operating expenses and capital requirements only
through approximately May 2006. We will need to raise additional funds to
continue our operations following that period. Furthermore, substantial
additional funds will be needed in order to fund our continued efforts to obtain
FDA approval of Psoraxine(R), especially given the failure of our Phase II study
to meet its primary endpoint.

Psoriasis

      Psoriasis is a chronic inflammatory skin disorder of currently unknown
origins that generally lasts a lifetime and for which there is presently no
known cure. Researchers believe that psoriasis may be caused by the immune
system sending faulty signals that affect the growth cycle of skin cells. As a
result, skin cells accumulate on the surface of the body faster than normal. In
people without psoriasis, skin cells mature and are shed approximately every 28
days. In psoriatic skin, the skin cells mature over a period of approximately
three to six days.

      The symptoms of psoriasis include scaly skin and inflammation occurring on
a cyclical basis, with periods of remission and relapse. There are five types of
psoriasis. The most common form, appearing in approximately 80% of individuals
suffering from the disease, is plaque psoriasis. The other forms are guttate,
inverse, erythrodermic and pustular psoriasis. Psoriasis typically does not
prevent individuals with the condition from functioning normally. However, the
pain, discomfort and emotional effects may be extensive.

Market Opportunity

      According to the National Psoriasis Foundation, psoriasis affects
approximately 2.1% of the United States population, or more than 4.5 million
people in the United States. Psoriasis also affects approximately 1% to 3% of
the world's population. Approximately 150,000 to 260,000 new cases of psoriasis
are diagnosed each year. In addition, each year approximately 350 people in the
United States die due to complications caused by psoriasis. Primarily, such
complications occur in relation to severe, extensive forms of psoriasis such as
erythrodermic or pustular psoriasis, where large areas of skin are shed. Because
the skin plays an important role in regulating body temperature and serving as a
barrier to infection, when a person's skin is severely compromised, secondary
infections may occur. These serious forms of psoriasis may also cause
complicating factors, such as fluid loss and strain on the circulatory system.

      The National Psoriasis Foundation also indicates that between 10% and 30%
of people who have psoriasis will also develop psoriatic arthritis, which is
similar to rheumatoid arthritis, but generally milder. Psoriatic arthritis
causes inflammation and stiffness in the soft tissue around joints, and
frequently affects the fingers and toes. Psoriatic arthritis may also affect
other areas of the body such as the wrists, neck, lower back, knees and ankles.

      Psoriasis is a chronic illness that, in many cases, requires continuous
treatment. Patients with psoriasis often pay for costly medications and face
ongoing visits with physicians. Severe cases may require periods of
hospitalization. The National Psoriasis Foundation estimates that the costs of
treating psoriasis may exceed $3.0 billion annually.


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<PAGE>

Psoraxine(R)

      Psoraxine(R) was developed by Dr. Jose Antonio O'Daly, our Chairman of the
Board and Chief Scientific Officer. In 1991, Dr. O'Daly was conducting trials
for a vaccine for leishmaniasis in Caracas, Venezuela. One patient involved in
the leishmaniasis vaccine trials, who also suffered from psoriasis for 12 years,
experienced complete remission of psoriasis after receiving the vaccine. As a
result of this discovery, Dr. O'Daly focused his efforts on developing a product
for the treatment of psoriasis. From 1992 through 2001, Dr. O'Daly developed
Psoraxine(R), a purified version of the original product that is an
immunotherapeutic agent presented in liquid form and packed in 0.5 milligram
ampules for intra-muscular injection. Dr. O'Daly tested the original product
that was a precursor of Psoraxine(R) in approximately 2,900 patients in several
clinical trials in Venezuela. The results from the studies provided evidence of
remission of psoriasis lesions as a result of treatment with the product. In
addition, individuals in the studies did not present severe side effects as a
result of treatment. In one clinical study, of the 2,770 patients, 648, or 28%,
experienced complete remission of psoriasis. In addition, almost half of the
patients experienced psoriasis reduction of between 70% to 99% as measured by
the Psoriasis Area and Severity Index ("PASI"). Additional studies yielded
average PASI reductions of between 73% and 92%.

      Dr. O'Daly licensed Psoraxine(R) to us in 2001 and moved to the United
States in 2002. We made capital investments to our research and development
facility of approximately $500,000 in 2002 and we filed an Investigational New
Drug application with the FDA for Psoraxine(R) in March 2003. On August 4, 2003
the FDA allowed us to commence our Phase I clinical trials for Psoraxine(R).

      The purpose of Phase I studies is to test the safety of a drug. We have
completed our Phase I studies, which involved the administration by
intramuscular injection of a single dose of 50, 150 or 300 micrograms of
Psoraxine(R) or a placebo in a controlled setting to groups of psoriatic
patients. Our Phase I results indicate that Psoraxine(R) is safe and
well-tolerated. We spent approximately $130,000 on our Phase I studies in 2003
and approximately $210,000 on our Phase I studies in 2004.

      We commenced Phase II studies in April 2004. The purpose of Phase II
studies is to test the safety and efficacy of a drug. The Phase II studies have
been completed. We spent approximately $2,150,000 on our Phase II studies in
2004. The initial analysis of the preliminary data from the Phase II studies
indicated that treatment with Psoraxine(R) did not provide any statistically
significant clinical improvement of psoriasis in participants of the studies. We
are continuing to analyze the data from the Phase II studies to understand why
statistical significance at its primary endpoint was not achieved and to
evaluate our clinical development options for Psoraxine(R). We spent $1,635,461
during fiscal year 2005 to complete Phase II studies. For the year ended
December 31, 2005, we reflected $2,510,521 in research and development expenses
which included $114,976 to record the impairment of an intangible asset. For the
year ended December 31, 2004, we reflected $7,689,060 in research and
development expenses, including $4,519,400 related to SkyePharma.

Current Psoriasis Therapies

      The topical treatment for psoriasis has been based on the use of
emollients, keratolytic agents, coal tar, anthralin, corticosteroids of medium
to strong potency and calcipotriene. UVB phototherapy has been used in the
treatment of moderate cases of psoriasis. For severe cases, systemic treatments
include methotextrate, cyclosporine and oral retinoids. Each of these treatments
has variable efficacy, with side effects and cosmetic problems in addition to
the failure to prevent frequent relapses.


                                       5
<PAGE>

Competition and Psoriasis Treatments in Development

      The pharmaceutical and biotechnology industries are intensely competitive.
Many companies, including biotechnology, chemical and pharmaceutical companies,
are actively engaged in activities similar to ours, including research and
development of drugs for the treatment of the same disease as Psoraxine(R). The
FDA has approved Amevive, manufactured by Biogen, Raptiva, manufactured by
Genentech/Xoma, and Enbrel, manufactured by Amgen and Wyeth, for the treatment
of moderate-to-severe chronic plaque psoriasis in adult patients. If we succeed
in obtaining FDA approval of Psoraxine(R), Amevive, Raptiva and Enbrel may
compete directly with our product. In addition to Biogen, Genentech/Xoma, Amgen
and Wyeth, our competitors may include Centocor, Abbott Laboratories and
Novartis. Many of these companies have substantially greater financial and other
resources, larger research and development staffs, and more extensive marketing
and manufacturing organizations than we have. In addition, these companies have
more experience in preclinical testing, clinical trials and other regulatory
approval procedures than we have. There are also academic institutions,
governmental agencies and other research organizations that are conducting
research in areas in which we are working. They may also come to develop and
market commercial products, either on their own or through collaborative
efforts.

      We expect to encounter significant competition for any of the
pharmaceutical products we develop. Companies that complete clinical trials
obtain required regulatory approvals and commence commercial sales of their
products before their competitors may achieve a significant competitive
advantage.

      Developments by others may render our product obsolete or noncompetitive.
We will face intense competition from other companies for collaborative
arrangements with pharmaceutical and biotechnology companies, for establishing
relationships with academic and research institutions and for licenses to
additional technologies. These competitors may succeed in developing
technologies or products that are more effective than Psoraxine(R).

Government Regulation

      The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our potential products.

      The process required by the FDA before our product candidate,
Psoraxine(R), may be marketed in the United States generally involves the
following:

o     preclinical laboratory and animal tests;

o     submission of an Investigational New Drug application, which must become
      effective before clinical trials may begin;

o     adequate and well controlled human clinical trials to establish the safety
      and efficacy of the proposed drug for its intended use; and

o     FDA approval of a new drug application or biologics license application.


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<PAGE>

      The testing and approval process requires substantial time, effort and
financial resources, and there can be no assurance that any approvals for
Psoraxine(R) or any other potential products will be granted on a timely basis,
if at all.

      Prior to commencing clinical trials, which are typically conducted in
three sequential phases, a company must submit an Investigational New Drug
application to the FDA. In March 2003, we filed our Investigational New Drug
application for Psoraxine(R) with the FDA. The Investigational New Drug
application automatically becomes effective 30 days after receipt by the FDA,
unless the FDA, within the 30-day time period, raises concerns or questions
about the conduct of the trial. In such a case, the Investigational New Drug
sponsor and the FDA must resolve any outstanding concerns before the clinical
trial can begin. In August 2003, the FDA informed us that we could commence our
clinical trials of Psoraxine(R). We have completed Phase I clinical trials in
which Psoraxine(R) was found to be generally safe and well-tolerated in Phase I
test patients. We also completed 12 months ago a Phase II clinical trial, which
did not achieve its primary endpoint for PASI (Psoriasis Area and Severity
Index) reduction. We are continuing to analyze the data collected during the
Phase II study, including biopsy data indicating cellular level changes that has
not been previously available, to gain a better understanding of the results,
and to direct our future efforts.

      Although we remain committed to the future clinical development of
Psoraxine(R), we may not successfully complete the three phases of clinical
trials of Psoraxine(R) within any specific time period, if at all. Furthermore,
the FDA or an institutional review board or the sponsor may suspend a clinical
trial at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.

      The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application or biologics
license application. The FDA may deny a new drug application or biologics
license application if the applicable regulatory criteria are not satisfied or
may require additional clinical data. Even if such data is submitted, the FDA
may ultimately decide that the new drug application or biologics license
application does not satisfy the criteria for approval. Once issued, the FDA may
withdraw product approval if compliance with regulatory standards is not
maintained or if problems occur after the product reaches market. In addition,
the FDA may require testing and surveillance programs to monitor the effect of
approved products which have been commercialized, and the FDA has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs.

      Satisfaction of FDA requirements or similar requirements of state, local
and foreign regulatory agencies typically takes several years and the actual
time required may vary substantially based upon the type, complexity and novelty
of the product or indication. Government regulation may delay or prevent
marketing of potential products or new indications for a considerable period of
time and impose costly procedures upon our activities. Success in early stage
clinical trials does not assure success in later stage clinical trials.

      Data obtained from clinical activities is not always conclusive and may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications and dosages.
Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain, additional regulatory approvals for any of our
product candidates would have a material adverse effect on our business.


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<PAGE>

      Any products manufactured or distributed by us pursuant to FDA approvals
are subject to continuing regulation by the FDA, including record-keeping
requirements and reporting of adverse experiences with the drug. Drug
manufacturers and their subcontractors are required to register their
establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with good manufacturing practices, which impose certain procedural
and documentation requirements upon us and any third party manufacturers we may
utilize. We cannot be certain that our present or future suppliers will be able
to comply with the good manufacturing practices, regulations and other FDA
regulatory requirements.

      Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union, registration procedures are
available to companies wishing to market a product in more than one EU Member
State. If the regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted. This foreign regulatory approval process involves all of the risks
associated with FDA clearance. To date, we have obtained regulatory approval for
clinical testing of Psoraxine(R) in Venezuela, but we have not obtained final
regulatory approval for commercial distribution of Psoraxine(R) in Venezuela
because we do not have manufacturing facilities in that country and such
facilities are required by regulatory authorities in Venezuela before granting
commercial approval for a proposed drug.

Intellectual Property

      In January 2004 the United States Patent and Trademark Office ("PTO")
issued a patent to Dr. Jose O'Daly for the "Compositions and Methods for the
Treatment and Clinical Remission of Psoriasis." Under the terms of a license
agreement and assignment of license agreement, we have the exclusive right and
license to use and exploit this patent. Dr. O'Daly will continue to maintain
ownership rights with respect to the patent and patent application. However, Dr.
O'Daly has granted us a perpetual, royalty free license to his patent under the
agreements, which will terminate only upon the expiration of the patent, or upon
the commencement of a bankruptcy or insolvency proceeding involving our company
or upon our dissolution or liquidation.

      In March 2002, Akiva LLC, an entity controlled by Dr. O'Daly, also filed
an application to obtain patent protection internationally under the Patent
Cooperation Treaty. In addition, in August 2003, Akiva LLC filed patent
applications in the European Union, Australia, Brazil, Canada, Mexico and Japan.
We have rights to these applications, which are currently pending, pursuant to
the license and assignment of license agreements described above.

      In January 2004, Dr. O'Daly filed a patent application with the PTO
focusing on the mechanism of action of Psoraxine(R), expanding the claims to
include medical indications other than psoriasis, such as Atopic Dermatitis,
Psoriatic Arthritis and Rheumatoid Arthritis. In addition, the patent elaborates
further on the mechanism of action of Leishmania extracts, which are believed to
induce T-cell activation. In January 2004, Dr. O'Daly also filed a second patent
relating to a culture medium for parasitic organisms, which is part of our
technology platform. Dr. O'Daly has assigned to us the rights in the patent
applications. Also, in January 2004, the PTO granted us a federal trademark
registration for the mark Psoraxine(R).


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<PAGE>

Agreements with SkyePharma

      We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma PLC ("SkyePharma") pursuant to which SkyePharma purchased an
aggregate of 2,000,000 shares of our Series A Convertible Preferred Stock, par
value $.001 per share ("Series A Preferred Stock"), for an aggregate purchase
price of $20.0 million. On January 20, 2004, pursuant to our Omnibus Conversion
Agreement with SkyePharma, dated January 12, 2004, SkyePharma converted all of
its 2,000,000 shares of our Series A Preferred Stock into 25,000,000 shares of
our common stock at a conversion price of $0.80 per share. In March 2005,
SkyePharma also acquired an additional 11,160,000 shares of our common stock in
a privately negotiated transaction with two private holders. As a result,
SkyePharma beneficially owned 49.8% of our common stock at that time. During
August 2005, the Company closed on an investment of $2 million. Consequently
SkyePharma's share of beneficial ownership was approximately 39.7% on December
31, 2005. Additionally, during March 2006, the Company closed on an investment
of $250,000. Consequently SkyePharma's share of beneficial ownership is now
approximately 39.8%.

      On January 20, 2004, in connection with SkyePharma's conversion of the
Series A Preferred Stock, we entered into a Call Option Agreement with
SkyePharma, pursuant to which we received the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma at a premium to the $0.80
conversion price. In the event we exercise the call option, the exercise price
will be between $1.28 and $1.52 per share, depending on the date of exercise.
The call option will be exercisable by us for a period commencing upon our
achievement of a certain milestone event and ending on January 20, 2007. In June
2004, we assigned the right to purchase 1,250,000 shares under the Call Option
Agreement to FPP Capital Advisors as consideration for services it provided in
negotiating the Omnibus Conversion Agreement. FPP Capital Advisors is controlled
by Fabien Pictet, a member of our Board of Directors.

      On January 20, 2004, the closing date of the conversion of SkyePharma's
2,000,000 shares of our Series A Preferred Stock, we, SkyePharma and our other
original shareholders amended the Stockholders' Agreement, dated as of December
10, 2001 (the "Amended SkyePharma Stockholders' Agreement"). Pursuant to the
Amended SkyePharma Stockholders' Agreement, our board of directors is required
to be comprised of at least seven directors and must include at least two
independent directors. Per the Amended SkyePharma Stockholders' Agreement,
SkyePharma has the right to nominate one director. Michael Ashton is
SkyePharma's initial and current nominated director. Until January 20, 2007,
Jose Antonio O'Daly has the right to nominate one Director. The Amended
SkyePharma Stockholders' Agreement will terminate upon the later of (i) the date
on which SkyePharma no longer beneficially owns, in the aggregate, at least 20%
of our outstanding common stock or (ii) January 20, 2007. Further, the Amended
SkyePharma Stockholders' Agreement may be terminated by the mutual written
consent of the parties. Pursuant to the Amended SkyePharma Stockholders'
Agreement, SkyePharma is required to vote its shares of our common stock in
favor of certain enumerated transactions that have been approved by our board of
directors and all of our independent directors. These transactions include (i)
the amendment of our certificate of incorporation solely to increase our
authorized capital stock, (ii) the adoption or amendment of an employee benefit
plan applicable to all employees, (iii) the issuance of additional securities
for cash and (iv) the sale of all of our outstanding capital stock or all or
substantially all of our assets, or our merger with another entity, provided
that SkyePharma will receive the same consideration for its shares as other
holders of common stock and will be able to participate in the sale or merger on
the same terms as the most favorable terms available to any of our other
stockholders and the total consideration for the transaction is greater than
$135 million.


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<PAGE>

      We also entered into two agreements concerning the formulation and
development of our initial injectable product candidate, Psoraxine(R), with
SkyePharma. Under the terms of the Technology Access Option Agreement, dated
December 10, 2001, we paid to SkyePharma a $5.0 million technology access fee
for the option to acquire a license for DepoFoam and other relevant drug
delivery technologies owned by SkyePharma. Under the terms of the Technology
Access Option Agreement, if we exercise our option, we must pay a royalty of 5%
of net sales of all products manufactured or sold that use or exploit the drug
delivery technologies that we license from SkyePharma. In addition, if we
exercise our option, SkyePharma retains the right during the term of the
Technology Access Option Agreement to undertake the manufacture of all of our
products that incorporate or utilize the drug delivery technologies. The option
we received under the Technology Access Option Agreement expires on December 10,
2008. The Technology Access Option Agreement may be terminated by either party
if (i) the other party commits any irremediable breach of the agreement, (ii)
the other party commits any remediable breach and fails to remedy such breach
within sixty days of service of notice of the breach, (iii) a court makes an
administration order with respect to the other party or any composition in
satisfaction of the debts of, or scheme of arrangement of the affairs of, the
other party, or (iv) the other party becomes insolvent, has a receiver appointed
over any of its assets, enters into any composition with creditors generally or
has an order made or resolution passed for it to be wound up. SkyePharma has the
right of first negotiation to acquire the worldwide marketing rights to
Psoraxine(R). We have evaluated the technology access option fee we paid under
the Technology Access Option Agreement, which we have been capitalizing as a
research and development intangible asset over a seven-year period, and have
determined that as of December 31, 2004, the technology access option fee
exceeded its fair market value. Consequently, we recorded as additional research
and development costs in 2004 a charge of $2,797,612 to reflect an impairment of
this intangible asset.

      In addition, we entered into a Service Agreement, dated December 10, 2001,
pursuant to which SkyePharma was to provide us with development, manufacturing,
pre-clinical and clinical development services in consideration of $11 million,
of which $3 million was paid in 2001, with the remaining $8 million paid
primarily during 2002 for second generation Psoraxine(R). The Service Agreement
terminated on December 31, 2002. We entered into an Amendment to the Service
Agreement with SkyePharma, effective as of January 1, 2003, to extend the term
of the Service Agreement and modify the services to be provided by SkyePharma
such that SkyePharma continued to provide certain services to us through
December 31, 2004, in consideration for payments made during 2002. The agreement
expired on December 31, 2004.

Blue Cedar August 2005 Private Placement

      On August 19, 2005, we completed a private placement of securities from
which we received gross proceeds of approximately $2,000,000. The transaction
consisted of the sale to one accredited investor, Blue Cedar, of units
consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to purchase
over a 5-year period 18,181,818 shares of common stock with an exercise price of
$0.165 and (iii) warrants to purchase over a 12-month period 12,121,212 shares
of common stock with an exercise price of $0.165. We relied upon the exemption
from registration provided under Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder. The private placement was only made
available to one "accredited investor" as defined in Rule 501 of Regulation D.
Lipworth Capital Limited acted as our placement agent in connection with the
private placement. We paid an 8% fee to our placement agent and issued warrants
to purchase 1,454,545 shares of common stock with an exercise price of $0.165,
in connection with the financing in addition to other costs. Additionally, we
granted Blue Cedar certain registration rights pursuant to a registration rights
agreement, dated as of August 17, 2005, in connection with this transaction. The
registration rights agreement required us to file a registration statement
within approximately 30 days of the final closing of our private placement
covering the resale of all shares included therein, as well as the shares
underlying the warrants. Because a registration statement covering the resale of
such shares was not filed or effective by December 31, 2005, the date specified
in the agreement, we are subject to liquidated damages payments of $10,000 per
month, being 0.5% of the aggregate purchase price plus 10% interest per annum to
be paid on unpaid liquidated damages amounts until such time as a registration
statement covering the resale of securities sold to Blue Cedar is declared
effective by the Securities and Exchange Commission.


                                       10
<PAGE>

      Concurrently with the closing of the private placement, we and Blue Cedar
entered into the Blue Cedar Stockholder's Agreement. Pursuant to the Blue Cedar
Stockholder's Agreement, our Board of Directors is required to be comprised of
at least eight directors and Blue Cedar may designate one director to our Board
of Directors. Manuel Tarabay is Blue Cedar's initial and current designated
director. Further, pursuant to the Blue Cedar Stockholder's Agreement, we agreed
not to enter into any service agreement, distribution arrangement or transfer of
personnel with any of our stockholders owning more than 10% of the outstanding
shares of common stock until we complete Phase II clinical trials of
Psoraxine(R), without the prior written consent of Blue Cedar, which shall not
be unreasonably withheld. Additionally, for a period of two years following the
closing date of the private placement, we granted Blue Cedar certain pre-emptive
rights, allowing Blue Cedar to participate in substantially all sales of
securities. The Blue Cedar Stockholder's Agreement will terminate upon the
earlier of the Blue Cedar Termination Date or August 15, 2008. The "Blue Cedar
Termination Date" is the date on which Blue Cedar no longer beneficially owns,
in the aggregate, at least 20% of our outstanding common stock.

Other Research and Development Efforts

      In addition to our development of Psoraxine(R) for the treatment of
psoriasis, we are researching its possible application for the treatment of
other conditions, such as eczema, seborrheic dermatitis and leishmaniasis. We
are also developing a second product for the treatment of arthritis. We intend
to market this product primarily in the United States, although we have not
named this product yet and we do not have any approvals from, nor has any
application been filed with, the FDA or any foreign governmental regulatory
authority for this product. Currently, we do not have any collaborators for this
product. We are also engaged in preliminary research of a treatment for
transplant rejection.

Employees and Consultants

      As of March 31, 2006, we employed five full-time employees, including
three scientists and one laboratory technician. We also have seven consultants.
We have no part-time employees. None of our employees are covered by a
collective bargaining agreement and we believe that our employee relations are
good.

                           FORWARD-LOOKING STATEMENTS

      This annual report on Form 10-KSB contains many forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate", and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future operating results or of
our financial condition or state other "forward-looking" information.

      We believe that it is important to communicate our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned "Risk Factors" and
"Management's Discussion and Analysis or Plan of Operation", as well as any
other cautionary language in this annual report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" section, the "Management's Discussion and
Analysis or Plan of Operation" section and elsewhere in this annual report could
seriously harm our business.


