U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

      For the fiscal year ended December 31, 2004

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

      For the transition period from _____ to _____

                        Commission file number 000-30997

                                  ASTRALIS LTD.
                 (Name of small business issuer in its charter)

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

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

                            Issuer's telephone number
                                 (973) 227-7168

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

         Securities registered under Section 12(g) of the Exchange Act:
                         Common Stock, $.0001 par value
                                (Title of class)

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

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

      State issuer's revenues for its most recent fiscal year. --

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of March 29, 2005, was approximately $4,868,697.

      As of March 29, 2005, there were 73,173,055 shares of the registrant's
common stock outstanding.

      Transitional Small Business Disclosure Format (check one):

      Yes |_| No |X|

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the proxy statement for the annual meeting of shareholders of
Astralis Ltd., to be filed pursuant to Regulation 14A no later than April 30,
2005, are incorporated by reference into Part III of this Form 10-K.

<PAGE>

                                     PART I

Item 1. Description of Business

General

      We are a development-stage biotechnology company primarily engaged in
research and development of treatments for immune system disorders and skin
diseases. We are focusing on the development of two products. Our primary
product, Psoraxine(R), is an immunotherapeutic product for the treatment of the
skin disease psoriasis. We are currently engaged in ongoing research and
development of Psoraxine(R). We are also developing a product for the treatment
of arthritis. In addition, we are engaged in research on the possible
development of the technology underlying Psoraxine(R) for the treatment of other
indications, such as eczema, seborrheic dermatitis and leishmaniasis.

      We were 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 -

      Astralis Phase II Study of Psoraxine(R) for Psoriasis Did Not Meet Primary
      Study Endpoint

      On March 14, 2005, we issued a press release to disclose the results of
our Phase II study for Psoraxine(R). The Phase II study of our 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. The Phase II
randomized, double-blind, placebo-controlled study involved 120 patients with
moderate to severe psoriasis who received intramuscular injections of
Psoraxine(R). The primary endpoint of the study was a specified level of
improvement of symptoms as measured in accordance with the Psoriasis Area and
Severity Index (PASI), a measurement scale that ranks the severity of symptoms
of patients suffering from psoriasis. Initial analysis of the preliminary data
showed no statistically significant clinical improvement compared to placebo
following six injections over twelve weeks of treatment. We are currently
analyzing the data from our Phase II study to understand why the results differ
from the long-term improvement of the more than 2,700 patients who were treated
with Psoraxine(R) in pre-clinical studies and whether a different approach,
including evaluating a longer course of therapy and/or modifications to the
formulation, may yield an outcome that is more consistent with results from
pre-clinical studies. Further details about the study will be available when all
data analyses are complete.

      SkyePharma Acquired 11,160,000 Additional Shares of Astralis

      Pursuant to a Stock Purchase Agreement, dated December 29, 2004, between
SkyePharma, Mike Ajnsztajn, our former Chief Executive Officer and former member
of our Board of Directors, and Gaston Liebhaber, a former member of our Board of
Directors, effective March 3, 2005, SkyePharma purchased 11,160,000 shares,
collectively, of our common stock from Mr. Ajnsztajn and Mr. Liebhaber. As a
result of this purchase, SkyePharma owns 36,360,000 shares, or 49.8%, of our


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issued and outstanding common stock. See Risk Factor entitled "One of our
existing stockholders can exert control over us and may not make decisions that
further the best interests of all stockholders" for a discussion of the possible
consequences of SkyePharma's ownership of our common stock.

      Limited Working Capital

      Based on our current plans, we believe that we have sufficient funds to
meet our operating expenses and capital requirements through approximately the
2nd quarter of 2005. 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.

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


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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
indicates that treatment with Psoraxine(R) did not provide any statistically
significant clinical improvement of psoriasis in participants of the studies. We
are currently analyzing 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 expect that we
will be required to spend a total of approximately $4,500,000 during fiscal year
2005 to complete Phase II studies, analyze results, and redesign and implement
our clinical development strategy. For the year ended December 31, 2004, we
reflected $7,689,060 in research and development expenses, including $4,519,400
related to SkyePharma. For the year ended December 31, 2003, we reflected
$4,045,673 in research and development expenses, including $1,721,788 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.

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


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<PAGE>

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.

      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.


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<PAGE>

      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 have also recently completed a Phase II clinical trial, which
did not achieve its primary endpoint for PASI (Psoriasis Area and Severity
Index) reduction. We are currently analyzing 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 owns 49.8% of our common stock.

      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 (the "Amended
Agreement"), dated as of December 10, 2001. Pursuant to the Amended Agreement,
our board of directors is now required to be comprised of at least seven
directors and must include at least two independent directors. Per the Amended
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
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 Agreement may be
terminated by the mutual written consent of the parties. Pursuant to the Amended
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.

      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%


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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.

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 December 31, 2004, we employed seven full-time employees, including
four scientists and one laboratory technician. We also have 14 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.


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<PAGE>

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.


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<PAGE>

Risk Factors

      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.

      Based on our current plans, we believe that we have sufficient funds to
meet our operating expenses and capital requirements through approximately the
2nd quarter of 2005. 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 $49,702,357
as of December 31, 2004 which has increased to date. The cumulative net loss
through December 31, 2004 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.

      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 analyze 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.


                                       10
<PAGE>

      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 may affect our ability to
implement our business plan.

      On July 28, 2004, we accepted the resignations of Mike Ajnsztajn and Gina
Tedesco, effective immediately with respect to their positions as members of our
Board of Directors and effective as of August 26, 2004 with respect to their
positions as our Chief Executive Officer and Chief Financial Officer,
respectively. On October 13, 2004, we retained Peter Golikov as interim Chief
Executive Officer and Michael Garone as interim Chief Financial Officer. On
November 24, 2004, Mr. Golikov ceased being our interim Chief Executive Officer.


