**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-Q**


**** QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934




For
      the
      quarterly period ended June
      30,
      2006




Commission
      file number 333-83152




**INYX,
      INC.**


(Exact
      name of registrant as specified in its charter)




Nevada
              *(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            75-2870720
              *(I.R.S.
                Employer*
              *Identification
                No.)*825
                Third Avenue, 40thFloor,
              New
                York, New York
              *(Address
                of principal executive offices)*
            10022
              *(Zip
                Code)*Registrant’s
                telephone number, including area code: (212)
                838-1111






Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 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 ý No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. (Check one):


Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filerý




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




At
      August
      11, 2006, the registrant had outstanding 53,106,650 shares of par value $0.001
      common stock.







**PART
      I — FINANCIAL INFORMATION**









**Item
      1. FINANCIAL STATEMENTS**




Condensed
                Consolidated Balance Sheets as of June 30, 2006 and December 31,
                2005;
            F-2Condensed
                Consolidated Statements of Operations for the three and six months
                ended
                June 30, 2006 and 2005;
            F-3Condensed
                Consolidated Statements of Cash Flows for six months ended June 30,
                2006
                and 2005;
            F-4Notes
                to Condensed Consolidated Financial Statements
            F-5















F-1





**** **INYX,
      INC.**


**Condensed
      Consolidated Balance Sheets**


**(in
      thousands)**




**June
                30, 2006**
            
            **December
                31, 2005****(Unaudited)****Assets**Current
                assets:Cash
                and cash equivalents
            
            **$**
            **1,344**
            
            $
            1,023Accounts
                receivable, net
            
            
            **23,189**
            
            
            19,782Inventories,
                net
            
            
            **9,790**
            
            
            11,331Prepaid
                expenses and other current assets
            
            
            **3,411**
            
            
            2,589Total
                current assets
            
            
            **37,734**
            
            
            34,725Property,
                plant and equipment, net
            
            
            **41,440**
            
            
            40,781Deferred
                financing costs, net
            
            
            **1,262**
            
            
            1,434Deferred
                costs and deposits
            
            
            **5,573**
            
            
            431Intangible
                assets, net
            
            
            **14,534**
            
            
            14,782**62,809**
            
            
            57,428Total
                assets
            
            **$**
            **100,543**
            
            $
            92,153**Liabilities
                and Stockholders’ Deficiency**Current
                liabilities:Borrowings
                under lines of credit
            
            **$**
            **37,856**
            
            $
            30,011Accounts
                payable
            
            
            **14,368**
            
            
            11,589Accrued
                expenses and other current liabilities
            
            
            **12,184**
            
            
            9,557Deferred
                tax liability
            
            
            **1,889**
            
            
            1,858Deferred
                revenues
            
            
            **3,620**
            
            
            -Seller
                financing
            
            
            **13,090**
            
            
            14,014Current
                portion of long term debt
            
            
            **9,350**
            
            
            9,288Total
                current liabilities
            
            
            **92,357**
            
            
            76,317Long
                term debt, net of current portion
            
            
            **41,760**
            
            
            46,236Total
                liabilities
            
            
            **134,117**
            
            
            122,553Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock - $0.001 par value, 10,000,000 shares authorized - none issued
                and
                outstanding
            
            
            **-**
            
            
            -Common
                stock - $0.001 par value, 150,000,000 shares authorized - 49,836,899
                shares issued and outstanding at June 30, 2006, net of 610,461 shares
                of
                treasury stock; 43,389,922 shares issued and outstanding at December
                31,
                2005, net of 209,732 shares of treasury stock
            
            
            **50**
            
            
            43Additional
                paid-in capital
            
            
            **40,152**
            
            
            33,315Accumulated
                deficit
            
            
            **(73,781**
            **)**
            
            (61,343
            )Subscriptions
                receivable
            
            
            **(293**
            **)**
            
            (293
            )Accumulated
                other comprehensive income (loss) - foreign currency translation
                adjustment
            
            
            **298**
            
            
            (2,122
            )Total
                stockholders’ deficiency
            
            
            **(33,574**
            **)**
            
            (30,400
            )Total
                liabilities and stockholders’ deficiency
            
            **$**
            **100,543**
            
            $
            92,153





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






F-2


**INYX,
      INC.**


**Condensed** **Consolidated
      Statements of Operations**


**(in
      thousands, except per share data)**





**For
                the Three Months Ended**
              **June
                30,**
            
            **For
                the Six Months Ended**
              **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****(Unaudited)**
            
            **(Unaudited)**Net
                revenues
            
            **$**
            **20,142**
            
            $
            8,501
            
            **$**
            **41,554**
            
            $
            11,178Cost
                of sales
            
            
            **12,528**
            
            
            5,864
            
            
            **25,639**
            
            
            8,399Gross
                profit
            
            
            **7,614**
            
            
            2,637
            
            
            **15,915**
            
            
            2,779Operating
                expenses:Research
                and development
            
            
            **485**
            
            
            590
            
            
            **1,167**
            
            
            947General
                and administrative
            
            
            **10,531**
            
            
            4,585
            
            
            **15,261**
            
            
            6,426Selling
            
            
            **2,032**
            
            
            40
            
            
            **3,274**
            
            
            174Depreciation
            
            
            **1,538**
            
            
            555
            
            
            **3,052**
            
            
            716Amortization
                of intangible assets
            
            
            **443**
            
            
            362
            
            
            **879**
            
            
            409Total
                operating expenses
            
            
            **15,029**
            
            
            6,132
            
            
            **23,633**
            
            
            8,672Loss
                from operations before interest and financing costs, provision for
                income
                taxes and extraordinary gain
            
            
            **(7,415**
            **)**
            
            (3,495
            )
            
            **(7,718**
            **)**
            
            (5,893
            )Interest
                and financing costs
            
            
            **2,430**
            
            
            1,534
            
            
            **4,720**
            
            
            6,146Net
                loss before provision for income taxes and extraordinary
                gain
            
            
            **(9,845**
            **)**
            
            (5,029
            )
            
            **(12,438**
            **)**
            
            (12,039
            )Provision
                for income taxes
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            -Net
                loss before extraordinary gain
            
            
            **(9,845**
            **)**
            
            (5,029
            )
            
            **(12,438**
            **)**
            
            (12,039
            )Extraordinary
                gain, net of taxes
            
            
            **-**
            
            
            917
            
            
            **-**
            
            
            917Net
                loss
            
            **$**
            **(9,845**
            **)**
            $
            (4,112
            )
            **$**
            **(12,438**
            **)**
            $
            (11,122
            )Basic
                and fully diluted loss per share before extraordinary gain
            
            **$**
            **(0.20**
            **)**
            $
            (0.12
            )
            **$**
            **(0.26**
            **)**
            $
            (0.31
            )Basic
                and fully diluted income from extraordinary gain
            
            
            **-**
            
            
            0.02
            
            
            **-**
            
            
            0.02Basic
                and fully diluted loss per share
            
            **$**
            **(0.20**
            **)**
            $
            (0.10
            )
            **$**
            **(0.26**
            **)**
            $
            (0.29
            )Weighted-average
                number of shares used in computing basic and fully diluted loss per
                share
            
            
            **49,529,321**
            
            
            39,983,983
            
            
            **47,698,433**
            
            
            39,144,672








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




F-3


**INYX,
      INC.**


**Condensed
      Consolidated Statements of Cash Flows**


**** **(in
      thousands)**





**For
                the Six Months Ended**
              **June
                30,****2006**
            
            **2005****(Unaudited)**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss before extraordinary gain
            
            **$**
            **(12,438**
            **)**
            $
            (12,039
            )Income
                from extraordinary gain
            
            
            **-**
            
            
            917Net
                loss for the period
            
            
            **(12,438**
            **)**
            
            (11,122
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            **3,052**
            
            
            716Amortization
                of financing costs and debt discount
            
            
            **332**
            
            
            2,455Amortization
                of intangible assets
            
            
            **879**
            
            
            409Provision
                for bad debts
            
            
            **(517**
            **)**
            
            (96
            )Provision
                for inventory obsolescence
            
            
            **392**
            
            
            239Compensation
                expense on stock options issued to employees
            
            
            **442**
            
            
            131Warrants
                issued for financing & consulting fees
            
            
            **-**
            
            
            162Issuance
                of stock for termination fees and conversion of debt
            
            
            **-**
            
            
            1,578Total
                adjustments
            
            
            **4,580**
            
            
            5,594Changes
                in assets and liabilities:Accounts
                receivable
            
            
            **(3,712**
            **)**
            
            (295
            )Inventories
            
            
            **622**
            
            
            (407
            )Prepaid
                and other current assets
            
            
            **(899**
            **)**
            
            (1,175
            )Deferred
                financing costs
            
            
            **(160**
            **)**
            
            (919
            )Deferred
                revenue
            
            
            **3,605**
            
            
            -Customer
                advances
            
            
            **-**
            
            
            1,126Accounts
                payable and accrued expenses
            
            
            **6,310**
            
            
            2,633Other,
                net
            
            
            **(1,145**
            **)**
            
            21Net
                cash used in operating activities
            
            
            **(3,237**
            **)**
            
            (4,544
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property, plant and equipment
            