                                       11
<PAGE>

                                  RISK FACTORS

      You should carefully consider each of the following risk factors and all
of the other information in this report. The following risks relate principally
to the Company's business. If any of the following risks actually occur, the
business, financial condition or results of operations of the Company could be
materially adversely affected. As a result, the market price of shares of the
Company's common stock could decline significantly.

      We will need to obtain additional funds immediately to support our future
operation expenses. Our auditors have expressed uncertainty regarding our
ability to continue as a going concern.

      As of April 15, 2006 we have $277,705 in available cash and accounts
payable of $65,067. Based on our current plans, we believe that we have
sufficient funds to meet our operating expenses and capital requirements through
approximately May 2006. We will need to raise additional funds to continue our
operations following that period. Furthermore, substantial additional funds will
be needed in order to fund our continued efforts to obtain FDA approval of
Psoraxine(R), especially given the failure of our Phase II study to meet its
primary endpoint. No assurance can be given that we will be able to obtain
financing, or successfully sell assets or stock, or, even if such transactions
are possible, that they will be on terms reasonable to us or that they will
enable us to satisfy our cash requirements. In addition, raising additional
funds by selling additional shares of our capital stock will dilute the
ownership interest of our stockholders. If we do not obtain additional funds, we
will likely be required to eliminate programs, delay development of our
products, alter our business plans, or in the extreme situation, cease
operations.

      As a result of our losses and the matters described in the preceding
paragraph, the Independent Auditors' Report on our financial statements includes
a paragraph indicating doubt about our ability to continue as a going concern.
The financial statements that accompany this report do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.

      We have no sales; we will not have sales in the foreseeable future; we are
in an early stage of development and we may never sell products or become
profitable.

      We commenced our current operations in 2001 and such operations remain in
an early stage of development. We have no products approved for sale and
therefore, no means to generate revenue. We have not commercialized any
products, had no revenues and had incurred a cumulative net loss of $53,616,516
as of December 31, 2005 which has increased to date. The cumulative net loss
through December 31, 2005 includes non-cash preferred stock dividends of
$22,218,750. We expect that substantial losses will continue for the foreseeable
future. In order to obtain revenue from the sales of our product candidate,
Psoraxine(R), we must successfully develop, test, obtain regulatory approval
for, manufacture, market and eventually sell such product candidate. Our
expenses have consisted principally of costs incurred in research and
development and from general and administrative costs associated with our
operations. We expect our expenses to increase and to continue to incur
operating losses for the next several years as we continue our research and
development efforts for Psoraxine(R) and any subsequent product candidates.
Commercialization of any of our products will take a significant amount of time
and successful commercialization may not occur at all. As a result, we may never
become profitable.

      Psoraxine(R) may never be approved by the FDA because the results of our
Phase II study failed to meet its primary study endpoint.


                                       12
<PAGE>

      We have focused our development efforts to date on conducting clinical
trials for an immuno-stimulatory drug, Psoraxine(R), for the treatment of
psoriasis. We recently conducted a randomized, double-blinded,
placebo-controlled clinical study involving 120 patients with moderate to severe
psoriasis who received six (6) intramuscular injections of Psoraxine(R). The
primary endpoint of the study was a specified level of improvement of symptoms
measured in accordance with the Psoriasis Area and Severity Index, or PASI,
which is a measurement scale that ranks the severity of symptoms of patients
suffering from psoriasis. Our initial analysis of the preliminary data showed no
statistically significant improvement of those Phase II study patients who
received six injections of Psoraxine(R) for a twelve weeks treatment period
compared to patients taking a placebo.

      The failure of our Phase II study to meet its primary endpoint makes FDA
approval of Psoraxine(R) substantially more uncertain. To continue Psoraxine(R)
's development and to obtain FDA approval to market Psoraxine(R), we must
complete our analysis of the data from the Phase II study to identify why the
Phase II study failed to meet its primary endpoint. We must then undertake
additional Phase I or Phase II clinical trials that are adjusted to account for
the cause or causes of the initial Phase II study's failure. Although we have
already identified a number of possible reasons for the failure to demonstrate
efficacy in the recent Phase II trial, and we have also developed a preliminary
plan for new clinical studies, there can be no guarantee that we will be able to
identify with certainty why our Phase II study failed to meet its primary
endpoint and that we will be able to make the needed adjustments for further
Phase II studies to be successful. There is also no guarantee that the FDA would
approve Psoraxine(R) even if we deem additional clinical trials to be
successful.

      We have devoted most of our resources to the development of Psoraxine(R)
and our business is dependent on its success. In the United States, the
marketing of Psoraxine(R) depends on FDA approval of the product. Analyzing the
Phase II study data and conducting additional Phase II clinical trials will
delay FDA approval. We may also decide to discontinue further clinical trials of
Psoraxine(R), which would prevent us from obtaining FDA approval. If we are not
able to obtain FDA approval for Psoraxine(R), we would be unable to sell the
product and we would have to identify new potential products to develop.

      Recent and future changes in senior management and board composition may
affect our ability to implement our business plan. In addition we only have one
member of our Audit Committee.

      On January 25, 2006, we accepted the resignation James Sharpe, effective
as of December 31, 2005 with respect to his position as Chief Executive Officer,
President and member of the Board of Directors. Michael Garone, our Chief
Financial Officer, currently serves as the interim Chief Executive Officer and
interim President. Mr. Sharpe is our third Chief Executive Officer and President
to resign in an 18 month period. Our ability to implement our business strategy
may be adversely affected if we continue to experience unplanned senior
management changes in the future or if we are unable to successfully integrate
our current and future senior management personnel into our organization.
Additionally there have been changes to the composition of our Board of
Directors. In April 2006, we received an announcement from Fabien Pictet that he
will be resigning as a member of the Board of Directors. Further, in December
2005, Steven Fulda resigned as a member of the Audit Committee and member of the
Board of Directors. As a result of Mr. Fulda's resignation, we only have one
member of the Audit Committee. Moreover, our Audit Committee does not contain a
member that qualifies as a financial "expert" as defined by Item 401(e) of
Regulation S-B of the Exchange Act.

      One of our existing stockholders can exert control over us and may not
make decisions that further the best interests of all stockholders.

      SkyePharma owns approximately 39.8% of our outstanding common stock. As a
result, SkyePharma may exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Furthermore, the interests of SkyePharma may not always coincide
with our interests or the interests of other stockholders and accordingly, they
could cause us to enter into transactions or agreements which we would not
otherwise consider. In addition, this concentration of ownership may delay or
prevent a merger or acquisition resulting in a change in our control might
affect the market price of our common stock, even when such a change in control
may be in the best interest of all stockholders.


                                       13
<PAGE>

      We may not be successful in the development and commercialization of
products.

      We may not develop products that prove to be safe and effective, that meet
applicable regulatory standards or that we can manufacture at reasonable costs
or market successfully. Successful products will require significant development
and investment, including testing, to demonstrate their safety and efficacy
prior to their commercialization. We have not proven our ability to develop and
commercialize products. We must conduct a substantial amount of additional
research and development before any regulatory authority will approve our
initial product candidate, Psoraxine(R). Our research and development and
clinical trials may not confirm the safety and efficacy of our products, in
which case regulatory authorities may not approve them. In addition, even if we
successfully complete our research and development efforts, Psoraxine(R) may not
perform in the manner we anticipate, and may not be accepted for use by the
public.

      Substantial additional funds and effort will be necessary for further
development and commercialization of Psoraxine(R).

      Our initial product candidate, Psoraxine(R), will require the commitment
of substantial resources to move it towards commercialization. Before obtaining
regulatory approvals for the commercial sale of Psoraxine(R), we must
demonstrate the safety and efficacy of our product candidate through preclinical
testing and clinical trials. Conducting clinical trials involves a lengthy,
expensive and uncertain process. Completion of clinical trials may take several
years or more. The length of time generally varies substantially according to
the type, complexity, novelty and intended use of the product. If we or the U.S.
Food and Drug Administration believe that our clinical trials expose
participating patients to unacceptable health risks, we may suspend such trials.

      We may encounter problems in our studies which will cause us or the FDA to
delay or suspend the studies. Some of the factors that may delay our
commencement and rate of completion of clinical trials include:

o     ineffectiveness of the study compound, or perceptions by physicians that
      the compound will not successfully treat a particular indication;

o     inability to manufacture sufficient quantities of compounds for use in
      clinical trials;

o     failure of the FDA to approve our clinical trial protocols;

o     slower than expected rate of patient recruitment;

o     unforeseen safety issues; or

o     government or regulatory delays.

      The failure of future clinical trials may harm our business, financial
condition and results of operations.


                                       14
<PAGE>

      Our potential therapeutic products face a lengthy and uncertain regulatory
process. If we do not obtain regulatory approval of our potential products, we
will not be able to commercialize these products.

      The FDA must approve any therapeutic product before it can be marketed in
the United States. Before we obtain FDA approval of a new drug application or
biologics license application, the product must undergo extensive testing,
including animal and human clinical trials, which can take many years and
requires substantial expenditure. Data obtained from such testing may be
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new drug application may cause delays or rejections. We must
devote a substantial amount of time and resources in the regulatory process in
order to obtain regulatory approval of our initial product candidate,
Psoraxine(R).

      Because our initial product candidate, Psoraxine(R), involves the
application of new technologies and may be used upon new therapeutic approaches,
government regulatory authorities may subject this product to more rigorous
review and may grant regulatory approvals more slowly for this product than for
products using more conventional technologies. We have not received approval
from the FDA to market or commercialize Psoraxine(R). The regulatory agencies of
foreign governments must also approve any therapeutic product we may develop
before the product can be sold in those countries. To date, although we have
obtained regulatory approval for clinical testing of Psoraxine(R) in Venezuela,
we have not sought, nor have we obtained, regulatory approval for the
commercialization of Psoraxine(R) in Venezuela because, among other things, we
do not have manufacturing facilities in that country and such facilities are
required by regulatory authorities in Venezuela before granting commercial
approval for a proposed drug.

      Even after investing significant time and resources, we may not obtain
regulatory approval for our product. If we do not receive regulatory approval,
we cannot sell the product. Even if we receive regulatory approval, this
approval may place limitations on the indicated uses for which we can market the
product. Further, after granting regulatory approval, regulatory authorities
subject a marketed product and its manufacturer to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on the product, manufacturer and manufacturing facility,
including withdrawal of the product from the market. In certain countries,
regulatory agencies also set or approve prices.

      Even if product candidates emerge successfully from clinical trials, we
may not be able to successfully manufacture, market and sell them.

      We have not successfully completed clinical trials of Psoraxine(R). If
Psoraxine(R) emerges successfully from clinical trials and obtains regulatory
approval, we will either commercialize products resulting from our proprietary
programs directly or through licensing arrangements with other companies. We
have no experience in manufacturing and marketing, and we currently do not have
the resources or capability to manufacture, market or sell our products on a
commercial scale. In order to commercialize Psoraxine(R) directly, we would need
to develop or obtain through outsourcing arrangements the capability to
manufacture, market and sell products. In addition, we currently do not have any
agreements for the marketing or sale of any of our products and we may not be
able to enter into such agreements on commercially reasonable terms, or at all.

      We license and do not own our intellectual property. Any inability to
protect our proprietary technologies adequately could harm our competitive
position.


                                       15
<PAGE>

      We license, and do not own, the intellectual property rights to
Psoraxine(R). Dr. Jose Antonio O'Daly is the owner of the patent for
Psoraxine(R). Under the terms of a license agreement and assignment of license
agreement, we have the right to use any patent issued pursuant to Dr. O'Daly's
patent application. We also have rights to other patents filed by Dr. O'Daly
under the terms of our employment agreement with him. Our success will depend in
part on our ability to obtain patents and maintain adequate protection of other
intellectual property for our technologies and products in the United States and
other countries. If we do not adequately protect our intellectual property,
competitors may be able to use our technologies and erode or negate our
competitive advantage. The laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States, and we
may encounter significant problems in protecting our proprietary rights in these
foreign countries.

      The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that we cover our proprietary technologies with valid and enforceable
patents or we effectively maintain such proprietary technologies as trade
secrets. We will apply for patents covering both our technologies and product
candidates as we deem appropriate. However, we may fail to apply for patents on
important technologies or products in a timely fashion, or at all, and in any
event, the applications we do file may be challenged and may not result in
issued patents. Any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If we encounter challenges to the use or validity of
any of our patents, resulting in litigation or administrative proceedings, we
would incur substantial costs and the diversion of management in defending the
patent. In addition, we do not control the patent prosecution of technology that
we license from others. Accordingly, we cannot exercise the same degree of
control over this intellectual property as we would over technology we own.

      We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.

      Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.

      Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.

      We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
Biogen, Genentech/Xoma, Amgen, Wyeth, Abbott Laboratories and Novartis. These
organizations may develop technologies that provide superior alternatives to our
technologies. Further, our competitors may be more effective at implementing
their technologies to develop commercial products.


                                       16
<PAGE>

      Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.

      If we lose our key personnel or fail to attract and retain additional
personnel, we may be unable to discover and develop our products.

      We depend on the services of Dr. Jose Antonio O'Daly, the Chairman of our
Board of Directors and our Chief Scientific Officer, and Michael Garone, interim
Chief Executive Officer, interim President and Chief Financial Officer, the loss
of whose services would adversely impact the achievement of our objectives. To
execute our business plan fully it is essential that we retain these executives.
In addition, recruiting and retaining qualified scientific personnel to perform
future research and development work will be critical to our success. Although
we believe we can successfully attract and retain qualified personnel, we face
intense competition for experienced scientists. Failure to attract and retain
skilled personnel would prevent us from pursuing collaborations and developing
our products and core technologies to the extent otherwise possible.

      Our planned activities will require additional expertise. These activities
will require the addition of new personnel, including management, and the
development of additional expertise by existing management personnel. The
inability to acquire or develop this expertise could impair the growth, if any,
of our business.

      If we face claims in clinical trials of a drug candidate, these claims
will divert our management's time and we will incur litigation costs.

      We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of Psoraxine(R) results in personal injury or
death. We may experience clinical trial liability claims if our drug candidates
are misused or cause harm before regulatory authorities approve them for
marketing. Although, we currently maintain clinical liability insurance
coverage, it may not sufficiently cover any claims made against us and may not
be available in the future on acceptable terms, if at all. Any claims against
us, regardless of their merit, could strain our financial resources in addition
to consuming the time and attention of our management. Law suits for any
injuries caused by our products may result in liabilities that exceed our total
assets.

      Some of our existing stockholders can exert control over us and many not
make decisions that further the best interests of all stockholders.

      Our officers, directors and principal stockholders (greater that 5%
stockholders) together control approximately 77.7% of our outstanding common
stock. As a result, these stockholders, if they act individually or together,
may exert a significant degree of influence over our management and affairs and
over matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Furthermore, the interests
of this concentration of ownership may not always coincide with our interests or
the interests of other stockholders and accordingly, they could cause us to
enter into transactions or agreements which we would not otherwise consider. In
addition, this concentration of ownership may delay or prevent a merger or
acquisition resulting in a change in control of us and might affect the market
price of our common stock, even when such a change in control may be in the best
interest of all stockholders.


                                       17
<PAGE>

      The market price of our common stock may be highly volatile.

      The market price of our common stock has been and will likely continue to
be highly volatile. From the date trading of our common stock commenced until
March 31, 2006, the range of our stock price has been between $0.02 and $7.15.
Factors including announcements of technological innovations by us or other
companies, regulatory matters, new or existing products or procedures, concerns
about our financial position, operating results, government regulation, or
developments or disputes relating to agreements, patents or proprietary rights
may have a significant impact on the market price of our stock. In addition,
potential dilutive effects of future sales of shares of common stock by us, our
stockholders, or the holders of warrants and options, could have an adverse
effect on the price of our common stock.

      A large number of shares of our common stock may be sold in the market,
which may depress the market price of our common stock.

      Sales of substantial amounts of our common stock in the public market, or
the perception that these sales might occur, could materially and adversely
affect the market price of our common stock or our future ability to raise
capital through an offering of our equity securities. We have an aggregate of
91,454,873 shares of our common stock outstanding. If all options and warrants
currently outstanding to purchase shares of our common stock are exercised,
there will be approximately 145,223,895 shares of our common stock outstanding.
Of the outstanding shares, up to 73,173,055 shares are freely tradable without
restriction or further registration under the Securities Act, unless the shares
are held by one of our "affiliates" as such term is defined in Rule 144 of the
Securities Act. The remaining shares may be sold only pursuant to a registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act. The sale and distribution of these shares
may cause a decline in the market price of our common stock.

      Our common stock qualifies as a "penny stock" under SEC rules which may
make it more difficult for our stockholders to resell their shares of our common
stock.

      Our common stock trades on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it were
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because our common stock does not trade on a stock exchange or
on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market
price of the common stock is less than $5.00 per share, the common stock
qualifies as a "penny stock." SEC Rule 15g-9 under the Exchange Act imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination on the
appropriateness of investments in penny stocks for the customer and must make
special disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock could adversely affect
the market liquidity of the shares, which in turn may affect the ability of
holders of our common stock to resell the stock.

Item 2. Description of Property


                                       18
<PAGE>

      We lease our executive offices and research laboratory located at 75
Passaic Avenue, Fairfield, New Jersey 07004. The yearly rent for such office and
laboratory space is $110,400.

Item 3. Legal Proceedings

      Neither we, nor any of our properties, are presently a party to any
material legal proceeding, nor, to our knowledge, is any such proceeding
threatened against us or any of our properties.

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

      No matters were submitted for a vote of our shareholders during the fourth
quarter of fiscal 2005.

                                     PART II

Item 5. Market For Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities

Market Information

      Our common stock is traded on the Over-the-Counter Bulletin Board ("OTC
Bulletin Board") under the symbol ASTR.OB. The following table sets forth, for
the periods indicated, the range of high and low bid quotations for shares of
our common stock as quoted on the OTC Bulletin Board. The reported bid
quotations reflect inter-dealer prices, without retail markup, markdown or
commissions, and may not necessarily represent actual transactions.


         2004                            High                  Low
         ----                            ----                  ---
         First Quarter                  $1.66                 $0.64
         Second Quarter                 $1.46                 $1.04
         Third Quarter                  $1.05                 $0.51
         Fourth Quarter                 $0.85                 $0.42

         2005
         ----
         First Quarter                  $0.84                 $0.20
         Second Quarter                 $0.40                 $0.20
         Third Quarter                  $0.25                 $0.15
         Fourth Quarter                 $0.16                 $0.02

Holders of Common Stock

      As of March 31, 2006, there were approximately 89 record holders of our
common stock.


                                       19
<PAGE>

Dividends

      We have never paid or declared a cash dividend on our common stock. We
intend, for the foreseeable future, to retain all future earnings for use in our
business. The amount of dividends we pay in the future, if any, will be at the
discretion of our Board of Directors and will depend upon our earnings, capital
requirements, financial condition and other relevant factors.

Equity Compensation Plan Information

      The following table provides information with respect to the equity
securities that are authorized for issuance under our compensation plans as of
December 31, 2005:

            Equity Compensation Plan Information at December 31, 2005

<TABLE>
<CAPTION>
                                                 Number of securities to    Weighted-average   Number of securities
                                                    be issued upon the       exercise price     remaining available
                                                 exercise of outstanding     of outstanding     for future issuance
                                                  options, warrants and         options,           under equity
                                                        rights (a)            warrants and      compensation plans
                                                                                 rights        (excluding securities
                                                                                  (b)          reflected in column a)

<S>                                                      <C>                   <C>                   <C>
Equity compensation plans approved by
securities holders                                       1,454,000             $0.26-$2.50           3,521,000

Equity compensation plans not approved by
securities holders                                          0                      0                     0

Total                                                    1,454,000             $0.26-$2.50           3,521,000
</TABLE>

Recent Sales of Unregistered Securities

      On March 31, 2006, the Company closed a private placement of securities
from which it received proceeds of $250,000. In connection with such private
placement, the Company issued to Blue Cedar, an accredited investor and
currently a stockholder of the Company, (i) a convertible promissory note in the
principal amount of $250,000, convertible into shares of the Company's Common
Stock at $0.09 per share, and (ii) a warrant to purchase 2,777,778 shares of
Common Stock. Lipworth Capital Limited acted as the placement agent in
connection with this private placement. The securities offered and sold in this
private placement were sold in reliance on an exemption from the registration
requirements under Regulation D of the Securities Act of 1933.

      On August 19, 2005, the Company closed a private placement of securities
from which they received gross proceeds of approximately $2,000,000. The
transaction consisted of the sale to one accredited investor, Blue Cedar, of
units consisting of: (i) 18,181,818 shares of Common Stock, (ii) warrants to
purchase over a 5-year period 18,181,818 shares of common stock with an exercise
price of $0.165 and (iii) warrants to purchase over a 12-month period 12,121,212
shares of common stock with an exercise price of $0.165. The Company relied upon
the exemption from registration provided under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The private placement
was only made available to one "accredited investor" as defined in Rule 501 of


                                       20
<PAGE>

Regulation D and the required number of manually executed originals and true
copies of Form D were and timely filed with the Securities and Exchange
Commission. Lipworth Capital Limited acted as the placement agent in connection
with the private placement. The Company paid an 8% fee to the placement agent
and issued warrants to purchase 1,454,545 shares of common stock with an
exercise price of $0.165, in connection with the financing in addition to other
costs. Additionally, the Company granted Blue Cedar certain registration rights
pursuant to a registration rights agreement, dated as of August 17, 2005, in
connection with this transaction. The registration rights agreement required the
Company to file a registration statement within approximately 30 days of the
final closing of the private placement covering the resale of all shares
included therein, as well as the shares underlying the warrants. Because a
registration statement covering the resale of such shares was not filed or
effective by December 31, 2005, the date specified in the agreement, the Company
is subject to liquidated damages payments of $10,000 per month, being 0.5% of
the aggregate purchase price plus 10% interest per annum to be paid on unpaid
liquidated damages amounts until such time as a registration statement covering
the resale of securities sold to Blue Cedar is declared effective by the
Securities and Exchange Commission.

      On June 4, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.28 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.

      On April 11, 2005, the Company issued 50,000 options to a newly elected
director. The options were issued with an exercise price of $0.26 and with a
term of 10 years. The options shall vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested.

      On February 2, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.69 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.

      In January 2005, the Company issued 100,000 shares of the Company's common
stock along with 728,000 options to James Sharpe, the Company's former Chief
Executive Officer and President. The options were issued with an exercise price
of $0.70 with a term of ten years. The options vest over three years, with 25%
vesting on the date of the grant and 25% vesting on the anniversary of the grant
date until fully vested. Mr. Sharpe resigned as Chief Executive Officer,
President and member of the Board of Directors as of January 25, 2006, with an
effective resignation date of December 31, 2005.

      In the first quarter of 2005 SkyePharma purchased the 11,160,000 shares of
common stock from Mike Ajnsztajn and Gaston Liebhaber. Consequently, as of March
3, 2005 SkyePharma owned approximately 49.7% of the Company's outstanding common
stock.

