**UNITED STATES**

**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 May 31, 2007**
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE                        SECURITIES EXCHANGE ACT OF 1934 |
|---|-----------------------------------------------------------------------------------------------------------|

For            the transition period from o to            o

Commission file number  333-130729
| **ARTHRO                        PHARMACEUTICALS INC.**(name of small business issuer in its charter)             |
|------------------------------------------------------------------------------------------------------------------|
| **Nevada**(State or other jurisdiction of incorporation or                        organization)                  |   | **98-040762**(I.R.S. Employer Identification No.) |
| **3316 West                        1st Avenue****Vancouver, BC, Canada**(Address of principal executive offices) |   | **V6R 1G4**(Zip Code) |

Issuer's telephone number**604.732.8455**

Securities registered pursuant to Section 12(b) of the Act:
| Title of each                        classNil |   | Name of each                        exchange on which registeredNil |
|-----------------------------------------------|--------|---------------------------------------------------------------------|

Securities registered pursuant to Section 12(g) of the Act:
| **Common                        Stock, par value $0.001**(Title of class) |
|---------------------------------------------------------------------------|

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

**Note:**Checking the box above will not            relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the            Exchange act from their obligations under those Sections.

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            if there is no disclosure of delinquent filers in response to Item 405 of Regulation            S-B 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. [            ]

 

 

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

State Issuer's revenues for its most recent fiscal year: $Nil

State            the aggregate market value of the voting and non-voting common equity held by            non-affiliates computed by reference to the price at which the common equity was sold,            or the average bid and asked price of such common equity, as of a specified date within            the past 60 days:

**1,970,909 common shares at $0.035(1) =            $68,981.82**

(1) The aggregate market value of the voting stock held by            non-affiliates is computed by reference to the last reported sale price of our stock            which was $0.035 per share.

**(APPLICABLE ONLY TO CORPORATE REGISTRANTS)**

State            the number of shares outstanding of each of the Issuer's classes of common equity, as            of the latest practicable date.

6,970,909 common shares issued and outstanding as of August 16,            2007

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

Transitional Small Business Disclosure Format (Check one): Yes            o Nox

 

 

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**PART I**

**Item 1. Description of Business.**

This annual report contains forward-looking statements as that term is            defined in Section 27A of the United States Securities Act of 1933 and Section 21E of            the Securities and Exchange Act of 1934. These statements relate to future events or            our future financial performance. In some cases, you can identify forward-looking            statements by terminology such as "may", "should", "expects", "plans", "anticipates",            "believes", "estimates", "predicts", "potential" or "continue" or the negative of these            terms or other comparable terminology. These statements are only predictions and            involve known and unknown risks, uncertainties and other factors, including the risks            in the section entitled "Risk Factors", that may cause our or our industry's actual            results, levels of activity, performance or achievements to be materially different            from any future results, levels of activity, performance or achievements expressed or            implied by these forward-looking statements.

Although we believe that the expectations reflected in the            forward-looking statements are reasonable, we cannot guarantee future results, levels            of activity, performance or achievements. Except as required by applicable law,            including the securities laws of the United States, we do not intend to update any of            the forward-looking statements to conform these statements to actual            results.

Our financial statements are stated in United States dollars and are            prepared in accordance with United States generally accepted accounting            principles.

In this annual report, unless otherwise specified, all dollar amounts            are expressed in United States dollars. As used in this annual report, the terms "we",            "us", "our", and "Arthro" mean Arthro Pharmaceuticals Inc., unless otherwise            indicated.

*General*

We were incorporated on October 27, 2004, in the State of Nevada. Our             principal  offices  are  located  at  3316 West            1st Avenue, Vancouver, British Columbia, Canada, V6R  1G4.  Our            phone number is 604.732.8455.

Effective November 8, 2004, we entered into a licensing agreement for            the exclusive rights to manufacture, market, distribute and sell the arthritic pain            reliever, Arthrospray, in the United States of America and its territories.

Arthrospray is a non-prescription, topical arthritic pain reliever            formulated to penetrate the skin to provide fast, soothing relief from arthritic pain.            All active ingredients are exempt from new drug status by the Food and Drug            Administration (FDA) for the purposes of providing topical arthritic pain relief. Our            plan was to manufacture, market and distribute Arthrospray in the U.S. and its            territories. Management did have some success working on product label design, sourcing            third party liquid drug manufacturers and sourcing potential on-line distribution            partners during the past year.

There have been recent developments in arthritic pain relief that may            have a significant negative effect on our company's ability to successfully compete in            this market. These developments include the administration of the drugs Mabthera,            Toulizunab and Orencia, which the Medical University of Vienna used in clinical trials.            These drugs were shown to diminish signs and symptoms of rheumatoid arthritis, improve            physical function and health status and retard progression of joint damage. These            drugs, if successfully brought to market, would be far superior to topical pain            relievers. Therefore, as a result of the recent developments in the treatment of            arthritic and rheumatic pain, the long lead time and significant expense to become a            public company, which was necessary to begin seeking capital to implement our business            plan, we are actively seeking to create shareholder value by searching for alternative            business opportunities. Accordingly, we determined that this asset was impaired and            wrote down the value of the license agreement on our balance sheet from $2,000 to its            fair value of $1.00. We can provide no assurance that we will be able to locate any            such business opportunities.

We are currently seeking business opportunities with established            business entities for the merger of a target business with our company. In certain            instances, a target business may wish to become a subsidiary of our company or may wish            to contribute assets to our company rather than merge. We anticipate that any new            acquisition or business opportunities by our company will require additional financing.            There can be no assurance, however, that

 

 

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we            will be able to acquire the financing necessary to enable us to pursue our plan of            operation. If our company requires additional financing and we are unable to acquire            such funds, our business may fail.

We may seek a business opportunity with entities who have recently            commenced operations, or entities who wish to utilize the public marketplace in order            to raise additional capital in order to expand business development activities, to            develop a new product or service, or for other corporate purposes. We may acquire            assets and establish wholly-owned subsidiaries in various businesses or acquire            existing businesses as subsidiaries.

In implementing a structure for a particular business acquisition or            opportunity, we may become a party to a merger, consolidation, reorganization, joint            venture, or licensing agreement with another corporation or entity. We may also acquire            stock or assets of an existing business. Upon the consummation of a transaction, it is            likely that our present management will no longer be in control of our company. In            addition, it is likely that our officers and directors will, as part of the terms of            the acquisition transaction, resign and be replaced by one or more new officers and            directors.

The search for and analysis of new business opportunities will be            undertaken by our president, Peter Hughes, who is not a professional business analyst.            In seeking or analyzing prospective business opportunities, Mr. Hughes may utilize the            services of outside consultants or advisors.

As of the date hereof, management has not entered into any formal            written agreements for a business combination or opportunity. When any such agreement            is reached, we intend to disclose such an agreement by filing a current report on Form            8-K with the Securities and Exchange Commission.

We anticipate that the selection of a business opportunity in which to            participate will be complex and without certainty of success. Management believes that            there are numerous firms in various industries seeking the perceived benefits of being            a publicly registered corporation. Business opportunities may be available in many            different industries and at various stages of development, all of which will make the            task of comparative investigation and analysis of such business opportunities extremely            difficult and complex. We can provide no assurance that we will be able to locate            compatible business opportunities.

We have not been successful raising the funding necessary to proceed            with our business plan. Historically, we have been able to raise a limited amount of            capital through private placements of our equity stock, but we are uncertain about our            continued ability to raise funds privately. Further, we believe that our company may            have difficulties raising capital until we locate a prospective business opportunity            through which we can pursue our plan of operation. If we are unable to secure adequate            capital to continue our acquisition efforts, our shareholders may lose some or all of            their investment and our business may fail.

*Competition*

We are, and will continue to be, an insignificant participant seeking a            suitable business opportunity or business combination. A large number of established            and well-financed entities, including venture capital firms, are active in seeking            suitable business opportunities or business combinations which may also be desirable            target candidates for our company.  Virtually all such entities have significantly            greater financial resources, technical expertise and managerial capabilities than our            company.  Consequently, we are at a competitive disadvantage in identifying            possible business opportunities and completing a business combination.  In            addition, we will also compete with numerous other small public companies seeking            suitable business opportunities or business combinations.

*Employees*

We have no employees. In seeking or analyzing prospective business            opportunities, our president, Peter Hughes, may utilize the services of outside            consultants or advisors.

RISK FACTORS

Much of the information included in this annual report includes or is            based upon estimates, projections or other "forward-looking statements". Such            forward-looking statements include any projections or estimates made by us and our            management in connection with our business operations. While these forward-looking            statements, and

 

 

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any            assumptions upon which they are based, are made in good faith and reflect our current            judgment regarding the direction of our business, actual results will almost always            vary, sometimes materially, from any estimates, predictions, projections, assumptions,            or other future performance suggested herein. We undertake no obligation to update            forward-looking statements to reflect events or circumstances occurring after the date            of such statements.