            
            **(2,232**
            **)**
            
            (163
            )Increase
                in deferred acquisition costs
            
            
            **(5,034**
            **)**
            
            -Acquisition
                of Aventis Pharmaceuticals, Puerto Rico
            
            
            **-**
            
            
            (23,035
            )Net
                cash used in investing activities
            
            
            **(7,266**
            **)**
            
            (23,198
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Borrowings
                under revolving line of credit, net of fees
            
            
            **6,891**
            
            
            8,490Proceeds
                from issuance of long term debt
            
            
            **246**
            
            
            31,731Repayment
                of long term debt and related fees
            
            
            **(4,593**
            **)**
            
            (12,134
            )Proceeds
                from issuance of demand notes to stockholders
            
            
            **-**
            
            
            600Repayment
                of demand note to stockholders
            
            
            **-**
            
            
            (67
            )Net
                proceeds from issuance of common stock and warrants
            
            
            **6,363**
            
            
            (138
            )Proceeds
                from exercise of stock options
            
            
            **5**
            
            
            -Repayment
                of capital lease obligation
            
            
            **(33**
            **)**
            
            (86
            )Net
                cash provided by financing activities
            
            
            **8,879**
            
            
            28,396Effect
                of exchange rate changes on cash
            
            
            **1,945**
            
            
            130Net
                increase (decrease) in cash and cash equivalents
            
            
            **321**
            
            
            784CASH
                AND CASH EQUIVALENTS, beginning of the period
            
            
            **1,023**
            
            
            336CASH
                AND CASH EQUIVALENTS, end of the period
            
            **$**
            **1,344**
            
            $
            1,120Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            **$**
            **2,200**
            
            $
            1,167Cash
                paid for taxes
            
            **$**
            **-**
            
            $
            -





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




F-4


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**







**Note
      1** **.** **Nature
      of** **Business
      and Basis of Presentation**




Inyx,
      Inc. (“Inyx” or the “Company”) through its wholly-owned subsidiaries, Inyx
      Pharma Limited (“Inyx Pharma”); Inyx Canada Inc. (“Inyx Canada”); Inyx USA, Ltd.
      (“Inyx USA”); Inyx Europe Limited (“Inyx Europe”), including Inyx Europe’s
      wholly-owned subsidiary Ashton Pharmaceuticals Limited (“Ashton Pharmaceuticals”
or “Ashton”);  and
      Exaeris Inc. (“Exaeris”), is a specialty pharmaceutical company which focuses on
      the development, manufacturing and marketing of prescription and
      over-the-counter aerosol pharmaceutical products and drug delivery technologies
      for the treatment of respiratory, allergy, cardiovascular and dermatological
      conditions. In addition, the Company performs certain sales and marketing
      functions to market and promote its manufacturing, technical and product
      development capabilities to its client base.




Inyx’s
      client base primarily consists of ethical pharmaceutical corporations, branded
      generic pharmaceutical distributors and biotechnology companies. Until it has
      completed developing its own products as well as its own distribution and
      marketing capabilities, the Company expects to continue to depend on its
      customers’ distribution channels or strategic partners to market and sell the
      products it manufactures.




The
      accompanying unaudited consolidated financial statements of Inyx have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions for Form 10-Q and Rule 10-01
      of
      Regulation S-X. They do not include all information and notes required by
      generally accepted accounting principles for complete financial statements
      and
      should be read together with the audited financial statements and notes thereto
      included in our annual report on Form 10-K for the year ended December 31,
      2005.
      The balance sheet data as of December 31, 2005 was derived from audited
      financial statements but does not include all disclosures required by generally
      accepted accounting principles. Certain reclassifications have been made to
      conform to the 2006 presentation. The financial information furnished reflects
      all adjustments, consisting only of normal recurring accruals, which are, in
      the
      opinion of management, necessary for a fair presentation of the financial
      position, results of operations and cash flows for the quarterly periods
      presented. The results of operations for the periods presented are not
      necessarily indicative of our future results of operations for the entire year.




All
      inter-company accounts and transactions have been eliminated in
      consolidation.




**Note
      2.** **Summary
      of Significant Accounting Policies**




Significant
      accounting policies are detailed in our annual report on Form 10-K for the
      year
      ended December 31, 2005. The financial information presented herein should
      be
      read in conjunction with our consolidated financial statements for the year
      ended December 31, 2005.




**Revenue
      Recognition**





The
      Company recognizes revenue in accordance with the SEC’s Staff Accounting
      Bulletin Topic 13, “ *Revenue
      Recognition* ”
(“SAB
      Topic 13”). Revenue is recognized when all of the following criteria are met:
      (1) persuasive evidence of an arrangement exists; (2) delivery has
      occurred or services have been rendered; (3) the seller’s price to the
      buyer is fixed and determinable; and (4) collection is reasonably assured.
      Revenue is recognized when products are shipped and are recorded at the invoiced
      value of goods supplied to customers net of discounts, sales tax and value-added
      tax. Development revenue in the form of products and services is recognized
      using the proportional-performance model, whereby revenue is recognized as
      performance occurs based on the relative value of the performance that has
      occurred to that point in time. The Company fulfills obligations for development
      revenue over a period of time as its customers receive value throughout the
      performance period.




F-5


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**





The
      Company allocates revenue to separate elements in multiple element arrangements
      based on the guidance in Emerging Issues Task Force No. 00-21 (“EITF 00-21”),
“ *Accounting
      for Revenue Arrangements with Multiple Deliverables* .”
      Revenue is allocated to a delivered product or service when all of the following
      criteria are met: (1) the delivered item has value to the customer on a
      stand alone basis; (2) there is objective and reliable evidence of the fair
      value of the undelivered item; and (3) if the arrangement includes a
      general right of return relative to the delivered item, delivery, or performance
      of the undelivered item is considered probable and substantially in our control.
      The Company uses the relative fair values of the separate deliverables to
      allocate revenue.





The
      Company obtains detailed credit evaluations of customers and establishes credit
      limits as required, generally without requiring collateral. Exposure to losses
      on receivables is principally dependent on each customer’s financial condition.
      The Company monitors its exposure for credit risk losses and maintains an
      allowance for anticipated losses.





***Multiple
        Deliverables***
 
 The
        Company has revenue arrangements whereby it delivers to the customer multiple
        products and services. Such arrangements have generally included some
        combination of the following: product commercialization services; licensed
        rights to technology, patented products, compounds, data and other intellectual
        property; and development services. In accordance with EITF 00-21, the Company
        analyzes our multiple element arrangements to determine whether the elements
        can
        be separated. The Company performs its analysis at the inception of the
        arrangement and as each product or service is delivered. If a product or
        service
        is not separable when it is delivered, no revenue is allocated. When a delivered
        product or service (or group of delivered products or services) meets the
        criteria in EITF 00-21, the Company allocates revenue. The Company determines
        the fair value of a separate deliverable using the price it charges other
        customers when it sells that product or service separately; however, if the
        Company does not sell the product or service separately, it uses third-party
        evidence of fair value. The Company considers licensed rights or technology
        to
        have stand-alone value to its customers if the Company or others have sold
        such
        rights or technology separately or the Company’s customers can sell such rights
        or technology separately without the need for our continuing
        involvement.
  ***License
        Arrangements***
 
 License
        arrangements may consist of non-refundable up-front license fees, data transfer
        fees, various performance or sales milestones and future product royalty
        payments. Some of these arrangements are multiple element arrangements.
 
 Non-refundable,
        up-front fees that are not contingent on any future performance by the Company,
        and require no consequential continuing involvement on its part, are recognized
        as revenue when the license term commences and the licensed data, technology
        and/or compound is delivered. Such deliverables may include physical quantities
        of compounds, design of the compounds and structure-activity relationships,
        the
        conceptual framework and mechanism of action, and rights to the patents or
        patents pending for such compounds. The Company defers recognition of
        non-refundable up-front fees if it has continuing performance obligations
        without which the technology, right, product or service conveyed in conjunction
        with the non-refundable fee has no utility to the licensee that is separate
        and
        independent of the Company’s performance under the other elements of the
        arrangement. In addition, if the Company has continuing involvement through
        development services that are required because its know-how and expertise
        related to the technology is proprietary to the Company, or can only be
        performed by the Company, then such up-front fees are deferred and recognized
        over the period of continuing involvement.


F-6


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**





***Development
      Services***





Payments
      related to substantive, performance-based milestones in a development
      arrangement are recognized as revenue upon the achievement of the milestones
      as
      specified in the underlying agreements when they represent the culmination
      of
      the earnings process. Revenue from development services is recognized during
      the
      period in which the services are performed and is based upon the number of
      full-time-equivalent personnel working on the specific project at the
      agreed-upon rate.  Payments received in advance are recorded as deferred
      revenue until the development services are performed, costs including labor,
      materials and overhead are incurred and a milestone has been achieved.




***Shipping
      and Handling Costs*** ****





The
      Company typically does not charge customers for shipping and handling costs.
      Shipping and handling costs are classified as cost of sales in the accompanying
      consolidated statements of operations.




**Recent
      Accounting Pronouncements**




In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), "Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes." FIN 48 clarifies the accounting for income taxes
      by prescribing the minimum recognition threshold a tax position is required
      to
      meet before being recognized in the financial statements. FIN 48 also provides
      guidance on de-recognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. The interpretation
      applies to all tax positions related to income taxes subject to FASB Statement
      No. 109.