      On December 10, 2004, we entered into an Employment Agreement with Jose
Antonio O'Daly, the Chairman of our Board of Directors and our Chief Scientific
Officer. Pursuant to the terms of the Employment Agreement, we granted Dr.
O'Daly options to purchase 728,000 shares of our common stock at an initial
exercise price of $0.70 per share. The options were fully vested upon grant and
expire in ten years.

      On July 9, 2004, Steven Fulda, a former member of our Board of Directors,
exercised options to purchase 25,000 shares of our common stock at $0.45 per
share.

      On July 2, 2004, we granted options to purchase 50,000 shares of our
common stock at an exercise price of $1.00 per share to Samuel Barnett, one of
our Directors. Twenty-five percent of the options were vested upon the date of
grant, and options to purchase an additional 12,500 shares of our common stock
will vest each year thereafter on the anniversary of the date of grant. The
options will expire in four years.


                                       21
<PAGE>

      In June 2004, we issued units consisting of 150,000 shares of common stock
and warrants to purchase 150,000 shares of common stock to FPP Capital Advisors,
which is controlled by Fabien Pictet, a member of our Board of Directors, in
consideration for services valued at $75,000 that were rendered to us in
negotiating a Call Option Agreement, dated January 12, 2004, between us and
SkyePharma. The 150,000 warrants have an exercise price of $0.73 per share of
common stock and expire five years from the date of issue. Under the Call Option
Agreement, SkyePharma agreed that up to 12,500,000 shares of its common stock
issued upon conversion of the Series A Convertible Preferred Stock will be
subject to a call option, exercisable at our discretion upon completion of
agreed upon milestones and ending on January 20, 2007. In the event we exercise
the call option, the exercise price will be between $1.28 and $1.52 per share,
depending on the date of exercise. We assigned to FPP Capital Advisors the right
to purchase 1,250,000 shares of our common stock pursuant to the Call Option
Agreement. We relied on the exemption from registration with the Securities and
Exchange Commission provided under Section 4(2) of the Securities Act and Rule
506 of Regulation D under the Securities Act.

      On January 20, 2004 and February 19, 2004, we sold to accredited investors
units consisting of an aggregate of 10,459,866 shares of common stock and
warrants to purchase 10,459,866 shares of common stock for an aggregate purchase
price of approximately $5.23 million. The warrants have an exercise price of
$0.73 and expire in four years. We relied on the exemption from registration
under Regulation D of the Securities Act. In July 2004, we filed a registration
statement under the Securities Act covering the resale of the shares purchased
and the shares issuable upon exercise of the warrants.

      In connection with the private placements on January 20, 2004 and February
19, 2004, FPP Capital Advisors received a consulting fee of $261,496, warrants
to purchase 418,394 shares of our common stock at $0.50 per share and warrants
to purchase 418,394 shares of our common stock at $0.73 per share. The warrants
expire in four years. FPP Capital Advisors will be paid an additional consulting
fee equal to 5% of the proceeds we receive upon exercise of the warrants issued
in the private placements. We relied on the exemption from registration with the
Securities and Exchange Commission provided under Section 4(2) of the Securities
Act and Rule 506 of Regulation D under the Securities Act.

      On January 20, 2004, pursuant to an Omnibus Conversion Agreement, dated
January 12, 2004, between us and SkyePharma, SkyePharma converted all of its
2,000,000 outstanding shares of Series A Convertible Preferred Stock into
25,000,000 shares of our common stock at a conversion price of $0.80 per share.
As a result of this conversion, we no longer have any shares of preferred stock
outstanding and SkyePharma no longer has rights as a preferred stockholder. We
relied on the exemption from registration with the Securities and Exchange
Commission provided under 4(2) of the Securities Act and Rule 506 of Regulation
D under the Securities Act.

      During the thirteen month period ending January 31, 2003, SkyePharma
purchased 2,000,000 shares of our Series A Convertible Preferred Stock, par
value $.001 per share pursuant to a Purchase Agreement dated as of December 10,
2001, at a purchase price of $10.00 per share, or an aggregate purchase price of
$20.0 million. We sold these shares in reliance on the exemption from
registration with the Securities and Exchange Commission provided under Section
4(2) and Rule 506 of Regulation D under the Securities Act.

      On January 10, 2002, Mike Ajnsztajn, our former Chief Executive Officer
and a former member of our Board of Directors, Jose Antonio O'Daly, the Chairman
of our Board of Directors and our Chief Scientific Officer, and Gaston
Liebhaber, a former member of our Board of Directors, transferred, respectively,
175,000, 275,000 and 50,000 shares of our common stock owned by them to Manuel
Tarabay for consulting services rendered by Mr. Tarabay in connection with their
efforts to raise capital for our company. Messrs. Ajnsztajn, O'Daly and
Liebhaber relied on the exemption from registration afforded by Section 4(2) of
the Securities Act.


                                       22
<PAGE>

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

      The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this annual report on Form 10-KSB. This annual
report contains certain statements of a forward-looking nature relating to
future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this annual report, including the matters set forth under the
caption "Risk Factors" which could cause actual results to differ materially
from those indicated by such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.

Overview

      We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases. Our initial product candidate, Psoraxine(R), is a protein extract used
for the treatment of the skin disease psoriasis.

      Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:

o     Ongoing research and development of Psoraxine(R);

o     Conducting clinical trials to obtain the approval of the United States
      Food and Drug Administration for the marketing of Psoraxine(R); and

o     Development of the technology underlying Psoraxine(R) for the treatment of
      indications other that psoriasis, such as eczema, seborrheic dermatitis
      and leishmaniasis.

Fiscal year ended December 31, 2005 compared to fiscal year ended December 31,
2004.

For fiscal year ended December 31, 2005:

      On August 19, 2005, the Company closed a private placement of securities
from which they received gross proceeds of approximately $2,000,000. The
transaction consisted of the sale to one accredited investor, Blue Cedar, of
units consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to
purchase over a 5-year period 18,181,818 shares of common stock with


                                       23
<PAGE>

an exercise price of $0.165 and (iii) warrants to purchase over a 12-month
period 12,121,212 shares of common stock with an exercise price of $0.165. The
Company relied upon the exemption from registration provided under Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The
private placement was only made available to one "accredited investor" as
defined in Rule 501 of Regulation D and the required number of manually executed
originals and true copies of Form D were and timely filed with the Securities
and Exchange Commission. Lipworth Capital Limited acted as the placement agent
in connection with the private placement. The Company paid an 8% fee to the
placement agent and issued warrants to purchase 1,454,545 shares of common stock
with an exercise price of $0.165, in connection with the financing in addition
to other costs. Additionally, the Company granted Blue Cedar certain
registration rights pursuant to a registration rights agreement, dated as of
August 17, 2005, in connection with this transaction. The registration rights
agreement required the Company to file a registration statement within
approximately 30 days of the final closing of the private placement covering the
resale of all shares included therein, as well as the shares underlying the
warrants. Because a registration statement covering the resale of such shares
was not filed or effective by December 31, 2005, the date specified in the
agreement, the Company is subject to liquidated damages payments of $10,000 per
month, being 0.5% of the aggregate purchase price plus 10% interest per annum to
be paid on unpaid liquidated damages amounts until such time as a registration
statement covering the resale of securities sold to Blue Cedar is declared
effective by the Securities and Exchange Commission.

      In August 2005, the Board of Directors approved a resolution, subject to
shareholder approval, to increase the authorized number of shares of common
stock by 200,000,000 shares. The Company has not yet held a stockholders meeting
to approve such amendment.

      For the fiscal year ended December 31, 2005, we had no revenue from
operations and incurred operating expenses of $4,168,452 which consisted
primarily of:

o     Research and development costs of $2,510,521, including $1,635,461 that
      we incurred to complete our Phase II clinical study.

o     General and administrative costs of approximately $1,657,931, including
      professional fees and our general corporate expenditures.

      In December 2005, we received $306,921 in cash from the sale of a portion
of our tax related net operating losses ("NOLS") under the State of New Jersey's
Technology Business Tax Certificate Transfer Program. The program is an
initiative adopted by the New Jersey State legislature that allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
NOLS and defined research and development tax credits for cash.

      In the fourth quarter of 2005 we recognized $83,000 as the fair value of
the liquidated damages penalty provision payments in connection with the
Registration Rights Agreement with Blue Cedar.

      As a result, during the fiscal year ended December 31, 2005, we incurred a
net loss of $3,914,159.

For fiscal year ended December 31, 2004:

      On January 20, 2004 we closed a private placement from which we received
gross proceeds of approximately $4.08 million. The transaction consisted of the
sale to accredited investors of units consisting of 8,159,964 shares of common
stock and warrants to purchase 8,159,964 shares of common stock. Concurrently
with this transaction, SkyePharma converted all of its outstanding shares of
Series A Preferred Stock into 25,000,000 shares of common stock at a reduced
conversion price of $0.80 per share. In accordance with Statement of Financial
Auditing Standard 84, "Induced Conversions of Convertible Debt, an Amendment of
APB Opinion No. 26," we recorded this conversion transaction as a non-cash
preferred stock dividend in January 2004 in the amount of $10,750,000.


                                       24
<PAGE>

      On February 19, 2004, we held a second closing for our private placement
from which we received gross proceeds of approximately $1.15 million. The
transaction consisted of the sale to accredited investors of units consisting of
2,299,902 shares of common stock and warrants to purchase 2,299,902 shares of
common stock. In connection with our private placements and the conversion of
SkyePharma's Series A Preferred Stock, SkyePharma agreed that 12,500,000 shares
of the common stock issued upon conversion will be subject to a right of
repurchase by us under certain circumstances at a premium to the conversion
price. We assigned the right to purchase 1,250,000 of these shares to FPP
Capital Advisors as consideration for services it provided to us in negotiating
the Series A Preferred Stock conversion by SkyePharma. Accordingly, we recorded
a non-cash charge of $376,508 in June 2004 in connection with this assignment.

      In February 2004, in connection with the private placement, FPP Capital
Advisors received a consulting fee of $261,496, warrants to purchase 418,394
shares of our common stock at $0.50 per share and warrants to purchase 418,394
shares of our common stock. In June 2004, we issued units consisting of 150,000
shares of common stock and warrants to purchase 150,000 shares of common stock
to FPP Capital Advisors in consideration for services rendered to us in
negotiating our right to repurchase 12,500,000 shares of common stock from
SkyePharma.

      For the fiscal year ended December 31, 2004, we had no revenue from
operations and incurred operating expenses of $9,580,307 which consisted
primarily of:

o     Research and development costs of $7,689,060, including $2,360,000 that we
      incurred to conduct our Phase I and Phase II clinical studies, $1,007,500
      for services provided by SkyePharma under our Service Agreement with them,
      amortization of approximately $714,288 of the technology option license
      under our Technology Access Option Agreement with SkyePharma as an
      intangible asset over its seven-year life, and a charge of $2,797,612 to
      record an impairment of the technology option license.

o     General and administrative costs of approximately $1,860,844, including
      professional fees and our general corporate expenditures.

      In December 2004, we received $293,461 in cash from the sale of a portion
of our tax related NOLS under the State of New Jersey's Technology Business Tax
Certificate Transfer Program. The program is an initiative adopted by the New
Jersey State legislature that allows qualified technology and biotechnology
businesses in New Jersey to sell unused amounts of NOLS and defined research and
development tax credits for cash.

      As a result, during the fiscal year ended December 31, 2004, we incurred a
net loss of $20,037,568, which also included a non-cash preferred stock dividend
of $10,750,000.

The Next Twelve Months

      At December 31, 2005 we had cash balances of $633, 468, which as of March
31, 2006 was substantially depleted but with the addition of funds from our sale
of convertible notes and warrants, we estimate will last us through
approximately May 2006, and no marketable securities. On March 31, 2006, the
Company closed a private placement of securities from which it received proceeds
of $250,000. In connection with such private placement, the Company issued to
Blue Cedar, an accredited investor and currently a stockholder of the Company,
(i) a convertible promissory note in the principal amount of $250,000,
convertible into shares of the Company's Common Stock at $0.09 per share, and
(ii) a warrant to purchase 2,777,778 shares of Common Stock. Lipworth Capital
Limited acted as the placement agent in connection with this private placement.
The securities offered and sold in this private placement were sold in reliance
on an exemption from the registration requirements under Regulation D of the
Securities Act of 1933. At March 31, 2006 the Company had cash balances of
$289,607 which we estimate will last us through approximately May 2006 and no
marketable securities.

      Based on our current operating plan, we anticipate conducting the
following activities and using our cash over the course of the next twelve
months as follows:


                                       25
<PAGE>

o     Our primary focus is to further development efforts of our initial product
      candidate, Psoraxine(R). In March 2005, the Company announced that the
      Phase II study of its novel immuno-stimulatory product for the treatment
      of Psoriasis did not meet the primary study endpoint upon completion of
      the treatment phase of the study. In the study, Psoraxine(R) was found to
      be safe and well-tolerated. Accordingly, we analyzed the data and
      developed an hypothesis that may explain why we received these unexpected
      results. In this regard, we are implementing cost containment measures;
      realigning development activities to focus on such things as formulation,
      manufacturing, analytical protocols and potency; and we are testing the
      hypothesis to explain unexpected results and determine the best course for
      future development. We remain committed to Psoraxine(R) and its future
      development, and hope to see it return to Phase II clinical trials in
      2006.

o     We intend to implement our business plan and facilitate the operations of
      our company. The business plan will be implemented in phases: during the
      first phase we expect to test the hypothesis developed recently to assess
      causes for unexpected results in the Phase II trial. During the second
      phase, test results will be used to design and begin a new Phase II trial.
      We expect that we would be required to incur expenses of approximately
      $750,000 to third parties in connection with continuing development of
      Psoraxine(R).

o     We will spend approximately $450,000 to pay management salaries and
      salaries of employees, a portion of which is treated as research and
      development expense.

o     We also expect to expend approximately $700,000 for our general
      administrative and working capital requirements.

o     In connection with the August 2005 Blue Cedar private placement, because a
      registration statement covering the resale of the Blue Cedar shares was
      not filed or effective by December 31, 2005, we are required to pay
      liquidated damages payments of $10,000 per month, being 0.5% of the
      aggregate purchase price plus 10% annum interest until such time as a
      registration statement covering the resale of securities sold to Blue
      Cedar is declared effective by the Securities and Exchange Commission.

o     We will need to raise additional funds immediately to continue our
      operations for the period following the first quarter of 2006 and to fund
      any of the activities described above. Furthermore, substantial additional
      funds will be needed in order to fund our continued efforts to obtain FDA
      approval of Psoraxine(R). No assurance can be given that we will be able
      to obtain financing on terms that we find acceptable, or that they will
      enable us to satisfy our cash requirements. In addition, raising
      additional funds by selling additional shares of our capital stock will
      dilute the ownership interest of our stockholders. Presently, neither our
      management nor our bankers have identified new sources of capital. If we
      do not obtain additional funds, we will likely be required to cease
      operations.

Item 7. Financial Statements

      The financial statements required by this Item 7 begin at page F-1 of this
annual report.

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

      None.

Item 8A. Controls and Procedures

      (a) Evaluation of disclosure controls and procedures.

      Based on their evaluation as of the end of the period covered by this
Annual Report on Form 10-KSB, our interim Chief Executive Officer, interim
President and Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the


                                       26
<PAGE>

Exchange Act) are not effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.

      As a result of the audit of our 2005 financial statements by our
independent auditors we have become aware of certain deficiencies that exist in
the design and operation of our internal controls over financial reporting that
our independent auditors consider to be material weaknesses under standards of
the Public Company Accounting Oversight Board (PCAOB).

      Our independent auditors identified certain errors in the financial
statements in the current period that were not initially identified by the
Company's internal control over financial reporting. The aggregate amount of
these errors was material to our financial statements and therefore represent a
material weakness in our internal control over financial reporting. Upon being
notified of these errors we corrected the information included in the financial
statements before such statements were filed with the Securities and Exchange
Commission or disclosed publicly to any parties.

      Management will review the system of internal controls and take steps to
insure information required to be disclosed by the Company in reports that we
file is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Committee's rules and forms.

      (b) Changes in internal controls.

      There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Item 8B. Other Information

      None.

                                    PART III

Item 9. Directors and Executive Officers of the Registrant

Code of Business Conduct and Ethics

      We have a Code of Business Conduct and Ethics that applies to all
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. You can find our
Code of Business and Ethics on our website by going to the following address:
www.astralisltd.com. We will post any amendments to the Business Code of Conduct
and Ethics as well as any waivers that are required to be disclosed by the rules
of the Securities and Exchange Commission on our website.

      Our Board of Directors has adopted Corporate Governance Guidelines and
Charters for the Audit, Compensation and Nominating and Corporate Governance
Committees of the Board of Directors. You can find these documents on our
website by going to the following address: www.astralisltd.com.

      You can also obtain a printed copy of any of the materials referred to
above by contacting us at the following address: 75 Passaic Avenue, Fairfield,
New Jersey 07004, Attention: Secretary.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers and directors and persons who own more than 10% of our
common stock ("Reporting Persons") to file reports of ownership and changes in
ownership of our common stock with the SEC. Reporting Persons are required by
SEC regulations to furnish us with copies of all reports they file pursuant to
Section 16(a).

      Based solely on our review of the copies of such forms received or written
representations from Reporting Persons, we believe that with respect to the
fiscal year ended December 31, 2005, all the Reporting Persons complied with all
applicable filing requirements except that Fabien Pictet failed to timely file
Forms 4 and Forms 5.

Directors and Executive Officers

      The names, ages and positions of our current directors and executive
officers are as follows:


                                       27
<PAGE>

Name                                Age                  Position
--------------------------------    ---      -----------------------------------
Jose Antonio O'Daly, M.D., Ph.D.     64      Chairman of the Board of Directors
                                             and Chief Scientific Officer

Michael Garone                       47      Chief  Financial  Officer,  Interim
                                             Chief  Executive Officer and
                                             Interim President

Michael Ashton                       60      Director

Samuel Barnett, Ed.D.                58      Director

Fabien Pictet                        47      Director

Gordon Schooley, Ph.D.               59      Director

Manuel Tarabay                       53      Director

There are no familial relationships among our directors and/or officers.
Directors hold office until the next annual meeting of our stockholders or until
their respective successors have been elected and qualified. Officers serve at
the pleasure of the Board of Directors.

Jose Antonio O'Daly, M.D., Ph.D. Dr. O'Daly has served as our Chairman of the
Board of Directors since November 2001, and was appointed our Chief Scientific
Officer on December 22, 2004. From November 2001 to December 22, 2004, Dr.
O'Daly served as our President of Research and Development. Dr. O'Daly is the
sole founder of the Center for Research and Treatment for Psoriasis in Caracas,
Venezuela and has served as its President since 1998. From 1972 to 1998, Dr.
O'Daly served as Director and Head of Research of the Microbiology Center of the
Venezuelan Institute of Scientific Investigations. Dr. O'Daly attended the
Central University of Venezuela, Caracas, receiving his Doctorate of Medical
Sciences in 1968. In 1971, Dr. O'Daly earned a Doctorate of Philosophy from the
Johns Hopkins University in Baltimore, Maryland. Dr. O'Daly is an honorary
member of the Venezuelan Medical Academy.

Michael Garone. Mr. Garone has served as our Chief Financial Officer since
February 21, 2005. From October 13, 2004 to February 21, 2005, Mr. Garone served
as our Interim Chief Financial Officer. During 2004, Mr. Garone founded Gar-1
Business Advisory Services, L.L.C., an independent consulting company for
information movement and management companies. From 1983 to 2003, Mr. Garone was
employed by AT&T, Inc. where he held various positions of increasing
responsibilities, including Chief Financial Officer of AT&T Alascom and
Financial Planning Vice President, Broadband and Internet Services. Mr. Garone
began his career in finance as an Over-the-Counter stock trader specializing in
high technology start-up companies. Mr. Garone holds a B.A. in Mathematics from
Colgate University and an M.B.A. from Columbia University.

Michael Ashton. Mr. Ashton has served as one of our Directors since January
2002. Mr. Ashton has 30 years of experience in the pharmaceutical industry, and
since 1997 he has held the position of Chief Executive Officer of SkyePharma
PLC, a London-based drug delivery technology provider. Prior to joining
SkyePharma, Mr. Ashton served as Chairman and Chief Executive Officer of the
U.S. subsidiary of Faulding, Australia's largest pharmaceutical companies. Mr.
Ashton is a member of the Board of Directors of Transition Inc. Mr. Ashton holds
a Bachelor of Pharmacy Degree from Sydney University and an M.B.A. from Rutgers
University.


                                       28
<PAGE>

Samuel Barnett, Ed.D. Mr. Barnett has served as one of our Directors and a
member of our audit committee since June 2004. In 1979, Mr. Barnett founded
Barnett International, a consulting firm, and served as Chief Consultant from
1979 to 1999. From 1999 to 2000, Mr. Barnett served as Lead Partner of the
Americas Pharmaceutical Practice of PricewaterhouseCoopers Consulting. From 2000
to 2005, he served as Lead Partner of the Americas Life Sciences Consulting
Practice for IBM Business Consulting Services. Mr. Barnett holds a Bachelor's
Degree from Wesleyan University and received both his Master's and Doctorate
Degrees from Temple University.

Fabien Pictet. Mr. Pictet has served as one of our Directors since February
2002. Since 1998, Mr. Pictet has served as Chairman of Fabien Pictet and
Partners, a London-based investment firm. Mr. Pictet has 20 years of experience
in investing in emerging markets. During his 11 year tenure with Pictet and Cie,
from 1986 to 1997, Mr. Pictet held various positions ranging from Manager
responsible for U.S. equity investments to Partner responsible for all of the
firm's institutional activities in Geneva, Zurich and London. Mr. Pictet holds a
Bachelor's Degree in Economics from the University of San Francisco and a
Master's Degree in International Management from American Graduate School of
International Management. On April 19, 2006, Mr. Pictet announced that he will
be resigning as a member of the Board of Directors. However, an effective date
of Mr. Pictet's resignation has not yet been set.

Gordon Schooley, Ph.D. Dr. Schooley has served as one of our Directors and a
member of our Medical Advisory Board since April 11, 2005. Dr. Schooley has over
33 years of experience in the pharmaceutical field, including extensive
experience in clinical and product development. Since 1999, Dr. Schooley has
served as Chief Scientific Officer of SkyePharma PLC. From 1989 to 1998, Dr.
Schooley served as Vice President of Clinical and Regulatory Affairs for
Alliance Pharmaceutical Corp. From 1987 to 1989, Dr. Schooley served as Vice
President of Clinical and Regulatory Affairs for Newport Pharmaceuticals
International, Inc. From 1979 to 1987, Dr. Schooley served as Director of
Clinical Research, Biostatistics and Computing Services for Allergan
Pharmaceuticals. Dr. Schooley currently serves as a member of the Scientific
Advisory Boards of Topigen Pharmaceuticals, Inc., Progen Ltd., and Seacology
Foundation. Dr. Schooley holds a B.S. and an M.S. in Business and Statistics
from Brigham Young University and received his Doctorate of Philosophy in
Biostatistics from the University of Michigan School of Public Health.