                                       11
<PAGE>

On February 15, 2005, we retained James Sharpe as our Chief Executive Officer.
On February 21, 2005, we retained Michael Garone as our Chief Financial Officer.
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.

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

      SkyePharma acquired 11,160,000 additional shares of our common stock on
March 3, 2005, in a privately negotiated transaction, increasing its ownership
of our common stock from 34.5% to 49.8%. 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 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.

      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.

      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).


                                       12
<PAGE>

      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.

      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.


                                       13
<PAGE>

      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.

      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


                                       14
<PAGE>

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, the loss of whose services
would adversely impact the achievement of our objectives. We recently hired a
Chief Executive Officer and Chief Financial Officer. 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.


                                       15
<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 29, 2005, the range of our stock price has been between $.16 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
73,173,055 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 90,120,946 shares of common stock outstanding. Of
the outstanding shares, up to 73,148,055 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 Securities Exchange Act
of 1934 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.


                                       16
<PAGE>

Item 2. Description of Property

      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 $77,500.

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 2004.

                                     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. 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.

2003                                                          High         Low

First Quarter                                                 $0.72        $0.34
Second Quarter                                                $1.01        $0.40
Third Quarter                                                 $1.41        $0.36
Fourth Quarter                                                $0.87        $0.42

2004

First Quarter                                                 $1.66        $0.64
Second Quarter                                                $1.46        $1.04
Third Quarter                                                 $1.05        $0.51
Fourth Quarter                                                $0.85        $0.42


                                       17
<PAGE>

Holders of Common Stock

      As of March 29, 2005, there were approximately 2,894 holders of our common
stock.


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, 2004:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                    EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------------------------
                                                                                       Number of securities
                               Number of securities to      Weighted-average           remaining available for
                               be issued upon exercise      exercise price of          issuance under equity
                               of outstanding options,      outstanding options,       compensation plans
                               warrants and rights          warrants and rights        (excluding securities
                                        (a)                        (b)                 reflected in column (a))
---------------------------------------------------------------------------------------------------------------
<S>                                    <C>                     <C>                             <C>
Equity compensation
plans approved by                      1,118,000               $0.45-$2.74                     3,857,000
security holders
---------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security                  --                       --                               --
holders
---------------------------------------------------------------------------------------------------------------
Total                                  1,118,000               $0.45-$2.74                     3,857,000
---------------------------------------------------------------------------------------------------------------
</TABLE>

Recent Sales of Unregistered Securities

      On February 15, 2005, we entered into an Employment with James Sharpe, our
President and Chief Executive Officer, and a member of Board of Directors.
Pursuant to the terms of the Employment Agreement, we granted Mr. Sharpe options
to purchase 728,000 shares of our common stock, which will vest to the extent of
182,000 immediately and then an additional 182,000 shares per year on a
cumulative basis until all options have vested. The options have an initial
exercise price of $0.70 per share and have a term of ten years. In addition, Mr.
Sharpe was issued 100,000 shares of our common stock, which were fully vested
and considered fully paid when issued. On February 15, 2006, Mr. Sharpe will be
issued an additional 100,000 shares of our common stock, which will be fully
vested and fully paid on the date of issuance.


                                       18
<PAGE>

      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 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.

      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 of 1933
and Rule 506 of Regulation D under the Securities Act of 1933.

      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 of 1933. In July 2004, we filed a
registration statement under the Securities Act of 1933 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 of 1933 and Rule 506 of Regulation D under the Securities Act of 1933.


                                       19
<PAGE>

      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 of 1933 and Rule 506 of
Regulation D under the Securities Act of 1933.

      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 of 1933.

      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 of 1933.

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


                                       20
<PAGE>

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, 2004 compared to fiscal year ended December 31,
2003

      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.

      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.


                                       21
<PAGE>

      1 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.

      In December 2004, we received $293,461 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.

      For fiscal year ended December 31, 2003:

      In January 2003, pursuant to a Purchase Agreement dated as of December 10,
2001, we sold 250,000 shares of our Series A Convertible Preferred Stock to
SkyePharma for an aggregate purchase price of $2,500,000. We received proceeds
of $2,480,000 after we netted out from the proceeds $20,000 due to SkyePharma in
connection with the Service Agreement.

      During the fiscal year ended December 31, 2003, we received $825,000
outstanding under subscription notes. In April 2003, we entered into an Amended
Investor Relation Agreement with a stockholder who had outstanding subscription
notes. In exchange for services rendered, we reduced the outstanding amount by
$36,000. In 2004, the stockholder will provide services valued at $24,000 in
lieu of payment of the outstanding subscription receivable balance.

      For the fiscal year ended December 31, 2003, we had no revenue from
operations and incurred operating expenses of $5,362,081 which consisted
primarily of:

      o     Research and development costs of $4,045,673, including $1,007,500
            that we incurred in connection with services provided by SkyePharma
            under our Service Agreement with them and amortization of
            approximately $714,288 under our technology option license which is
            being amortized over a seven year period.

      o     General and administrative costs of approximately $1,290,346,
            including professional fees and our general corporate expenditures.

      As a result, during the fiscal year ended December 31, 2003, we incurred a
net loss of $5,080,427.

      In December 2003, we received $221,636 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.