FIN
      48 is
      effective for fiscal years beginning after December 15, 2006. Differences
      between the amounts recognized in the statements of financial position prior
      to
      the adoption of FIN 48 and the amounts reported after adoption should be
      accounted for as a cumulative-effect adjustment recorded to the beginning
      balance of retained earnings. The Company does not believe the
      adoption of FIN 48 will have a material impact on our financial statements.






In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets" ("SFAS 156"). SFAS 156 provides relief for entities that use derivatives
      to economically hedge fluctuations in the fair value of their servicing rights
      and changes how gains and losses are computed in certain transfers or
      securitizations. SFAS 156 is effective as of the beginning of the first fiscal
      year that begins after September 15, 2006. The Company does not expect the
      adoption of SFAS 156 to have a material impact on its consolidated financial
      position or results of operations.






In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments" ("SFAS 155"). SFAS 155 allows financial instruments
      that
      have embedded derivatives to be accounted for as a whole, eliminating the need
      to bifurcate the derivative from its host, if the holder elects to account
      for
      the whole instrument on a fair value basis. This statement is effective for
      all
      financial instruments acquired or issued after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006. The Company does not
      expect the adoption of SFAS 155 to have a material impact on its consolidated
      financial position or results of operations.




**Reclassifications**




Certain
      reclassifications have been made to prior period consolidated financial
      statements to conform to the current period presentation. These
      reclassifications had no effect on net income or earnings per share as
      previously reported.





F-7


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**







**Note
      3.** **Acquisition
      of the Business Assets of Aventis PR**




On
      March
      31, 2005, Inyx USA acquired the business assets of Aventis PR from the
      Sanofi-Aventis Group. The acquisition was accounted for as a business
      combination in accordance with Statement of Financial Accounting Standard No.
      141 *“Business
      Combinations”* (“SFAS
      No. 141”) *.* In
      connection with this acquisition, Inyx USA paid approximately $20.8 million
      as a
      total purchase price comprising of a cash payment of approximately $19.7 million
      paid upon closing, approximately $2.7 million in direct transaction costs
      (including approximately $90,000 of additional transaction costs incurred
      subsequent to closing), a subsequent purchase price adjustment of approximately
      $570,000 paid to Aventis PR in August 2005, and received a purchase price
      reduction amounting to approximately $2.3 million relating
      to the final value assigned to the commercial contracts transferred to the
      Company on acquisition as agreed by the Company and Aventis PR, pursuant to
      a
      purchase price settlement adjustment in November 2005. Aventis PR is a
      pharmaceutical manufacturing operation producing dermatological, respiratory
      and
      allergy products under contract manufacturing agreements with third party
      customers. The results of operations of the acquired Aventis PR business assets
      are included in the Company’s consolidated results of operations effective April
      1, 2005 (the day after completion of the acquisition of such business
      assets).




The
      Aventis PR acquisition was funded through a credit facility from Westernbank
      Business Credit, a Division of Westernbank Puerto Rico (“Westernbank”). The
      Westernbank financing consists of a revolving working capital line of credit,
      three term loans and a mezzanine loan, together referred to as the “First
      Westernbank Credit Facility” (see
      Note
      13,  footnote (1) ).




The
      purchase price was allocated to the identifiable net assets acquired including
      the identifiable intangible assets based on their estimated fair market values
      at the date of acquisition as determined by the Valuations Services Practice
      of
      BearingPoint, Inc.




The
      fair
      value of the assets acquired from the transaction totalled approximately $62.9
      million based on independent third-party appraisals and valuations, which
      resulted in negative goodwill of $42.1 million. The negative goodwill was
      proportionately allocated over the non-current tangible and intangible assets
      acquired as follows:




**Fair
                Value of Assets Acquired**
            
            
            **Allocation
                of Negative Goodwill**
            
            
            **Allocation
                of Purchase Price of Assets Acquired**Land
            
            $
            3,040
            
            $
            (2,129
            )
            $
            911Building
            
            
            12,700
            
            
            (8,893
            )
            
            3,807Machinery
                and equipment
            
            
            21,809
            
            
            (15,090
            )
            
            6,719Computer
                hardware and software
            
            
            1,185
            
            
            (720
            )
            
            465Inventory
            
            
            2,334
            
            
            -
            
            
            2,334*Identifiable
                intangible assets subject to amortization:*Customer
                contracts
            
            
            4,700
            
            
            (3,291
            )
            
            1,409Customer
                relationships
            
            
            17,100
            
            
            (11,975
            )
            
            5,125$
            62,868
            
            $
            (42,098
            )
            $
            20,770





The
      fair
      values assigned to the acquired assets are based on estimates and assumptions
      provided and other information compiled by management, including independent
      valuations that utilize established valuation techniques appropriate for the
      industry in which the Company operates. The property, plant and equipment are
      depreciated based on the Company’s existing depreciation policies. The
      intangible assets, which represent the value assigned to customer contracts,
      are
      amortized on a straight line basis over three years. The intangible asset which
      represents the value assigned to customer relationships is amortized over a
      period of ten years.




F-8


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**







**Note
      4.** **Acquisition
      of CMSL**




On
      August
      31, 2005, Inyx Europe, a wholly-owned United Kingdom subsidiary of the Company,
      completed the purchase of all of the outstanding shares of CMSL from UCB. On
      September 9, 2005, the Company changed the “CMSL” name to Ashton Pharmaceuticals
      Limited.




The
      Ashton share acquisition was accounted for as a business combination in
      accordance with Statement of Financial Accounting Standard No. 141 *“Business
      Combinations”* (“SFAS
      No. 141”) *.* The
      acquisition cost of $40.7 million consisted of an initial deposit of
      approximately $610,000, a cash payment at closing of approximately $23.2
      million, a purchase price deferral of approximately $9.8 million payable in
      six
      installments commencing at the end of May 2006, an amount equivalent to $4.6
      million representing the additional net current assets acquired not considered
      when purchase price was negotiated and direct transaction costs of approximately
      $2.4 million.




The
      Ashton acquisition was funded through a credit facility
      from Westernbank. The
      Westernbank financing consists of a revolving working capital line of credit,
      three term loans and a mezzanine loan, together referred to as the “Second
      Westernbank Credit Facility” (see Note 13,  footnote (2) ).




The
      purchase price was allocated to the identifiable net assets acquired including
      the identifiable intangible assets based on their estimated fair market values
      at the date of acquisition as determined by the Valuations Services Practice
      of
      BearingPoint, Inc.




The
      fair
      value of the assets acquired from the transaction totaled approximately $55.6
      million based on independent third-party appraisals and valuations, which
      resulted in negative goodwill of $14.9 million. The negative goodwill was
      proportionately allocated over the non-current tangible and intangible assets
      acquired as follows:




**Fair
                Value of Assets and Liabilities Acquired**
            
            **Allocation
                of Negative Goodwill**
            
            **Allocation
                of Purchase Price of Assets and Liabilities
                Acquired**Land
            
            $
            1,787
            
            $
            (577
            )
            $
            1,210Buildings
            
            
            7,146
            
            
            (2,310
            )
            
            4,836Machinery
                and equipment
            
            
            26,799
            
            
            (8,661
            )
            
            18,138Net
                working capital
            
            
            7,000
            
            
            -
            
            
            7,000Excess
                over agreed working capital
            
            
            4,607
            
            
            -
            
            
            4,607*Identifiable
                intangible assets subject to amortization:*Trademarks
                and trade names
            
            
            160
            
            
            (52
            )
            
            108Customer
                relationships
            
            
            8,400
            
            
            (2,715
            )
            
            5,685Product
                Licenses
            
            
            1,820
            
            
            (588
            )
            
            1,232Deferred
                tax liability
            
            
            (1,858
            )
            
            -
            
            
            (1,858
            )Assumed
                liability
            
            
            (230
            )
            
            -
            
            
            (230
            )$
            55,631
            
            $
            (14,903
            )
            $
            40,728






F-9


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**







**Note
      5.** **Accounts**  **Receivable,
      Net**




Accounts
      receivable, net, consist of the following:




**June
                30, 2006**
            
            **December
                31,****2005****(Unaudited)**Trade
                receivables
            
            **$**
            **23,771**
            
            $
            20,824Less
                allowance for doubtful accounts
            
            
            **(582**
            **)**
            
            (1,042
            )**$**
            **23,189**
            
            $
            19,782





As
        of June 30, 2006, the Company billed certain customers in advance for products
        and services to be provided pursuant to arrangements under contract
        manufacturing and product support and service agreements. Such advance billings
        in the amount of $23.4 million are recorded as deferred revenue and offset
        against the related accounts receivable balance in the accompanying balance
        sheets. The Company has also received cash payments in advance of shipments
        or
        services provided relating to contract manufacturing and product support
        and
        service agreements. Such up-front cash payments in the amount of $3.6 million
        are recorded as deferred revenue in the accompanying balance
        sheets.