Manuel Tarabay. Mr Tarabay has served as one of our Directors since August 19,
2005. Mr. Tarabay joined the Board in connection with the investment of $2
million by Blue Cedar. He serves as Blue Cedar's representative on the Board in
accordance with the terms of Blue Cedar's investment which closed on August 19,
2005. Mr.Tarabay also acts as financial advisor to several investors who reside
in the Middle East and Europe. During his 25 year career in Finance he has had
various assignments throughout the world with Merrill Lynch, JPMorgan, Bankers
Trust, Donaldson Lufkin Jenrette, and Credit Suisse First Boston. Mr. Tarabay
holds a B. A. Degree in Mathematics (Computer Sciences) from Dartmouth College;
a M. S. Degree in Computer Electronics Engineering from the Jesuit School of
Engineering in Beirut; and an MBA Degree in Finance from Insead in
Fountainbleau.


                                       29
<PAGE>

Advisors

      Medical Advisory Board

James Leyden, M.D. Dr. Leyden has served as the Chairman of our Medical Advisory
Board since November 2001. Dr. Leyden has been a Professor of Dermatology at the
Hospital of the University of Pennsylvania in Philadelphia since 1983. He has
served on the boards of many of the nation's key dermatological committees,
including those of the American Academy of Dermatology and the Dermatology
Foundation. Dr. Leyden has also served as a consultant to the U.S. Food and Drug
Administration and the Federal Trade Commission, and to drug regulation agencies
in England, Germany and Austria. Dr. Leyden has also assisted in the
development, testing and commercialization of Accutane, Bactroban, Nizoral,
Cleocin, Benzamycin, Benzaclin, Minocin and the use of bicarbonate to control
body odor. Dr. Leyden holds a Bachelor's Degree from Saint Joseph's College and
an M.D. from the University of Pennsylvania School of Medicine.

Gerald Krueger, M.D. Dr. Krueger has served on our Medical Advisory Board since
December 2003. Dr. Krueger is a Professor of Dermatology at the University of
Utah School of Medicine. Dr. Krueger consults for the U.S. Food and Drug
Administration on psoriasis and serves on the executive committee of the
Dermatology Foundation. In addition, he recently completed a ten-year term as
Chairman of the Medical Advisory Board of the National Psoriasis Foundation. Dr.
Krueger has been elected into the Alpha Omega Honor Society of Medicine. He has
received the Taub International Award for psoriasis research, the American Skin
Association Award for psoriasis research and the National Psoriasis Foundation's
Lifetime Achievement Award and Founders Award.

      Our Medical Advisory Board does not hold any formal meetings. However,
management consults with the Medical Advisory Board from time to time. On April
11, 2005, we also appointed Dr. Schooley to serve on our Medical Advisory Board.

Audit Committee

      The Audit Committee of our Board of Directors is an "Audit Committee" for
the purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. The
Audit Committee recommends to the Board of Directors the independent public
accountants to be selected to audit our annual financial statements, evaluates
internal accounting controls, reviews the adequacy of the internal audit budget,
personnel and plan, and determines that all audits and exams required by law are
performed fully, properly, and in a timely fashion. The sole member of the Audit
Committee is Samuel Barnett. Currently, there is a vacancy on the Audit
Committee as a result of Steven Fulda resigning on December 11, 2005 as a member
of the Board of Directors and member of the Audit Committee. As a member of the
Audit Committee, Mr. Fulda had served as the Audit Committee "financial expert"
as defined by Item 401(e) of Regulation S-B of the Exchange Act. Samuel Barnett
shall serve as the sole member of the Audit Committee until the Board of
Directors appoints a member of the Board of Directors to fill the vacancy on the
Audit Committee left by Mr. Fulda's resignation.

      Other than in his capacity as a member of the Audit Committee, member of
the Board of Directors or a member of any of our other Board committees, Mr.
Barnett has not accepted from us, directly or indirectly, any consulting,
advisory or other compensatory fee. In addition, Mr. Barnett does not have
direct or indirect beneficial ownership of over 10% of our common stock or is
one of our executive officers. Our Board of Directors has determined that Mr.
Barnett is "independent" under NASD Rule 4200 and Item 7(d)(3)(iv) of Schedule
14A, promulgated under the Exchange Act.


                                       30
<PAGE>

Item 10. Executive Compensation.

      The following table sets forth certain information regarding compensation
paid by us and our predecessors during each of the last three fiscal years to
our Chief Executive Officer and any other executive officer who received
compensation greater than $100,000 during any of the last three fiscal years.

                           Summary Compensation Table

                                                   Annual Compensation

                                                                  Other Annual
  Name and Principal Position            Year      Salary ($)   Compensation ($)
  ---------------------------            ----      ----------   ----------------
James Sharpe                             2005       231,000
Former President and Chief               2004            --            --
Executive Officer (1)                    2003            --            --
                                         2002            --            --

Mike Ajnsztajn                           2004       109,875         2,437(4)
Prior Chief Executive Officer (2)        2003       154,375         4,613
                                         2002       150,000         4,613

Jose Antonio O'Daly,                     2005       217,482        34,283(6)
Chairman of the Board of Directors       2004       188,487        41,004(5)
and Chief Scientific Officer (3)         2003       158,750        73,740
                                         2002       150,000        56,671

Michael Garone (7)                       2005       187,200            --
Chief Financial Officer, interim
Chief Executive Officer and
interim President

----------
(1) On January 25, 2006, we accepted the resignation of Mr. Sharpe, effective
December 31, 2005 with respect to his position as a member of our Board of
Directors and with respect to his position as our Chief Executive Officer and
President.

(2) On July 28, 2004, we accepted the resignation of Mr. Ajnsztajn, effective
immediately with respect to his position as a member of our Board of Directors
and effective August 26, 2004 with respect to his position as our Chief
Executive Officer.

(3) Dr. O'Daly became one of our employees on July 1, 2002. Prior to July 1,
2002, Dr. O'Daly provided services as a consultant to the company.

(4) For the fiscal year ended December 31, 2004, this amount includes $2,437 in
health insurance premiums paid by us for Mr. Ajnsztajn's benefit.


                                       31
<PAGE>

(5) For the fiscal year ended December 31, 2004, this amount includes $8,707 in
health insurance premiums paid by us for Dr. O'Daly's benefit, an automobile
allowance of $5,729 and $26,568 for a furnished apartment.

(6) For fiscal year ended December 31, 2005, this amount includes legal fees
paid by the Company for Dr. O'Daly's benefit in accordance with his employment
contract.

(7) Mr. Garone became the Chief Financial Officer as of February 21, 2005. As of
January 25, 2006, Mr. Garone was appointed by the Board of Directors to serve as
interim Chief Executive Officer and interim President until the Board elects a
new Chief Executive Officer and President to replace James Sharpe.

Employment Agreements

      On December 22, 2004, we entered into an employment agreement with Jose
Antonio O'Daly, the Chairman of our Board of Directors and our Chief Scientific
Officer. Under the terms of his employment agreement, Dr. O'Daly is entitled to
an annual base salary of $231,000 payable in arrears in bi-monthly installments,
less statutory deductions (the "Base Salary") and an annual bonus of up to 25%
of his Base Salary and based upon achievement of such goals and subject to such
additional terms as may be determined by the Board of Directors. As a member of
our senior management team, Dr. O'Daly has been granted the option to purchase
728,000 shares of our common stock with an initial exercise price of $0.70 per
share. The options are fully vested and have a term of ten years. In the event
of a voluntary termination for "good reason" or if Dr. O'Daly is terminated
following a change in control or without "cause," he generally will receive,
among other things, the following severance benefits: (a) an amount equal to two
times his annual Base Salary established for the fiscal year in which the date
of termination occurs and (b) an amount equal to two times his annual bonus
award established for the fiscal year in which his date of termination occurs.
In the event of a voluntary termination by Dr. O'Daly without good reason, or if
Dr. O'Daly is terminated by us for cause, he will receive the following
severance benefits: (a) an amount equal to his Base Salary for one year and (b)
an amount equal to one times his annual bonus award established for the fiscal
year in which his date of termination occurs. The employment agreement includes
certain non-competition and confidentiality provisions.

      On January 27, 2005, we entered into an employment agreement with James
Sharpe, our former Chief Executive Officer and President, pursuant to which Mr.
Sharpe was entitled to (i) an annual base salary of $231,000 payable in arrears
in bi-monthly installments, less statutory deductions ("Sharpe's Base Salary");
(ii) an annual bonus of up to 25% of Sharpe's Base Salary, based upon
achievement of such goals and subject to such additional terms as were to be
determined by the Board of Directors; and (iii) 100,000 shares of fully vested
common stock issued on Mr. Sharpe's first day of employment. In addition, in
accordance with his employment agreement, Mr. Sharpe had been granted options to
purchase 728,000 shares of common stock, of which options to purchase 182,000
shares had vested at the time of his resignation. Mr. Sharpe resigned from his
positions at the Company, pursuant to the terms of the Separation Agreement,
dated January 25, 2006. Pursuant to the terms of the Separation Agreement, Mr.
Sharpe received a severance payment in the amount of $50,000. In addition, in
accordance with the terms of the Separation Agreement, Mr. Sharpe had been
granted options to purchase 182,000 shares of common stock which vested on
January 27, 2006 at the market price as of such date and additional options to
purchase 182,000 shares of common stock on January 27, 2007 at the market price
as of such date.

      On February 21, 2005, we entered into a consultant agreement with Michael
Garone, whereby Mr. Garone was retained on a full-time, exclusive basis to serve
as our Chief Financial Officer (the "Consultant Agreement"). As Chief Financial
Officer, Mr. Garone is responsible for, among other things, our financial
planning and funding. In addition, Mr. Garone leads and implements our long-term


                                       32
<PAGE>

strategy and vision to provide successful growth in value for our investors and
shareholders. Under the terms of the Consultant Agreement, Mr. Garone is
entitled to a monthly fee of at least $15,600. We have agreed to indemnify Mr.
Garone against any claims that may arise as a result of the performance of his
duties as our Chief Financial Officer under the consultant agreement and to
include him, at our cost, as an insured party under our current directors' and
officer' liability insurance policy. The term of the consultant agreement will
continue until terminated by either party without cause upon 30 days written
notice or with cause upon 10 days written notice.

      On January 25, 2006 the Company's Board of Directors appointed Mr. Garone
to serve as interim Chief Executive Officer and interim President until the
Company's Board of Directors elects a new Chief Executive Officer and President
to replace Mr. Sharpe.

      None of our other executive officers receive compensation pursuant to any
standard arrangement for their services as executive officers.

2001 Stock Option Plan

      Our 2001 Stock Option Plan ("2001 Plan") was unanimously adopted by the
Board of Directors on November 1, 2001 and approved by our stockholders at a
special meeting held on November 1, 2001. The 2001 Plan provides for the
issuance of 5,000,000 shares of common stock underlying stock options available
for grant thereunder. The purpose of the 2001 Plan is to provide additional
incentive to our directors, officers, employees and consultants who are
primarily responsible for our management and growth. Each option will be
designated at the time of grant as either an incentive stock option (an "ISO")
or as a non-qualified stock option (a "NQSO"). As of December 31, 2005, options
to purchase 1,454,000 shares of common stock have been granted under the 2001
Plan.

      The 2001 Plan will be administered by our Board of Directors, or by any
committee that we may in the future form and to which the Board of Directors may
delegate the authority to perform such functions (in either case, the
"Administrator").

      Every person who at the date of grant of an option is an employee of ours
or any affiliate of ours is eligible to receive NQSOs or ISOs under the 2001
Plan. Every person who at the date of grant is a consultant to, or non-employee
director of, ours or any affiliate of ours is eligible to receive NQSOs under
the 2001 Plan.

      The exercise price of a NQSO will be not less than 85% of the fair market
value of the stock subject to the option on the date of grant. To the extent
required by applicable laws, rules and regulations, the exercise price of a NQSO
granted to any person who owns, directly or by attribution under the Code
(currently Section 424(d)), stock possessing more than 10% of the total combined
voting power of all classes of our stock or stock of any of our affiliates (a
"10% Shareholder") will not be less than 110% of the fair market value of the
stock covered by the option at the time the option is granted. The exercise
price of an ISO will be determined in accordance with the applicable provisions
of the Code and will not be less than the fair market value of the stock covered
by the option at the time the option is granted. The exercise price of an ISO
granted to any 10% Shareholder will not be less than 110% of the fair market
value of the stock covered by the option at the time the option is granted.

      The Administrator, in its sole discretion, will fix the term of each
option, provided that the maximum term of an option will be ten years. ISOs
granted to a 10% Shareholder will expire not more than five years after the date
of grant. The 2001 Plan provides for the earlier expiration of options in the
event of certain terminations of employment of the holder.


                                       33
<PAGE>

      Options may be granted and exercised under the 2001 Plan only after there
has been compliance with all applicable federal and state securities laws. The
2001 Plan will terminate within ten years from the date of its adoption by the
Board of Directors.

      If for any reason other than death or permanent and total disability, an
optionee ceases to be employed by us or any of our affiliates (such event being
called a "Termination"), options held at the date of Termination (to the extent
then exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, or such other period of not less than
thirty days after the date of such Termination as is specified in the Option
Agreement or by amendment thereof (but in no event after the expiration date of
the option (the "Expiration Date")); provided, however, that if such exercise of
the option would result in liability for the optionee under Section 16(b) of the
Exchange Act, then such three-month period automatically will be extended until
the tenth day following the last date upon which optionee has any liability
under Section 16(b) (but in no event after the Expiration Date).

      The Board of Directors may at any time amend, alter, suspend or
discontinue the 2001 Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect outstanding
options except to conform the 2001 Plan and ISOs granted under the 2001 Plan to
the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance will require shareholder approval
unless (i) shareholder approval is required to preserve incentive stock option
treatment for federal income tax purposes or (ii) the Board of Directors
otherwise concludes that shareholder approval is advisable.

Board Composition

      We currently have six directors, each serving a term until the next annual
meeting of stockholders. Pursuant to the Blue Cedar Stockholder's Agreement,
Blue Cedar may designate one director to our Board of Directors. Manuel Tarabay
is Blue Cedar's initial and current designated director. The Blue Cedar
Stockholder's Agreement will terminate upon the later of the Blue Cedar
Termination Date or August 15, 2008. The "Blue Cedar Termination Date" is the
date on which Blue Cedar no longer beneficially owns, in the aggregate, at least
20% of the outstanding common stock of the Company. Further, pursuant to the
Amended SkyePharma Stockholders' Agreement, our Board of Directors must include
at least two independent directors and SkyePharma has the right to nominate one
director. Michael Ashton is SkyePharma's initial and current nominated director.
Until January 20, 2007, Dr. O'Daly has the right to nominate one director. The
Amended SkyePharma Stockholders' Agreement will terminate upon the later of (i)
the date on which SkyePharma no longer beneficially owns, in the aggregate, at
least 20% of our outstanding common stock or (ii) January 20, 2007. Further, the
Amended SkyePharma Stockholders' Agreement may be terminated by the mutual
written consent of the parties.

Compensation of Directors

      We reimburse all outside directors for travel and lodging expenses related
to scheduled board meetings. Our Board of Directors authorized the following
payments for non-executive directors during the fiscal year-ended December 31,
2005: $1,000 for each board meeting attended in person and $400 for each meeting
attended by teleconference; an annual retainer of $4,000 paid to the Chairman of
the Audit Committee; $1,000 paid to each Audit Committee member per financial
filing; an annual retainer of $2,500 paid to the Chairman of the Compensation
Committee; an annual retainer of $1,500 paid to each Compensation Committee
member, other than the Chairman; an annual retainer of $3,000 paid to the
Chairman of the Strategic Planning Committee; an annual retainer of $1,000 paid
to each Strategic Planning Committee member, other than the Chairman; and $1,000
paid to each Strategic Planning Committee member for each half-day strategic
planning meeting attended in person. In addition, each non-executive Director
will receive a one-time grant upon election to the Board of stock options to
purchase 50,000 shares of our common stock, vesting over a four-year period with
the first 25% vesting on the date of grant, and an annual grant upon the
anniversary of election to the Board of stock options to purchase 20,000 shares
of our common stock, vesting over a four-year period with the first 25% vesting
on the date of grant. Other than the foregoing, our directors do not receive
compensation pursuant to any standard arrangement for their services as
directors.


                                       34
<PAGE>

Indemnification Matters

      Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.

      Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.

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

      The following table sets forth the names and beneficial ownership of our
common stock owned as of March 31, 2006, by (i) each of our directors, (ii) each
person named in the Summary Compensation Table, (iii) all our directors and
executive officers as a group, and, to the best of our knowledge, (iv) all
holders of 5% or more of the outstanding shares of our common stock. Unless
otherwise noted, the address of all the individuals and entities named below is
care of Astralis Ltd. at 75 Passaic Avenue, Fairfield, NJ 07004.

<TABLE>
<CAPTION>
Name and Address                        Number of Shares of Common
                                            Stock Beneficially          Percentage of Common
                                                 Owned (1)                   Stock Owned

<S>                                            <C>                              <C>
Dr. Jose Antonio O'Daly (2) (3)                 14,368,000                      15.6%

Michael Ashton (4)                              36,413,900                      39.8%

Samuel Barnett, Ph.D (5)                           130,000                         *

Fabien Pictet (6)                                3,677,794                       3.9%

Gordon Schooley (7)                                 12,500                         *

Manuel Tarabay (8)                                 880,500                         *

Blue Cedar  (9)
  P.O. Box 546
  28-30 The Parade
  St. Helier, Jersey JE4 8X9                    54,040,404                      42.4%
  Channel Islands, United Kingdom

SkyePharma   (3) (4)

   105 Piccadilly
   London W1J 7NJ
   England                                      36,413,900                      39.8%

All Officers and Directors                     109,523,098                      84.3%
as a Group (2) (4) (5) (6) (7) (8)
</TABLE>

--------------------------------------------------------------------------------
*     Less than 1%


                                       35
<PAGE>

(1) Beneficial ownership is determined in accordance with Rule 13d-3(a) of the
Securities Exchange Act of 1934 and generally includes voting or investment
power with respect to securities. Except as indicated by footnotes and subject
to community property laws, where applicable, the person named above has sole
voting and investment power with respect to all shares of the common stock shown
as beneficially owned by him. The beneficial ownership percentage is based on
91,454,873 shares of our common stock outstanding as of March 31, 2006.

(2) Includes 13,640,000 shares of common stock and vested options to purchase
728,000 shares of common stock.

(3) Under the terms of Amended SkyePhama Stockholders' Agreement dated as of
January 20, 2004 by and among us, SkyePharma, Dr. O'Daly and our other original
shareholders, the parties agreed to vote all shares held by such parties for (i)
one director designated by SkyePharma, (ii) one director designated by Dr.
O'Daly, (iii) one director designated by each of the other three original
shareholders and (iv) two independent director. No party to the agreement has
the right to dispose (or direct the disposition of) any shares of common stock
held by any of the other parties to the agreement. Accordingly, each party
disclaims beneficial ownership of the shares held by the other parties. Since
the date of such agreement, the other three original shareholders resigned their
positions with us and transferred all of their shares of common stock to
SkyePharma. As a result, none of them have any rights to designate a director
under the Agreement

(4) Includes 36,393,900 shares of common stock beneficially owned by SkyePharma
and warrants to purchase 20,000 shares of common stock beneficially owned by
SkyePharma that are exercisable within 60 days of March 31, 2006. Mr. Ashton is
Chief Executive Officer of SkyePharma. Under the terms of a Call Option
Agreement dated January 20, 2004, we have the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma. In June 2004, we assigned
the right to purchase 1,250,000 shares under the Call Option Agreement to FPP
Capital Advisors, an entity controlled by Fabien Pictet. The call option will be
exercisable by us for a period commencing upon our achievement of a certain
milestone event and ending on January 20, 2007.

(5) Includes 100,000 shares of common stock and options to purchase 30,000
shares of common stock that are exercisable within 60 days of March 31, 2006.


                                       36
<PAGE>

(6) Includes 1,260,000 shares of common stock owned by FPP Emerging Hedge Fund
1, Ltd. and warrants to purchase an aggregate of 632,000 shares of common stock
owned by FPP Emerging Hedge Fund 1, Ltd. that are exercisable within 60 days of
March 31, 2006. Includes 390,000 shares of common stock and warrants to purchase
500,000 shares of common stock owned by Perly International Ltd. that are
exercisable within 60 days of March 31, 2006. Includes 180,000 shares of common
stock owned by Pictet Private Equity Investors, S.A. and warrants to purchase
36,000 shares held by Pictet Private Equity Investors S.A. that are exercisable
within 60 days of March 31, 2006. Includes 150,000 shares of common stock owned
by FPP Capital Advisors and warrants to purchase 519,794 shares held by FPP
Capital Advisors that are exercisable within 60 days of March 31, 2006. Mr.
Pictet controls FPP Emerging Hedge Fund 1, Ltd., Perly International Ltd.,
Pictet Private Equity Investors, S.A., and FPP Capital Advisors. In June 2004,
we assigned the right to purchase 1,250,000 shares of our common stock under the
Call Option Agreement between us and SkyePharma to FPP Capital Advisors, an
entity controlled by Fabien Pictet. The shares beneficially owned by Mr. Pictet,
as reflected in this table do not include these 1,250,000 shares. On April 19,
2006, Mr. Pictet announced that he will be resigning from the Board of
Directors. However, an effective date of Mr. Pictet's resignation has not yet
been set.

(7) Includes options to purchase 12,500 shares of common stock that are
exercisable within 60 days of March 31, 2006.

(8) Includes 796,000 shares of common stock, warrants to purchase 72,000 shares
of common stock within 60 days of March 31, 2006 and options to purchases 12,500
shares of common stock within 60 days of March 31, 2006. Mr. Tarabay is the Blue
Cedar designee to the Board of Directors.

(9) Includes 18,181,818 shares of common stock owned by Blue Cedar and (i)
warrants to purchase 18,181,818 shares of common stock for a period of five
years and (ii) warrants to purchase 12,121,212 shares of common stock for a
period of twelve months. The warrants may be exercised as of August 17, 2005.
Includes a promissory note that is convertible into 2,777,778 common stock and
warrants to purchase 2,777,778 common stock for a period of five years.

Item 12. Certain Relationships and Related Transactions

Relationship with Dr. Jose Antonio O'Daly

      In January 2004 the PTO issued a patent to Dr. Jose O'Daly for the
"Compositions and Methods for the Treatment and Clinical Remission of Psoriasis"
(the "Psoriasis Formula"). Under the terms of a license agreement and assignment
of license agreement, we have the exclusive right and license to use and exploit
this patent. Dr. O'Daly will continue to maintain ownership rights with respect
to the patent and patent application. However, Dr. O'Daly has granted us a
perpetual, royalty free license to his patent under the agreements, which will
terminate only upon the expiration of the patent, or upon the commencement of a
bankruptcy or insolvency proceeding involving our company or upon our
dissolution or liquidation.