Such estimates, projections or other "forward-looking statements"            involve various risks and uncertainties as outlined below. We caution readers of this            annual report that important factors in some cases have affected and, in the future,            could materially affect actual results and cause actual results to differ materially            from the results expressed in any such estimates, projections or other "forward-looking            statements". In evaluating us, our business and any investment in our business, readers            should carefully consider the following factors.

*We            are a development stage company with a limited operating history that makes it            impossible to reliably predict future growth and operating results.*

We have not been able to achieve profitable operations and there are no            assurances that we will be able to do so in the future. Potential investors should be            aware of the difficulties normally encountered by a new enterprise and the high rate of            failure of such enterprises. The potential for future success must be considered in            light of the problems, expenses, difficulties, complications and delays encountered in            connection with the development of a business in general. There is no history upon            which to base any assumption as to the likelihood that we will prove successful, and            there can be no assurance that we will generate significant operating revenues in the            future or ever achieve profitable operations.

*We            have no agreement for a business combination or other transaction and there can be no            assurance that we will be able to successfully identify and evaluate a suitable            business opportunity.*

As at the date of this report, we have no agreement with respect to            acquiring a business opportunity or engaging in a business combination with any private            entity.  The success of our company following an entry into any business            opportunity or business combination will depend to a great extent on the operations,            financial condition and management of any identified business opportunity.  While            management intends to seek business opportunities and/or business combinations with            entities with established operating histories, there is no assurance that we will            successfully locate business opportunities meeting such criteria.  In the event            that we complete a business combination or otherwise acquire a business opportunity,            the success of our operations may be dependent upon management of the successor firm or            venture partner firm, together with a number of other factors beyond our            control.

*As            there are a large number of established and well-financed entities actively seeking            suitable business opportunities and business combinations, we are at a competitive            disadvantage in identifying and completing such opportunities.*

We are, and will continue to be, an insignificant participant seeking a            suitable business opportunity or business combination.  A large number of            established and well-financed entities, including venture capital firms, are active in            seeking suitable business opportunities or business combinations which may also be            desirable target candidates for our company.  Virtually all such entities have            significantly greater financial resources, technical expertise and managerial            capabilities than our company.  Consequently, we are at a competitive disadvantage            in identifying possible business opportunities and completing a business combination.             In addition, we will also compete with numerous other small public companies            seeking suitable business opportunities or business combinations.

*Upon completion of a business opportunity or combination, there can            be no assurance that we will be able to successfully manage or achieve growth of that            business opportunity or combination.*

Our ability to achieve growth upon the acquisition of a suitable            business opportunity or business combination will be dependent upon a number of factors            including our ability to hire and train management and other employees and the adequacy            of our financial resources.  There can be no assurance that we will be able to            successfully manage any business opportunity or business combination. Failure to manage            anticipated growth effectively and efficiently could have a material adverse effect on            our company.

 

 

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*If            we complete a business opportunity or combination, management of our company may be            required to sell or transfer common shares and resign as members of our board of            directors.*

A business combination or acquisition of a business opportunity            involving the issuance of our common shares may result in new shareholders obtaining a            controlling interest in our company.  Any such business combination or acquisition            of a business opportunity may require management of our company to sell or transfer all            or a portion of the shares they hold in our company and require such individuals to            resign as members of our board. The resulting change in control of our company could            result in the removal of one or more of our present officers and directors and a            corresponding reduction in or elimination of their participation in the future affairs            of our company.

*If            we complete a business opportunity or combination, we may be required to issue a            substantial number of common shares which would dilute the shareholdings of our current            shareholders and result in a change of control of our company.*

We may pursue the acquisition of a business opportunity or a business            combination with a private company.  The likely result of such a transaction would            result in our company issuing common shares to shareholders of such private company.             Issuing previously authorized and unissued common shares in the capital of our            company will reduce the percentage of common shares owned by existing shareholders and            may result in a change in the control of our company and our management.

*Our            common stock is illiquid and shareholders may be unable to sell their            shares.*

There is currently a no market for our common stock and we can provide            no assurance to investors that a market will develop.  If a market for our common            stock does not develop, our shareholders may not be able to re-sell the shares of our            common stock that they have purchased and they may lose all of their investment.             Public announcements regarding our company, changes in government regulations,            conditions in our market segment or changes in earnings estimates by analysts may cause            the price of our common shares to fluctuate substantially. These fluctuations may            adversely affect the trading price of our common shares.

*We            may be unsuccessful at identifying, acquiring and operating suitable business            opportunities and if we are unable to find, acquire or operate a suitable opportunity            for our company, we may never achieve profitable operations.*

We may not be able to find the right business opportunity for our            company to become engaged in or we may not succeed in becoming engaged in the business            opportunity we choose because we may not act fast enough or have enough money or other            attributes to attract the new business opportunity.  Before we begin to have any            significant operations, we will have to become involved in a viable business            opportunity.  In addition, in order to be profitable, we will have to, among other            things, hire consultants and employees, develop products and/or services, market our            products/services, ensure supply and develop a customer base.  There is no            assurance that we will be able to identify, negotiate, acquire and develop a business            opportunity and we may never be profitable.

**RISKS RELATED TO OUR COMMON STOCK**

*Our            stock is a penny stock.* *Trading of our stock may be restricted by the Securities and Exchange            Commission's penny stock regulations which may limit a stockholder's ability to buy and            sell our stock.*

Our stock is a penny stock.  The Securities and Exchange Commission            has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security            that has a market price (as defined) less than $5.00 per share or an exercise price of            less than $5.00 per share, subject to certain exceptions.  Our securities are            covered by the penny stock rules, which impose additional sales practice requirements            on broker-dealers who sell to persons other than established customers and "accredited            investors".  The term "accredited investor" refers generally to institutions with            assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000            or annual income exceeding $200,000 or $300,000 jointly with their spouse.  The            penny stock rules require a broker-dealer, prior to a transaction in a penny stock not            otherwise exempt from the rules, to deliver a standardized risk disclosure document in            a form prepared by the Securities and Exchange Commission which provides information            about penny stocks and the nature and level of risks in the penny stock market.             The broker-dealer also must provide the customer with current bid and offer            quotations for the penny stock, the compensation of the broker-dealer and its            salesperson in the transaction and monthly account statements showing the market value            of each penny stock held in the

 

 

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customer's account.  The bid and offer quotations, and the            broker-dealer and salesperson compensation information, must be given to the customer            orally or in writing prior to effecting the transaction and must be given to the            customer in writing before or with the customer's confirmation.  In addition, the            penny stock rules require that prior to a transaction in a penny stock not otherwise            exempt from these rules, the broker-dealer must make a special written determination             that  the  penny stock is a  suitable  investment for the             purchaser and receive the purchaser's written agreement to the transaction.             These disclosure requirements may have the effect of reducing the level of            trading activity in the secondary market for the stock that is subject to these penny            stock rules.  Consequently, these penny stock rules may affect the ability of            broker-dealers to trade our securities.  We believe that the penny stock rules            discourage investor interest in and limit the marketability of our common            stock.

*The            National Association of Securities Dealers, or NASD, has adopted sales practice            requirements which may also limit a stockholder's ability to buy and sell our            stock.*

In addition to the "penny stock" rules described above, the NASD has            adopted rules that require that in recommending an investment to a customer, a            broker-dealer must have reasonable grounds for believing that the investment is            suitable for that customer.  Prior to recommending speculative low priced            securities to their non-institutional customers, broker-dealers must make reasonable            efforts to obtain information about the customer's financial status, tax status,            investment objectives and other information.  Under interpretations of these            rules, the NASD believes that there is a high probability that speculative low priced            securities will not be suitable for at least some customers.  The NASD            requirements make it more difficult for broker-dealers to recommend that their            customers buy our common stock, which may limit your ability to buy and sell our stock            and have an adverse effect on the market for our shares.

**Item 2. Description of Property.**

We do not own or lease any real property. Our principal executive            offices are controlled by Ms. Celine Totman, our secretary and director, at 3316 West            1st Avenue, Vancouver, British Columbia, Canada, V6R 1G4. We pay $400.00 per            month to Ms. Totman pursuant to a one year rental agreement dated December 1, 2004. The            agreement was renewed on December 1, 2006 and accrues monthly. We believe our current            premises are adequate for our current operations and we do not anticipate that we will            require any additional premises in the foreseeable future.

**Item 3. Legal Proceedings.**

We know of no material, existing or pending legal proceedings against            our company, nor are we involved as a plaintiff in any material proceeding or pending            litigation. There are no proceedings in which any of our directors, officers or            affiliates, or any registered or beneficial shareholder, is an adverse party or has a            material interest adverse to our interest.

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

None.

**PART II**

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

Our common shares were approved for quotation on the OTC Bulletin Board            on April 16, 2007 under the symbol "AROP". There have not been any sales of our stock            on the OTC Bulletin Board.