**Note
      6.** **Inventories,
      Net**




Inventories,
      net, which are valued using the first-in, first-out method of accounting
      and is stated at the lower of cost or net realizable value, are comprised
      of the following:




**June
                30, 2006**
            **December
                31,****2005****(Unaudited)**Raw
                materials
            **$
                6,970**
            $
                8,000Work
                in process
            **4,374**
            3,145Finished
                goods
            **1,446**
            1,244**12,790**
            12,389Less
                provision for obsolescence
            **(3,000)**
            (1,058)**$
                9,790**
            $
                11,331





**N** **ote
      7.** **Property,
      Plant and Equipment, Net**




Property,
      plant and equipment, net, **** consist
      of the following:




**June
                30, 2006**
            
            **December
                31, 2005****(Unaudited)**Land
            
            **$**
            **2,759**
            
            $
            2,662Buildings
            
            
            **9,656**
            
            
            9,144Machinery,
                equipment and office furniture
            
            
            **32,655**
            
            
            26,152Computer
                hardware and software
            
            
            **1,683**
            
            
            1,156**46,753**
            
            
            39,114Less
                accumulated depreciation
            
            
            **(7,435**
            **)**
            
            (4,201
            )**39,318**
            
            
            34,913Equipment
                held for future use(a)
            
            
            **-**
            
            
            1,541Construction
                in progress(b)
            
            
            **2,122**
            
            
            4,327**$**
            **41,440**
            
            $
            40,781




F-10


**INYX,
        INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(tabular
        amounts are expressed in thousands)**




(a)
              Equipment
                  held for future use consists of hydrofluoroalkane (“HFA”) metered dose
                  inhaler (“MDI”) manufacturing equipment held for use that was placed in
                  service during the current quarter to commercially manufacture
                  products
                  for two of our larger customers at our Inyx Pharma
                  site.


(b)
              The
                  construction in progress relates primarily to costs associated
                  with
                  building a hydrocarbon aerosol manufacturing line for a number
                  of pending
                  customer projects at the Company’s Inyx USA facility. Additional costs and
                  expenses necessary to complete the manufacturing line and commence
                  commercial manufacturing on the line are estimated to be in excess
                  of $8.8
                  million over the next two years.




For
      the
      three and six months ended June 30, 2006, depreciation of property, plant and
      equipment was approximately $1.5 million and $3.1 million, respectively. For
      the
      three and six months ended June 30, 2005, depreciation of property, plant and
      equipment was approximately $555,000 and $716,000, respectively.




**Note
      8.** **Deferred
      Financing Costs, Net**




Deferred
      financing costs, net, are comprised of bank fees and legal costs incurred in
      connection with obtaining the First and Second Westernbank Credit Facilities.
      The Company incurred $969,000 in such costs and fees on March 31, 2005, when
      obtaining the First Westernbank Credit Facility, and an additional $788,000
      on
      August 31, 2005 in obtaining the Second Westernbank Credit Facility used to
      fund
      the Company’s acquisition of Ashton. During the six months ended June 30, 2006,
      the Company incurred an additional amount of $160,000 relating to amendment
      to
      the agreements increasing the limits under these credit facilities. Such
      deferred financing costs are being amortized to interest and financing costs
      over the three year term of the Westernbank credit facilities.




Deferred
      financing costs, net, consist of the following:




**June
                30, 2006**
            
            **December
                31, 2005****(Unaudited)**Deferred
                financing costs
            
            **$**
            **1,917**
            
            $
            1,757Less
                accumulated amortization
            
            
            **(655**
            **)**
            
            (323
            )**$**
            **1,262**
            
            $
            1,434




**Note
      9.** **Deferred
      Costs and Deposits**




Deferred
      costs and deposits consist of the following:





**June
                30, 2006**
            
            **December
                31, 2005****(Unaudited)**Deferred
                acquisition costs(a)
            
            **$**
            **4,121**
            
            $
            407Deposits
                and other(b)
            
            
            **1,452**
            
            
            24**$**
            **5,573**
            
            $
            431





(a)
            The
                Company has deferred legal, consulting, translation, environmental,
                regulatory and risk assessment fees and costs for appraisals, third
                party
                travel and other direct costs relating to the strategic acquisitions
                (including business and intellectual property acquisitions) that
                the
                Company is currently working on. In management’s judgment, these business
                development activities and strategic acquisitions have a high probability
                of being successful and are expected to be completed within the next
                twelve months.
              
              Deferred
                costs associated with successful
                negotiations will be included as part of the acquisition costs of
                such
                investments. If a related project is abandoned, deferred costs will
                be
                expensed in the Company’s results of
                operations.




(b)
              This
                    includes a refundable deposit of $500,000 for corporate
                    equipment.  Such deposit was repaid to the Company subsequent to June
                    30, 2006.  This also includes a refundable deposit in the amount of
                    $581,000 for the acquisition of a building to be used for office
                    space,
                    and meeting and training facilities, expected to close in
                    November 2006. The total purchase price of the building is approximately
                    $4.3 million which does not include renovation costs of approximately
                    $500,000.
   F-11
 **INYX,
        INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**







**Note
      10.**  **Intangible
      Assets, Net**




Intangible
      assets, net, consist of the following:




**June
                30,****2006**
            
            **December
                31, 2005****(Unaudited)**Customer
                relationships (accelerated 10 year life and 15 year life)
            
            **$**
            **10,810**
            
            $
            10,810Customer
                contracts (3 year life)
            
            
            **1,409**
            
            
            1,409Customer
                list (12 year life)
            
            
            **1,280**
            
            
            1,280Product
                licenses (10 year life)
            
            
            **1,232**
            
            
            1,232Know-how
                (10 year life)
            
            
            **598**
            
            
            598Patent
                (7 year life)
            
            
            **132**
            
            
            132Trademarks
                and trade names (3 months)
            
            
            **108**
            
            
            108**15,569**
            
            
            15,569Effect
                of foreign currency translation
            
            
            **371**
            
            
            (116
            )Less
                accumulated amortization
            
            
            **(2,598**
            **)**
            
            (1,671
            )**13,342**
            
            
            13,782Intangible
                assets, other
            
            
            **1,192**
            
            
            1,000**$**
            **14,534**
            
            $
            14,782




Intangible
      assets, other ,
      consist
      of deposits made towards an intellectual property purchase that are in
      the process of being acquired and developed. Such costs will be amortized over
      their estimated useful lives upon completion of the purchased transaction.
      Intangible assets are
      carried at cost less accumulated amortization.




For
      the
      three and six months ended June 30, 2006, amortization expense related to
      intangible assets totaled approximately $443,000 and $879,000, respectively.
      In
      comparison, for the three and six months ended June 30, 2005, amortization
      expense related to intangible assets totaled approximately $362,000 and
      $409,000, respectively. The aggregate estimated amortization expense for
      intangible assets as of June 30, 2006, for the remainder of this year, each
      of
      the following four years and thereafter is as follows:





6
                months ending December 31, 2006
            
            $
            935Year
                ending December 31, 2007
            
            
            1,796Year
                ending December 31, 2008
            
            
            1,637Year
                ending December 31, 2009
            
            
            1,281Year
                ending December 31, 2010
            
            
            1,253Thereafter
            
            
            6,440$
            13,342





**Note
      11.**  **Borrowings
      under Lines of Credit**




On
      March
      31, 2005, the Company obtained a three-year revolving working capital line
      of
      credit facility from Westernbank, under the First Westernbank Credit Facility,
      allowing the Company to borrow up to $10.0 million. On September 1, 2005, the
      limit was increased to $15.0 million.  Advances under this facility are
      limited to 85% of eligible accounts receivables and together with the reserve
      amounting to $500,000, shall not exceed $15.0 million, and 60% of eligible
      inventory, which shall not exceed a sub-limit of $5.0 million for such
      inventory.




F-12


**INYX,
        INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(tabular
        amounts are expressed in thousands)**


On
      August
      31, 2005, the Company obtained an additional revolving working capital line
      of
      credit facility with Westernbank, under the Second Westernbank Credit Facility,
      allowing the Company to borrow up to $11.7 million.  Advances under this
      facility are limited to 85% of eligible accounts receivables together with
      the
      reserve of $500,000, not to exceed $11.7 million plus a reserve of $500,000,
      and
      60% of eligible inventory, which shall not exceed a sub-limit of $5.0 million
      for such inventory. On
      January 19, 2006, this facility was increased to $16.7 million, and during
      the
      three months ended June 30, 2006, this facility was further increased to $20.0
      million.




As
      of
      June 30, 2006, total advances under the First and Second Westernbank Credit
      Facilities amounted to approximately $33.2 million.




On
      November 22, 2005, the Company obtained an additional facility of up to $5.0
      million from Westernbank under the First Westernbank Credit Facility. This
      Secured Over Formula Advance (“SOFA”) facility is collateralized by the equity
      in Company owned fixed assets, to be utilized for prepayment of inventory
      purchases, and is revolving in nature. As at June 30, 2006, total advances
      under
      this facility amounted to approximately $4.6 million.




Borrowings
      under the above facilities bear interest at Westernbank’s prime rate (8.0% as of
      June 30, 2006 and 7.0% as of December 31, 2005) plus 1.0%.  Borrowings
      under the revolving working capital lines of credit are collateralized by the
      eligible receivables and inventories and are guaranteed by the Company and
      its
      subsidiaries.  The Company is required to maintain compliance with certain
      financial covenants including a specified working capital and net worth levels
      based on the Company’s consolidated operating budget.  As of June 30, 2006,
      the Company was in violation of certain financial covenants in its Westernbank
      Credit Facility; Westernbank has waived certain requirements of the loan and
      security agreements such that non-compliance of certain covenants shall not
      trigger an event of default. The Company expects to be in compliance as of
      September 30, 2006.