The Next Twelve Months

      At December 31, 2004 we had cash balances of $2,312,401, which we estimate
will last us through approximately the second quarter of 2005, 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:


                                       22
<PAGE>

      o     Our primary focus is to further our 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 are currently analyzing the data to understand why
            we received these unexpected results. In this regard, we are
            implementing cost containment measures and realigning development
            activities to focus on such things as formulation, manufacturing,
            analytical protocols and potency. We remain committed to
            Psoraxine(R) and its future development, and hope to see it return
            to Phase II clinical trials in 2006. We also remain committed to
            exploring applications of our technology platform in other
            dermatological diseases, as well as in other therapeutic areas
            including arthritis. We expect that we would be required to incur
            expenses of approximately $2,500,000 to third parties in connection
            with continuing development of Psoraxine(R) and exploration of other
            applications of the technology.

      o     We intend to implement our business plan and facilitate the
            operations of our company. We will spend approximately $1,250,000 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 $1,100,000 for our general
            administrative and working capital requirements.

      We will need to raise additional funds immediately to continue our
operations for the period following the second quarter of 2005 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. If we do not obtain additional funds, we will likely be required
to eliminate programs, delay development of our products, or in the extreme
situation, 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 Chief Executive Officer 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 Securities Exchange Act of 1934 (the
"Exchange Act")) are 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.


                                       23
<PAGE>

      (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; Compliance With
        Section 16(a) of the Exchange Act.

      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. Telephone number (973) 227-7168.

      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
members of that Committee are Steven Fulda and Samuel Barnett.

      Apart from certain information concerning our Executive Officers which is
set forth in Part I of this Report, the other information required by this item
is incorporated herein by reference to the applicable information in the proxy
statement for our 2005 Annual Meeting including the information set forth under
the captions "Election of Directors, Section 16(a) Beneficial Ownership
Reporting Compliance and Governance of the Company - Audit Committee."

Item 10. Executive Compensation.

      The information concerning our executive compensation required by Item 10
shall be included in the Proxy Statement to be filed relating to our 2005 Annual
Meeting of Stockholders and is incorporated herein by reference, including the
information set forth under the caption "Executive Compensation."


                                       24
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

      The information concerning our beneficial owners required by Item 11 shall
be included in the Proxy Statement to be filed relating to our 2005 Annual
Meeting of Stockholders and is incorporated herein by reference, including the
information set forth under the caption "Share Ownership of Certain Beneficial
Owners, Directors and Officers."


Item 12. Certain Relationships and Related Transactions.

      The information concerning certain relationships and related transactions
required by Item 12 shall be included in the Proxy Statement to be filed
relating to our 2005 Annual Meeting of Stockholders and is incorporated herein
by reference, including the information set forth under the caption "Certain
Relationships and Related Transactions."

Item 13. Exhibits and Reports on Form 8-K.

      (a) Exhibits

Exhibit Number                                                      Description

3.1 *       Certificate of Incorporation of Astralis Ltd.
3.2 *       Amendment to the Certificate of Incorporation of Astralis Ltd.
3.3         Bylaws of Astralis Ltd.
3.4         Amendment to the Bylaws of Astralis Ltd.
4.1 **      Specimen of Stock Certificate for Common Stock of Astralis Ltd.
10.1 ***    Agreement and Plan of Merger, dated November 21, 2001
10.2 #      Contribution Agreement, dated as of September 10, 2001, between
            Astralis Ltd., Astralis LLC and the members of Astralis LLC
10.3 ##     Purchase Agreement, dated December 10, 2001, between Astralis Ltd.
            and SkyePharma PLC
10.4 ##     Stockholder Agreement, dated December 10, 2001, between Astralis
            Ltd., SkyePharma PLC, Jose Antonio O'Daly, Mike Ajnsztajn and Gaston
            Liebhaber
10.5 ###    2001 Stock Option Plan
10.6 +      Sub-Lease Agreement, dated February 2002, between SGS U.S. Testing
            Company Inc. and Astralis Ltd.
10.7 +      License Agreement dated April 26, 2001 between Jose Antonio O'Daly
            and Astralis LLC
10.8 +      Assignment of License, dated November 13, 2001, between Astralis LLC
            and Astralis Ltd. (f/k/a Hercules Development Group, Inc.)
10.9 +      Form of Warrant
10.10 ++    Agreement for Services dated December 10, 2001 between SkyePharma
            Inc. and Astralis Ltd.
10.11 ++    Technology Access Option Agreement dated December 10, 2001 by and
            among SkyePharma Inc., SkyePharma Holding AG and Astralis Ltd.
10.12 +++   Employment Agreement dated December 10, 2001, between Dr. Jose
            Antonio O'Daly and Astralis Ltd.
10.13 +++   Amendment #1 to Agreement for Services dated March 18, 2003 between
            SkyePharma Inc. and Astralis Ltd.


                                       25
<PAGE>

10.14 *     Omnibus Conversion Agreement dated January 12, 2004 between Astralis
            Ltd. and SkyePharma PLC
10.15 *     Call Option Agreement dated January 20, 2004 between Astralis Ltd.
            and SkyePharma PLC
10.16 *     Amendment No. 1, dated January 20, 2004, to Stockholders Agreement,
            dated December 10, 2001 by and among Astralis Ltd., SkyePharma PLC,
            Jose Antonio O'Daly, Mike Ajnsztajn, Gaston Liebhaber and Gina
            Tedesco
10.17       Employment Agreement dated December 22, 2004 between Astralis Ltd.
            and Jose Antonio O'Daly
10.18       Employment Agreement dated January 27, 2005 between Astralis Ltd.
            and James Sharpe
10.19       Consultant Agreement dated February 21, 2005 between Astralis Ltd.
            and Michael Garone
14.1 *      Code of Ethics for CEO and Senior Financial Officers
31.1        Certification by the Chief Executive Officer pursuant to Section 302
            of the Sarbanes-Oxley Act of 2002
31.2        Certification by 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

----------

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

** 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.

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

# 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.

## 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.

### 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.

+ 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.

++ 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.