On August 16, 2007, the shareholders' list of our common shares showed            33 registered shareholders and 6,970,909 common shares issued and            outstanding.

We have not declared any dividends since incorporation and do not            anticipate that we will do so in the foreseeable future. Although there are no            restrictions that limit the ability to pay dividends on our common shares, our            intention is to retain future earnings for use in our operations and the expansion of            our business.

 

 

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*Recent Sales of Unregistered Securities*

We did not issue any equity securities during the year ended May 31,            2007 that were not otherwise reported in a quarterly report filed on Form 10-QSB or in            a current report filed on Form 8-K.

*Equity Compensation Plan Information*

We do not have any equity compensation plans in place.

*Purchases of Equity Securities by the Issuer and Affiliated            Purchasers*

We did not purchase any of our shares of common stock or other            securities during our fiscal year ended May 31, 2007.

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

The following discussion should be read in conjunction with our            financial statements and the related notes that appear elsewhere in this annual report.            The following discussion contains forward-looking statements that reflect our plans,            estimates and beliefs. Our actual results could differ materially from those discussed            in the forward looking statements. Factors that could cause or contribute to such            differences include those discussed below and elsewhere in this annual report,            particularly in the section entitled "Risk Factors" beginning on page 4 of this annual            report.

Our consolidated audited financial statements are stated in United            States dollars and are prepared in accordance with United States generally accepted            accounting principles.

*Corporate History*

We were incorporated on October 27, 2004, in the State of Nevada. Our             principal  offices  are  located  at  3316 West            1st Avenue, Vancouver, British Columbia, Canada, V6R  1G4.  Our            phone number is 604.732.8455.

Effective November 8, 2004, we entered into a licensing agreement for            the exclusive rights to manufacture, market, distribute and sell the arthritic pain            reliever, Arthrospray, in the United States of America and its territories.

*Plan of Operation*

There have been recent developments in arthritic pain relief that may            have a significant negative effect on our company's ability to successfully compete in            this market. Therefore, as a result of the recent developments (as discussed in            Item 1 of this annual report) in the treatment of arthritic and rheumatic pain,            the long lead time and significant expense to become a public company, which was            necessary to begin seeking capital to implement our business plan, we are actively            seeking to create shareholder value by searching for alternative business            opportunities. Accordingly, we determined that this asset was impaired and wrote down            the value of the license agreement on our balance sheet from $2,000 to its fair value            of $1.00.We can provide no assurance that we will be able to locate any such business            opportunities. 

We may seek a business opportunity with entities which have recently            commenced operations or wish to utilize the public marketplace in order to raise            additional capital in order to expand business development activities or develop a new            product or service. We may acquire assets and establish wholly-owned subsidiaries in            various businesses or acquire existing businesses as subsidiaries.  No assurances            can be given that we will be successful in locating or negotiating with any startups or            find any assets to acquire.

The search for and analysis of new business opportunities will be            undertaken by our current management who are not professional business analysts.             In seeking or analyzing prospective business opportunities, our management may utilize            the services of outside consultants or advisors.

Management does not have the capacity to conduct as extensive an            investigation of a target business as might be undertaken by a venture capital fund or            similar institution. As a result, management may elect to merge with a target business            which has one or more undiscovered shortcomings and may, if given the choice to            select

 

 

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among            target businesses, fail to enter into an agreement with the most investment-worthy            target business.  Likewise, no assurances can be given that we will be able to            enter into a business combination, as to the terms of a business combination, or as to            the nature of the target business.

As of the date hereof, management has not made any decisions concerning            or entered into any written agreements for a business combination. When any such            agreement is reached or other material fact occurs, we will file notice of such            agreement or fact with the Securities and Exchange Commission on Form 8-K. Persons            reading this report are advised to determine if we have subsequently filed a Form            8-K.

As of May 31, 2007, our company had cash of $1,720 and a working capital            deficiency of $76,811.  We anticipate that we will incur approximately $10,000            during the next twelve months in connection with our company locating, evaluating and            negotiating potential business opportunities through which to carry out an asset            acquisition or business combination.  We anticipate that we will incur additional            expenses if we are successful in locating a business opportunity and enter into an            agreement to acquire assets or carry out a business combination with a suitable target            company.  If we acquire assets, we will require significant funds to develop and            commercialize the products or technologies in addition to any acquisition costs that            may be incurred.  It is not possible to estimate such funding requirements until            such time as we enter into a definitive agreement.

In addition to the costs in locating and evaluating business            opportunities as set out above, we estimate our general operating expenses for the next            twelve month period to be as follows:
| Estimated                        General Operating Expenses During the Next Twelve Month                        Period |
|------------------------------------------------------------------------------------------------------------------------|
| Operating                        expenditures                                                                          |   |
| Professional Fees                                                                                                      | $20,000 |
| General and Administrative Expenses                                                                                    | $31,000 |
| Total                                                                                                                  | $51,000 |

*Employees*

Currently we have no employees. We anticipate that we will be conducting            most of our business through our management and any consultants which we may            engage.

*Professional Fees*

We expect to incur on-going legal, accounting and audit expenses to            comply with our reporting responsibilities as a public company under the United States            Securities Exchange Act of 1934, as amended.  We estimate such expenses for the            next fiscal year to be approximately $20,000.

*General and Administrative Expenses*

We anticipate spending $31,000 on general and administrative costs in            the next twelve month period.  These costs primarily consist of expenses such as            office supplies and office equipment.

To date, we have had negative cash flows from operations and we have            been dependent on sales of our equity securities and debt financing to meet our cash            requirements.  We expect this situation to continue for the foreseeable future.             We anticipate that we will have negative cash flows during the next twelve month            period.

We incurred a net loss of $54,657 for the year ended May 31, 2007.             As indicated above, we anticipate that our estimated working capital requirements            and projected operating expenses for the next twelve months will be $51,000, excluding            the costs associated with locating suitable business opportunities.  As we had a            working capital deficiency of $76,811 as of May 31, 2007, we will be required to raise            additional funds through the issuance of equity securities or through debt financing in            order to carry-out our plan of operations for the next twelve month period.  There            can be no assurance that we will be successful in raising the required capital or that            actual cash requirements will not exceed our estimates.

 

 

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Given that we have not generated any revenues to date, our cash            requirements are subject to numerous contingencies and risk factors beyond our control,            including operation and acquisition risks, competition from well-funded competitors,            and our ability to manage growth.  We can offer no assurance that our company will            generate cash flow sufficient to achieve profitable operations or that our expenses            will not exceed our projections.  If our expenses exceed estimates, we will            require additional monies during the next twelve months to execute our business            plan.

There are no assurances that we will be able to obtain funds required            for our continued operation.  There can be no assurance that additional financing            will be available to us when needed or, if available, that it can be obtained on            commercially reasonable terms.  If we are not able to obtain additional financing            on a timely basis, we will not be able to meet our other obligations as they become due            and we will be forced to scale down or perhaps even cease the operation of our            business.

There is substantial doubt about our ability to continue as a going            concern as the continuation of our business is dependent upon obtaining further            long-term financing, successful operation or successful development of a suitable            alternative business and, finally, achieving a profitable level of operations.             The issuance of additional equity securities by us could result in a significant            dilution in the equity interests of our current stockholders.  Obtaining            commercial loans, assuming those loans would be available, will increase our            liabilities and future cash commitments.

**CRITICAL ACCOUNTING POLICIES**

The preparation of financial statements in conformity with United States            generally accepted accounting principles requires management to make estimates and            assumptions that affect the amounts reported in the financial statements and            accompanying disclosures of our company.  Although these estimates are based on            management's knowledge of current events and actions that our company may undertake in            the future, actual results may differ from such estimates.

*Going Concern*

Due to the uncertainty of our ability to meet our current operating            expenses and the capital expenses noted above, in their report on the annual financial            statements for the year ended May 31, 2007, our independent auditors included an            explanatory paragraph regarding concerns about our ability to continue as a going            concern. Our financial statements contain additional note disclosures describing the            circumstances that lead to this disclosure by our independent auditors.

The continuation of our business is dependent upon us raising additional            financial support. The issuance of additional equity securities by us could result in a            significant dilution in the equity interests of our current stockholders. Obtaining            commercial loans, assuming those loans would be available, will increase our            liabilities and future cash commitments.

**NEW            ACCOUNTING PRONOUNCEMENTS**

We have determined that there were no new accounting pronouncements as            of August 14, 2007 which have a material effect on our company or our            operations.

**Item 7. Financial Statements.**

Our financial statements are stated in United States dollars, are            prepared in accordance with United States generally accepted accounting            principles.

It is the opinion of management that the audited financial statements            for the fiscal year ended May 31, 2007 include all adjustments necessary in order to            ensure that the audited financial statements are not misleading.