**Note
      12.**  **Seller
      Financing**




During
      the three month period ended June 30, 2006, the Company settled
      approximately $1.6 million (£900,000) to the previous owner of Ashton, UCB
      Pharma, relating to a deferred purchase price of that business. As of June
      30,
      2006, the amount owed to UCB Pharma was approximately $8.4 million (€6.7
      million). The Company also owes approximately $4.7 million (£2.6 million) as
      payment due for the additional net current assets acquired not considered when
      the purchase price was negotiated between the parties (“excess working capital
      adjustment”). This excess working capital adjustment is non-interest bearing.




The
      Company is in the process of renegotiating the payment terms of the
      deferred purchase price, which is non-interest bearing, and is due to commence
      on September 29, 2006, payable in four equal monthly installments at the end
      of
      each respective month. The Company is also entitled, at any time prior to
      payment of the balance of the purchase price, to set-off against any unpaid
      claim it may have against UCB under the Ashton share purchase agreement. As
      collateral for the deferred portion of the purchase price, the Company granted
      UCB a secondary security position over the Company’s assets behind Westernbank’s
      current first security position, which is to be released upon full payment
      of
      the deferred purchase price. Westernbank and UCB have also agreed to an
      inter-creditor agreement to be terminated upon full payment of the deferred
      purchase price.




F-13


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**




**Note
      13.**  **Long
      term Debt, Net of Current Portion**




Debt,
      net
      of current portion, consists of the following:




**June
                30, 2006**
            
            **December
                31, 2005****(Unaudited)**Prime+
                2% Secured Term Promissory Note A issue to Westernbank(1)
            
            **$**
            **2,562**
            
            $
            2,315Prime+
                2% Secured Term Promissory Note B issue to Westernbank(1)
            
            
            **11,360**
            
            
            12,780Prime+
                2% Secured Term Promissory Note C issue to Westernbank(1)
            
            
            **11,013**
            
            
            11,40715%
                Secured Term Loan D Promissory Note issued to Westernbank(1)
            
            
            **4,000**
            
            
            4,500Prime+
                2% Secured Term Promissory Note A issue to Westernbank by Inyx Europe(2)
            
            
            **2,883**
            
            
            2,983Prime+
                2% Secured Term Promissory Note B issue to Westernbank by Inyx Europe(2)
            
            
            **8,657**
            
            
            9,637Prime+
                2% Secured Term Promissory Note C issue to Westernbank by Inyx Europe(2)
            
            
            **2,650**
            
            
            2,95015%
                Secured Term Loan D-Europe Promissory Note issued to Westernbank
                by Inyx
                Europe(2)
            
            
            **7,950**
            
            
            8,850Capital
                lease obligations, due to financial institutions, collateralized
                by
                software and equipment, due in monthly installments of $14,000 including
                interest of 10% to 27%, through 2006(3)
            
            
            **35**
            
            
            102**51,110**
            
            
            55,524Less
                current portion
            
            
            **(9,350**
            **)**
            
            (9,288
            )**$**
            **41,760**
            
            $
            46,236





(1)
                The
                      First Westernbank Credit Facility, as amended, is comprised
                      of a revolving
                      loan (see Note 11) of up to $15.0
                      million including a reserve of $500,000,
                      a
                      SOFA line of up to $5.0 million (see Note 11), capital expenditure
                      loan
                      Term Note “A” of up to $5.0 million, for the purpose of funding ongoing
                      construction or the acquisition of new equipment, two term
                      loans (Term
                      Notes “B” and “C”) and a mezzanine loan (Term Note “D”) amounting in
                      aggregate to up to $31.0 million for the purpose of refinancing
                      the
                      indebtedness to Laurus Funds and purchasing the business assets
                      of Aventis
                      PR. The term notes are collateralized by substantially all
                      the property of
                      the Company and its subsidiaries whether now owned or thereafter
                      to be
                      acquired. All the term notes mature March 31, 2008 and are
                      automatically
                      renewed on a year-to-year basis unless terminated by the Company
                      or
                      Westernbank. Term Notes “A”, “B”, and “C” bear interest at Westernbank
                      prime rate (8.0% and 7.0% at June 30, 2006 and December 31,
                      2005,
                      respectively) plus 2.0%. The Term Note “D” bears interest at the rate of
                      15.0% per annum. Payment of the amounts due under the Term
                      Notes
                      accelerates upon the occurrence of an Event of
                      Default.




(2)
                In
                      connection with the acquisition of Ashton, the Company, through
                      its wholly
                      owned subsidiary, Inyx Europe, obtained an additional non-dilutive,
                      asset
                      based, secured credit facility from Westernbank totaling $36.5
                      million
                      (the “Second Westernbank Credit Facility”). The Second Westernbank Credit
                      Facility is comprised of a revolving loan of up to $11.7 million
                      including
                      a reserve of $500,000 (see Note 12) plus a series of four term
                      loans (Term
                      Note “A”, “B”, “C” and “D”), amounting in the aggregate up to $24.8
                      million, and utilized to help fund the acquisition of all the
                      outstanding
                      shares of Ashton. The limit available under the revolving loan
                      was
                      increased by Westernbank on January 19, 2006 by $5.0 million
                      to $16.7
                      million and again during the three months ended June 30, 2006
                      to $20.0
                      million, thus increasing total availability under these facilities
                      to
                      $44.8 million. The loans are secured by all of the assets of
                      the Company
                      and its subsidiaries whether now owned or thereafter to be
                      acquired. The
                      principal payments of Term Notes “A”, “B” and “C” commenced on December 1,
                      2005. All of the Term Notes mature on March 31, 2008, and are
                      automatically renewed on a year-to-year basis unless terminated
                      by the
                      Company or Westernbank. Term Notes “A”, “B” and “C” bear interest at
                      Westernbank prime rate + 2% (8.0% and 7.0% at June 30, 2006
                      and December
                      31, 2005, respectively). Term Note “D” bears interest at the rate of 15.0%
                      per annum, and principal payments based on an agreed-upon formula
                      commenced January 1, 2006. Payment of the amounts due under
                      the Term Notes
                      accelerates upon the occurrence of an Event of
                      Default.
  F-14
 **INYX,
              INC.**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(tabular
              amounts are expressed in thousands)**
 (3)
                    The
                            Company leases computers and furniture under capital
                            leases that expire in
                            2006. Interest rates range from 10% to 27%.


The
      aggregate maturities of the Westernbank long term debt facilities are as
      follows:




6
                month period ending December 31, 2006
            
            $
            4,593Year
                ending December 31, 2007
            
            
            9,571Year
                ending December 31, 2008
            
            
            36,911$
            51,075




These
      Westernbank loans are automatically renewable after the initial three year
      period ending on March 31, 2008 on a year to year basis, unless terminated
      by
      the Company or Westernbank. The amortization schedule for repayment of the
      term
      loans ranges from 60 months to 180 months.




As
      of
      June 30, 2006, the Company was in violation of certain financial covenants
      in
      its Westernbank Credit Facility; Westernbank has waived certain requirements
      of
      the loan and security agreements such that non-compliance of certain covenants
      shall not trigger an event of default.




**Note
      14.**   **Net
      Loss per Share**




The
      Company follows the guidelines of Statement of Financial Accounting Standards
      No. 128, “ *Earnings
      per Share* ”
(“SFAS
      No.128”) in calculating its loss per share. SFAS No.128 states basic and diluted
      earnings per share are based on the weighted average number of shares of common
      stock and potential common stock outstanding during the period. Potential common
      stock equivalents for purposes of determining diluted earnings per share include
      the effects of dilutive stock options, warrants and convertible securities.
      The
      effect on the number of shares of such potential common stock equivalents is
      computed using the treasury stock method or the if-converted method, as
      applicable. The Company has excluded all outstanding options and warrants as
      well as shares issued upon conversion of convertible debt from the calculation
      of diluted net loss per share because these securities are anti-dilutive.




Accordingly,
      as of June 30, 2006 and December 31, 2005, the Company had common stock
      equivalents of approximately 9,697,526 and 3,043,172 shares respectively,
      related to options and warrants with exercise prices ranging from $0.95 to
      $2.89
      per share.




**Note
      15.**  **Commitments
      and Contingencies**




***Leases***




The
      Company has commitments under various long term operating lease agreements
      for
      various premises. In addition to rent, the Company and its subsidiaries are
      responsible for operating costs, real estate taxes and insurance. As of June
      30,
      2006, future minimum annual rental commitments under operating leases are as
      follows:




6
                month period ending December 31, 2006
            
            $
            609Year
                ending December 31, 2007
            
            
            1,065Year
                ending December 31, 2008
            
            
            731Year
                ending December 31, 2009
            
            
            428Year
                ending December 31, 2010
            
            
            220Thereafter
            
            
            31$
            3,084




F-15


**INYX,
        INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(tabular
        amounts are expressed in thousands)**


***Legal
      Matters***




The
      Company and its
      subsidiaries are subject to claims and lawsuits arising in the ordinary course
      of business. Management, in consultation with its legal advisors, believes
      that
      the outcomes of such legal matters are remote and unlikely to have a material
      adverse effect on the Company’s financial position or operating
      results.