      In March 2002, Akiva LLC, an entity controlled by Dr. O'Daly, also filed
an application to obtain patent protection internationally for the Psoriasis
Formula under the Patent Cooperation Treaty. In addition, in August 2003, Akiva
LLC filed patent applications in the European Union, Australia, Brazil, Canada,
Mexico and Japan. We have rights to these applications, which are currently
pending, pursuant to the license and assignment of license agreements described
above.


                                       37
<PAGE>

      In January 2004, Dr. O'Daly filed a patent application with the PTO
focusing primarily on the mechanism of action of our initial injectable product
candidate, Psoraxine(R), expanding the claims to include medical indications
other than psoriasis, such as Atopic Dermatitis, Psoriatic Arthritis and
Rheumatoid Arthritis. In January 2004, Dr. O'Daly also filed a second patent
relating to a culture medium for parasitic organisms, which is part of our
technology platform. Dr. O'Daly has assigned to us the rights in these patent
applications.

Relationship with SkyePharma

      We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma pursuant to which SkyePharma purchased an aggregate of 2,000,000
shares of our Series A Preferred Stock, for an aggregate purchase price of $20.0
million. On January 20, 2004, pursuant to the Omnibus Conversion Agreement dated
January 12, 2004 between us and SkyePharma, SkyePharma converted all of its
2,000,000 shares of Series A Preferred Stock into 25,000,000 shares of our
common stock at a conversion price of $0.80 per share. On March 3, 2005,
SkyePharma acquired 11,160,000 additional shares of our common stock in a
privately negotiated transaction. As a result, as of April 29, 2005 SkyePharma
beneficially owns 49.8% of our common stock on a fully diluted basis.

      On January 20, 2004, in connection with SkyePharma's conversion of our
Series A Preferred Stock, we entered into the Call Option Agreement with
SkyePharma, pursuant to which we received the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma at a premium to the $0.80
conversion price. In the event we exercise the call option, the exercise price
will be between $1.28 and $1.52 per share, depending on the date of exercise.
The call option will be exercisable by us upon our achievement of a certain
milestone event and ending on January 20, 2007.

      On January 20, 2004, we, SkyePharma, Dr. O'Daly and our other original
shareholders entered into the Amended SkyePharma Stockholders' Agreement.
Pursuant to the Amended SkyePharma Stockholders' Agreement, our Board of
Directors is required to be comprised of at least seven Directors and must
include at least two independent Directors. Per the Amended SkyePharma
Stockholders' Agreement, SkyePharma has the right to nominate one Director.
Michael Ashton is SkyePharma's initial and current nominated Director. Until
January 20, 2007, Dr. O'Daly has the right to nominate one Director. The Amended
SkyePharma Stockholders' Agreement will terminate upon the later of (i) the date
on which SkyePharma no longer beneficially owns, in the aggregate, at least 20%
of our outstanding common stock or (ii) January 20, 2007. Further, the Amended
SkyePharma Stockholders' Agreement may be terminated by the mutual written
consent of the parties. Pursuant to the Amended SkyePharma Stockholders'
Agreement, SkyePharma is required to vote its shares of our common stock in
favor of certain enumerated transactions, where those transactions have been
approved by our Board of Directors and all of the independent Directors. These
transactions include (i) the amendment of our certificate of incorporation
solely to increase our authorized capital stock, (ii) the adoption or amendment
of an employee benefit plan applicable to all employees, (iii) the issuance of
additional securities for cash and (iv) the sale of all of our outstanding
capital stock or all or substantially all of our assets, or our merger with
another entity, provided that SkyePharma will receive the same consideration for
its shares as other holders of common stock and will be able to participate in
the sale or merger on the same terms as the most favorable terms available to
any of our other stockholders and the total consideration for the transaction is
greater than $135 million.


                                       38
<PAGE>

      We also entered into two agreements concerning the formulation and
development of Psoraxine(R) with SkyePharma. Under the terms of the Technology
Access Option Agreement, dated December 10, 2001, we paid to SkyePharma a $5.0
million technology access fee for the option to acquire a license for certain
drug delivery technologies owned by SkyePharma. Under the terms of the
Technology Access Option Agreement, if we exercise our option, we must pay a
royalty of 5% of net sales of all products manufactured or sold that use or
exploit the drug delivery technologies that we license from SkyePharma. In
addition, if we exercise our option, SkyePharma retains the right during the
term of the Technology Access Option Agreement to undertake the manufacture of
all of our products that incorporate or utilize the drug delivery technologies.
The option we received under the Technology Access Option Agreement expires on
December 10, 2008, unless terminated sooner pursuant to the terms of the
Technology Access Option Agreement. Pursuant to the Technology Access Option
Agreement, SkyePharma also has the right of first negotiation to acquire the
worldwide marketing rights to Psoraxine(R).

      On December 10, 2001, we entered into the Service Agreement with
SkyePharma pursuant to which SkyePharma was to provide us with development,
manufacturing, pre-clinical and clinical development services in consideration
of $11 million. The Service Agreement terminated on December 31, 2002. We
entered into an Amendment to the Service Agreement with SkyePharma, effective as
of January 1, 2003, to extend the term of the Service Agreement and modify the
services to be provided by SkyePharma such that SkyePharma continued to provide
certain services to us through December 31, 2004, in consideration for payments
made during 2002. The agreement expired on December 31, 2004.

Relationship with FPP Capital Advisors

      In connection with private placements of units consisting of common stock
and warrants that occurred in 2004, FPP Advisors, an entity controlled by our
board member, Fabien Pictet, received a consulting fee of $261,496. In addition,
for consulting services provided in connection with the private placement, FPP
Advisors and certain other selling stockholders received warrants to purchase an
aggregate of 418,394 shares of our common stock at $0.50 per share and warrants
to purchase an aggregate of 418,394 shares of our common stock at $0.73 per
share. Upon exercise of the warrants issued in the private placement, we will
pay a cash commission equal to 5% of the amounts raised through the exercise of
the warrants.

      In addition, in consideration for services provided in negotiating our
Omnibus Conversion Agreement with SkyePharma, we issued to FPP Capital Advisors
units consisting of 150,000 shares of common stock and warrant stock and
warrants to purchase 150,000 shares of common stock at an exercise price of
$0.73 per share. We also assigned the right to purchase 1,250,000 shares under
our Call Option Agreement with SkyePharma to FPP Capital Advisors.

      In addition to FPP Capital Advisors, Fabien Pictet controls FPP Emerging
Hedge Fund Iand Pictet & Cie, both of which were investors in our private
placements in early 2004.

Relationship with Blue Cedar and Lipworth Capital Limited

      On March 31, 2006, the Company closed a private placement of securities
from which it received proceeds of $250,000. In connection with such private
placement, the Company issued to Blue Cedar, an accredited investor and
currently a stockholder of the Company, (i) a convertible promissory note in the
principal amount of $250,000, convertible into shares of the Company's Common
Stock at $0.09 per share, and (ii) a warrant to purchase 2,777,778 shares of
Common Stock. Lipworth Capital Limited acted as the placement agent in
connection with this private placement. The securities offered and sold in this
private placement were sold in reliance on an exemption from the registration
requirements under Regulation D of the Securities Act of 1933.


                                       39
<PAGE>

      Additionally, on August 19, 2005, we completed a private placement of
securities from which we received gross proceeds of approximately $2,000,000.
The transaction consisted of the sale to one accredited investor, Blue Cedar, of
units consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to
purchase over a 5-year period 18,181,818 shares of common stock with an exercise
price of $0.165 and (iii) warrants to purchase over a 12-month period 12,121,212
shares of common stock with an exercise price of $0.165. We relied upon the
exemption from registration provided under Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder. The private placement was
only made available to one "accredited investor" as defined in Rule 501 of
Regulation D. Lipworth Capital Limited acted as our placement agent in
connection with the private placement. We paid an 8% fee to our placement agent
and issued warrants to purchase 1,454,545 shares of common stock with an
exercise price of $0.165, in connection with the financing in addition to other
costs. Additionally, we granted Blue Cedar certain registration rights pursuant
to a registration rights agreement, dated as of August 17, 2005, in connection
with this transaction. The registration rights agreement required us to file a
registration statement within approximately 30 days of the final closing of our
private placement covering the resale of all shares included therein, as well as
the shares underlying the warrants. Because a registration statement covering
the resale of such shares was not filed or effective by December 31, 2005, the
date specified in the agreement, we are subject to liquidated damages payments
of $10,000 per month, being 0.5% of the aggregate purchase price plus 10%
interest per annum to be paid on unpaid liquidated damages amounts until such
time as a registration statement covering the resale of securities sold to Blue
Cedar is declared effective by the Securities and Exchange Commission.

      Concurrently with the closing of the private placement, we and Blue Cedar
entered into the Blue Cedar Stockholder's Agreement. Pursuant to the Blue Cedar
Stockholder's Agreement, our Board of Directors is required to be comprised of
at least eight directors and Blue Cedar may designate one director to the Board
of Directors of the Company. Manuel Tarabay is Blue Cedar's initial and current
designated director. Further, pursuant to the Blue Cedar Stockholder's
Agreement, we agreed not to enter into any service agreement, distribution
arrangement or transfer of personnel with any of our stockholders owning more
than 10% of the outstanding shares of common stock until we complete Phase II
clinical trials of Psoraxine(R), without the prior written consent of Blue
Cedar, which shall not be unreasonably withheld. Additionally, for a period of
two years following the closing date of the private placement, we granted Blue
Cedar certain pre-emptive rights, allowing Blue Cedar to participate in
substantially all sales of securities. The Blue Cedar Stockholder's Agreement
will terminate upon the later of the Blue Cedar Termination Date or August 15,
2008. The "Blue Cedar Termination Date" is the date on which Blue Cedar no
longer beneficially owns, in the aggregate, at least 20% of our outstanding
common stock.

Item 13. Exhibits

Exhibit Number     Description
--------------     -----------

3.1 (1)            Certificate of Incorporation of Astralis Ltd.

3.2 (2)            Bylaws of Astralis Ltd.

4.1 (9)            Specimen Stock Certificate

10.1 (2)           Agreement and Plan of Merger

10.2 (4)           Contribution Agreement dated September 10, 2001

10.3 (5)           Purchase Agreement dated December 10, 2001

10.4 (5)           Stockholder Agreement dated December 10, 2001

10.5 (7)           2001 Stock Option Plan

10.6 (3)           Sub-Lease Agreement

10.7 (3)           License Agreement dated April 26, 2001 between Jose Antonio
                   O'Daly and Astralis LLC


                                       40
<PAGE>

10.8 (3)           Assignment of License

10.9 (3)           Form of Warrant

10.10 (8)          Agreement for Services dated December 10, 2001 between
                   SkyePharma Inc. and Astralis Ltd.

10.11 (8)          Technology Access Option Agreement dated December 10, 2001
                   by and among SkyePharma Inc., SkyePharma Holding AG and
                   Astralis Ltd.

10.12 (6)          Employment Agreement dated December 10, 2001, between
                   Dr. Jose Antonio O'Daly and Astralis Ltd.

10.13 (6)          Amendment #1 to Agreement for Services dated March 18, 2003
                   between SkyePharma Inc. and Astralis Ltd.

10.14 (7)          Omnibus Conversion Agreement dated January 12, 2004 between
                   Astralis Ltd. and SkyePharma PLC

10.15 (7)          Call Option Agreement dated January 20, 2004 between
                   Astralis Ltd. and SkyePharma PLC

10.16 (7)          Amendment No. 1 to Stockholders Agreement dated January 20,
                   2004 by and among Astralis Ltd., SkyePharma PLC, Jose
                   Antonio O'Daly, Mike Ajnsztajn, Gaston Liebhaber and Gina
                   Tedesco

10.17 (11)         Securities Purchase Agreement, dated August 17, 2005, by and
                   between Astralis Ltd. and Blue Cedar Limited.

10.18 (11)         Registration Rights Agreement, dated August 17, 2005, by and
                   between Astralis Ltd. and Blue Cedar Limited.

10.19 (11)         Stockholder's Agreement, dated August 17, 2005, by and
                   between Astralis Ltd. and Blue Cedar Limited.

10.20 (11)         Long-term  Common Stock  Purchase  Warrant,  issued to Blue
                   Cedar  Limited by Astralis Ltd.

10.21 (11)         Short-term Common Stock Purchase Warrant, issued to Blue
                   Cedar Limited by Astralis Ltd.

10.22 (11)         Long-term Common Stock Purchase Warrant, issued to Lipworth
                   Capital Limited by Astralis Ltd.

10.23 (12)         Separation Agreement and General Release, dated January 25,
                   by and between James Sharpe and the Registrant.

10.24 (13)         Form of Subscription Agreement, dated March 31, 2006, by and
                   between Astralis Ltd. and Blue Cedar Limited.

10.25 (13)         Form of Warrant, dated March 31, 2006, issued to Blue Cedar
                   Limited by Astralis Ltd.

10.26 (13)         Form of Convertible Promissory Note in the principal amount
                   of $250,000, dated March 31, 2006, issued to Blue Cedar
                   Limited by Astralis Ltd.

14.1 (1)           Code of Ethics for Chief Executive Officer and Senior
                   Financial Officers

31.1               Certification by the Interim Chief Executive Officer and the
                   Chief Financial Officer pursuant to Section 302 of the
                   Sarbanes-Oxley Act of 2002

32.1               Certification pursuant to Section 906 of the Sarbanes-Oxley
                   Act of 2002

----------

(1)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Annual Report on Form 10-KSB on March 30, 2004.


                                       41
<PAGE>

(2)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Preliminary Proxy Statement for Astralis Pharmaceuticals Ltd. on
      November 16, 2001.

(3)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Registration Statement on Form SB-2 for Astralis Ltd. on March 14,
      2002.

(4)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Current Report on Form 8-K for Astralis Pharmaceuticals Ltd. on
      November 14, 2001.

(5)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Current Report on Form 8-K for Astralis Ltd. on December 14, 2001.

(6)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Annual Report on Form 10-KSB on March 31, 2003.

(7)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Preliminary Proxy Statement for Hercules Development Group Inc. on
      October 4, 2001.

(8)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Amendment to the Registration Statement on Form SB-2 for Astralis
      Ltd. on July 23, 2002.

(9)   Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Registration Statement on Form SB-2 for Astralis Ltd. on May 28,
      2004.

(10)  Previously filed with the Securities and Exchange Commission as an Exhibit
      to the Registration Statement on Form SB-2 for Astralis Ltd. on June 28,
      2004.

(11)  Previously filed with the Securities and Exchange Commission as an Exhibit
      on Form 10-QSB on August 19, 2005.

(12)  Previously filed with the Securities and Exchange Commission as an Exhibit
      on Form 8-K on March 30, 2006.

(13)  Previously filed with the Securities and Exchange Commission as an Exhibit
      on Form 8-K on April 6, 2006.

Item 14. Principal Accountant Fees and Services

      The following disclosure presents fees billed for professional services
rendered by L J Soldinger Associates, LLC, our independent auditors, for 2005
and 2004.

Audit- Fees

      The aggregate fees billed for professional services in connection with the
audit of our annual financial statements, and the reviews of our quarterly
financial statements and audit services provided in connection with regulatory
filings, were approximately $128,000 and $168,000 for 2005 and 2004,
respectively.

Audit-Related Fees


                                       42
<PAGE>

      The aggregate fees billed for assurance and related services in connection
with securities registration and related matters were approximately $24,000 and
$25,000 for 2005 and 2004, respectively.

Tax Fees

There were no tax related services provided by our independent auditors in 2005
or 2004.

All Other Fees

There were no other services provided by our independent auditors in 2005 or
2004.

Pre-Approval of Audit and Permissible Non-Audit Services

      The Audit Committee pre-approves all audit and permissible non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. The Audit
Committee has adopted a policy for the pre-approval of services provided by the
independent auditors. Under the policy, pre-approval is generally provided for
up to one year and any pre-approval is detailed as to the particular service or
category of services. In addition, the Audit Committee may pre-approve
particular services on a case-by-case basis. All audit and permissible non-audit
services provided by L J Soldinger Associates LLC to us for 2005 and 2004 were
approved by the Audit Committee.


                                       43
<PAGE>

                                 SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ASTRALIS LTD


By: /s/ Michael Garone                                       April 21, 2006
    -------------------------------                          -------------------
    Michael Garone                                           Date
    Interim President, Interim Chief Executive
    Officer and Chief Financial Officer
    (Principal Executive Officer)

Pursuant to the requirements the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


By: /s/ Michael Garone                                       April 21, 2006
    -------------------------------                          -------------------
    Michael Garone                                           Date
    Interim President, Interim Chief Executive
    Officer and Chief Financial Officer
    (Principal Executive Officer, Principal
    Financial and Accounting Officer)


By: /s/ Jose Antonio O'Daly                                  April 21, 2006
    -------------------------------                          -------------------
    Jose Antonio O'Daly, M.D.                                Date
    Chairman of the Board
    and Chief Scientific Officer


By: /s/ Michael Ashton                                       April 21, 2006
    -------------------------------                          -------------------
    Michael Ashton                                           Date
    Director


By: /s/ Samuel Barnett                                       April 21, 2006
    -------------------------------                          -------------------
    Samuel Barnett                                           Date
    Director


By: /s/ Fabien Pictet                                        April 21, 2006
    -------------------------------                          -------------------
    Fabien Pictet                                            Date
    Director


                                       44
<PAGE>

By: /s/ Manuel Tarabay                                       April 21, 2006
    -------------------------------                          -------------------
    Manuel Tarabay                                           Date
    Director


By: /s/ Gordon Schooley                                      April 21, 2006
    -------------------------------                          -------------------
    Gordon Schooley, Ph.D.                                   Date
    Director


                                       45
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                        INDEX TO THE FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Report of Independent Registered Public Accounting Firm                       F2

Balance Sheets                                                                F3

Statements of Operations                                                      F4

Statements of Stockholders' Equity                                            F5

Statements of Cash Flows                                                     F11

Notes to Financial Statements                                                F12


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Astralis Ltd.

We have audited the accompanying balance sheets of Astralis Ltd. (a development
stage entity) as of December 31, 2005 and 2004, and the related statements of
operations, stockholders' equity and cash flows for the years then ended and the
period March 12, 2001 (date of inception) through December 31, 2005. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these 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. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Astralis Ltd. as of December
31, 2005 and 2004, and the results of its operations, changes in stockholders'
equity and its cash flows for the years then ended and the period March 12, 2001
(date of inception) through December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred net losses since inception, does
not have sufficient funds to execute its business plan, and estimates its
current cash will last through May 2006. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


L J SOLDINGER ASSOCIATES, LLC

Deer Park, Illinois
April 3, 2006


                                      F-2
<PAGE>

                                  Astralis, LTD
                          (A Development Stage Entity)
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                December 31,
                                                                       -----------------------------
                                                                           2005             2004
                                                                       ------------     ------------
<S>                                                                    <C>              <C>
Current Assets
   Cash and cash equivalents                                           $    633,468     $  2,312,401
   Prepaid expenses                                                          64,207           70,895
   Supplies                                                                  32,108           55,851
                                                                       ------------     ------------

                           Total Current Assets                             729,783        2,439,147

Other Intangible Assets, Net                                                     --          117,923
Property and Equipment, Net                                                 101,371          214,140
Deposits                                                                     25,000           26,763
                                                                       ------------     ------------

                                                                       $    856,154     $  2,797,973
                                                                       ============     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
   Accounts payable and accrued expenses                               $    475,102     $    397,762
                                                                       ------------     ------------

                           Total Current Liabilities                        475,102          397,762
                                                                       ------------     ------------

Commitments and Contingencies

Stockholders' Equity
   Common stock; $.0001 par value; 150,000,000 shares authorized at
      2005 and 2004; 91,454,873 and 73,173,055 issued and
       outstanding at 2005 and 2004                                           9,145            7,317
   Additional paid-in capital                                            53,988,423       52,095,251
   Deficit accumulated in the development stage                         (53,616,516)     (49,702,357)
                                                                       ------------     ------------

                           Total Stockholders' Equity                       381,052        2,400,211
                                                                       ------------     ------------

                                                                       $    856,154     $  2,797,973
                                                                       ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-3
<PAGE>

                                  Astralis, LTD
                          (A Development Stage Entity)
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                           March 12, 2001
                                                             Year Ended December 31,       (Inception) to
                                                          -----------------------------     December 31,
                                                              2005             2004             2005
                                                          ------------     ------------     ------------
<S>                                                       <C>              <C>              <C>
Revenues                                                  $         --     $         --     $         --
                                                          ------------     ------------     ------------

Operating Expenses
   Research and development - related party                         --        4,519,400       16,278,822
   Research and development                                  2,510,521        3,169,660        8,959,749
   Depreciation and amortization                                25,345           30,403           98,369
   General and administrative                                1,632,586        1,860,844        7,010,040
                                                          ------------     ------------     ------------

                          Total Operating Expenses           4,168,452        9,580,307       32,346,980
                                                          ------------     ------------     ------------

Loss From Operations                                        (4,168,452)      (9,580,307)     (32,346,980)

Other (income) expense
    Investment (income) loss                                   (30,372)             722         (210,196)
    Registration rights penalty                                 83,000               --           83,000
                                                          ------------     ------------     ------------

                          Total Other Expense (Income)          52,628              722         (127,196)
                                                          ------------     ------------     ------------

Loss before income tax benefit                              (4,221,080)      (9,581,029)     (32,219,784)

   Income tax benefit                                          306,921          293,461          822,018
                                                          ------------     ------------     ------------

Net Loss                                                    (3,914,159)      (9,287,568)     (31,397,766)

Preferred Stock Dividends                                           --      (10,750,000)     (22,218,750)
                                                          ------------     ------------     ------------

Net Loss to Common Stockholders                             (3,914,159)     (20,037,568)     (53,616,516)
                                                          ============     ============     ============

Basic and Diluted Loss per Common Share                   $      (0.05)    $      (0.28)    $      (1.03)
                                                          ============     ============     ============

Basic and Diluted Weighted Average
  Common Shares Outstanding                                 79,985,782       71,073,507       51,864,466
                                                          ============     ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-4
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                      Preferred Stock                   Common Stock             Additional
                                                ----------------------------    ----------------------------       Paid-In
                                                   Shares           Amount         Shares          Amount          Capital
                                                ------------    ------------    ------------    ------------    ------------
<S>                                                <C>          <C>               <C>           <C>             <C>
Balances, March 12, 2001
  (Date of Inception)                                     --    $         --              --    $         --    $         --

Members' capital contributions, 3/15/2001                 --              --      25,300,000           2,530          30,653

Capital contributions received,
  3/1 - 8/13/2001                                         --              --              --              --              --

Members' contributed services,
  3/15 - 6/30/2001                                        --              --              --              --          12,986

Members' capital contributions, 9/1/2001                  --              --       2,700,000             270       1,349,730

Warrants to purchase 6,300,000 shares of
  common stock at $1.60 per share issued
  in private placement                                    --              --              --              --              --

Common stock issuable for consulting
  services, 9/1/2001; 500,000 shares                      --              --              --              --         135,000

Common stock issued in private placement
  net of issuance costs, 11/13/2001;
  2,076,179 shares at $1.60 per share                     --              --       2,076,179             208       3,190,429

Warrants to purchase 415,237 shares of
  common stock at $4.00 per share issued
  in private placement, 11/13/2001                        --              --              --              --              --