The following financial statements are filed as part of this annual            report:

Report of Independent Registered Public Accounting Firm of Amisano            Hanson, Chartered Accountants. for the audited financial statements for the year ended            May 31, 2007, dated July 27, 2007;

 

 

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|--------|--------|

 

 

Balance Sheets at May 31, 2007 and 2006;

Statements of Operations for the year ended May 31, 2007, May 31, 2006            and for the period October 27, 2004 (Date of Inception) to May 31, 2007;

Statements of Cash Flows for the year ended May 31, 2007, May 31, 2006            and for the period October 27, 2004 (Date of Inception) to May 31, 2007;

Statements of Stockholders Equity (Deficiency) for the period October            27, 2004 (Date of Inception) to May 31, 2007; and

Notes to the Consolidated Financial Statements.

 

 

----

- 12            -

 

 

 

 

 

 

 

 

 

 

 

 

**ARTHRO PHARMACEUTICALS, INC.**

(A            Development Stage Company)

REPORT AND FINANCIAL STATEMENTS

May            31, 2007 and 2006

(Stated in US            Dollars)

 

 

----

- 13            -

 

 

 

 

 

 

 
| **A PARTNERSHIPOFINCORPORATEDPROFESSIONALS** | **AMISANOHANSON**            |
|----------------------------------------------|------------------------------|
|                                         | **CHARTERED****ACCOUNTANTS** |

 

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To            the Stockholders,

Arthro Pharmaceuticals, Inc.

(A            Development Stage Company)

 

We            have audited the accompanying balance sheets of Arthro Pharmaceuticals, Inc. (A            Development Stage Company) as of May 31, 2007 and 2006 and the related statements of            operations, stockholders’ equity and cash flows for the years ended May 31, 2007            and 2006 and the period October 27, 2004 (Date of Inception) to May 31, 2007. 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 of America). Those standards require that we plan and            perform an 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, these financial statements referred to above present fairly, in all            material respects, the financial position of Arthro Pharmaceuticals Inc. as of May 31,            2007 and 2006 and the results of its operations and its cash flows for the year ended            May 31, 2007 and the period October 27, 2004 (Date of Inception) to May 31, 2007, in            conformity with accounting principles generally accepted in the United States of            America.

 

The            accompanying financial statements referred to above have been prepared assuming that            the Company will continue as a going concern. As discussed in Note 1 to the financial            statements, the Company is in the development stage, has no established sources of            revenue and is dependent on its ability to raise capital from shareholders or other            sources to sustain operations. These factors, along with other matters as set forth in            Note 1, raise substantial doubt that the Company will be able to continue as a going            concern. Management plans in regard to their planned financing and other matters are            described in Note 1. The financial statements do not include any adjustments that might            result from the outcome of these uncertainties.

 

 
| Vancouver, Canada | ***“AMISANO HANSON”*** |
|-------------------|------------------------------------|
| July 27, 2007     | Chartered Accountants              |

 

 
| 750 West Pender Street, Suite                        604                                                                                                                                       Telephone: 604-689-0188                                                                                                                                                                               |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Vancouver                        Canada                                                                                                                Facsimile:   604-689-9773                                                                              |
| V6C                        2T7                                                                                                                            E-MAIL:     amishan@telus.net |

 

 

 

 

 

----

- 14            -

 

 

**ARTHRO PHARMACEUTICALS, INC.**

(A            Development Stage Company)

BALANCE SHEETS

May            31, 2007 and 2006

(Stated in US            Dollars)

 

 
|                                             | 2007                                | 2006      |
|--------------------------------------------------|-------------------------------------|-----------|
| **ASSETS**                                       |
| Current                                          |                                |      |
| Cash                                             | $                                   | 1,720     | $ | 1,148 |
| Prepaid expense                                  |                                | 1,500     |   | 1,500 |
|                                             |                                |      |   |   |
|                                             |                                | 3,220     |   | 2,648 |
|                                             |                                |      |   |   |
| Equipment – Note 3                         |                                | 767       |   | 1,096 |
| License agreement – Note 4                 |                                | 1         |   | 2,000 |
|                                             |                                |      |   |   |
|                                             | $                                   | 3,988     | $ | 5,744 |
|                                             |                                |      |   |   |
| **LIABILITIES**                                  |
|                                             |                                |      |   |   |
| Current                                          |                                |      |   |   |
| Accounts payable and accrued liabilities         | $                                   | 12,951    | $ | 8,178 |
| Due to related parties – Note 7            |                                | 67,060    |   | 18,932 |
|                                             |                                |      |   |   |
|                                             |                                | 80,011    |   | 27,110 |
|                                             |                                |      |   |   |
| **STOCKHOLDERS’ DEFICIENCY**               |
|                                             |                                |      |   |   |
| Common stock                                     |                                |      |   |   |
| 75,000,000                                       | shares authorized, $0.001 par value |      |   |   |   |
| 6,970,909                                        | shares issued (2006: 6,970,909)     |      | 6,971 |   | 6,971 |
| Additional paid-in capital                       |                                | 66,990    |   | 66,990 |
| Deficit accumulated during the development stage |                                | (149,984) |   | (95,327) |
|                                             |                                |      |   |   |
|                                             |                                | (76,023)  |   | (21,366) |
|                                             |                                |      |   |   |
|                                             | $                                   | 3,988     | $ | 5,744 |

 

Nature            and Continuation of Operations – Note 1

Commitments – Note 8

Subsequent Event – Note 10

 

 

 

 

 

SEE            ACCOMPANYING NOTES

 

 

----

- 15            -

 

 

**ARTHRO PHARMACEUTICALS, INC.**

(A            Development Stage Company)

STATEMENTS OF OPERATIONS

for            the years ended May 31, 2007 and 2006 and

for            the period October 17, 2004 (Date of Inception) to May 31, 2007

(Stated in US            Dollars)

 

 
|                                           |        |          | October 27,   |
|------------------------------------------------|-------------|---------------|---------------|
|                                           |        |          | 2004 (Date of |
|                                           | Years ended | Inception) to |
|                                           | May 31,     | May 31,       |
|                                           | 2007        | 2006          | 2007          |
|                                           |        |          |          |
| Expenses                                       |        |          |          |
| Accounting and audit fees                      | $           | 18,432        | $             | 13,000 | $ | 36,432 |
| Depreciation                                   |        | 329           |          | 400 |   | 993 |
| Consulting fees                                |        | 2,000         |          | 14,750 |   | 26,750 |
| Filing fees                                    |        | 2,207         |          | 360 |   | 2,567 |
| Legal fees                                     |        | 752           |          | 3,500 |   | 4,252 |
| Management fees – Note 7                 |        | 24,000        |          | 24,000 |   | 60,000 |
| Office and administration                      |        | 138           |          | 3,138 |   | 5,391 |
| Rent – Note 7                            |        | 4,800         |          | 4,800 |   | 11,600 |
|                                           |        |          |          |   |   |   |
| Loss for the period before other item          |        | (52,658)      |          | (63,948) |   | (147,985) |
|                                           |        |          |          |   |   |   |
| Other item:                                    |        |          |          |   |   |   |
| Write-down of license agreement – Note 4 |        | (1,999)       |          | - |   | (1,999) |
|                                           |        |          |          |   |   |   |
| Net loss for the period                        | $           | (54,657)      | $             | (63,948) | $ | (149,984) |
|                                           |        |          |          |   |   |   |
| Basic and diluted loss per share               | $           | (0.01)        | $             | (0.01) |   |   |
|                                           |        |          |          |   |   |   |
| Weighted average number of shares outstanding  |        | 6,970,909     |          | 6,922,964 |   |   |
|                                           |        |          |          |   |   |   |

 

 

 

 

 

 

 

 

 

SEE            ACCOMPANYING NOTES

 

 

----

- 16            -

 

 

**ARTHRO PHARMACEUTICALS, INC.**

(A            Development Stage Company)

STATEMENTS OF CASH FLOWS

for            the years ended May 31, 2006 and 2007 and

for            the period October 17, 2004 (Date of Inception) to May 31, 2007

(Stated in US            Dollars)