***Key
      Suppliers***




The
      Company purchases raw materials and components from a limited number of key
      suppliers. A loss of any one of these suppliers would have a material adverse
      effect on the Company’s operations.




***Key
      Customers***




For
      the
      three months ended June 30, 2006, the Company’s three top current
      customers in the
      aggregate accounted
      for approximately $11.4 million of revenue or approximately 56.6% of total
      net
      revenues. In comparison, for the three months ended June 30, 2005, the Company’s
      top three customers in the aggregate accounted for approximately $5.8 million
      in
      net revenues or approximately 68% of total net revenues.




The
      Company’s management believes that a delay in the production requirements for
      any one of the Company’s major customers or the loss of any one of the Company’s
      top three customers would have a material adverse affect on operations and
      on
      the realizability of the Company’s assets.




***Corporate
      Development Activities***




The
      Company is also involved in a number of corporate development projects including
      research and development, and equipment acquisition activities that require
      the
      use of capital resources over extended periods of time. These activities may
      also include the use of external resources and third parties that require
      prepayment or cash deposits for supplies, equipment, and products or services
      that the Company may require from time to time.




**Note
      16.**  **Subsequent
      Events**




Subsequent
      to June 30, 2006, the Company issued 2,659,290 shares of its restricted common
      stock upon the exercise of 2,659,290 warrants at prices per share ranging from
      $0.95 to $1.35 for total cash proceeds of approximately $3.0 million. All such
      proceeds were used for operating activities and working capital.




On
      August
      3, 2006, the Company entered into an Asset Purchase Agreement with a U.S.-based
      eye care pharmaceutical company to acquire that company’s right, title and
      interest in and all inventory, intellectual property, sales and marketing
      promotional materials and assigned contracts for six over-the-counter eye care
      products. The purchase price for such assets is $3,750,000. The Company made
      an
      initial payment of $750,000, and an additional $3.0 million is required to
      be
      paid upon consummation of transaction on August 31, 2006. The Company intends
      to
      fund the balance of this transaction from working capital.




F-16




**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**







**Note
      17.**  **Equity
      Incentive Plans**




On
      August
      28, 2005, the Company adopted the 2005 Equity Incentive Plan (the “2005 Plan”),
      which provides for the granting of incentive awards,
      which include stock options,
      restricted stock and other stock-based awards for the
      benefit of employees, officers, directors and  those
      persons who the Company believes may have made a valuable contribution to the
      Company. The 2005 Plan authorizes total stock awards of up to 6,000,000 shares
      of the Company’s common stock.




On
      May 1,
      2003, the Company’s Board of Directors adopted the 2003 Stock Option Plan (the
“2003 Plan”) which provides for the granting of stock options to employees,
      officers, directors and those making valuable contributions to the Company.
      The
      total number of shares of the Company’s common stock available for granting
      under the 2003 Plan is 5,000,000.




All
      options granted pursuant to the 2003 Plan and the 2005 Plan shall be exercisable
      at a price
      per share at least equal to the fair market value at the time of grant. Unless
      otherwise specified, all options expire ten years from the date of grant. Both
      the 2003 Plan and the 2005 Plan are administered by the Company’s Compensation
      Committee.




For
      the
      three and six months ended June 30, 2006, the Company granted 720,000 and
      997,000 stock options to purchase 720,000 and 997,000 shares of the Company’s
      common stock respectively. The fair value of these shares approximating $961,000
      and $1.3 million respectively was evaluated using the Black-Scholes option
      pricing model with the following assumptions: a risk free interest rate of
      4.20%
      to 5.11%, an expected life of four years, a volatility factor of 52% to 68%
      and
      a dividend yield of 0%.




During
      the three months and six ended June 30, 2006 the Company issued nil and 5,000
      shares of its common stock with a value of approximately nil and $6,000
      respectively for exercising stock options at a price of $1.10 per
      share.




For
      the
      three and six months ended June 30, 2006, nil and 310,000 stock options
      respectively were forfeited and cancelled, as compared to 150,000 and 550,000
      shares for the three and six months ended June 30, 2005.




For
      the
      three and six months ended June 30, 2006, total compensation costs relating
      to
      stock options granted to employees, officers, directors, and other persons
      approximated $285,000 and $442,000, as compared to $65,000 and $131,000 for
      the
      three and six months ended June 30, 2005. These
      amounts are included in general and administrative expenses in the consolidated
      statements of operations, as the Company expects that it will continue to issue
      stock options to such persons.




**Note
      18.**  **Accumulated
      Other Comprehensive Income (Loss)**




The
      accumulated other comprehensive income (loss) reflected in the consolidated
      statement of changes in stockholders’ deficiency and other comprehensive loss
      represents accumulated foreign currency translation adjustments associated
      with
      the conversion of the Company’s United Kingdom and Canadian subsidiaries’
accounts to US dollars. These amounts are not adjusted for income taxes as
      they
      relate to an indefinite investment in a foreign subsidiary.




F-17


**INYX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(tabular
      amounts are expressed in thousands)**





**Note
      19** **.**  **Warrants**




During
      the three and six months ended June 30, 2006, the Company received approximately
      $1.8 million and $6.4 million respectively in cash proceeds from the exercise
      of
      1,839,905 and 6,441,977 warrants respectively at exercise prices per share
      ranging from $0.81 to $2.60. All such proceeds were used for operating
      activities and working capital. In addition, for the three and six months ended
      June 30, 2006, pursuant to certain cashless exercise of warrants, approximately
      10,000 and 401,000 shares of common stock were returned into treasury
      respectively.




In
      comparison, the Company did not issue any warrants for the three months ended
      June 30, 2005. During
      the six months ended June 30, 2005, the Company issued to Laurus Funds, 300,000
      five year warrants in conjunction with a waiver received and certain amendments
      to the registration rights agreements with Laurus Funds. The waiver covered
      any
      Events of Default that may have occurred under the credit facility and term
      note
      due to Laurus Funds. These warrants allow the holders to purchase the Company’s
      common stock at a price of $0.95 per share. The fair value of these warrants
      was
      estimated using the Black-Scholes option pricing model with the following
      weighted average assumption: a risk free interest rate of 3.14%, an expected
      life of four years, a volatility factor of 57.0%, and a dividend yield of 0.0%.
      The value assigned to these warrants was approximately $162,000 and was charged
      as interest and financing costs to the Company’s consolidated statement of
      operations for the six months ended June 30, 2005.




**Note
      20** **.**  **Related
      Party Transactions**




Karver
      International, Inc. (“Karver”) is an affiliated company that subleases office
      space from the Company on the 40 th Floor,
      825 Third Avenue, New York, New York 10022. This consists of approximately
      25%
      of the Company’s total office space in New York. For
      the
      three months ended June 30, 2006 and 2005, the Company charged Karver $10,125
      and $9,000, respectively, for the sublease of furnished office space. In
      addition, the Company charged Karver $7,500 for the three months ended June
      30,
      2006 for management services in accordance with a related management services
      agreement. Under that management services agreement, certain Inyx employees
      located at the Company’s office in Toronto, Canada provide information
      technology, word processing and bookkeeping services to Karver, with such
      services consisting of approximately ten hours of allocated work-time per week.
      There were no similar charges for the three months ended June 30,
      2005.




During
      the three months ended June 30, 2006, the Company entered into a short term
      lease agreement with Karver for sublease of an office space that the Company
      required in Miami, Florida, on a month-to-month basis. Monthly rent payments
      payable to Karver amount to $2,500. For the three month period ended June 30,
      2006, Karver charged the Company a total of $7,500 for sublease of such office
      space.




**Note
      21.**  **Liquidity
      and Capital Resources**




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplates continuation of the Company as a going concern. The Company
      has experienced recurring operating losses and has an accumulated deficit and
      negative working capital. Additionally, the Company has significant debt
      payments due within the next twelve months. As of June 30, 2006, the Company
      was
      in violation of certain financial covenants in connection with its Westernbank
      Credit Facility and although the Company was granted a waiver regarding these
      covenants through August, 21, 2006 by Westernbank, there can be no assurances
      that the Company will meet such covenants in the future or that Westernbank
      will
      continue to grant such waivers.




F-18


**INYX,
        INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(tabular
        amounts are expressed in thousands)**


Management
      of the Company intends to mitigate any factors relating to its future liquidity
      and capital resources from:




1)
      Cash
      generated from its operations. The Ashton business, which was acquired by the
      Company through its wholly-owned subsidiary, Inyx Europe, on August 31, 2005,
      has historically been a profitable operation and the Company expects it to
      continue to be so. The Company also expects to generate positive cash flow
      from
      its Inyx Pharma manufacturing facility as that operation continues to gain
      new
      products and new customers, especially in the HFA production area. The Company
      expects that the Inyx USA operation will commence to generate positive cash
      flow
      by the end of 2006, once the Company completes its transition of its Manatí,
      Puerto Rico site into an integrated business unit, capable of product
      commercialization, manufacturing and distribution for Inyx’s proprietary
      products. The Company also expects its Exaeris subsidiary, which commenced
      formal operations in January 2006, to start to materially contribute to its
      operating cash flow prior to the end of 2006 as a result of the King
      Pharmaceuticals collaboration, the MD Turbo co-promotion agreement, and other
      strategic initiatives including the acquisition of high margin proprietary
      products and complementary profitable businesses currently being completed
      by
      Exaeris.