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


                                       26
<PAGE>

      (b) Reports on Form 8-K

      On October 19, 2004, we filed a current report on Form 8-K reporting under
Item 5.02 - Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers.

      On October 29, 2004, we filed a current report on Form 8-K reporting under
Item 1.01 - Entry into a Material Definitive Agreement, and Item 5.02 -
Departure of Directors or Principal Officers; Election of Directors; Appointment
of Principal Officers.

      On November 3, 2004, we filed a current report on Form 8-K/A, amending our
Form 8-K filed on October 29, 2004 reporting under Item 1.01 - Entry into a
Material Definitive Agreement, and Item 5.02 - Departure of Directors or
Principal Officers; Election of Directors; Appointment of Principal Officers.

      On November 19, 2004, we filed a current report on Form 8-K reporting our
results of operations and financial condition for the quarter ending September
30, 2004 in a press release dated November 15, 2004.

      On November 24, 2004, we filed a current report on Form 8-K reporting our
results of operations and financial condition for the quarter ending September
30, 2004 in a press release dated November 19, 2004.

      On November 29, 2004, we filed a current report on Form 8-K reporting
under Item 5.02 - Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers.

      On December 28, 2004, we filed a current report on Form 8-K reporting
under Item 5.03 - Amendments to Articles of Incorporation or Bylaws; Changes in
Fiscal Year.

Item 14. Principal Accountant Fees and Services

      The information concerning our principal accounting fees required by Item
14 shall be included in the Proxy Statement to be filed relating to our 2005
Annual Meeting of Stockholders and is incorporated herein by reference,
including the information set forth under the caption "Independent Auditors."


                                       27
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 and 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                               ASTRALIS LTD.
                                               (Registrant)


                                               By: /s/ James Sharpe
                                                   --------------------
                                                   James Sharpe
                                                   President and Chief Executive
                                                   Officer

      In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.

      Signature                          Title                       Date


/s/ Jose Antonio O'Daly         Chairman of the Board and         March 30, 2005
-------------------------       Chief Scientific Officer
Dr. Jose Antonio O'Daly


/s/ James Sharpe                President                         March 30, 2005
-------------------------       Chief Executive Officer and
James Sharpe                    Director
                                (principal executive officer)


/s/ Michael Garone              Chief Financial Officer           March 30, 2005
-------------------------       (principal financial and
Michael Garone                  accounting officer)


/s/ Michael Ashton              Director                          March 31, 2005
-------------------------
Michael Ashton


/s/ Samuel Barnett              Director                          March 30, 2005
-------------------------
Samuel Barnett


/s/ Steven Fulda                Director                          March 29, 2005
-------------------------
Steven Fulda


/s/ Fabien Pictet               Director                          March 31, 2005
-------------------------
Fabien Pictet


                                       28
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)

                        INDEX TO THE FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----

Accountants' Report                                                          F2

Balance Sheets                                                               F3

Statements of Operations                                                     F4

Statements of Stockholders' Equity                                           F5

Statements of Cash Flows                                                    F13

Notes to Financial Statements                                               F14


                                      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, 2004 and 2003, 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, 2004. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Astralis Ltd. as of December
31, 2004 and 2003, 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, 2004 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, estimates its current
cash will last through the end of the second quarter of 2005, and reported in
2005 the results from its Phase II testing indicated no statistical difference
between the Company's product and a placebo. 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
February 16, 2005


                                      F-2
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                                 Balance Sheets

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                        -----------------------------
                                                                            2004             2003
                                                                        ------------     ------------
<S>                                                                     <C>              <C>
Current Assets
   Cash and cash equivalents                                            $  2,312,401     $     10,660
   Marketable securities                                                          --        1,374,174
   Prepaid expense - related party                                                --        1,007,500
   Prepaid expenses                                                           70,895           84,902
   Supplies                                                                   55,851           87,037
                                                                        ------------     ------------

                    Total Current Assets                                   2,439,147        2,564,273

Intangible Assets, Net - Related Party                                            --        3,511,900
Other Intangible Assets, Net                                                 117,923           94,640
Property and Equipment, Net                                                  214,140          293,049
Deposits                                                                      26,763           29,953
                                                                        ------------     ------------

                                                                        $  2,797,973     $  6,493,815
                                                                        ============     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
   Accounts payable and accrued expenses                                $    397,762     $    279,506
                                                                        ------------     ------------

                    Total Current Liabilities                                397,762          279,506
                                                                        ------------     ------------

Commitments and Contingencies

Stockholders' Equity
   Convertible preferred stock; Series A, $.001 par value;
     3,000,000 shares authorized at 2004 and 2003; 0 and
     2,000,000 issued and outstanding at 2004 and 2003, respectively
     (liquidation preference - $0 and $22,122,600 at 2004 and 2003,               --            2,000
     respectively)
   Common stock; $.0001 par value; 150,000,000 shares authorized at
     2004 and 2003; 73,173,055 and 37,538,189 issued and
     outstanding at 2004 and 2003, respectively                                7,317            3,754
   Additional paid-in capital                                             52,095,251       35,929,864
   Deferred compensation                                                          --           (4,822)
   Common stock subscriptions receivable                                          --          (24,000)
   Accumulated other comprehensive loss                                           --          (27,698)
   Deficit accumulated in the development stage                          (49,702,357)     (29,664,789)
                                                                        ------------     ------------

                    Total Stockholders' Equity                             2,400,211        6,214,309
                                                                        ------------     ------------

                                                                        $  2,797,973     $  6,493,815
                                                                        ============     ============
</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,
                                                   2004            2003             2004
                                               ------------     ------------    --------------
<S>                                            <C>              <C>              <C>
Revenues                                       $         --     $         --     $         --
                                               ------------     ------------     ------------