 

 
|                                                                   |        |          | October 27,   |
|------------------------------------------------------------------------|-------------|---------------|---------------|
|                                                                   |        |          | 2004 (Date of |
|                                                                   | Years ended | Inception) to |
|                                                                   | May 31,     | May 31,       |
|                                                                   | 2007        | 2006          | 2007          |
|                                                                   |        |          |          |
| Operating Activities                                                   |        |          |          |
| Net loss for the period                                                | $           | (54,657)      | $             | (63,948) | $ | (149,984) |
| Add amounts not involving cash                                         |        |          |          |   |   |   |
| Depreciation                                                           |        | 329           |          | 400 |   | 993 |
| Consulting fees paid by stock                                          |        | -             |          | 1,750 |   | 1,750 |
| Write-down of license agreement                                        |        | 1,999         |          | - |   | 1,999 |
| Change in non-cash working capital balances related to operations |        |          |          |   |   |   |
| Prepaid expenses                                                       |        | -             |          | 900 |   | (1,500) |
| Accounts payable and accrued liabilities                               |        | 4,773         |          | 5,178 |   | 12,951 |
|                                                                   |        |          |          |   |   |   |
|                                                                   |        | (47,556)      |          | (55,720) |   | (133,791) |
|                                                                   |        |          |          |   |   |   |
| Investing Activity                                                     |        |          |          |   |   |   |
| Purchase of equipment                                                  |        | -             |          | - |   | (1,760) |
|                                                                   |        |          |          |   |   |   |
| Financing Activities                                                   |        |          |          |   |   |   |
| Issue of common stock                                                  |        | -             |          | - |   | 70,211 |
| Advances from related parties                                          |        | 48,128        |          | 18,932 |   | 67,060 |
|                                                                   |        |          |          |   |   |   |
|                                                                   |        | 48,128        |          | 18,932 |   | 137,271 |
|                                                                   |        |          |          |   |   |   |
| Increase (decrease) in cash during the period                          |        | 572           |          | (36,788) |   | 1,720 |
|                                                                   |        |          |          |   |   |   |
| Cash, beginning of the period                                          |        | 1,148         |          | 37,936 |   | - |
|                                                                   |        |          |          |   |   |   |
| Cash, end of the period                                                | $           | 1,720         | $             | 1,148 | $ | 1,720 |
|                                                                   |        |          |          |   |   |   |

Non-cash Transaction – Note 9

 

 

 

 

 

SEE            ACCOMPANYING NOTES

 

 

----

- 17            -

 

 

**ARTHRO PHARMACEUTICALS, INC.**

(A            Development Stage Company)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

for            the period October 27, 2004 (Date of Inception) to May 31, 2007

(Stated in US            Dollars)

 

 
|                           |          |      |        | Deficit     |   |
|--------------------------------|---------------|-----------|-------------|-------------|--------|
|                           |          |      |        | Accumulated |   |
|                           |          |      | Additional  | During the  |   |
|                           | Common Shares | Paid-in   | Development |        |
|                           | Number        | Par Value | Capital     | Stage       | Total  |
|                           |          |      |        |        |   |
| Balance, October 27, 2004      | -             | $         | -           | $           | -      | $ | - | $ | - |
| Issued for cash:               |          |      |        |        |   |   |   |   |   |
| for private placement          | - at $0.001   | 3,000,000 |        | 3,000       |   | - |   | - |   | 3,000 |
|                           | - at $0.035   | 1,920,909 |        | 1,921       |   | 65,290 |   | - |   | 67,211 |
| Issued for license agreement   | - at $0.001   | 2,000,000 |        | 2,000       |   | - |   | - |   | 2,000 |
| Net loss for the period        | -             |      | -           |        | -      |   | (31,379) |   | (31,379) |
|                           |          |      |        |        |   |   |   |   |   |
| Balance, May 31, 2005          | 6,920,909     |      | 6,921       |        | 65,290 |   | (31,379) |   | 40,832 |
| Issued for consulting services | - at $0.035   | 50,000    |        | 50          |   | 1,700 |   | - |   | 1,750 |
| Net loss for the year          | -             |      | -           |        | -      |   | (63,948) |   | (63,948) |
|                           |          |      |        |        |   |   |   |   |   |
| Balance, May 31, 2006          | 6,970,909     |      | 6,971       |        | 66,990 |   | (95,327) |   | (21,366) |
| Net loss for the year          | -             |      | -           |        | -      |   | (54,657) |   | (54,657) |
|                           |          |      |        |        |   |   |   |   |   |
| Balance, May 31, 2007          | 6,970,909     | $         | 6,971       | $           | 66,990 | $ | (149,984) | $ | (76,023) |
|                           |          |      |        |        |   |
|                                |               |           |             |             |        |  |  |  |  |  |  |  |

 

 

 

 

 

 

 

 

SEE            ACCOMPANYING NOTES

 

 

----

- 18            -

 

 

**ARTHRO PHARMACEUTICALS, INC.**

(A            Development Stage Company)

NOTES            TO THE FINANCIAL STATEMENTS

May            31, 2007 and 2006

(Stated in US            Dollars)

 

 
| Note 1 | Nature and Continuance of Operations |
|--------|--------------------------------------|

 

Arthro Pharmaceuticals Inc. (the “Company”) was incorporated            in the State of Nevada on October 27, 2004, and is in the development stage. On            November 8, 2004, the Company entered into a License Agreement to manufacture, market            and distribute an arthritic pain reliever under the name ‘Arthrospray’            (Note 4). The Company is also seeking alternative business opportunities.

 

These financial statements have been prepared in accordance with            generally accepted accounting principles applicable to a going concern, which assumes            that the Company will be able to meet its obligations and continue its operations for            its next fiscal year. Realization values may be substantially different from carrying            values as shown and these financial statements do not give effect to adjustments that            would be necessary to the carrying values and classification of assets and liabilities            should the Company be unable to continue as a going concern. At May 31, 2007, the            Company had not yet achieved profitable operations, has accumulated losses of $143,485            since its inception, has a working capital deficiency of $72,291 and expects to incur            further losses in the development of its business, all of which casts substantial doubt            about the Company’s ability to continue as a going concern. The Company’s            ability to continue as a going concern is dependent upon its ability to generate future            profitable operations and/or to obtain the necessary financing to meet its obligations            and repay its liabilities arising from normal business operations when they come            due.

 

Management plans to continue to provide for its capital needs during the            year ended May 31, 2008, by issuing equity securities or seeking short-tem loans            from its directors or officers.

 
| Note 2 | Summary of Significant Accounting Policies |
|--------|--------------------------------------------|

 

The financial statements of the Company have been prepared in accordance            with generally accepted accounting principles in the United States of America. Because            a precise determination of many assets and liabilities is dependent upon future events,            the preparation of financial statements for a period necessarily involves the use of            estimates, which have been made using careful judgement. Actual results may vary from            these estimates.

             

The financial statements have, in management’s opinion, been            properly prepared within the framework of the significant accounting policies            summarized below:

             

Development Stage Company

             

The Company complies with Financial Accounting Standard Board Statement            (“FAS”) No. 7 for its characterization of the Company as a development            stage company.

 

 

----

- 19            -

 

 

Arthro            Pharmaceuticals Inc.

(A            Development Stage Company)

Notes            to the Financial Statements

May 31,            2007 and 2006

(Stated in US            Dollars) – Page 2

 
| Note 2 | Summary of Significant Accounting Policies– (cont’d) |
|--------|------------------------------------------------------------------|

             

Foreign Currency Translation

             

The Company’s functional and reporting currency is the United            States dollar. Monetary assets and liabilities are translated into United States            dollars at the exchange rate in effect at the end of the period. Non-monetary assets            and liabilities are translated at the exchange rate prevailing when the assets were            acquired or the liabilities assumed. Revenues and expenses are translated at the rate            approximating the rate of exchange on the transaction date. All exchange gains and            losses on transactions denominated in currencies other than the functional currency are            included in the determination of net income (loss) for the period.

             

Basic and Diluted Loss Per Share

             

The Company reports basic loss per share in accordance with the FAS No.            128, “Earnings Per Share.” Basic loss per share is computed using the            weighted average number of shares outstanding during the period. The Company has no            dilutive potential common shares, which would give rise to calculation of diluted loss            per share.

             

Income Taxes

             

The Company uses the asset and liability method of accounting for income            taxes pursuant to FAS, No. 109 “Accounting for Income Taxes.” Under the            assets and liability method of FAS 109, deferred tax assets and liabilities are            recognized for the future tax consequences attributable to temporary differences            between the financial statements carrying amounts of existing assets and liabilities            and loss carryforwards and their respective tax bases. Deferred tax assets and            liabilities are measured using enacted tax rates expected to apply to taxable income in            the years in which those temporary differences are expected to be recovered or            settled.

             

Equipment

             

Equipment, which consists of computer equipment, is recorded at cost.            The Company provides for depreciation using a 30% declining balance annual            rate.

             

Additions during the year are amortized at one-half the annual            rate.

 

License Agreement

 

The License Agreement is recorded at cost. As the License Agreement has            an indefinite life, no amortization is provided. The License Agreement is reviewed            periodically for impairment of value. An impairment loss will be recognized when the            carrying value exceeds fair value.

 

 

 

----

- 20            -

 

 

Arthro            Pharmaceuticals Inc.

(A            Development Stage Company)

Notes            to the Financial Statements

May 31,            2007 and 2006

(Stated in US            Dollars) – Page 3

 

 
| Note 2 | Summary of Significant Accounting Policies– (cont’d) |
|--------|------------------------------------------------------------------|

 

Impairment of Long-lived Assets

             

Long-lived assets are reviewed for impairment in accordance with FAS No            144, “Accounting for the Impairment or Disposal of Long-lived Assets.”            Under FAS No. 144, these assets are tested for recoverability whenever events or            changes in circumstances indicate that their carrying amounts may not be recoverable.            An impairment charge is recognized for the amount, if any, which the carrying value of            the asset exceeds the fair value.