2)
      Its
      Westernbank credit facilities including its revolving working capital lines
      of
      credit and capital expenditure loans. During 2005, the Company received
      increased limits on the First Westernbank Credit Facility amounting in aggregate
      to $10.0 million. In addition, in January 2006, the Company received an
      additional $5.0 million increase to its limit under the Second Westernbank
      Credit Facility, and a further increase of $3.3 million to this facility during
      the three months ended June 30, 2006.




3)
      The
      issuance of additional equity or debt securities to assist funding its
      operations and strategic growth plans including through product and business
      acquisitions.




There
      can
      be no assurances that the Company’s intentions will be achieved or that
      additional financing will be obtained.




**Note
      22.**  **Extraordinary
      Gain**




For
      the
      three and six months ended June 30, 2006, the Company recorded no income or
      expenses from extraordinary items.




By
      way of
      comparison, on March 31, 2005, Sanofi-Aventis advanced the Company, on a one
      time basis, $3.5 million for manufacturing, product support and business
      transition services to be provided from our Puerto Rico site. For the three
      months ended June 30, 2005, the Company recorded extraordinary income, net
      of
      costs and accrued interest, of approximately $917,000 for the services provided
      under the advance. As of June 30, 2005, approximately $1.2 million of the
      advance remained outstanding. This amount was repaid in December
      2005.





F-19


**UNAUDITED
      PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS**




The
      following unaudited consolidated pro forma statements of operations presented
      herein for the three and six months ended June 30, 2005, give effect to the
      acquisitions of the business assets of Aventis PR and the CMSL (n/k/a Ashton)
      operations as if these acquisitions had taken place at the beginning of the
      respective periods presented.




The
      pro
      forma results for the three months ended June 30, 2005, as summarized below,
      include the actual results of the Company combined with the results of the
      acquired business of CMSL (n/k/a Ashton) for the three months ended June 30,
      2005.




The
      pro
      forma results for the six months ended June 30, 2005, as summarized below,
      include the actual results of the Company combined with the results of the
      acquired business of Aventis PR for the three months ended March 31, 2005,
      and
      the results of the acquired business of CMSL (n/k/a Ashton) for the six months
      ended June 30, 2005; i.e. prior to the respective acquisition dates of those
      two
      businesses.




The
      historical financial data presented is derived from the historical financial
      statements of both companies, prepared in accordance with generally accepted
      accounting principles in the United States of America. The unaudited pro forma
      adjustments and certain assumptions are described in the accompanying notes
      which should be read in conjunction with this unaudited pro forma consolidated
      statement of operations.




The
      preparation of the unaudited pro forma statement of operations for Aventis
      PR
      included an adjustment to reduce any revenues attributable to any Aventis PR
      inter-company sales and customer contracts not renewed at the date of
      acquisition. The Aventis acquisition was accounted for using the purchase method
      of accounting. The unaudited pro forma financial data is not necessarily
      indicative of the operations had the acquisition taken place at the beginning
      of
      the periods presented and such data is not intended to project the Company’s
      results of operations for any future period.




The
      CMSL
      (n/k/a Ashton) acquisition was a share purchase agreement. As such, all
      historical financial information is assumed to be as recorded with the exception
      of the pro forma adjustments as described in the following notes.










**Unaudited
      Consolidated Pro Forma Statement of Operations**


**For
      the Six Months Ended June 30, 2005**





Aventis
                Pharma-ceuticals Puerto Rico, Inc.
            
            Adjustments
              (1)
            
            Aventis
                Puerto Rico (Acquired)
            
            CMSL
              (n/k/a
                Ashton) (Acquired)
                (2)
            
            Inyx,
                Inc.
            
            Aventis
                PR Pro Forma Adjustments
              (3)
            
            CMSL
                (n/k/a Ashton) Pro Forma Adjustments
              (4)
            
            CombinedNet
                revenues
            
            $
            15,575
            
            $
            (11,905)
            (a)
            $
            3,670
            
            $
            22,184
            
            $
            11,178
            
            $
            -
            
            $
            -
            
            $
            37,032Cost
                of sales
            
            
            12,242
            
            
            (10,261
            )
            
            1,981
            
            
            18,073
            
            
            8,400
            
            
            -
            
            
            -
            
            
            28,454Gross
                profit
            
            
            3,333
            
            
            (1,644
            )
            
            1,689
            
            
            4,111
            
            
            2,778
            
            
            -
            
            
            -
            
            
            8,578Operating
                expenses:Research
                and development
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            947
            
            
            -
            
            
            -
            
            
            947General
                and administrative
            
            
            2,609
            
            
            (1,729
            )
            
            880
            
            
            1,819
            
            
            6,426
            
            
            -
            
            
            -
            
            
            9,125Selling
            
            
            -
            
            
            12
            
            
            12
            
            
            658
            
            
            174
            
            
            -
            
            
            -
            
            
            844Depreciation
            
            
            -
            
            
            71
            
            
            71
            
            
            1,952
            
            
            716
            
            
            220
            (a)
            
            186
            (a)
            
            3,145Amortization
                of intangible assets
            
            
            -
            
            
            226
            
            
            226
            
            
            333
            
            
            409
            
            
            89(b
            )
            
            454
            (b)
            
            1,511Total
                Operating expenses
            
            
            2,609
            
            
            (1,420
            )
            
            1,189
            
            
            4,762
            
            
            8,672
            
            
            309
            
            
            640
            
            
            15,572Income
                (loss) from operations before interest and financing costs, income
                tax
                benefit and extraordinary gain
            
            
            724
            
            
            (224
            )
            
            500
            
            
            (651
            )
            
            (5,894
            )
            
            (309)
            (c)
            
            (640)
            (c)
            
            (6,994
            )Interest
                (benefit) expense
            
            
            (1,159
            )
            
            1,524
            
            
            365
            
            
            -
            
            
            6,146
            
            
            (3,061
            )
            
            1,152
            
            
            4,602Restructuring
                expense (benefit)
            
            
            7,965
            
            
            (7,965
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -(Loss)
                profit before income tax benefit and extraordinary gain
            
            
            (6,082
            )
            
            6,217
            
            
            135
            
            
            (651
            )
            
            (12,040
            )
            
            2,752
            
            
            (1,792
            )
            
            (11,596
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            253
            
            
            -
            
            
            -
            
            
            538
            
            
            791Extraordinary
                gain
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            917
            
            
            -
            
            
            -
            
            
            917Net
                (loss) income
            
            $
            (6,082
            )
            $
            6,217
            
            $
            135
            
            $
            (398
            )
            $
            (11,123
            )
            $
            2,752
            
            $
            (1,254
            )
            $
            (9,888
            )







**Unaudited
      Consolidated Pro Forma Statement of Operations**


**For
      the Three Months Ended June 30, 2005**







CMSL
              (n/k/a
                Ashton)
              (Acquired)
              (2)
            
            Inyx,
                Inc.
            
            Aventis
                PR Pro Forma Adjustments
              (3)
            
            CMSL
                (n/k/a Ashton) Pro Forma Adjustments
              (4)
            
            CombinedNet
                revenues
            
            $
            9,486
            
            $
            8,501
            
            $
            -
            
            $
            -
            
            $
            17,987Cost
                of sales
            
            
            7,304
            
            
            5,865
            
            
            -
            
            
            -
            
            
            13,169Gross
                profit
            
            
            2,182
            
            
            2,636
            
            
            -
            
            
            -
            
            
            4,818Operating
                expenses:Research
                and development
            
            
            -
            
            
            590
            
            
            -
            
            
            -
            
            
            590General
                and administrative
            
            
            863
            
            
            4,584
            
            
            -
            
            
            -
            
            
            5,447Selling
            
            
            379
            
            
            40
            
            
            -
            
            
            -
            
            
            419Depreciation
            
            
            1,011
            
            
            555
            
            
            249
            (a)
            
            93
            (a)
            
            1,908Amortization
                of intangible assets
            
            
            168
            
            
            362
            
            
            32
            (b)
            
            227
            (b)
            
            789Total
                Operating expenses
            
            
            2,421
            
            
            6,131
            
            
            281
            
            
            320
            
            
            9,153Income
                (loss) from operations before interest and financing costs, income
                tax
                benefit and extraordinary gain
            
            
            (239
            )
            
            (3,495
            )
            
            (281)
            (c)
            
            (320)
            (c)
            
            (4,335
            )Interest
                (benefit) expense
            
            
            -
            
            
            1,534
            
            
            717
            
            
            576
            
            
            2,827Restructuring
                expense (benefit)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -(Loss)
                profit before income tax benefit and extraordinary item
            
            
            (239
            )
            
            (5,029
            )
            
            (998
            )
            
            (896
            )
            
            (7,162
            )Income
                tax benefit
            
            
            93
            
            
            -
            
            
            -
            
            
            269
            
            
            362Extraordinary
                gain
            
            
            -
            
            
            917
            
            
            -
            
            
            -
            
            
            917Net
                (loss) income
            
            $
            (146
            )
            $
            (4,112
            )
            $
            (998
            )
            $
            (627
            )
            $
            (5,883
            )








**Notes
      to unaudited pro forma consolidated statement of
      operations**




**For
      the Three and Six Months Ended June 30, 2005**




(1)
              Reflects
                  adjustments to eliminate certain revenues and expenses historically
                  recorded or incurred by Aventis PR which related to those operations
                  not
                  acquired by Inyx USA.


a.
            Aventis
                PR’s revenue represents all manufacturing revenues relating to the
                carved-out business of Aventis PR and was derived using the actual
                product
                volumes of the products acquired in the acquisition on March 31,
                2005,
                extended at the newly negotiated unit prices for each one of these
                products.