Operating Expenses
   Research and development - related party       4,519,400        1,721,788       16,278,822
   Research and development                       3,169,660        2,323,885        6,449,228
   Depreciation and amortization                     30,403           26,062           73,024
   General and administrative                     1,860,844        1,290,346        5,377,454
                                               ------------     ------------     ------------

                   Total Operating Expenses       9,580,307        5,362,081       28,178,528
                                               ------------     ------------     ------------

Loss From Operations                             (9,580,307)      (5,362,081)     (28,178,528)

Investment income (loss)                               (722)          60,018          179,824
                                               ------------     ------------     ------------

Loss before income tax benefit                   (9,581,029)      (5,302,063)     (27,998,704)

Income tax benefit                                  293,461          221,636          515,097
                                               ------------     ------------     ------------

Net Loss                                         (9,287,568)      (5,080,427)     (27,483,607)

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

Net Loss to Common Stockholders                $(20,037,568)    $ (5,080,427)    $(49,702,357)
                                               ============     ============     ============

Basic and Diluted Loss per Common Share        $      (0.28)    $      (0.14)    $      (1.12)
                                               ============     ============     ============

Basic and Diluted Weighted Average
 Common Shares Outstanding                       71,073,507       37,538,189       44,472,789
                                               ============     ============     ============
</TABLE>

               See the accompanying notes to financial statements.


                                      F-4
<PAGE>

                                                                     Page 1 of 8

                                  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              --              --              --              --              --

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>

                                                                     Page 2 of 8

                                  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>
Balances, March 12, 2001
 (Date of Inception)                      $        --     $        --     $        --    $        --     $        --

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

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,            (1,350,000)             --              --             --              --
9 /1/2001

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

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>

                                                                     Page 3 of 8

                                  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>

                                                                     Page 4 of 8

                                  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 Brought Forward                  $ (1,350,000)  $   (398,250)  $         --   $ (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             --             --             --        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                --             --             --     (9,078,750)            --     (9,078,750)

Amortization of deferred compensation               --         34,254             --             --         34,254

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

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)       (15,181)
                                          ------------   ------------   ------------   ------------   ------------   ------------

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

Balance, December 31, 2002                $   (885,000)  $    (12,164)  $    (15,181)  $(24,584,362)  $  7,938,193
                                          ------------   ------------   ------------   ------------   ------------
</TABLE>

               See the accompanying notes to financial statements.


                                      F-8
<PAGE>

                                                                     Page 5 of 8

                                  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>

                                                                     Page 6 of 8

                                  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 Brought Forward               $   (885,000)   $    (12,164)   $    (15,181)   $(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              --              --              --         825,000

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

Amortization of deferred compensation            --          25,663              --              --          25,663

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

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)        (12,517)
                                       ------------    ------------    ------------    ------------    ------------    ------------

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

Balance, December 31, 2003             $    (24,000)   $     (4,822)   $    (27,698)   $(29,664,789)   $  6,214,309
                                       ------------    ------------    ------------    ------------    ------------
</TABLE>

               See the accompanying notes to financial statements.


                                      F-10
<PAGE>

                                                                     Page 7 of 8

                                  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 $0.50 per unit              --               --       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,
 in lieu of payment for services                     --               --               --              --         376,507

Amortization of 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>

                                                                     Page 8 of 8

                                  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 Brought Forward          $    (24,000)    $     (4,822)    $    (27,698)    $(29,664,789)    $  6,214,309

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

Collection of subscription
 receivable,                            24,000               --               --               --           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,
 in lieu of payment for services            --               --               --               --          376,507

Amortization of deferred
 compensation                               --            4,822               --               --            4,822

 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           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 Cash Flows

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,     March 12, 2001
                                                                         -----------------------------   (Inception) to
                                                                             2004             2003      December 31, 2004
                                                                         ------------     ------------  -----------------
<S>                                                                      <C>              <C>              <C>
Cash Flows from Operating Activities
   Net loss                                                              $ (9,287,568)    $ (5,080,427)    $(27,483,607)
   Adjustments to reconcile net loss to net cash used in operating
   activities
      Depreciation and amortization                                           867,902          847,754        2,562,751
      Impairment of intangible asset                                        2,797,612               --        2,797,612
      Amortization of net premium paid on investments                              --            5,737           54,551
      Dividend income reinvested                                             (117,219)         (72,308)        (199,323)
      Members' contributed salaries                                                --               --           12,986
      Research and development service fee netted against proceeds
       received from preferred stock issuance                                      --           20,000        5,015,000
      Operating expenses paid by related parties on behalf of company              --               --           17,587
       Amortization of deferred compensation                                    4,822           25,663          197,489
       Investor relation fees netted against subscription receivable           24,000           36,000           60,000
       Compensatory common stock                                               75,000               --          210,000
       Assignment of call option                                              376,508               --          376,508
       Loss on sale of available-for-sale securities and fixed asset
       retirement                                                             129,832           23,759          160,736
   Changes in assets and liabilities
      Prepaid expenses                                                      1,059,838          975,847          (32,564)
      Interest receivable                                                          --            5,891               --
      Supplies                                                                 31,186          (56,798)         (55,851)
      Deposits                                                                  3,190               --          (26,763)
      Accounts payable and accrued expenses                                    77,228           (1,169)         339,304
                                                                         ------------     ------------     ------------

Net Cash Used in Operating Activities                                      (3,957,669)      (3,270,051)     (15,993,584)
                                                                         ------------     ------------     ------------

Cash Flows from Investing Activities
   Purchases of available-for-sale securities                              (4,300,010)      (1,919,734)     (13,858,181)
   Proceeds from sale of available-for-sale securities                      5,690,970        1,783,032       13,843,916
   Expenditures related to patent                                             (26,947)         (36,267)         (94,383)
   Insurance proceeds from claim                                                4,113               --            4,113
   Purchases of property and equipment                                        (74,157)         (60,910)        (568,131)
                                                                         ------------     ------------     ------------