Net assets and liabilities acquired in
  merger with Hercules                                    --              --       7,512,000             751        (303,071)

Preferred stock issued, net of issuance
  costs, 12/10/2001; 1,000,000 shares
  at $10.00 per share                              1,000,000           1,000              --              --       9,946,496

Preferred stock dividend, 12/10/2001                      --              --              --              --       2,120,000

Options to purchase 200,000 shares of
  common stock at $1.77 (based on
  valuation) issued for legal services,
  12/31/2001                                              --              --              --              --         354,000

Options to purchase 100,000 shares of
  common stock at $1.77 (based on
  valuation) issued for consulting services,
  12/31/2001                                              --              --              --              --         177,000

Amortization of deferred compensation                     --              --              --              --              --

COMPREHENSIVE LOSS

     Net loss                                             --              --              --              --              --
                                                ------------    ------------    ------------    ------------    ------------
           Total Comprehensive Loss

Balance, December 31, 2001                         1,000,000    $      1,000      37,588,179    $      3,759    $ 17,013,223
                                                ------------    ------------    ------------    ------------    ------------
</TABLE>

               See the accompanying notes to financial statements


                                      F-5
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                                                            Deficit
                                                                            Accumulated   Accumulated
                                                                               Other       During the                     Total
                                              Subscription    Deferred     Comprehensive  Development                 Comprehensive
                                               Receivable   Compensation        Loss         Stage          Total          Loss
                                              ------------  ------------   -------------  -----------    -----------  -------------
<S>                                           <C>             <C>            <C>          <C>            <C>           <C>
Balances, March 12, 2001
  (Date of Inception)                         $        --    $        --     $       --   $        --    $        --

Members' capital contributions, 3/15/2001         (33,183)            --             --            --             --

Capital contributions received,
  3/1 - 8/13/2001                                  33,183             --             --            --         33,183

Members' contributed services,
  3/15 - 6/30/2001                                     --             --             --            --         12,986

Members' capital contributions, 9/1/2001       (1,350,000)            --             --            --             --

Warrants to purchase 6,300,000 shares of
  common stock at $1.60 per share issued
  in private placement                                 --             --             --            --             --

Common stock issuable for consulting
  services, 9/1/2001; 500,000 shares                   --             --             --            --        135,000

Common stock issued in private placement
  net of issuance costs, 11/13/2001;
  2,076,179 shares at $1.60 per share                  --             --             --            --      3,190,637

Warrants to purchase 415,237 shares of
  common stock at $4.00 per share issued
  in private placement, 11/13/2001                     --             --             --            --             --

Net assets and liabilities acquired in
  merger with Hercules                                 --             --             --            --       (302,320)

Preferred stock issued, net of issuance
  costs, 12/10/2001; 1,000,000 shares
  at $10.00 per share                                  --             --             --            --      9,947,496

Preferred stock dividend, 12/10/2001                   --             --             --    (2,120,000)            --

Options to purchase 200,000 shares of
  common stock at $1.77 (based on valuation)
  issued for legal services, 12/31/2001                --       (354,000)            --            --             --

Options to purchase 100,000 shares of
  common stock at $1.77 (based on valuation)
  issued for consulting services, 12/31/2001           --       (177,000)            --            --             --

Amortization of deferred compensation                  --        132,750             --            --        132,750

COMPREHENSIVE LOSS

     Net loss                                                                              (4,075,364)    (4,075,364)    (4,075,364)
                                              -----------    -----------     ----------   -----------    -----------   ------------

           Total Comprehensive Loss                                                                                    $ (4,075,364)
                                                                                                                       ============
Balance, December 31, 2001                    $(1,350,000)    $  (398,250)   $       --   $(6,195,364)   $ 9,074,368
                                              -----------     -----------    ----------   -----------    -----------
</TABLE>

               See the accompanying notes to financial statements


                                      F-6
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                           Preferred Stock                 Common Stock                Additional
                                                    ----------------------------    -----------------------------        Paid-In
                                                        Shares          Amount         Shares           Amount           Capital
                                                    ------------    ------------    ------------     ------------     ------------
<S>                                                    <C>          <C>               <C>            <C>              <C>
Balances Brought Forward                               1,000,000    $      1,000      37,588,179     $      3,759     $ 17,013,223

Oversubscription of common stock issued
  in private placement, 11/13/2001; 49,990
  shares cancelled at $1.60 per share, 1/24/2002              --              --         (49,990)              (5)         (79,995)

Preferred stock issue, net of issuance costs,
  1/31/2002; 250,000 shares at $10.00 per share          250,000             250              --               --        2,499,750

Preferred stock issue, net of issuance costs,
  4/30/2002; 250,000 shares at $10.00 per share          250,000             250              --               --        2,499,750

Preferred stock dividend, April 30, 2002                      --              --              --               --          270,000

Preferred stock issue, net of issuance costs,
  7/31/2002; 250,000 shares at $10.00 per share          250,000             250              --               --        2,499,750

Collection of subscription receivable                         --              --              --               --               --

Options issued for consulting services,
  9/10/2002; 15,000 options at $0.38 per
  option, based on valuation                                  --              --              --               --            5,700

Preferred stock dividend, 12/10/2002                          --              --              --               --        9,078,750

Amortization of deferred compensation                         --              --              --               --               --

Fair value adjustment on deferred
  compensation                                                --              --              --               --         (357,532)

COMPREHENSIVE LOSS

   Net loss                                                   --              --              --               --               --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities                                                 --              --              --               --               --
                                                    ------------    ------------    ------------     ------------     ------------

           Total Comprehensive Loss

Balance, December 31, 2002                             1,750,000    $      1,750      37,538,189     $      3,754     $ 33,429,396
                                                    ============    ============    ============     ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-7
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                                                                   Accumulated
                                                                                      Other
                                                   Subscription      Deferred     Comprehensive
                                                    Receivable     Compensation        Loss
                                                   ------------    ------------   -------------
<S>                                                <C>             <C>             <C>
Balances Brought Forward                           $ (1,350,000)   $   (398,250)   $         --

Oversubscription of common stock issued
  in private placement, 11/13/2001; 49,990
  shares cancelled at $1.60 per share, 1/24/2002             --              --              --

Preferred stock issue, net of issuance costs,
  1/31/2002; 250,000 shares at $10.00 per share              --              --              --

Preferred stock issue, net of issuance costs,
  4/30/2002; 250,000 shares at $10.00 per share              --              --              --

Preferred stock dividend, April 30, 2002                     --              --              --

Preferred stock issue, net of issuance costs,
  7/31/2002; 250,000 shares at $10.00 per share              --              --              --

Collection of subscription receivable                   465,000              --              --

Options issued for consulting services,
  9/10/2002; 15,000 options at $0.38 per
  option, based on valuation                                 --          (5,700)             --

Preferred stock dividend, 12/10/2002                         --              --              --

Amortization of deferred compensation                        --          34,254              --

Fair value adjustment on deferred
  compensation                                               --         357,532              --

COMPREHENSIVE LOSS

   Net loss                                                  --              --              --

   Other comprehensive loss:

   Unrealized loss on available-for-sale
   securities                                                --              --         (15,181)
                                                   ------------    ------------    ------------

           Total Comprehensive Loss


Balance, December 31, 2002                         $   (885,000)   $    (12,164)   $    (15,181)
                                                   ============    ============    ============

<CAPTION>
                                                      Deficit
                                                    Accumulated
                                                    During the                         Total
                                                    Development                    Comprehensive
                                                       Stage           Total           Loss
                                                   ------------    ------------    -------------
<S>                                                <C>             <C>             <C>
Balances Brought Forward                           $ (6,195,364)   $  9,074,368

Oversubscription of common stock issued
  in private placement, 11/13/2001; 49,990
  shares cancelled at $1.60 per share, 1/24/2002             --         (80,000)

Preferred stock issue, net of issuance costs,
  1/31/2002; 250,000 shares at $10.00 per share              --       2,500,000

Preferred stock issue, net of issuance costs,
  4/30/2002; 250,000 shares at $10.00 per share              --       2,500,000

Preferred stock dividend, April 30, 2002               (270,000)             --         (270,000)

Preferred stock issue, net of issuance costs,
  7/31/2002; 250,000 shares at $10.00 per share              --       2,500,000

Collection of subscription receivable                        --         465,000

Options issued for consulting services,
  9/10/2002; 15,000 options at $0.38 per
  option, based on valuation                                 --              --

Preferred stock dividend, 12/10/2002                 (9,078,750)             --       (9,078,750)

Amortization of deferred compensation                        --          34,254

Fair value adjustment on deferred
  compensation                                               --              --

COMPREHENSIVE LOSS

   Net loss                                          (9,040,248)     (9,040,248)   $  (9,040,248)

   Other comprehensive loss:

   Unrealized loss on available-for-sale
   securities                                                --         (15,181)         (15,181)
                                                   ------------    ------------    -------------

           Total Comprehensive Loss                                                $ (18,404,179)
                                                                                   =============

Balance, December 31, 2002                         $(24,584,362)   $  7,938,193
                                                   ============    ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-8
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                          Preferred Stock                  Common Stock             Additional
                                                   ----------------------------    ----------------------------       Paid-In
                                                      Shares          Amount          Shares          Amount          Capital
                                                   ------------    ------------    ------------    ------------    ------------
<S>                                                   <C>          <C>               <C>           <C>             <C>
Balances Brought Forward                              1,750,000    $      1,750      37,538,189    $      3,754    $ 33,429,396

Preferred stock issue, net of issuance costs,
  1/31/2003; 250,000 shares at $10.00 per share         250,000             250              --              --       2,499,750

Collection of subscription receivable                        --              --              --              --              --

Reduction of subscription receivable,
  in lieu of payment for services                            --              --              --              --              --

Amortization of deferred compensation                        --              --              --              --              --

Fair value adjustment on deferred
  compensation                                               --              --              --              --          18,321

Offering cost for January 2004
  private placement                                          --              --              --              --         (17,603)

COMPREHENSIVE LOSS

   Net loss                                                  --              --              --              --              --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities                                                --              --              --              --              --
                                                   ------------    ------------    ------------    ------------    ------------
           Total Comprehensive Loss

Balance, December 31, 2003                            2,000,000    $      2,000      37,538,189    $      3,754    $ 35,929,864
                                                   ============    ============    ============    ============    ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-9
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                                                                      Accumulated
                                                                                         Other
                                                   Subscription       Deferred       Comprehensive
                                                    Receivable      Compensation          Loss
                                                   ------------     ------------     -------------
<S>                                                <C>              <C>              <C>
Balances Brought Forward                           $   (885,000)    $    (12,164)    $    (15,181)

Preferred stock issue, net of issuance costs,
  1/31/2003; 250,000 shares at $10.00 per share

Collection of subscription receivable,                  825,000               --               --

Reduction of subscription receivable,
  in lieu of payment for services                        36,000               --               --

Amortization of deferred compensation                        --           25,663               --

Fair value adjustment on deferred
  compensation                                               --          (18,321)              --

Offering cost for January 2004,
  private placement                                          --               --               --

COMPREHENSIVE LOSS

   Net loss                                                  --               --               --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   Securities, net                                           --               --          (12,517)
                                                   ------------     ------------     ------------

           Total Comprehensive Loss


Balance, December 31, 2003                         $    (24,000)    $     (4,822)    $    (27,698)
                                                   ============     ============     ============

<CAPTION>
                                                      Deficit
                                                    Accumulated
                                                    During the                           Total
                                                    Development                      Comprehensive
                                                       Stage            Total            Loss
                                                   ------------     ------------     -------------
<S>                                                <C>              <C>              <C>
Balances Brought Forward                           $(24,584,362)    $  7,938,193

Preferred stock issue, net of issuance costs,
  1/31/2003; 250,000 shares at $10.00 per share                        2,500,000

Collection of subscription receivable,                       --          825,000

Reduction of subscription receivable,
  in lieu of payment for services                            --           36,000

Amortization of deferred compensation                        --           25,663

Fair value adjustment on deferred
  compensation                                               --               --

Offering cost for January 2004,
  private placement                                          --          (17,603)

COMPREHENSIVE LOSS

   Net loss                                          (5,080,427)      (5,080,427)    $ (5,080,427)

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   Securities, net                                           --          (12,517)         (12,517)
                                                   ------------     ------------     ------------

           Total Comprehensive Loss                                                  $ (5,092,944)
                                                                                     ============

Balance, December 31, 2003                         $(29,664,789)    $  6,214,309
                                                   ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-10
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                          Preferred Stock                    Common Stock             Additional
                                                   -----------------------------     ----------------------------      Paid-In
                                                      Shares            Amount          Shares          Amount         Capital
                                                   ------------     ------------     ------------    ------------    ------------
<S>                                                  <C>            <C>                <C>           <C>             <C>
Balances Brought Forward                              2,000,000     $      2,000       37,538,189    $      3,754    $ 35,929,864

Common stock issue, net of issuance costs,
  Jan-Feb 2004 at $2.00 per share                            --               --       10,459,866           1,046       4,953,147

Collection of subscription receivable                        --               --               --              --              --

Conversion of Preferred Stock, Series A              (2,000,000)          (2,000)      25,000,000           2,500            (500)

Preferred stock dividend                                     --               --               --              --      10,750,000

Common stock issued,
  in lieu of payment for services                            --               --          150,000              15          74,985

Call option assigned,                                        --               --               --              --         376,507
  in lieu of payment for services

Amortization of deferred compensation                        --               --               --              --              --

Fair value adjustment on deferred
  compensation                                               --               --               --              --              --

  Stock options exercised                                    --               --           25,000               2          11,248

COMPREHENSIVE LOSS

   Net loss                                                  --               --               --              --              --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities                                                --               --               --              --              --
                                                   ------------     ------------     ------------    ------------    ------------

           Total Comprehensive Loss

Balance, December 31, 2004                                   --     $         --       73,173,055    $      7,317    $ 52,095,251
                                                   ============     ============     ============    ============    ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-11
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                                                                      Accumulated
                                                                                         Other
                                                   Subscription       Deferred       Comprehensive
                                                    Receivable      Compensation          Loss
                                                   ------------     ------------     -------------
<S>                                                <C>              <C>              <C>
Balances Brought Forward                           $    (24,000)    $     (4,823)    $    (27,698)

Common stock issue, net of issuance costs,
  Jan -Feb 2004 at $2.00 per share                           --               --               --

Collection of subscription receivable,                   24,000               --               --

Conversion of Preferred Stock, Series A                      --               --               --

Preferred stock dividend                                     --               --               --

Common stock issued,
  in lieu of payment for services                            --               --               --

Call option assigned,                                        --               --               --
  in lieu of payment for services

Amortization of deferred compensation                        --            4,823               --

Fair value adjustment on deferred
  compensation                                               --               --               --

  Stock options exercised                                    --               --               --

COMPREHENSIVE LOSS

   Net loss                                                  --               --               --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities, net                                           --               --           27,698
                                                   ------------     ------------     ------------

           Total Comprehensive Loss


Balance, December 31, 2004                         $         --     $         --     $         --
                                                   ============     ============     ============

<CAPTION>
                                                      Deficit
                                                    Accumulated
                                                    During the                           Total
                                                    Development                      Comprehensive
                                                       Stage            Total            Loss
                                                   ------------     ------------     -------------
<S>                                                <C>              <C>              <C>
Balances Brought Forward                           $(29,664,789)    $  6,214,308

Common stock issue, net of issuance costs,
  Jan -Feb 2004 at $2.00 per share                           --        4,954,193

Collection of subscription receivable,                       --           24,000

Conversion of Preferred Stock, Series A                      --               --

Preferred stock dividend                            (10,750,000)              --     $ (10,750,000)

Common stock issued,
  in lieu of payment for services                            --           75,000

Call option assigned,                                        --          376,507
  in lieu of payment for services

Amortization of deferred compensation                        --            4,823

Fair value adjustment on deferred
  compensation                                               --               --

  Stock options exercised                                    --           11,250

COMPREHENSIVE LOSS

   Net loss                                          (9,287,568)      (9,287,568)       (9,287,568)

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities, net                                           --           27,698            27,698
                                                   ------------     ------------     -------------

           Total Comprehensive Loss                                                  $ (20,009,870)
                                                                                     =============

Balance, December 31, 2004                         $(49,702,357)    $  2,400,211
                                                   ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-12
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                         Preferred Stock                Common Stock            Additional
                                                   --------------------------    --------------------------      Paid-In
                                                      Shares         Amount         Shares         Amount        Capital
                                                   -----------    -----------    -----------    -----------    -----------
<S>                                                         <C>   <C>             <C>           <C>            <C>
Balances Brought Forward                                    --    $        --     73,173,055    $     7,317    $52,095,251

Common stock issued for services-officer                    --             --        100,000             10         64,990

Common stock issue, net of issuance costs,                  --             --     18,181,818          1,818      1,828,182
  August 2005 at $0.11 per share

COMPREHENSIVE LOSS

   Net loss                                                 --             --             --             --             --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities                                               --             --             --             --             --
                                                   -----------    -----------    -----------    -----------    -----------

           Total Comprehensive Loss

Balance, December 31, 2005                                  --    $        --     91,454,873    $     9,145    $53,988,423
                                                   ===========    ===========    ===========    ===========    ===========
</TABLE>

               See the accompanying notes to financial statements


                                      F-13
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                                                                     Accumulated
                                                                                        Other
                                                   Subscription       Deferred      Comprehensive
                                                    Receivable      Compensation         Loss
                                                   ------------     ------------    -------------
<S>                                                <C>              <C>             <C>
Balances Brought Forward                           $         --     $         --    $        000

Common stock issued for services-officer                     --               --              --

Common stock issue, net of issuance costs,
  August 2005 at $0.11 per share                             --               --              --

COMPREHENSIVE LOSS

   Net loss                                                  --               --              --

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities, net                                           --               --              --
                                                   ------------     ------------    ------------

           Total Comprehensive Loss


Balance, December 31, 2005                         $         --     $         --    $         --
                                                   ============     ============    ============

<CAPTION>
                                                      Deficit
                                                    Accumulated
                                                    During the                           Total
                                                    Development                      Comprehensive
                                                       Stage            Total            Loss
                                                   ------------     ------------     -------------
<S>                                                <C>              <C>              <C>
Balances Brought Forward                           $(49,702,357)    $  2,400,211

Common stock issued for services-officer                     --           65,000

Common stock issue, net of issuance costs,
  August 2005 at $0.11 per share                             --        1,830,000

COMPREHENSIVE LOSS

   Net loss                                          (3,914,159)      (3,914,159)    $ (3,914,159)

   Other comprehensive loss:

   Unrealized gain (loss) on available-for-sale
   securities, net                                           --               --               --
                                                   ------------     ------------     ------------

           Total Comprehensive Loss                                                  $ (3,914,159)
                                                                                     ============

Balance, December 31, 2005                         $(53,616,516)    $    381,052
                                                   ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-14
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,      March 12, 2001
                                                                                   -----------------------------    (Inception) to
                                                                                       2005             2004       December 31, 2005
                                                                                   ------------     ------------   -----------------
<S>                                                                                <C>              <C>              <C>
Cash Flows from Operating Activities
   Net loss                                                                        $ (3,914,159)    $ (9,287,568)    $(31,397,766)
   Adjustments to reconcile net loss to net cash used in operating activities
        Depreciation and amortization                                                   122,282          867,902        2,685,033
        Impairment of intangible asset                                                  114,976        2,797,612        2,912,588
        Amortization of net premium paid on investments                                      --               --           54,551
        Dividend income reinvested                                                           --         (117,219)        (199,323)
        Members' contributed salaries                                                        --               --           12,986
        Research and development service fee netted against proceeds
          received from preferred stock issuance                                             --               --        5,015,000
        Operating expenses paid by related parties on behalf of company                      --               --           17,587
         Amortization of deferred compensation                                               --            4,822          197,489
         Investor relation fees netted against subscription receivable                       --           24,000           60,000
         Compensatory common stock                                                       65,000           75,000          275,000
         Assignment of call option                                                           --          376,508          376,508
         Loss on sale of available-for-sale securities and fixed asset retirement            --          129,832          160,736
   Changes in assets and liabilities
        Prepaid expenses                                                                  6,688        1,059,838          (25,876)
        Interest receivable                                                                  --               --               --
        Supplies                                                                         23,743           31,186          (32,108)
        Deposits                                                                          1,763            3,190          (25,000)
        Accounts payable and accrued expenses                                            77,340           77,228          416,644
                                                                                   ------------     ------------     ------------

Net Cash Used in Operating Activities                                                (3,502,367)      (3,957,669)     (19,495,951)
                                                                                   ------------     ------------     ------------

Cash Flows from Investing Activities
   Purchases of available-for-sale securities                                                --       (4,300,010)     (13,858,181)
   Proceeds from sale of available-for-sale securities                                       --        5,690,970       13,843,916
   Expenditures related to patent                                                        (4,113)         (26,947)         (98,496)
   Insurance proceeds from claim                                                             --            4,113            4,113
   Purchases of property and equipment                                                   (2,453)         (74,157)        (570,584)
                                                                                   ------------     ------------     ------------

Net Cash (Used in) Provided by Investing Activities                                      (6,566)       1,293,969         (679,232)
                                                                                   ------------     ------------     ------------

Cash Flows from Financing Activities
   Repurchase of common stock                                                                --               --          (80,000)
   Collection of subscription receivable                                                     --               --        1,290,000
   Proceeds from exercise of stock options                                                   --           11,250           11,250
   Issuance of common stock, net of offering and transaction costs                    1,830,000        4,954,191        9,672,508
   Issuance of preferred stock                                                               --               --        9,932,496
   Private placement offering costs                                                          --               --          (17,603)
                                                                                   ------------     ------------     ------------

Net Cash Provided by Financing Activities                                             1,830,000        4,965,441       20,808,651
                                                                                   ------------     ------------     ------------

Net Increase (Decrease) in Cash and Cash Equivalents                                 (1,678,933)       2,301,741          633,468

Cash and Cash Equivalents, Beginning of Period                                        2,312,401           10,660               --
                                                                                   ------------     ------------     ------------

Cash and Cash Equivalents, End of Period                                           $    633,468     $  2,312,401     $    633,468
                                                                                   ============     ============     ============
</TABLE>

               See the accompanying notes to financial statements


                                      F-15
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS

Nature of Operations

Astralis, Ltd. (the "Company") is an emerging stage biotechnology company, based
in New Jersey and incorporated under the laws of the State of Delaware, which
primarily engages in research and development of treatments for immune system
disorders and skin diseases. The Company is currently developing two products.
Its primary product, Psoraxine(R), administered by intramuscular injection, is
an innovative immunotherapuetic product under development for the treatment of
psoriasis. The Company's second product is for the treatment of arthritis. The
Company is engaged in on-going research and development of Psoraxine(R), and
expects to recommence clinical trials to obtain the approval of the United
States Food and Drug Administration for the marketing of Psoraxine(R), and
development of the technology underlying the Psoraxine(R), for the treatment of
other indications, such as eczema, leishmaniasis and seborrheic dermatitis.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company's financial statements are prepared on the accrual basis of
accounting in accordance with United States generally accepted accounting
principles ("US GAAP").