             

Financial Instruments

             

The carrying value of the Company’s financial instruments            consisting of cash, accounts payable and accrued liabilities and due to related parties            approximate their fair value due to the short-term maturity of such instruments. Unless            otherwise noted, it is management’s opinion that the Company is not exposed to            significant interest, currency or credit risks arising from these financial            instruments.

             

New Accounting Standards

             

In June 2006, the Financial Accounting Standards Board            (“FASB”) issued FAS Interpretation No. 48, “Accounting for            Uncertainty in Income Taxes”. The interpretation clarifies the accounting for            uncertainty in income taxes recognized in a company’s financial statements in            accordance with FAS No. 109, “Accounting for Income Taxes”. Specifically,            the pronouncement prescribes a recognition threshold and a measurement attribute for            the financial statement recognition and measurement of a tax position taken or expected            to be taken in a tax return. The interpretation also provides guidance on the related            derecognition, classification, interest and penalties, accounting for interim periods,            disclosure and transition of uncertain tax position. The interpretation is effective            for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not            expected to have a material impact on the Company’s consolidated financial            position, results of operations or cash flows; however, the Company is still analyzing            the effects of FIN 48.

             

In September 2006, the FASB issued FAS No. 157, “Fair Value            Measurements”. This Statement defines fair value as used in numerous accounting            pronouncements, establishes a framework for measuring fair value in generally accepted            accounting principles and expands disclosure related to the use of fair value measures            in financial statements. The Statement is to be effective for the Company’s            financial statements issued in 2008; however, earlier application is encouraged. The            Company is currently evaluating the timing of adoption and the impact that adoption            might have on its financial position or results of operations.

 

 

----

- 21            -

 

 

Arthro            Pharmaceuticals Inc.

(A            Development Stage Company)

Notes            to the Financial Statements

May 31,            2007 and 2006

(Stated in US            Dollars) – Page 4

 

 
| Note 2 | Summary of Significant Accounting Policies– (cont’d) |
|--------|------------------------------------------------------------------|

 

New Accounting Standards–            (cont’d)

 

In September 2006, the Securities and Exchange Commission            (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”).            Due to diversity in practice among registrants, SAB 108 expressed SEC staff views            regarding the process by which misstatements in financial statements are evaluated for            purposes of determining whether financial statement restatement is necessary. SAB 108            is effective for fiscal years ending after November 15, 2006, and early application is            encouraged. SAB 108 did not have a material impact on its financial position or results            from operations.

             

In December 2006, the FASB issued FAS Staff Position (“FSP”)            EITF 00-19-2, “Accounting for Registration Payment Arrangements”. This FSP            specifies that the contingent obligation to make future payments or otherwise transfer            consideration under a registration payment arrangement should be separately recognized            and measured in accordance with FAS No. 5, “Accounting for Contingencies”.            This FSP is effective immediately for registration payment arrangements and the            financial instruments subject to those arrangements that re entered into or modified            subsequent to December 31, 2006. For registration payment arrangements and financial            instruments subject to those arrangements that were entered into prior to December 31,            2006, the guidance in the FSP is effective January 1, 2006 for the Company. This FSP            did not have a material impact on its financial position or results from            operations.

             

On February 15, 2007, the FASB issued FAS No. 159 “The Fair Value            Option for Financial Assets and Financial Liabilities”. This Statement            establishes presentation and disclosure requirements designed to facilitate comparisons            between companies that choose different measurement attributes for similar types of            assets and liabilities. FAS No. 159 is effective for the Company’s financial            statements issued in 2008. The Company is currently evaluating the impact that the            adoption of FAS No. 159 might have on its financial position or results of            operations.

 
| Note 3 | Equipment |
|--------|-----------|

 
|               | 2007                                                   |
|--------------------|--------------------------------------------------------|
|               |                                                   | Accumulated |   |
|               | Cost                                                   | Depreciation | Net |
|               |                                                   |   |   |
| Computer equipment | $        1,760 | $             993 | $           767 |

 
|               | 2006                                                   |
|--------------------|--------------------------------------------------------|
|               |                                                   | Accumulated |   |
|               | Cost                                                   | Depreciation | Net |
|               |                                                   |   |   |
| Computer equipment | $        1,760 | $             664 | $         1,096 |

 

 

 

----

- 22            -

 

 

Arthro            Pharmaceuticals Inc.

(A            Development Stage Company)

Notes            to the Financial Statements

May 31,            2007 and 2006

(Stated in US            Dollars) – Page 5

 
| Note 4 | License Agreement |
|--------|-------------------|

 

The Company entered into a License Agreement on November 8, 2004, to            acquire the intellectual and marketing license rights, in the United States and its            territories, to an arthritic pain reliever “Arthrospray.” The Company            issued 2,000,000 common shares to the President of the Company at a fair value of            $0.001, for a cost of $2,000, to acquire the license. During the year ended May 31,            2007, the Company determined that this asset was impaired and wrote it down to its fair            value of $1.

 
| Note 5 | Deferred Tax Assets |
|--------|---------------------|

 

The following table summarizes the significant components of the            Company’s deferred tax assets, after applying enacted corporation income tax            rates of 35%:

 
|                          | 2007   | 2006     |
|-------------------------------|--------|----------|
| Deferred tax assets           |   |     |
| Non-capital loss carryforward | $      | 41,356   | $ | 20,525 |
| Less valuation allowance      |   | (41,356) |   | (20,525) |
|                          |   |     |   |   |
|                          | $      | -        | $ | - |

 

The amount taken into income as deferred tax assets must reflect that            portion of the income tax loss carryforwards that is more likely-than-not to be            realized from future operations. Management considers it more-likely-than-not that the            loss carryforward amounts will not be utilized against future income and, accordingly,            a full valuation allowance has been applied.

 
| Note 6 | Income Taxes |
|--------|--------------|

 

No provision for income taxes has been provided for in these financial            statements due to the net loss. At May 31, 2007, the Company has net operating loss            carryforwards, totalling approximately $149,000, the benefit of which has not been            recorded in the financial statements. These losses will expire, if unused, commencing            in 2025.

 
| Note 7 | Related Party Transactions– Notes 4 and 8 |
|--------|-------------------------------------------------|

 

During the year ended May 31, 2007, the Company was charged $24,000            (2006: $24,000) for management services and $4,800 (2006: $4,800) for rent to directors            of the Company.

             

Amounts due to related parties of $67,060 (2006: $18,932) at May 31,            2007 are for cash advances, management fees, rent and office expenses incurred or paid            on behalf of the Company by the Company's directors.

             
| Note 8 | Commitments |
|--------|-------------|

 

The Company has a premises rental agreement with a director of the            Company at the monthly rate of $400 until November 30, 2007.

 

 

----

- 23            -

 

 

Arthro            Pharmaceuticals Inc.

(A            Development Stage Company)

Notes            to the Financial Statements

May 31,            2007 and 2006

(Stated in US            Dollars) – Page 6

 
| Note 9 | Non-cash Transactions |
|--------|-----------------------|

             

Investing and financing activities that do not have a direct impact on            current cash flows are excluded from the statements of cash flows. The following            transactions were excluded from the statements of cash flows:

             

During the year ended May 31, 2006 the Company issued 50,000 common            shares for services rendered valued at $1,750.

             

During the period October 27, 2004 (Date of Inception) to May 31, 2005,            the Company issued 2,000,000 common shares to the President of the Company to acquire            the intellectual and marketing license rights in the United States valued at            $2,000.

             
| Note 10 | Subsequent Event |
|---------|------------------|

             

Subsequent to May 31, 2007, a director of the Company advanced $5,880 to            the Company. This advance is unsecured, non-interest bearing and has no specific terms            for repayment.

 

 

 

----

- 24            -

 

 

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

None.

**Item 8A. Controls and Procedures.**

As required by Rule 13a-15 under the Exchange Act, we have carried out            an evaluation of the effectiveness of the design and operation of our company's            disclosure controls and procedures as of the end of the period covered by this annual            report, being May 31, 2007. This evaluation was carried out under the supervision and            with the participation of our company's management, including our company's president            and chief executive officer and our company's secretary and treasurer. Based upon that            evaluation, our company's president and chief executive officer and our company's            secretary and treasurer concluded that our company's disclosure controls and procedures            are effective as at the end of the period covered by this report. There have been no            changes in our internal controls over financial reporting that occurred during the            period covered by this report that have materially affected, or are reasonably likely            to materially affect our internal controls over financial reporting.

**Item 8B. Other Information.**

None.