Net Cash Used in Investing Activities                                       1,293,969         (233,879)        (672,666)
                                                                         ------------     ------------     ------------

Cash Flows from Financing Activities
   Repurchase of common stock                                                      --               --          (80,000)
   Collection of subscription receivable                                           --          825,000        1,290,000
   Proceeds from exercise of stock options                                     11,250               --           11,250
   Issuance of common stock, net of offering and transaction costs          4,954,191               --        7,842,508
   Issuance of preferred stock                                                     --        2,480,000        9,932,496
   Private placement offering costs                                                --          (17,603)         (17,603)
                                                                         ------------     ------------     ------------

Net Cash Provided by Financing Activities                                   4,965,441        3,287,397       18,978,651
                                                                         ------------     ------------     ------------

Net Increase (Decrease) in Cash and Cash Equivalents                        2,301,741         (216,533)       2,312,401

Cash and Cash Equivalents, Beginning of Period                                 10,660          227,193               --
                                                                         ------------     ------------     ------------

Cash and Cash Equivalents, End of Period                                 $  2,312,401     $     10,660     $  2,312,401
                                                                         ============     ============     ============
</TABLE>

               See the accompanying notes to financial statements.


                                      F-13
<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 also engaged in research on the possible development of the
technology underlying Psoraxine(R) for the treatment of other indications, such
as eczema and leishmaniasis.

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 ("SFAS") No. 7 "Accounting and Reporting for
Development Stage Enterprises." 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 get approval on Psoraxine(R), 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.

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.


                                      F-14
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, five-year for
automobile, 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 7.)

Fair Value of Financial Instruments

The Company's financial instruments, including cash and cash equivalents,
accounts payable and accrued expenses, are carried at cost, which approximates
fair value.

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 SFAS 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.


                                      F-15
<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
                                                                      -----------------------------
                                                                          2004             2003
                                                                      ------------     ------------
<S>                                                                   <C>              <C>
Net loss, as reported                                                 $(20,037,568)    $ (5,080,427)
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                                                            29,495           11,589
                                                                      ------------     ------------

 Pro forma net loss                                                   $(20,067,063)    $ (5,092,016)
                                                                      ============     ============

 Loss per share:
       Basic - as reported                                            $      (0.28)    $      (0.14)
       Basic - pro forma                                              $      (0.28)    $      (0.14)
</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.

                                                       2004               2003
                                                      -------           -------
Risk free rate                                           4.13%              2.1%
Expected years until exercise                           9.614               3.0
Expected stock volatility                               100.0%            100.0%
Dividend yield                                             --                --
                                                      =======           =======

Loss Per Share

Loss per common share is calculated in accordance with SFAS No. 128, Earnings
Per Share. 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:

                                                     2004                2003
                                                   ----------         ----------
Options                                             1,118,000            365,000
Warrants                                           18,151,891          6,780,237
Convertible preferred stock                                --         12,500,000
                                                   ----------         ----------

                                                   19,269,891         19,645,237
                                                   ==========         ==========


                                      F-16
<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
SFAS 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, amortization and impairment
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 $7,689,060 and $4,045,673 for the years ending December 31,
2004 and 2003, respectively; and $22,728,050 for the period from March 12, 2001
(date of inception) to December 31, 2004.

Included in this amount were payments to related parties (see Note 11). Also
included in the December 31, 2004 and for the period from March 12, 2001 (date
of inception) to December 31, 2004 amount is an impairment of intangible assets
of $2,797,612. (see Note 5).

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), Share-Based Payment, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS 123(R) supersedes Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Generally, the approach in SFAS 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. Statement 123(R) must be adopted no
later than January 1, 2006 and early adoption is permitted in periods in which
financial statements have not yet been issued.

As required, the Company will adopt SFAS No. 123(R) no later than January 1,
2006. Under SFAS No. 123(R), the Company may either recognize compensation cost
for share-based payments to employees based on the grant-date fair value from
the beginning of the period in which the provisions are first applied, without
restating periods prior to adoption, or may elect to restate prior periods by
recognizing compensation costs in the amounts previously reported in the
pro-forma footnote disclosures under the provisions of SFAS 123. The Company is
evaluating the impact of the two adoption methods and as yet has not determined
which method we will utilize.

The Company cannot estimate the impact of adopting Statement No. 123(R) because
it will depend on levels of share-based payments granted in the future but,
based solely upon the pro-forma disclosures for prior periods, we believe that
the impact will not be material to our results of operations.

NOTE 3 - GOING CONCERN

The Company incurred net losses to common stockholders of $20,037,568 and
$49,702,357 for the year ended December 31, 2004 and for the period March 12,
2001 (date of inception) to December 31, 2004, respectively. Included in these
net losses were non-cash preferred stock dividends generated from beneficial
conversion features of preferred stock in the amounts of $10,750,000 for the
year ended December 31, 2004 and $22,218,750 in the cumulative net loss (see
Note 8).

The Company estimates it has sufficient funds to meet operating expenses and
capital requirements through the end of the second quarter of 2005.


                                      F-17
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 3 - GOING CONCERN (Continued)

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 2005 and beyond. 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.

The Company is currently analyzing the data from its Phase II study to
understand why the results differ from the long-term improvement of the more
than 2,700 patients who were treated with Psoraxine in pre-clinical studies and
whether a different approach, including evaluating a longer course of therapy
and/or modifications to the formulation, may yield 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.