Development Stage Enterprise

The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards No. 7 "Accounting and Reporting for Development
Stage Enterprises" ("SFAS No. 7"). Under SFAS No. 7, certain additional
financial information is required to be included in the financial statements for
the period from inception of the Company to the current balance sheet date.

Since the inception of the Company, management has been in the process of
performing research and development activities, fulfilling FDA requirements in
order to enter human clinical trials in the US with Psoraxine(R), initiating
Phase I clinical studies and the raising of capital through private placement
stock offerings.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and investments in money market
funds. The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents.


                                      F-16
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits at financial institutions. To
mitigate this risk, the Company places its cash deposits only with high credit
quality institutions.

Property and Equipment

Furniture and equipment are recorded at cost, less accumulated depreciation
computed on a straight-line basis over the estimated useful lives of the
respective assets. Depreciation is computed using a four-year life for computer
and office equipment, three to four years for lab equipment, seven-year for
furniture and fixtures and three-year for leasehold improvements.

Income Taxes

Income taxes are recorded in the period in which the related transactions are
recognized in the financial statements, net of the valuation allowances, which
have been recorded against deferred tax assets. Deferred tax assets and
liabilities are recorded for the expected future tax consequences of temporary
differences between the tax basis and the financial reporting of assets and
liabilities. Net deferred tax assets and liabilities, relating primarily to
federal and state net operating loss carryforwards and research and development
credits that have been deferred for tax purposes have also been recorded. A
valuation reserve has been recorded to offset a portion of the deferred tax
benefit (except for amount realized through the sale of a portion of the
Company's New Jersey net operating loss) because management has determined it is
more likely than not that the deferred tax assets will not be realized. See Note
6.

Stock-Based Compensation Arrangements

The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees," and related interpretations, in accounting for its stock-based
grants to employees and directors. Under the intrinsic value method of
accounting, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
Company applies the disclosure provisions specified in SFAS No. 148, "Accounting
For Stock Based Compensation - Transition and Disclosure - an Amendment of SFAS
123." The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation," in accounting for stock-based grants to non-employees.

The following table illustrates the effect on net loss and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation.


                                      F-17
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                                      Year Ended
                                                                            -----------------------------
                                                                                 2005             2004
                                                                            ------------     ------------
      <S>                                                                   <C>              <C>
      Net loss, as reported                                                 $ (3,914,159)    $(20,037,568)
      Add:
          Stock-based compensation expense included in reported net
            loss determined under APB No. 25, net of related tax effects              --               --
      Deduct:
          Total stock-based director compensation expense determined
            under fair-value-based method for all awards, net of related
            tax effects                                                          272,545           29,495
                                                                            ------------     ------------

       Pro forma net loss                                                   $ (4,186,704)    $(20,067,063)
                                                                            ============     ============

       Loss per share:
             Basic - as reported                                            $      (0.05)    $      (0.28)
             Basic - pro forma                                              $      (0.05)    $      (0.28)
</TABLE>

These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes option-pricing model. The following summarizes the weighted
average of the assumptions used in the model.

                                                      2005          2004
                                                    -------       -------

      Risk free rate                                   4.12%         4.13%
      Expected years until exercise                    9.82         9.614
      Expected stock volatility                      103.41%        100.0%

Loss Per Share

Loss per common share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("FAS 128"). Basic loss per
common share is computed based upon the weighted average number of shares of
common stock outstanding for the period and excludes any potential dilution.
Shares associated with stock options, warrants and convertible preferred stock
are not included because their inclusion would be antidilutive (i.e., reduce the
net loss per share).

The common shares potentially issuable arising from these instruments, which
were outstanding during the periods presented in the financial statements,
consisted of:

                                               2005                2004
                                            ----------          ----------

      Options                                1,454,000           1,118,000
      Warrants                              46,759,466          18,151,891
                                            ----------          ----------
                                            48,213,466          19,269,891
                                            ==========          ==========


                                      F-18
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Segment Information

The Company has determined it has one reportable operating segment as defined by
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information."

Research and Development Costs

The cost of research, development and product improvement expenditures, which
includes depreciation of the Company's laboratory and amortization of the
technology access option, are charged to expense as they are incurred. Research,
development and product improvement costs included in operating expenses
amounted to $2,510,521 and $7,689,060 for the years ending December 31, 2005 and
2004, respectively; and $25,238,571 for the period from March 12, 2001 (date of
inception) to December 31, 2005.

Included in this amount were payments to related parties (see Note 10). Also
included in the December 31, 2005 and 2004 year ends is an impairment of
intangible assets for $114,976 and $2,797,612, respectively. For the period from
March 12, 2001 (date of inception) to December 31, 2005 amount, is an impairment
of intangible assets of $2,912,588. (see Note 4).

Recent Accounting Pronouncements

In December 2004, accounting standards were revised and now require all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The pro
forma disclosures previously permitted will no longer be an alternative to
financial statement recognition. The new accounting standard is effective for
fiscal years beginning after June 15, 2005. The guidance also provides for
classifying awards as either liabilities or equity, which impacts when and if
the awards must be remeasured to fair value subsequent to the grant date. We
adopted the new accounting standard effective January 1, 2006.

The impact of adoption on our reported results of operations for future periods
will depend on the level of share-based payments granted in the future. However,
had we adopted the revised accounting standards in prior periods, the impact of
that standard would have approximated the impact as described in the disclosure
of pro forma net loss and net loss per share in the table included in
Stock-Based Compensation Arrangements in Note 2 to the Consolidated Financial
Statements. Also, benefits of tax deductions in excess of recognized
compensation costs will be reported as financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. We believe this reclass will not have a material impact on our
Consolidated Statements of Cash Flows.


                                      F-19
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 3 - GOING CONCERN

The Company incurred net losses to common stockholders of $3,914,159 in 2005 and
had an accumulated deficit of $53,616,516 at December 31, 2005. Included in the
cumulative net losses was non-cash preferred stock dividend generated from
beneficial conversion features of preferred stock in the amount of $22,218,750.
(See Note 7)

Pharmaceutical products must undergo an extensive process, including testing in
compliance with U.S. Food and Drug Administration ("FDA") regulations, before
they can be commercially sold and distributed in the United States. FDA testing
occurs in various phases over a multiple number of years. The Company expects to
continue clinical testing of Psoraxine in 2006. The Company will need
significant additional funds to complete all of the testing required by the FDA.
Currently, the Company has no products approved for commercial sale and
therefore no means to generate revenue.

On March 14, 2005, the Company issued a press release to disclose the results of
its Phase II study for Psoraxine. The Phase II study of its novel
immuno-stimulatory product for the treatment of Psoriasis indicated no
statistical difference between the Company's product and a placebo. In the
study, Psoraxine was found to be safe and well tolerated.

Based on an analysis of the data from its Phase II study the Company has
developed a hypothesis to explain why the results differed from the long-term
improvement of the more than 2,700 patients who were treated with Psoraxine in
pre-clinical studies. The Company intends to reformulate the product and
reproduce the clinical studies performed in Venezuela using the formula deployed
in the Venezuelan trials. The Company hopes to demonstrate an outcome that is
more consistent with results from pre-clinical studies.

Consequently, the aforementioned items raise substantial doubt about the
Company's ability to continue as a going concern.

The Company raised $2,000,000 additional capital in August 2005 through a
private placement equity offering. These funds, in addition to its cash held at
December 31, 2005, are sufficient to finance the Company's needs for operating
and capital expenditures through May 2006. The Company will need to raise
significant additional funds from outside sources immediately and in future
years in order to complete existing and future phases of FDA required testing.

Management is seeking to identify additional capital immediately so that it may
continue its operations. These funds will be needed in order to finance the
Company's currently anticipated needs for operating and capital expenditures for
2006, including the cost to continue clinical trials of Psoraxine(R) and
initiate development of pipeline products to treat arthritis and leishmaniasis.
The Company will also need to raise significant additional funds from outside
sources in future years in order to complete existing and future phases of FDA
required testing.

The Company's ability to continue as a going concern is dependent upon it
raising capital immediately through debt and/or equity financing. There can be
no assurance that the Company will successfully raise the required future
financing on terms desirable to the Company or that the FDA will approve
Psoraxine for use in the United States. If the Company does not obtain the
needed funds, it will be required to cease operations. The Company is actively
seeking sources of financing. The Company is considering and will implement
further dramatic cost reduction measures to extend the availability of its
capital. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
amounts and classifications of liabilities that might result from the outcome of
this uncertainty.


                                      F-20
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 4 - INTANGIBLE ASSETS

The Company's policy is to capitalize the costs of purchased and internally
developed patents and those expenses in connection with patent rights licensed
to the Company. The life of the patent is 20 years from the date the patent is
applied for or 17 years from when it is granted, whichever is longer. The
Company's policy is to capitalize direct costs related to the rights it has
licensed, and amortize them on a straight-line basis over the remaining portion
of the 20-year period, which commenced on March 16, 2001, the date the
application was filed for the patent the Company has licensed

The Company paid $5,000,000 for a technology access option from SkyePharma PLC
("SkyePharma"). This option gives the Company the right, until December 10,
2008, to enter into a non-exclusive license agreement to utilize any of three
drug delivery systems of SkyePharma in connection with any drugs it develops to
treat two specific immunotherapies. Upon exercise of the option, the Company
will be required to pay a license fee of 5% of net sales of any product
utilizing the drug delivery systems. All other terms of the license agreement
will be determined upon exercise of the option.

The Company evaluated this intangible annually for impairment under FAS 144
"Accounting For The Impairment or disposal of Long-Lived Assets" and has
determined that as of December 31, 2004, the technology access option fee has no
market value due to current market conditions and impaired the remaining
unamortized amount. Current market conditions dictate the license fee no longer
has a market value because it has become common business practice for companies
who provide drug delivery systems to offer their systems, on a trial basis,
without charge, for the purpose of testing effectiveness of the delivery system
in an effort to obtain rights to distribute new drugs.

The Company has amortized $7,061 and $6,362 of patent costs and $0 and $714,288
of the cost of the technology option license in 2005 and 2004, respectively. The
Company recorded impairment charges in the amount of $2,797,612 in 2004 as a
result of the technology option license having no substantial market value. In
addition, the Company recorded impairment charges in the amount of $114,976 in
2005 pertaining to the patents under the accounting guidance in SFAS 144. The
amortization and impairment related to the technology option license and patent
is recorded as research and development cost as required by SFAS No. 2.

Intangible assets consisted of the following at December 31,

                                                 2005             2004
                                             -----------      -----------

      Patent                                 $   134,222      $   130,109
      Technology access fee                    5,000,000        5,000,000
      Less impairment                         (2,912,588)      (2,797,612)
      Less accumulated amortization           (2,221,634)      (2,214,574)
                                             -----------      -----------

                                             $        --      $   117,923
                                             ===========      ===========


                                      F-21
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31,

                                                      2005          2004
                                                   ---------     ---------

      Furniture and Fixtures                       $  28,281     $  28,281
      Computer Equipment                              32,930        30,477
      Leasehold Improvements                         199,741       199,741
      Lab Equipment                                  299,066       299,066
      Automobiles                                         --            --
                                                   ---------     ---------
                                                   $ 560,018     $ 557,565

      Accumulated depreciation and amortization     (458,647)     (343,425)
                                                   ---------     ---------

                                                   $ 101,371     $ 214,140
                                                   =========     =========

Depreciation expense amounted to $115,222 and $147,252 for the years ended
December 31, 2005 and 2004, respectively. The depreciation related to the
Company's laboratory and related equipment is recorded as research and
development as required by SFAS No. 2.

NOTE 6 - INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities reflected on
the financial statements and the amounts used for income tax purposes. The tax
effects of temporary differences and net operating loss carryforwards and tax
credits that give rise to significant portions of the deferred tax assets
recognized are presented below:

<TABLE>
<CAPTION>
                                                                      2005             2004
                                                                 ------------     ------------
      <S>                                                        <C>              <C>
      Deferred tax assets :
          Prepaid research and development                       $         --     $         --
          Deferred compensation                                        82,400           76,500
          Accumulated depreciation and amortization                 1,551,600        1,613,200
          Research and development credits carryforward             2,073,600        1,974,300
          Federal and state deferred tax benefit arising from
            net operating loss carryforwards                        9,672,300        8,370,600
                                                                 ------------     ------------
                                                                   13,379,900       12,034,600

      Less valuation allowance                                    (13,379,900)     (12,034,600)
                                                                 ------------     ------------

      Total deferred tax assets                                  $         --     $         --
                                                                 ============     ============
</TABLE>


                                      F-22
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 6 - INCOME TAXES (Continued)

As of December 31, 2005, the Company had losses, which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $25,900,000 that
may be offset against future taxable income. These carryforwards start to expire
in 2021. The Company generated federal research and development credits of
$1,416,500 that will expire in 2021 and state credits of $657,000 that will
expire in 2008. However, these carryforwards and credits may be significantly
limited due to changes in the ownership of the Company as a result of future
equity offerings.

Recognition of the benefits of the deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company generates any earnings or any specific level of
earnings in future years. Therefore, the Company has established a valuation
allowance for deferred tax assets (net of liabilities) of approximately
$13,379,900 and $12,034,600 as of December 31, 2005 and 2004.

In 2005 and 2004, the Company sold $3,965,391 and $3,791,489, respectively, of
its gross New Jersey net operating loss carryforwards under the State of New
Jersey's Technology Business Tax Certificate Transfer Program (the "Program").
The Program allows qualified technology and biotechnology businesses in New
Jersey to sell unused amounts of net operating loss carryforwards and defined
research and development tax credits for cash. The proceeds from the sale of the
Company's carryforwards were $306,921 and $293,461, respectively (net of fees)
and the amount was recorded as a tax benefit in the statements of operations.
The State of New Jersey renews the Program annually and limits the aggregate
proceeds of the program to $10,000,000. Due to the uncertainty at any time as to
the Company's ability to effectuate the sale of available New Jersey net
operating losses, and since the Company has no control or influence over the
Program, the benefits are recorded once the agreement with the counterpart is
signed and the sale is approved by the State.

In accordance with federal income tax regulations, the net loss incurred by
Astralis, LLC (the predecessor entity) from inception to the date of its merger
with the Company has been excluded from the benefits of the net operating loss
carryforwards reflected in this footnote.

The following table presents the principal reasons for the difference between
the Company's effective tax rates and the United States federal statutory income
tax rate of 34%.

<TABLE>
<CAPTION>
                                                                         2005             2004
                                                                     -----------      -----------
      <S>                                                            <C>              <C>
      Federal income tax benefit at statutory rate                   $ 1,302,600      $ 3,257,550
      State income tax benefit (net of effect of federal benefit)        221,700          446,600
      Non-deductible expenses                                           (317,300)        (170,650)
      Research and development credit                                     99,300          848,900
      Valuation allowance                                             (1,306,300)      (4,382,400)
      Benefit from sale of state net operating loss                      306,900          293,500
                                                                     -----------      -----------

          Income Tax Benefit                                         $   306,900      $   293,500
                                                                     ===========      ===========

          Effective Income Tax Rate                                           (9%)             (9%)
                                                                     ===========      ===========
</TABLE>


                                      F-23
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 - CAPITAL STOCK ACTIVITY

Common Stock

In 2001 Astralis LLC (the predecessor entity) and the Company merged and this
transaction was treated as a recapitalization of the Company, whereby the
Company issued to the members of Astralis, LLC, 28,000,000 shares of common
stock and warrants to purchase 6,300,000 shares of Company common stock for
$1.60 per share in a one-for-one exchange for all of the outstanding 28,000,000
Astralis, LLC member units of ownership and 6,300,000 options to purchase member
units.

Prior to the Merger

Astralis LLC issued 25,300,000 units on April 25, 2001 to various members for an
aggregate subscription receivable amount of $33,183. During the year, the
members paid $33,183 on behalf of the Company to satisfy their subscription
receivable.

In April 2001, the Company issued warrants to purchase 75,000 shares of common
stock at an exercise price of $1.75 per share. These warrants expired in April
2004.

On September 1, 2001, five new members were admitted as members of the LLC
through the execution of a subscription agreement. These new members subscribed
to units ("Units") from Astralis LLC consisting of an aggregate of 2,700,000
membership interests (the "Membership Interests") in Astralis LLC and 6,300,000
options to purchase additional Membership Interests in Astralis LLC for an
exercise price of $1.60 per Membership Interest.

On November 13, 2001, the aforementioned Units were exchanged for an aggregate
of 2,700,000 shares of our common stock and warrants to purchase 6,300,000
shares of common stock at an exercise price of $1.60 per share. The aggregate
purchase price for such Units was $1,350,000 and was paid with subscription
notes. Warrants to purchase 3,150,000 shares of common stock, as amended, were
to expire on December 13, 2004 and 3,150,000 expire November 13, 2006. The
3,150,000 warrants that were set to expire on December 13, 2004 were extended to
February 18, 2005 and subsequently extended to March 11, 2005 when they expired.

In September 2001, Astralis, LLC granted 500,000 membership units to a
consultant in return for services rendered. The membership units were
subsequently exchanged for shares of common stock of the Company. The cost of
the services, based on an independent valuation of the units granted, which
amounted to $135,000, were recorded at the time the services were rendered in
2001.

Subsequent to Merger

In November 2001, the Company completed a $3,321,887 private placement offering
pursuant to which it sold 103.81 units at $32,000 per unit for an aggregate
amount of $3,321,887. Each unit consisted of 20,000 shares of common stock and
warrants to purchase 4,000 shares of the Company's common stock at $4.00 per
share. The warrants expire on November 13, 2006. The holders of these shares of
common stock and warrants received registration rights. The Company was required
to file a registration statement by March 13, 2002 to register the sale of these
shares and the shares underlying the warrants. Upon consummation of the private
placement, the Company paid a $100,000 investment banking fee and entered into
an agreement for future investment banking services amounting to $144,000,
payable in 24 equal monthly installments of $6,000.


                                      F-24
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 - CAPITAL STOCK ACTIVITY (Continued)

In January 2002, the Company agreed to amend a subscription agreement with one
of the investors who participated in the November 2001 private placement
offering. The Company consented to reduce the number of shares in the
subscription agreement by 49,990 shares of common stock. The Company cancelled
the respective shares and returned the corresponding amount of funds to the
investor amounting to $80,000.

In 2002 and 2003, the Company collected $465,000 and $825,000 in cash of the
subscription receivables, respectively. In April 2003, the Company entered into
the Amended Investor Relation Agreement with one of the stockholders who has
outstanding subscription receivable with the Company. The Company agreed to
receive services in lieu of payment of the outstanding subscription receivable
in the amount of $60,000. In 2004 and 2003, the Company received services valued
at $24,000 and $36,000, respectively.

On December 15, 2003, the Company amended its Articles of Incorporation to
authorize the issuance of 150,000,000 shares of common stock, $0.0001 par value
per share, and 3,000,000 shares of Series A preferred stock, $0.001 par value of
which 73,173,055 shares of common and 0 share of Series A preferred were
outstanding as of December 31, 2004.

On January 20, 2004, the Company closed a private placement from which it
received gross proceeds of approximately $4,080,000. The transaction consisted
of the sale to accredited investors of units consisting of 8,159,964 shares of
common stock and warrants to purchase 8,159,964 shares of common stock. The
warrants have an exercise price of $0.73 and expire in four years.

On February 19, 2004, the Company closed the second round of its private
placement from which it received $1,150,000. The transaction consisted of sales
to accredited investors of units consisting of 2,299,902 shares of common stock
and warrants to purchase 2,299,902 shares of common stock. The warrants have an
exercise price of $0.73 and expire in four years.

FPP Capital Advisors whose sole shareholder is a director of the Company was
paid a consulting fee in the amount of $261,496 in February 2004 for the
consulting services related to the private placement completed in 2004. In
addition, the related party and his assignees received warrants to purchase an
aggregate of 418,394 shares of the Company's common stock at $0.50 per share and
warrants to purchase an aggregate of 418,394 shares of the Company's common
stock at $0.73 per share. An additional consulting fee equal to 5% of proceeds
received will be paid upon exercise of the warrants issued in the private
placements. The warrants expire in four years.

The Company issued to FPP Capital Advisors (a related party) 150,000 shares of
common stock and warrants to purchase 150,000 shares of common stock for
consulting services valued at $75,000. The warrants have an exercise price of
$0.73 and expire in five years. In addition, in connection with the conversion
by SkyePharma of its shares of the Company's Series A Preferred Stock, the
Company assigned to FPP Capital Advisors, as compensation, 10% of the call
option provided to the Company under the call option agreement dated January 20,
2004 between the Company and SkyePharma. Accordingly, the Company recorded a
non-cash charge of $376,508 in June 2004.

On July 9, 2004 a director of the Company exercised options to purchase 25,000
shares of common stock at $0.45 a share. The shares issued remain restricted.


                                      F-25
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 - CAPITAL STOCK ACTIVITY (Continued)

In the first quarter of 2005 SkyePharma purchased the 11,160,000 shares of
common stock from Mike Ajnsztajn and Gaston Liebhaber. Consequently, as of March
3, 2005 SkyePharma owned approximately 49.7% of the Company's outstanding common
stock.

In January 2005, the Company issued 100,000 shares of the Company's common stock
along with 728,000 options to James Sharpe, the Company's former Chief Executive
Office and President. The options were issued with an exercise price of $0.70
with a term of 10 years. The options vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested. On January 25, 2006, Mr. Sharpe entered into a "Separation
Agreement and General Release" with the Company and resigned as Chief Operating
Officer, President, and Member of the Board of Directors effective as of
December 31, 2005. See note 15.

On February 2, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.69 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.
On December 11, 2005, the director had resigned from the Board, for personal
reasons.

On April 11, 2005, the Company issued 50,000 options to a newly elected
director. The options were issued with an exercise price of $0.26 and with a
term of 10 years. The options shall vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested.

On June 4, 2005, the Company issued 20,000 options to a director. The options
were issued with an exercise price of $0.28 and with a term of 10 years. The
options shall vest over three years, with 25% vesting on the date of the grant
and 25% vesting on the anniversary of the grant date until fully vested.

On August 19, 2005, the Company closed a private placement of securities from
which they received gross proceeds of approximately $2,000,000. The transaction
consisted of the sale to one accredited investor, Blue Cedar Limited ("Blue
Cedar"), of units consisting of: (i) 18,181,818 shares of common stock, (ii)
warrants to purchase over a 5-year period 18,181,818 shares of common stock with
an exercise price of $0.165 and (iii) warrants to purchase over a 12-month
period 12,121,212 shares of common stock with an exercise price of $0.165. The
Company relied upon the exemption from registration provided under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 of
Regulation D promulgated thereunder. The private placement was only made
available to one "accredited investor" as defined in Rule 501 of Regulation D
and the required number of manually executed originals and true copies of Form D
were and timely filed with the Securities and Exchange Commission. Lipworth
Capital Limited acted as the placement agent in connection with the private
placement. The Company paid an 8% fee to the placement agent and issued warrants
to purchase 1,454,545 shares of common stock with an exercise price of $0.165,
in connection with the financing in addition to other costs. Additionally, the
Company granted Blue Cedar certain registration rights pursuant to a
registration rights agreement, dated as of August 17, 2005, in connection with
this transaction. The registration rights agreement requires the Company to file
a registration statement within approximately 30 days of the final closing of
the Company's private placement covering the resale of all shares included
therein, as well as the shares underlying the warrants. Because a registration
statement covering the resale of such shares was not filed or effective by
December 31, 2005, the date specified in the agreement, the Company is subject
to a penalty of $10,000 per month, being 0.5% of the aggregate purchase price,
plus interest at 10% per annum.