**PART III**

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

All directors of our company hold office until the next annual meeting            of the stockholders or until their successors have been elected and qualified. The            officers of our company are appointed by our board of directors and hold office until            their death, resignation or removal from office. Our directors and executive officers,            their ages, positions held, and duration as such, are as follows:

 
| **Name**        | **Position Held with the****Company**           | **Age** | **Date First Elected****or Appointed** |
|-----------------|-------------------------------------------------|---------|----------------------------------------|
| Peter R. Hughes | President, Chief Executive Officer and Director | 45      | October 27, 2004                       |
| Celine Totman   | Secretary, Treasurer and Director               | 34      | October 27, 2004                       |

*Business Experience*

The following is a brief account of the education and business            experience of each director and executive officer during at least the past five years,            indicating each person's business experience, principal occupation during the period,            and the name and principal business of the organization by which they were            employed.

*Peter R. Hughes*

Mr. Hughes is a businessman and has been our president, chief executive            officer and director since October 27, 2004. Mr. Hughes has been actively involved in            the pharmaceutical industry as an executive officer and director for over 18 years. Mr.            Hughes has experience in marketing and sales of consumer product lines, product            management, product licensing, product manufacturing and US government regulations            regarding health products as well as public company experience. He holds a Bachelors            Degree in Science from the University of British Columbia (1983) and successfully            completed the Canadian Securities Course in 1985.

 

 

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*Celine Totman*

Celine Totman has been our secretary, treasurer and director since            October 27, 2004. Ms. Totman received a Masters Degree in Environmental Sciences from            the University of Geneva, Switzerland in 1998 and a Bachelor Degree in Biology from the            University of Geneva, Switzerland in 1996. Ms. Totman is a Registered Professional            Biologist with the Association of Professional Biologists of British Columbia and, for            the past five years has worked as an environmental scientist and biologist in            Vancouver, British Columbia, Canada. Her specialty is environmental risk assessment and            water quality. Ms. Totman's work experience also includes market research and analysis            for various industries and website development and design.

*Family Relationships*

Mr. Hughes and Ms. Totman are married.

*Involvement in Certain Legal Proceedings*

Our directors, executive officers and control persons have not been            involved in any of the following events during the past five years:
|   | 1. | any bankruptcy petition filed by or against any business of                        which such person was a general partner or executive officer either at the                        time of the bankruptcy or within two years prior to that time; |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2. | any conviction in a criminal proceeding or being subject to                        a pending criminal proceeding (excluding traffic violations and other minor                        offenses); |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 3. | being subject to any order, judgment, or decree, not                        subsequently reversed, suspended or vacated, of any court of competent                        jurisdiction, permanently or temporarily enjoining, barring, suspending or                        otherwise limiting his involvement in any type of business, securities or                        banking activities; or |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 4. | being found by a court of competent jurisdiction (in a civil                        action), the Securities and Exchange Commission or the Commodity Futures                        Trading Commission to have violated a federal or state securities or                        commodities law, and the judgment has not been reversed, suspended, or                        vacated. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Compliance with Section 16(a) of the Securities Exchange Act of            1934*

Section 16(a) of the Securities Exchange Act requires our executive            officers and directors, and persons who own more than 10% of our common stock, to file            reports regarding ownership of, and transactions in, our securities with the Securities            and Exchange Commission and to provide us with copies of those filings. Based solely on            our review of the copies of such forms received by us, or written representations from            certain reporting persons, we believe that during fiscal year ended May 31, 2007, all            filing requirements applicable to its officers, directors and greater than 10% percent            beneficial owners were complied with, with the exception of the following:
| **Name**      | **Number of Late Reports** | **Number of Transactions Not****Reported on a Timely Basis** | **Failure to File****Requested Forms** |
|---------------|----------------------------|--------------------------------------------------------------|----------------------------------------|
| Peter Hughes  | 1(1)                       | 1(1)                                                         | 1(1)                                   |
| Celine Totman | 1(1)                       | 1(1)                                                         | 1(1)                                   |
| (1) | The named officer, director or greater than 10% stockholder,                        as applicable, filed a late Form 3 – Initial Statement in Beneficial                        Ownership of Securities. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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*Code of Ethics*

On August 17, 2007, our company's board of directors adopted a Code of            Business Conduct and Ethics that applies to, among other persons, our company's            president (being our principal executive officer) and our company's secretary (being            our principal financial and accounting officer and controller), as well as persons            performing similar functions. As adopted, our Code of Business Conduct and Ethics sets            forth written standards that are designed to deter wrongdoing and to            promote:
|   | (1) | honest and ethical conduct, including the ethical handling                        of actual or apparent conflicts of interest between personal and                        professional relationships; |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | full, fair, accurate, timely, and understandable disclosure                        in reports and documents that we file with, or submit to, the Securities                        and Exchange Commission and in other public communications made by                        us; |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (3) | compliance with applicable governmental laws, rules and                        regulations; |
|--------|-----|---------------------------------------------------------------------------------------------|
|   | (4) | the prompt internal reporting of violations of the Code of                        Business Conduct and Ethics to an appropriate person or persons identified                        in the Code of Business Conduct and Ethics; and |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (5) | accountability for adherence to the Code of Business Conduct                        and Ethics. |
|--------|-----|-------------------------------------------------------------------------------------------------|

Our Code of Business Conduct and Ethics requires, among other things,            that all of our company's personnel shall be accorded full access to our president and            secretary with respect to any matter which may arise relating to the Code of Business            Conduct and Ethics. Further, all of our company's personnel are to be accorded full            access to our company's board of directors if any such matter involves an alleged            breach of the Code of Business Conduct and Ethics by our president or            secretary.

In addition, our Code of Business Conduct and Ethics emphasizes that all            employees, and particularly managers and/or supervisors, have a responsibility for            maintaining financial integrity within our company, consistent with generally accepted            accounting principles, and federal , provincial and state securities laws. Any employee            who becomes aware of any incidents involving financial or accounting manipulation or            other irregularities, whether by witnessing the incident or being told of it, must            report it to his or her immediate supervisor or to our company's president or            secretary. If the incident involves an alleged breach of the Code of Business Conduct            and Ethics by the president or secretary, the incident must be reported to any member            of our board of directors. Any failure to report such inappropriate or irregular            conduct of others is to be treated as a severe disciplinary matter. It is against our            company policy to retaliate against any individual who reports in good faith the            violation or potential violation of our company's Code of Business Conduct and Ethics            by another.

Our Code of Business Conduct and Ethics is filed as Exhibit 14.1 to this            annual report on Form 10-KSB filed with the Securities and Exchange Commission. We will            provide a copy of the Code of Business Conduct and Ethics to any person without charge,            upon request. Requests can be sent to: Arthro Pharmaceuticals Inc., 3316 West            1st Avenue, Vancouver, British Columbia, Canada V6R 1G4.

*Nomination Process*

As of August 17 , 2007, we did not effect any material changes to the            procedures by which our shareholders may recommend nominees to our board of directors.            Our board of directors does not have a policy with regards to the consideration of any            director candidates recommended by our shareholders. Our board of directors has            determined that it is in the best position to evaluate our company's requirements as            well as the qualifications of each candidate when the board considers a nominee for a            position on our board of directors. If shareholders wish to recommend candidates            directly to our board, they may do so by sending communications to the president of our            company at the address on the cover of this annual report.

 

 

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|--------|--------|

 

 

*Audit Committee and Audit Committee Financial Expert*

We do not have a standing audit committee at the present time. Our board            of directors has determined that we do not have a board member that qualifies as an            "audit committee financial expert" as defined in Item 401(e) of Regulation            S-B.

We believe that our members of our board of directors are capable of            analyzing and evaluating our financial statements and understanding internal controls            and procedures for financial reporting. The board of directors of our company does not            believe that it is necessary to have an audit committee because we believe that the            functions of an audit committee can be adequately performed by the board of directors.            In addition, we believe that retaining an independent director who would qualify as an            "audit committee financial expert" would be overly costly and burdensome and is not            warranted in our circumstances given the early stages of our development and the fact            that we have not generated any revenues from operations to date.

**Item 10. Executive Compensation.**

The            particulars of compensation paid to the following persons:
|   | (a) | our principal executive officer; |
|--------|-----|----------------------------------|
|   | (b) | each of our two most highly compensated executive officers                        who were serving as executive officers at the year ended May 31, 2007;                        and |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (c) | up to two additional individuals for whom disclosure would                        have been provided under (b) but for the fact that the individual was not                        serving as our executive officer at the end of the most recently completed                        financial year, |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

who            we will collectively refer to as the named executive officers, of our company for the            years ended May 31, 2007 and 2006, are set out in the following summary compensation            tables:

 
| **SUMMARY COMPENSATION TABLE**                                |
|---------------------------------------------------------------|
| **Name****and Principal Position**                            | **Year** | **Salary****($)** | **Bonus****($)** | **Stock Awards****($)** | **Option Awards****($)** | **Non-Equity Incentive Plan Compensa-tion****($)** | **Change in Pension****Value and Nonqualified Deferred Compensation                        Earnings****($)** | **All****Other Compensa-tion****($)** | **Total****($)** |
| Peter HughesPresident, Chief Executive Officerand Director(1) | 2007

2006 | Nil

Nil | Nil

Nil | Nil

Nil | Nil

Nil | Nil

Nil | Nil

Nil | $24,000

$24,000 | $24,000

$24,000 |
| (1) | Peter Hughes was appointed as our President, Chief Executive                        Officer and director on October 27, 2004. |
|-----|-------------------------------------------------------------------------------------------------------------------------------|

We have not entered into any employment agreement or consulting            agreements with our directors and executive officers. There are no arrangements or            plans in which we provide pension, retirement or similar benefits for directors or            executive officers. Our directors and executive officers may receive stock options at            the discretion of our board of directors in the future. We do not have any material            bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may            be paid to our directors or executive officers, except that stock options may be            granted at the discretion of our board of directors.