Management plans to raise additional capital through private placement equity
offerings in 2005. These funds, in addition to its cash held at December 31,
2004, will be needed in order to finance the Company's currently anticipated
needs for operating and capital expenditures for 2005, including the cost to
evaluate the results of the Phase II study, 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 raising
capital through debt and 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 likely be
required to delay development of its products, alter its business plan, or in
the extreme situation, cease operations. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

NOTE 4 - MARKETABLE SECURITIES

The Company's marketable equity securities consisted of certificates of deposit,
fixed income funds that have a readily determinable fair market value.
Management determines the appropriate classifications of its investments using
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
at the time of purchase, and re-evaluates such determinations at each balance
sheet date.

The securities reflected in these financial statements are deemed by management
to be "available-for-sale" and, accordingly, are reported at fair value, with
unrealized gains and losses reported in other comprehensive income and reflected
as a separate component within the Stockholder's Equity section of the balance
sheets. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the specification
method.

The Company had no available for sale securities as of December 31, 2004.


                                      F-18
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 4 - MARKETABLE SECURITIES (Continued)

As of December 31, 2003, available-for-sale securities consist of the following:

<TABLE>
<CAPTION>
                                                              Gross            Gross
                                           Amortized        Unrealized      Unrealized
                             Due              Cost             Loss            Gains         Fair Value
                         -----------      -----------      -----------      -----------     -----------
<S>                        <C>            <C>              <C>              <C>             <C>
Fixed Income Fund          Current        $ 1,401,872      $   (27,740)     $        42     $ 1,374,174
                                          -----------      -----------      -----------     -----------

                                          $ 1,401,872      $   (27,740)     $        42     $ 1,374,174
                                          ===========      ===========      ===========     ===========
</TABLE>

The Company's investment income (loss) consists of:

                                                       Years Ended December 31,
                                                      -------------------------
                                                        2004            2003
                                                      ---------       ---------

Interest income                                       $ 127,409       $ 120,668

Realized loss from disposal of securities              (128,131)        (23,760)
Bad debt expense                                             --         (36,890)
                                                      ---------       ---------

                                                      $    (722)      $  60,018
                                                      =========       =========

NOTE 5 - 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. In addition, any use of the
delivery systems after December 10, 2008 will need to be negotiated under a new
licensing agreement at that time.

Management has taken the position that the technology access option fee is a
license fee which allows the Company, prior to commercialization of its drugs,
to utilize the established delivery system technologies of SkyePharma to test
for viability and enhancement of the Company's Psoraxine vaccine. In accordance
with Financial Accounting Standard No. 2 - Research and Development Costs ("SFAS
No. 2"), the Company has capitalized the technology access option as a research
and development intangible asset and is amortizing it over its seven-year life.
The Company evaluates this intangible annually for impairment under SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company
has determined that as of December 31, 2004, the technology access option fee
exceeded its fair market value and consequently the Company recorded impairment
charges in the amount of $2,797,612 in 2004.


                                      F-19
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 5 - INTANGIBLE ASSETS - (Continued)

The Company has amortized $6,362 and $2,892 of patent costs and $714,288 and
$714,288 of the cost of the technology option license in 2004 and 2003,
respectively. The amortization and impairment related to the technology option
license is recorded as research and development cost as required by SFAS No. 2.

Intangible assets consisted of the following at December 31,

                                                   2004                 2003
                                                -----------         -----------

Patent                                          $   130,109         $   100,464

Technology access fee                             5,000,000           5,000,000

Less impairment                                  (2,797,612)                 --

Less accumulated amortization                    (2,214,574)         (1,493,924)
                                                -----------         -----------

                                                $   117,923         $ 3,606,540
                                                ===========         ===========

Amortization expense related to the patents is expected to be approximately
$6,400 per year for each of the succeeding five years.

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31,

                                                        2004            2003
                                                      ---------       ---------

Furniture and Fixtures                                $  28,281       $  28,281
Computer Equipment                                       30,477          21,803
Leasehold Improvements                                  199,741         196,544
Lab Equipment                                           299,066         236,781
Automobiles                                                  --           8,945
                                                      ---------       ---------
                                                      $ 557,565       $ 492,354

Accumulated depreciation and amortization              (343,425)       (199,305)
                                                      ---------       ---------

                                                      $ 214,140       $ 293,049
                                                      =========       =========

Depreciation expense amounted to $147,252 and $130,574 for the years ended
December 31, 2004 and 2003, respectively. The depreciation related to the
Company's laboratory and related equipment is recorded as research and
development as required by SFAS No. 2.


                                      F-20
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 7 - 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>
                                                                    December 31,
                                                               2004             2003
                                                           ------------     ------------
<S>                                                        <C>              <C>
Deferred tax assets :
    Prepaid research and development                       $         --     $    798,800
    Deferred compensation                                        76,500           77,000
    Accumulated depreciation and amortization                 1,613,200          332,000
    Research and development credits carryforward             1,974,300        1,125,400
    Federal and state deferred tax benefit arising from
     net operating loss carryforwards                         8,370,600        5,612,500
                                                           ------------     ------------
                                                             12,034,600        7,945,700

Less valuation allowance                                    (12,034,600)      (7,945,700)
                                                           ------------     ------------

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

As of December 31, 2004, the Company had losses, which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $22,000,000 that
may be offset against future taxable income. These carryforwards start to expire
in 2021. The Company generated federal research and development credits of
$1,350,300 that will start to expire in 2021 and state credits of $624,000 that
will start to 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
$12,034,600 and $7,945,700 as of December 31, 2004 and 2003.

In 2004 and 2003, the Company sold $3,791,489 and $2,863,511, 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 $293,461 and $221,600, 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 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.