                                      F-26
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 - CAPITAL STOCK ACTIVITY (Continued)

The Company evaluated its issuance of common stock and related warrants with
Blue Cedar for possible application of derivative accounting under Statement of
Financial Accounting Standard ("SFAS") No. 133: Accounting for Derivative
Financial Instruments and Hedging Activities, Emerging Issues Task Force
("EITF") 00-19: Accounting for Derivative Financial Instrument Indexed to, and
Potentially Settled in, A Company's Own Stock, EITF 01-6: The Meaning of
"Indexed to a Company's Own Stock". It has determined that registration rights
related to this issuance were subject to derivative accounting. In evaluating
these registration rights and their related financial instruments the Company
applied the methodology of View C in EITF 05-4 Issue Summary No. 1 and accounted
for them as a freestanding instrument. The fair value of the registration rights
agreements was determined to be minimal at September 30, 2005. However, at
December 31, 2005, the Company determined the fair value to be $83,000. The
Company recognized this amount in expense and a corresponding liability in the
accompanying financial statements.

In August 2005, the Board of Directors approved a resolution, subject to
shareholder approval, to increase the authorized number of shares of common
stock by 200,000,000 shares. The Company has not yet held a stockholders meeting
to approve such amendment.

Preferred Stock

On December 13, 2001, the Company authorized 2,000,000 shares of preferred stock
to be designated as "Series A Convertible Preferred Stock" ("Series A
Preferred") with a $0.001 par value per share. If the Company declares a
dividend, holders of each share of Series A Preferred are entitled to
non-cumulative cash dividends which will be the greater of i) 6% of the
preferred share purchase price; or ii) the amount such holders would have
received had the holders converted to common stock immediately prior to record
date for payment of a dividend to holders of common stock. No dividend can be
declared or paid on common stock without an equal or greater dividend being paid
or declared on the Series A Preferred. Holders of each share of Series A
Preferred were entitled to vote on all matters at stockholder meetings. Holders
of each share of the Series A Preferred could convert their shares to common
stock at an initial conversion price of $2.50. The conversion price could be
adjusted and reset as set forth in the purchase agreement for the Series A
Preferred.

On December 10, 2001, the Company and SkyePharma entered into a purchase
agreement whereby SkyePharma agreed to purchase 2,000,000 shares of Series A
Preferred at a price of $10 per share over a 13-month period with five separate
closings. On December 10, 2002, the one-year anniversary of the agreement,
SkyePharma received registration rights on the common stock underlying its
Series A Preferred shares. The first closing occurred in December 2001 and the
Company sold 1,000,000 shares of Series A Preferred for a purchase price of
$10,000,000.

The second, third and fourth closing occurred in January 2002, April 2002, and
July 2002. On each closing, the Company sold 250,000 shares of Series A
Preferred for a purchase price of $2,500,000. The final 250,000 shares of Series
A Preferred totaling $2,500,000 closed on January 31, 2003.

The Company's stock price on December 10, 2001 was $3.03; consequently, pursuant
to the requirements of the Emerging Issues Task Force ("EITF") 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," as amended by EITF 00-27, the issuance of the
Series A Preferred, which was convertible initially at $2.50 per share at any
time, resulted in a beneficial conversion feature recorded as a preferred stock
dividend in the amount of $2,120,000.


                                      F-27
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 - CAPITAL STOCK ACTIVITY (Continued)

The Company's stock price on April 30, 2002 was $2.77; consequently, the
issuance of the Series A Preferred, which was convertible initially at $2.50 per
share at any time, resulted in a beneficial conversion feature recorded as a
preferred stock dividend in the amount of $270,000.

Since the conversion price of the Series A Preferred was subject to reset
provisions as described above, there was a beneficial conversion feature
applicable to the Series A Preferred. Using the potential conversion price of
$1.60 for the first anniversary date as specified in the purchase agreement, the
beneficial conversion feature resulted in an additional preferred stock dividend
of $9,078,750 in December 2002.

On January 20, 2004, Skyepharma converted all of its outstanding shares of
Series A Preferred Stock of the Company into 25,000,000 shares of common stock
at a reduced conversion price of $0.80 per share. Skyepharma agreed that up to
12,500,000 shares of its common stock issued upon conversion of the Series A
Preferred Stock will be subject to a call option at the discretion of the
Company upon completion of an agreed upon milestone at a premium in excess of
the conversion price. The call option can be exercised on or after July 21,
2004. Through the period ending on January 20, 2007, the exercise price will be
between $1.28 and $1.52 per share. In connection with this transaction and in
accordance with SFAS 84, "Induced Conversions of Convertible Debt, an Amendment
of APB Opinion No. 26" the Company recorded a non-cash preferred stock dividend
in January 2004 amounting to $10,750,000.

Composition of Board

On the closing date of conversion, January 20, 2004, the Company and other
original stockholders amended the stockholders agreement dated as of December
10, 2001. After the date of that Amendment, the Board of Directors is required
to be comprised of at least seven directors and include at least two independent
directors. Per the Amendment, SkyePharma shall have the right to nominate one
director, who shall initially be Michael Ashton. From the date of the Amendment
until the third anniversary, Jose Antonio O'Daly, Mike Ajnsztajn and Gaston
Liebhaber (the "Founders"), each has the right to nominate one director. The
Founders will initially be directors. The Agreement will terminate upon the
later of (i) the SkyePharma Termination Date or (ii) the third anniversary of
this Amendment, which is January 20, 2007. Further, this agreement may be
terminated by the mutual written consent. "The SkyePharma Termination Date" is
the date on which SkyePharma no longer beneficially owns, in the aggregate, at
least 20% of the outstanding common stock of the Company.

Pursuant to the Blue Cedar Stockholder's Agreement, Blue Cedar may designate one
director to the Company's Board of Directors. Manuel Tarabay is Blue Cedar's
initial and current designated director. The Blue Cedar Stockholder's Amendment
will terminate upon the later of the Blue Cedar Termination Date or August 15,
2008. The "Blue Cedar Termination Date" is the date on which Blue Cedar no
longer beneficially owns, in the aggregate, at least 20% of the outstanding
common stock of the Company.


                                      F-28
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 7 - CAPITAL STOCK ACTIVITY (Continued)

Stock Warrants

At December 31, 2005, the Company had the following outstanding common stock
warrants to purchase its securities:

                                          Number of Warrants      Exercise Price
                                                Issued               Per Share
                                          ------------------      --------------

                                              46,759,466          $0.165 - $4.00
                                          ==================      ==============

These warrants were primarily issued in connection with the exchange with
Astralis, LLC and the private placement offerings. These warrants expire between
2006 and 2010.

NOTE 8 - STOCK OPTION PLAN

On September 10, 2001, the Company adopted its 2001 Stock Option Plan that
provides for the granting of options to officers, directors, employees, and
consultants. The number of shares of common stock that can be purchased under
this plan is limited to 5,000,000 shares, adjustable for changes in the capital
structure of the Company. No options can be granted under this plan after
September 10, 2011. Options granted under this plan may be either incentive
stock options or non-qualified stock options. Options terms are not to exceed 10
years. The options have limited transferability, and will be subject to various
vesting provisions as determined at the date of grant. The Board of Directors or
a committee thereof will determine the exercise price of options granted in
accordance with the provisions of this plan. The Board has the ability to amend,
suspend or terminate this plan at any time, subject to restrictions imposed by
applicable law.

On December 31, 2001, the Company granted two consultants options to purchase an
aggregate 300,000 shares of the Company's common stock in exchange for their
services. These options vest ratably, at 75,000 per year, over a four-year
period commencing in 2001. The expiration terms of these options are 4 years, 3
years, 2 years and 1 year, for options vesting in 2001, 2002, 2003 and 2004,
respectively. The strike price for all of these options is $2.75.

During July 2002, the Company granted 15,000 stock options with a strike price
of $2.50, as compensation to a consultant.

The Company records deferred compensation when it makes compensatory stock
option grants to employees, members of the Board of Directors, consultants or
advisory board members. For the options granted to consultants, the amount of
deferred compensation recorded is the fair value of the stock options on the
grant date as determined using a Black-Scholes option-pricing model. The Company
records deferred compensation as a reduction to shareholders' equity with an
offsetting increase to additional paid-in capital. The Company then amortizes
deferred compensation into stock-based compensation expense over the performance
period, which typically coincides with the vesting period of the stock-based
award.

During April 2003, the Company granted options to purchase 50,000 shares of
common stock at an exercise price of $0.45 per share to one of its directors.
Options to purchase 12,500 shares of common stock vested on April 4, 2003, and
options to purchase an additional 12,500 shares will vest each year thereafter
for the following three years. In July 2004, 25,000 vested options were
exercised.


                                      F-29
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 8 - STOCK OPTION PLAN (Continued)

On July 2, 2004, the Company granted options to purchase 50,000 shares of common
stock at an exercise price of $1.00 per share to one of its directors. Options
to purchase 12,500 shares of common stock vested on grant date and options to
purchase an additional 12,500 shares will vest each year thereafter for the
following three years. The term of the options is four years.

During December 2004, the Company granted options to purchase 728,000 shares of
common stock at an exercise price of $0.70 per share to one of its officers. The
options are vested immediately and expire in ten years.

In January 2005, the Company issued 100,000 shares of the Company's common stock
along with 728,000 options to James Sharpe, the Company's former Chief Executive
Officer and President. The options were issued with an exercise price of $0.70
with a term of 10 years. The options vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested. Mr. Sharpe resigned as Chief Operating Officer, President, and
Member of the Board of Directors as of January 25, 2006 with an effective
resignation date of December 31, 2005. See Note 15.

On February 2, 2005, the Company issued 20,000 options to a director. The
options were issued with an exercise price of $0.69 and with a term of 10 years.
The options shall vest over three years, with 25% vesting on the date of the
grant and 25% vesting on the anniversary of the grant date until fully vested.

On April 11, 2005, the Company issued 50,000 options to a newly elected
director. The options were issued with an exercise price of $0.26 and with a
term of 10 years. The options shall vest over three years, with 25% vesting on
the date of the grant and 25% vesting on the anniversary of the grant date until
fully vested.

On June 4, 2005, the Company issued 20,000 options to a director. The options
were issued with an exercise price of $0.28 and with a term of 10 years. The
options shall vest over three years, with 25% vesting on the date of the grant
and 25% vesting on the anniversary of the grant date until fully vested.

NOTE 9 - DEFERRED COMPENSATION

The components of deferred compensation for the options granted are as follows
at December 31,

                                                      2005         2004
                                                    --------     --------

      Balance at January 1                          $     --     $  4,822
      Deferred compensation recorded                  65,000           --
      Fair value adjustments                              --           --
      Amortization to stock-based compensation       (65,000)      (4,822)
                                                    --------     --------

      Balance at December 31                        $     --     $     --
                                                    ========     ========


                                      F-30
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 9 - DEFERRED COMPENSATION (Continued)

Exercise prices for stock options outstanding as of December 31, 2005 and the
weighted average remaining contractual life are as follows:

<TABLE>
<CAPTION>
                                                            Weighted Average                               Weighted
                                                                Remaining                 Number           Average
      Exercise Prices           Options Outstanding         Contractual Life           Exercisable     Exercise Price
      ---------------           -------------------         ----------------           -----------     --------------
      <S>                           <C>                         <C>                       <C>               <C>
      $ 0.26 - 0.28                    70,000                   9.32 years                 17,500           $0.27
      $ 0.45                           25,000                   2.26 years                 12,500           $0.45
      $ 0.69 - 0.70                 1,294,000                   9.03 years                915,000           $0.70
      $ 1.10                           50,000                   8.43 years                 25,000           $1.10
      $ 2.50                           15,000                   1.69 years                 15,000           $2.50
</TABLE>

In accordance with FAS 123 the fair value of the options were estimated as of
the date of the grant or subsequent vesting date, or December 31, 2005 if not
vested, using a Black-Scholes option-pricing model. The assumptions used in
estimating the fair value of the options ranged as follows:

           Volatility                                100% - 130%
           Risk-free interest rate                  2.3% - 4.78%
           Expected life                            5 - 10 years
           Dividend yield                                --

The Company had the following outstanding common stock options to purchase its
securities at December 31:

<TABLE>
<CAPTION>
                                                 2005                                       2004
                                 ------------------------------------       -------------------------------------

                                    Number of          Exercise Price          Number of           Exercise Price
Description of Series            Options issued           Per Share         Options issued            Per Share
---------------------            --------------        --------------       --------------         --------------
<S>                                <C>                    <C>                  <C>                    <C>
Expire December 2005                      --              $      --              300,000              $    2.75
Expire September 2007                 15,000              $    2.50               15,000              $    2.50
Expire April 2008                     25,000              $    0.45                   --              $      --
Expire June 2014                      50,000              $    1.10                   --              $      --
Expire December 2014                 728,000              $    0.70              803,000              $    0.70
Expire February 2015                  20,000              $    0.69                   --              $      --
Expire February 2015                 546,000              $    0.70                   --              $      --
Expire April 2015                     50,000              $    0.26                   --              $      --
Expire June 2015                      20,000              $    0.28                   --              $      --
                                  ----------                                  ----------

Common Stock                       1,454,000                                   1,118,000
                                  ==========                                  ==========
</TABLE>


                                      F-31
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 9 - DEFERRED COMPENSATION (Continued)

The following tables summarize the Company's stock option activity and related
information:

                                                                Number of
                                                                 Shares
                                                               ----------

      Balance as of December 31, 2003                             365,000
      Granted                                                     778,000
      Exercised                                                   (25,000)
      Expired/forfeit                                                  --
                                                               ----------
      Balance as of December 31, 2004                           1,118,000
      Granted                                                     818,000
      Exercised                                                        --
      Expired/forfeit                                            (482,000)
                                                               ----------
      Balance as of December 31, 2005                           1,454,000
                                                               ==========

NOTE 10 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS

Patent

A founding member of the Company is the owner of a patent application, filed
March 16, 2001 with the United States Patent and Trademark Office, entitled
"Compositions and Methods for the Treatment and Clinical Remission of Psoriasis"
(the "Invention"). On April 26, 2001, the Company, in exchange for $10, entered
into an exclusive license agreement to use and exploit the Invention, the
technology related thereto, and the related patent rights, including the ability
to license foreign patent rights. The term of the license agreement expires on
the last date of expiration of the patent or earlier date as specified in the
license agreement.

During the term of the license agreement, the Company is required to pay all
fees and costs relating to the filing, prosecution, and maintenance of the
patent and associated rights. In addition, the Company is required to pay all
reasonable attorneys' fees of the Company, or patent owner, in the pursuit of
any patent infringement litigation.

The recorded value of the patent was impaired as of December 31, 2005 and the
Company recorded an impairment charge of $114,976 in relation to the patent (see
Note 4)

SkyePharma PLC Agreements

On December 10, 2001, the Company executed three agreements with SkyePharma, a
pharmaceutical company located in England.

The Company entered into a stock purchase agreement whereby SkyePharma agreed to
purchase 2,000,000 shares of Series A Preferred at a price of $10 per share in
five separate closings over a 13-month period commencing in December 2001 (see
Note 7).


                                      F-32
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 10 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS (Continued)

The Company entered into a technology option agreement whereby it agreed to pay
SkyePharma $5,000,000 in return for the right, for 7 years, to enter into a
non-exclusive license agreement with SkyePharma to utilize three drug delivery
systems ($2,000,000, $2,000,000, and $1,000,000, respectively per delivery
system). The royalty fee in this license agreement is specified to be 5% of the
net sales of any product the Company sells utilizing a SkyePharma drug delivery
system. All other terms of this license agreement would need to be determined
upon exercise of the option. The Company can transfer this option to another
party, subject to approval by SkyePharma. This license would only allow the
Company to use these delivery systems for drugs that treat two particular
immunotherapies - psoriasis and leishmaniasis. The $5,000,000 fee was required
to be paid on December 10, 2001 and was netted (for convenience purposes) out of
the first $10,000,000 installment purchase of preferred stock by SkyePharma.

The technology option was impaired as of December 31, 2004 and the Company
recorded an impairment charge of $2,797,612 in relation to the option (see Note
7).

The Company entered into a services agreement whereby it paid $11,000,000 to
SkyePharma in return for SkyePharma providing all development, manufacturing,
pre-clinical and clinical development services for the Company's primary -
second generation Psoraxine, up to the completion of Phase II clinical studies.
The contract recognized that SkyePharma performed $3,000,000 of these services
in the fourth quarter of 2001 and that SkyePharma will perform and be paid for
the remaining $8,000,000 of services in 2002 and 2003. The payment terms for the
services agreement are fixed. The Company paid $3,000,000 in 2001, $7,980,000 in
2002 and $20,000 in 2003.

The service agreement was terminated on December 31, 2002. In March 2003, the
Company and SkyePharma amended the original service agreement, effective January
1, 2003, to extend the term of the agreement and modify the services to be
provided by SkyePharma. SkyePharma will continue to provide certain services to
the Company through December 31, 2004 in consideration for payments it received
from the Company during 2002 in connection with this agreement, as a prepaid
expense. This prepaid amount will be expensed during the remaining period of the
amended service agreement, In 2004, the Company expensed $1,007,500 in
connection with the services agreement.

SkyePharma has the right of first negotiation to acquire the worldwide licensing
and distribution rights to Psoraxine up to the completion of the Phase II
studies. On completion of Phase II studies, Astralis will offer SkyePharma the
option to acquire the worldwide licensing and distribution rights to Psoraxine.
If SkyePharma does not take the option, Astralis will seek a marketing partner
to fund Phase III clinical studies and to provide a sales and marketing
infrastructure.

As of December 31, 2005, Skyepharma owns approximately 39.8% of the Company's
outstanding common stock.

Indemnification

The Company has agreed, subject to specific provisions in the Technology Access
Agreement, to indemnify SkyePharma, its directors and employees against any and
all losses, claims, demands, proceedings, actions, etc. which may be brought or
established against them as a result of, among other items, i) negligence of
Company personnel or contractors or ii) death, personal injury or property
damage or loss caused by the Company selling a product containing a SkyePharma
delivery system which is defective or not merchantable. However, this
indemnification does not apply to any death or personal injury arising from
defects inherent in the delivery systems or technical know-how of SkyePharma
licenses with the delivery system technology.


                                      F-33
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 11 - OPERATING LEASES

On March 13, 2002, the Company entered into a lease agreement for laboratory and
office space. The lease period is for three years and rent is $77,500 annually.
The Company also entered into a concurrent service agreement with the lessor of
the laboratory space on a time and material basis. During 2005, the Company
extended its lease through September 2006 for $110,400 annually.

During 2005 and 2004, the Company leased two apartments and an automobile for
two different key employees, one of whom is an officer. During 2005, the Company
canceled its obligation under these leases and carried no other leases for key
employees.

The Company incurred rent expense in the amount of $98,642 and $128,443 for 2005
and 2004, respectively.

The following is a schedule by year of future minimum rental payments required
under operating leases, as of December 31, 2005:

           Year Ending December 31:
               2006                                      $   82,800
               Thereafter                                        --

NOTE 12 - COMPREHENSIVE LOSS

Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                               ---------------------------------
                                                                   2005                 2004
                                                               ------------         ------------
      <S>                                                      <C>                  <C>
      Net loss                                                 $ (3,914,159)        $(20,037,568)
                                                               ------------         ------------

      Unrealized gain (loss) on securities:
         Unrealized gain arising during period                           --                   --
          Reclassification adjustment for loss realized
            in net loss                                                  --               27,698
                                                               ------------         ------------

      Unrealized gain (loss), net                                        --               27,698
                                                               ------------         ------------

       Comprehensive loss                                      $ (3,914,159)        $(20,009,870)
                                                               ============         ============
</TABLE>

NOTE 13 - CONCENTRATIONS

The Company currently has two products that are under development. Lack of
product development or customer interest could have a materially adverse effect
on the Company. Further, significant changes in technology could lead to new
products or services that compete with the product to be offered by the Company.
These changes could materially affect the price of the Company's products or
render them obsolete.


                                      F-34
<PAGE>

                                 Astralis, Ltd.
                          (A Development Stage Entity)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 14 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

The Company paid $2,307 and $0 in interest for 2005 and 2004, respectively. The
Company did not pay any taxes in 2005 or 2004.

In April 2005, the Company financed $24,184 of its business liability insurance
premiums by entering into a short-term note payable. The note matures on
February 16, 2006 and bears interest at a rate of 6.75% per annum. As of
December 31, 2005, this note had an outstanding balance of $4,946.

In January 2005, the Company financed $33,516 of its directors and officers
liability insurance premiums by entering into a short-term note payable. The
note matured on November 10, 2005 and bears interest at a rate of 5.75% per
annum. As of December 31, 2005, this note had an outstanding balance of $0.

In December 2004, the Company financed $28,280 of its directors and officers
liability insurance premiums by entering into a short-term note payable. The
note matures on October 10, 2005 and bears interest at a rate of 6.65% per
annum. As of December 31, 2005 and 2004, this note had an outstanding balance of
$0 and $28,280, respectively.

NOTE 15 - SUBSEQUENT EVENTS

On March 31, 2006, the Company issued to Blue Cedar Limited ("Blue Cedar"), an
accredited investor and currently a stockholder of the Company; (i) a
convertible promissory note in the principal amount of $250,000, convertible
into shares of the Company's common stock at $0.09 per share at any time prior
to the redemption date (March 31, 2009), interest will be charged on the note at
6% per annum and (ii) a warrant to purchase 2,777,778 shares of common stock at
an exercise price of $0.135 per share. The warrants expire five years from the
date of issuance.

On January 25, 2006, the Company's Chief Executive Officer and President, James
Sharpe, resigned pursuant to a Separation Agreement and General Release
("Separation Agreement"), by and between the Company and Mr. Sharpe. The
resignation was effective as of December 31, 2005. The separation agreement
calls for the following:

      -     $50,000 severance payment payable within 10 days of the signing of
            the separation agreement;

      -     All non-vested stock options have been terminated;

      -     The Company shall grant to Mr. Sharpe, an option to purchase 182,000
            shares of common stock on January 27, 2006 at the market price on
            that date;

      -     The Company shall grant to Mr. Sharpe, an additional option to
            purchase 182,000 shares of common stock on January 27, 2007 at the
            market price on that date;

      -     The Company will pay for Mr. Sharpe's COBRA premiums for six months
            after the separation date or until the date he becomes eligible for
            employer-provided benefits from another employer, whichever occurs
            first.

At December 31, 2005, the company has accrued the severance payment of $50,000
in the accompanying financial statements. The unvested options granted to Jim
Sharpe in 2005 that were previously expensed under FASB 148 disclosure have been
reversed in footnote 2. The new options granted with the separation agreement
will be accounted for under FASB 123(R) in 2006.


                                      F-35