 

 

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*Stock Options and Stock Appreciation Rights*

During the year ended May 31, 2007, we did not grant any stock options            or stock appreciation rights to any of our directors or officers and there were no            stock options or stock appreciation rights outstanding on May 31, 2007.

*Director Compensation*

We reimburse our directors for expenses incurred in connection with            attending board meetings. We did not pay any other director's fees or other cash            compensation for services rendered as a director for the year ended May 31,            2007.

We have no formal plan for compensating our directors for their service            in their capacity as directors, although such directors are expected in the future to            receive stock options to purchase common shares as awarded by our board of directors or            (as to future stock options) a compensation committee which may be established.            Directors are entitled to reimbursement for reasonable travel and other out-of-pocket            expenses incurred in connection with attendance at meetings of our board of directors.            Our board of directors may award special remuneration to any director undertaking any            special services on our behalf other than services ordinarily required of a director.            No director received and/or accrued any compensation for their services as a director,            including committee participation and/or special assignments.

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

The following table sets forth, as of August 16, 2007, certain            information with respect to the beneficial ownership of our common stock by each            stockholder known by us to be the beneficial owner of more than 5% of our common stock            and by our directors and executive officers. Each person has sole voting and investment            power with respect to the shares of common stock, except as otherwise indicated.            Beneficial ownership consists of a direct interest in the shares of common stock,            except as otherwise indicated. Except as otherwise noted, the number of shares            beneficially owned includes common stock which the named person has the right to            acquire, through conversion or option exercise, or otherwise, within 60 days after            August 16, 2007. Beneficial ownership calculations for 5% stockholders are based solely            on publicly filed Schedule 13Ds or 13Gs, which 5% stockholders are required to file            with the Securities and Exchange Commission.
| **Name and Address of****Beneficial Owner**                                | **Amount and Nature of****Beneficial Ownership** | **Percentage****of Class(1)** |
|----------------------------------------------------------------------------|--------------------------------------------------|-------------------------------|
| Peter Hughes3316 West 1st AvenueVancouver, British ColumbiaCanada V6R 1G4  | 2,000,000                                        | 28.69%                        |
| Celine Totman3316 West 1st AvenueVancouver, British ColumbiaCanada V6R 1G4 | 3,000,000                                        | 43.04%                        |
| Albert LegrandDieweg 531180 BrusselBelgium                                 | 587,636                                          | 8.4%                          |
| Directors and Officers(3) (as a group)                                     | 5,000,000                                        | 71.73%                        |

(1)         Based on 6,970,909 shares outstanding as of August 16, 2007. Beneficial            ownership is determined in accordance with the rules of the Securities and Exchange            Commission and generally includes voting or

             

             

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investment power with respect to securities. Except as otherwise            indicated, we believe that the beneficial owners of the common stock listed above,            based on information furnished by such owners, have sole investment and voting power            with respect to such shares, subject to community property laws where            applicable.

*Changes in Control*

We are unaware of any contract or other arrangement the operation of            which may at a subsequent date result in a change in control of our company.

*Equity Compensation Plan Information*

As at May 31, 2007, we do not have any equity compensation plans in            place.

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

Except as described below, no director, executive officer, principal            shareholder holding at least 5% of our common shares, or any family member thereof, had            any material interest, direct or indirect, in any transaction, or proposed transaction,            during the year ended May 31, 2007, in which the amount involved in the transaction            exceeded or exceeds the lesser of $120,000 or one percent of the average of our total            assets at the year end for the last three completed fiscal years.

Peter Hughes and Celine Totman, our officers and directors, have made a            series of unsecured, non-interest bearing demand loans to our company that were            necessary to keep our operations going, which included management fees, rent and office            expenses. As at May 31, 2007, these loans totalled $67,060 (2006: $18,932).

During the year ended May 31, 2007, we accrued management fees owing to            Peter Hughes totalling $24,000 (2006: $24,000) and we accrued rent owing to Celine            Totman totalling $4,800 (2006: $4,800).

*Independent Directors*

We do not have any independent directors.

**Item 13. Exhibits.**

*Exhibits Required by Item 601 of Regulation S-B*
|   | ExhibitNumber | Description                                                                                                                                                                                                                                                            |   |
|--------|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 1.1           | Licensing Agreement with Peter Hughes (incorporated by                        reference from our Registration Statement on Form SB-2 filed on April 18,                        2006)                                                                                   |   |
|   | 3.1           | Articles of Incorporation (incorporated by reference from                        our Registration Statement on Form SB-2 filed on April 18, 2006)                                                                                                                      |   |
|   | 3.2           | Bylaws (incorporated by reference from our Registration                        Statement on Form SB-2 filed on April 18, 2006)                                                                                                                                         |   |
|   | 4.1           | Regulation "S" Securities Subscription Agreement                        (incorporated by reference from our Registration Statement on Form SB-2                        filed on April 18, 2006)                                                                        |   |
|   | 14.1*         | Code of Ethics                                                                                                                                                                                                                                                         |   |
|   | 31.1*         | Certification of the Chief Executive                        Officer and Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of                        the *Securities Exchange Act of 1934*as adopted pursuant to Section 302 of the*Sarbanes-Oxley Act of 2002* |   |
|        |               |                                                                                                                                                                                                                                                                        |        |  |

 

 

 

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|--------|--------|

 

 

 
| 32.1* | Certification of the Chief Executive                        Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as                        adopted pursuant to Section 906 of the *Sarbanes-Oxley Act                        of 2002* |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

* Filed herewith

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

*Audit Fees*

Our board of directors appointed Amisano Hanson, Chartered Accountants,            as independent auditors to audit our financial statements for the current fiscal year.            The aggregate fees billed by Amisano Hanson for professional services rendered for the            audit of our annual financial statements included in this annual report on Form 10-KSB            for the fiscal year ended May 31, 2007 were $9,935 and for the fiscal year ended May            31, 2006 were $6,896.

*Audit Related Fees*

For the fiscal years ended May 31, 2007 and 2006, the aggregate fees            billed for assurance and related services by Amisano Hanson relating to our quarterly            financial statements which are not reported under the caption "Audit Fees" above, were            $nil and $nil.

*Tax            Fees*

For the fiscal years ended May 31, 2007 and 2006, the aggregate fees            billed for tax compliance, by Amisano Hanson were $nil and $nil.

*All            Other Fees*

For the fiscal years ended May 31, 2007 and 2006, the aggregate fees            billed by Amisano Hanson for other non-audit professional services, other than those            services listed above, totaled $6,681 and $7,653.

Our board of directors, who acts as our audit committee, has adopted a            policy governing the pre-approval by the board of directors of all services, audit and            non-audit, to be provided to our company by our independent auditors. Under the policy,            the board or directors has pre-approved the provision by our independent auditors of            specific audit, audit related, tax and other non-audit services as being consistent            with auditor independence. Requests or applications to provide services that require            the specific pre-approval of the board of directors must be submitted to the board of            directors by the independent auditors, and the independent auditors must advise the            board of directors as to whether, in the independent auditor's view, the request or            application is consistent with the Securities and Exchange Commission's rules on            auditor independence.

The board of directors has considered the nature and amount of the fees            billed by Amisano Hanson and believes that the provision of the services for activities            unrelated to the audit is compatible with maintaining the independence of Amisano            Hanson.

 

 

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**SIGNATURES**

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

**ARTHRO PHARMACEUTICALS INC.**

 

/s/            Peter Hughes

By:            Peter Hughes, President, Chief Executive Officer and Director

(Principal Executive Officer, Principal Financial Officer and

Principal Accounting Officer)

Dated:            August 29, 2007

In            accordance with the Exchange Act, this report has been signed below by the following            persons on behalf of the registrant and in the capacities and on the dates            indicated.

 

/s/            Peter Hughes

By:            Peter Hughes, President, Chief Executive Officer and Director

(Principal Executive Officer, Principal Financial Officer and

Principal Accounting Officer)

Dated:            August 29, 2007

 

/s/            Celine Totman

By:            Celine Totman, Secretary, Treasurer and Director

Dated:            August 29, 2007

 

 

CW1373972.4