                                      F-21
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 7 - INCOME TAXES (Continued)

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>
                                                                        December 31,
                                                                   2004             2003
                                                               -----------      -----------
<S>                                                            <C>              <C>
Federal income tax benefit at statutory rate                   $ 3,257,550      $ 1,802,700
State income tax benefit (net of effect of federal benefit)        446,600          296,300
Non-deductible expenses                                           (170,650)        (130,300)
Research and development credit                                    848,900          688,200
Valuation allowance before realization of state benefit         (4,382,400)      (2,656,900)
Benefit from sale of state net operating loss                      293,500          221,600
                                                               -----------      -----------

    Income Tax Benefit                                         $   293,500      $   221,600
                                                               ===========      ===========

    Effective Income Tax Rate                                           (9%)            (13%)
                                                               ===========      ===========
</TABLE>

NOTE 8 - CAPITAL STOCK ACTIVITY

Common Stock

In 2001 Astralis LLC 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.


                                      F-22
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)

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.

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.


                                      F-23
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)

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.

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.

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.


                                      F-24
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)

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. 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.

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.

In the first quarter of 2005 SkyePharma purchased the outstanding stock,
11,160,000 shares, and related rights from Mike Ajnsztajn and Gaston Liebhaber.
Consequently, as of March 3, 2005 SkyePharma owns approximately 49.8% of the
Company's outstanding common stock.

Stock Warrants

At December 31, 2004, the Company had the following outstanding common stock
warrants to purchase its securities:

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

                                              18,151,891           $0.50 - $4.00
                                           =============           =============

These warrants were primarily issued in connection with the exchange with
Astralis, LLC and the private placement offering.

NOTE 9 - 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.


                                      F-25
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 9 - STOCK OPTION PLAN - (Continued)

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.

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.

NOTE 10 - DEFERRED COMPENSATION

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

                                                          2004           2003
                                                        --------       --------
Balance at January 1                                    $  4,822       $ 12,164
Deferred compensation recorded                                --             --
Fair value adjustments                                        --         18,321
Amortization to stock-based compensation                  (4,822)       (25,663)
                                                        --------       --------

Balance at December 31                                  $     --       $  4,822
                                                        ========       ========


                                      F-26
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 10 - DEFERRED COMPENSATION - (Continued)

Exercise prices for stock options outstanding as of December 31, 2004 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>
$ 0.45                    25,000               3.25 years                   --          $ 0.45
$ 0.70                   728,000                 10 years              728,000          $ 0.70
$ 1.00                    50,000                3.5 years               12,500          $ 1.00
$ 2.50 - 2.75            315,000                1.08 year              315,000          $ 2.74
</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, 2004 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            2.1% - 4.19%
         Expected life                      1 - 10 years
         Dividend yield                           --

NOTE 11 - 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.

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 8).

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


                                      F-27
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 11 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS (Continued)

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 cost basis exceeded its fair value under the FAS No. 144
test as of December 31, 2004 and consequently the Company recorded an impairment
charge of $2,797,612 in relation to the option (see Note 5).

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 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 was expensed during the remaining period of the
amended service agreement, In 2004 and 2003, the Company expensed $1,007,500 and
$1,007,500, respectively, 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 March 7, 2005, SkyePharma owns approximately 49.8% 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.

NOTE 12 - 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 2003 and 2004, the Company leased two apartments and an automobile for
two different key employees, one of whom is an officer. One of the leases
terminated in August 2004. As of December 31, 2004, the Company had one lease
outstanding for an apartment of a key employee and one auto lease outstanding.


                                      F-28
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 12 - OPERATING LEASES (Continued)

The Company incurred rent expense in the amount of $128,443 and $137,070 for
2004 and 2003, respectively.

The following is a schedule by year of future minimum rental payments required
under operating leases, as of December 31, 2004:

                  Year Ending December 31:
                      2005                                  $ 58,835
                      2006                                     1,908
                      2007                                     1,113

NOTE 13 - 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,
                                                     -----------------------------
                                                         2004             2003
                                                     ------------     ------------
<S>                                                  <C>              <C>
Net loss to common stockholders                      $(20,037,568)    $ (5,080,427)
                                                     ------------     ------------

Unrealized gain (loss) on securities:
   Unrealized gain (loss) arising during period                --          (26,245)
    Reclassification adjustment for loss realized
      in net loss                                          27,698           13,728
                                                     ------------     ------------

Unrealized gain (loss), net                                27,698          (12,517)
                                                     ------------     ------------

 Comprehensive loss                                  $(20,009,870)    $ (5,092,944)
                                                     ============     ============
</TABLE>

NOTE 14 - 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.

NOTE 15 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

The Company did not pay any interest or taxes in 2004 or 2003.

NOTE 16 - SUBSEQUENT EVENTS

In January 2005, the Company entered into an Employment Agreement with the newly
hired Chief Executive Officer of the Company. The agreement is for a term of two
years and will be automatically renewed for an unlimited number of additional
terms of one year each unless either party provides written notice of
termination at least ninety days prior to the end of such term.


                                      F-29
<PAGE>

                                  ASTRALIS LTD.
                          (A Development Stage Entity)
                          Notes to Financial Statements

NOTE 16 - SUBSEQUENT EVENTS (Continued)

In January 2005, the Company issued 100,000 shares of the Company's common stock
along with 728,000 options to a newly hired officer of the Company. The options
were issued with an exercise price of $0.70 per share and vest equally over four
years, with a term of ten years.

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 our 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
thereby providing inconclusive results. In the study, Psoraxine was found to be
safe and well tolerated.

The Company is currently analyzing the data from the Phase II study to
understand why the results differ from the long-term improvement of the more
than 2,700 patients who were treated with Psoraxine in pre-clinical studies and
whether a different approach, including evaluating a longer course of therapy
and/or modifications to the formulation, may yield an outcome that is more
consistent with results from pre-clinical studies.


                                      F-30