(2)
            Reflects
                the actual revenue and expenses historically recorded by CMSL (n/k/a
                Ashton). The figures have been converted from GBP’s to US dollars based on
                average exchange rates in effect for the three and six months ended
                June
                30, 2005 and 2006. Adjustments were made to reduce the cost of sale
                and
                correspondingly increase the selling, general and administration
                cost to
                remain consistent with US reporting
                format.




(3)
            Reflects
                the following pro forma adjustments related to the Aventis PR
                acquisition:




a.
            Depreciation
                expense was adjusted to reflect the fair value of assets acquired
                as of
                the closing of the acquisition on March 31, 2005, and based on valuations
                provided by an independent third
                party.




b.
            The
                amortization of intangible assets was recorded to reflect the amortization
                of purchased intangible assets subject to amortization, including
                customer
                contract renewals and customer relationships that were acquired in
                the
                Aventis PR transaction on March 31, 2005, and based on valuations
                provided
                by an independent third party.




c.
            Reflects
                additional interest expense from the Westernbank credit facility
                closed on
                March 31, 2005 and a reduction of interest expense due to the repayment
                of
                the Laurus Master Funds credit facility also occurring on March 31,
                2005.




(4)  Reflects
      the following pro forma adjustments related to the CMSL (n/k/a Ashton)
      acquisition:




a.
            Depreciation
                expense was adjusted to reflect the fair value of assets acquired
                as of
                the closing of the acquisition on August 31, 2005, based on valuations
                provided by a third party.




b.
            Amortization
                of intangible assets was recorded to reflect the amortization of
                purchased
                intangible assets subject to amortization including customer contract
                renewals and customer relationships acquired in the CMSL (n/k/a Ashton)
                acquisition on August 31, 2005, and based on valuations provided
                by a
                third party.




c.
            Reflects
                additional interest expense from the new Westernbank credit facility
                closed on August 31, 2005.









**Item** **2.****MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




**Cautionary
      Note Regarding Forward-Looking Statements**




Statements
      included in this Quarterly Report on Form 10-Q that are not historical facts
      are
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995. Such statements are based on current
      expectations, but involve risks and uncertainties that could cause actual
      results to differ from those projected. The use of terminology such as “expect,”
“believe,” “intend,” “continue,” “anticipate” and other similar expressions
      generally identify forward-looking statements. They include statements relating
      to, among other things, future capital, business strategies, expansion and
      growth of operations, cash flow, marketing of products and services, and
      development of new products and services. Factors that could cause actual
      results to differ materially include, but are not limited to, those described
      throughout this report. The Company disclaims any obligation to update or revise
      any forward-looking statements to reflect events or circumstances occurring
      hereafter.




**General**




Inyx,
      Inc. (“Inyx”, “we”, “us”, “our”, or the “Company”), through its wholly-owned
      subsidiaries, Inyx USA, Ltd. (“Inyx USA”); Inyx Pharma Limited (“Inyx Pharma”);
      Inyx Europe Limited (“Inyx Europe”), including Inyx Europe’s wholly-owned
      subsidiary Ashton Pharmaceuticals Limited (“Ashton Pharmaceuticals” or
“Ashton”); Inyx Canada Inc. (“Inyx Canada”); and Exaeris Inc. (“Exaeris”) is a
      specialty pharmaceutical company .
      We
      focus our expertise on the development and manufacturing of prescription and
      over-the-counter (“OTC”) aerosol pharmaceutical products and drug delivery
      technologies for the treatment of respiratory, allergy, cardiovascular,
      dermatological and topical conditions. Our client base primarily consists of
      ethical pharmaceutical corporations, branded generic pharmaceutical distributors
      and biotechnology companies. Although we perform some sales and marketing
      functions, we have limited product distribution capabilities; therefore we
      depend on our customers’ distribution channels or strategic partners to market
      and sell the pharmaceutical products we develop and manufacture for them.




**Recent
      Developments**




*Commencement
      of Operations of Exaeris*




On
      March
      29, 2005, we incorporated a wholly-owned subsidiary, Exaeris Inc. (“Exaeris”), a
      Delaware Corporation, to manage
      and operate our pharmaceutical marketing and commercial activities, including
      those through collaborative agreements with other companies. In
      January 2006, Exaeris commenced formal operations.




Our
      strategy is to have Exaeris focus on the sales and marketing of niche or
      enhanced generic pharmaceutical products, including our clients’ products and
      our own developed or acquired proprietary products to specialists in the
      respiratory, allergy, dermatological, topical and cardiovascular treatment
      market sectors. By also leveraging our manufacturing expertise in such treatment
      areas, we believe that we can develop a strong competitive position in these
      niche market sectors and more effectively evolve into a fully-integrated
      specialty pharmaceutical company.





Exaeris’
      sales force has been initially established through a commercial relationship
      with a pharmaceutical contract sales representative organization, but we do
      intend to continue to develop and expand Exaeris’ sales and marketing functions
      in order to better serve our clients and collaborative partners. This includes
      the development or acquisition of managed care and national accounts sales
      teams, relationships with drug wholesalers, distributors and mass retailers,
      and
      the enhancement of Exaeris’ sales and market research and analytical operations,




23


In
      addition to continuing to develop and grow Exaeris’ sales and marketing
      functions and industry relationships, Exaeris’ management team’s initial primary
      focus will be to provide the sales, marketing and product promotion support
      required for our product development, manufacturing and marketing collaboration
      agreements with King Pharmaceuticals, Inc. (“King”) regarding King’s
      Intal ® and
      Tilade ® products.
      Intal ® and
      Tilade ® are
      non-steroidal, anti-inflammatory agents for the management of asthma. Such
      multi-year agreements were signed on September 8, 2005 and include the formation
      of an Alliance Management Committee, comprised of three senior executives from
      each company who plan, administer and monitor the activities of parties under
      the noted agreements. Under the King marketing and collaboration agreements,
      Exaeris commenced co-promoting and marketing Intal ® and
      Tilade ® in
      January 2006.




In
      April
      2006, Exaeris also entered into a co-promoting and co-marketing agreement with
      Teamm Pharmaceuticals, Inc. (“Teamm”) to launch a new product, MD TurboTM, in the
      United States. Teamm has licensed MD TurboTM for the U.S. market from a private
      company which developed the product. MD TurboTM is believed to be the first
      product that converts the traditional metered dose inhaler (“MDI”) into a
      breath-activated device. According to its developer, MD TurboTM is a
      patent-protected device that converts 90% of MDIs in use today into automated
      delivery by using a breath-actuated firing mechanism, better ensuring that
      the
      proper amount of medication is delivered into the lungs. MD TurboTM also contains
      an electronic dose counter to further help patients improve medication
      compliance by tracking the number of doses remaining before a refill is
      required.  We believe that the combination of these two key features −
breath activation and dose counting − should address two of the biggest
      challenges in MDI use. In June 2006, MD TurboTM was commercially
      launched.




*Exaeris
      Holdings Limited*




Subsequent
      to June 30, 2006, in order to expand our sales and marketing operations, we
      also
      formed Exaeris Holdings Limited (“Exaeris Holdings”), a wholly owned subsidiary
      of Exaeris that was incorporated in the State of Delaware. Through Exaeris
      Holdings, we intend to pursue the acquisition of specialty pharmaceutical
      companies with sales forces and proprietary product lines that are complementary
      to our existing business.




*Inyx
      Germany GmbH*




During
      the three months ended June 30, 2006, we organized Inyx Germany GmbH (“Inyx
      Germany”) (f/k/a Vision Beteilgungs GmbH), registered in Hamburg, Germany, to
      pursue the development, manufacturing and distribution of pharmaceutical
      products, as well as the acquisition and management of interests of such
      pharmaceutical companies, primarily in Germany. As of the date of this report,
      Inyx Germany had not yet commenced formal operations.




**Consolidated
      Results**




The
      accompanying consolidated financial information includes the accounts of Inyx
      and its wholly-owned subsidiaries: Inyx USA, Inyx Pharma, Inyx Europe, including
      Inyx Europe’s wholly-owned subsidiary Ashton Pharmaceuticals, Inyx Canada and
      Exaeris.  All significant inter-company accounts and transactions have been
      eliminated in consolidation.  The Pro Forma results give effect to the
      acquisitions of Aventis PR (“Inyx USA”) and CMSL (“Ashton”) as if these
      operations had been owned and operated by Inyx for the three and six months
      ended June 30, 2005, along with our Company’s other operations.




24


**Critical
      Accounting Policies and Significant Estimates**




Management’s
      discussion and analysis of Inyx’s financial condition and results of operations
      is based upon the consolidated financial statements which have been prepared
      in
      accordance with U.S. generally accepted accounting principles. The preparation
      of these financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities,
      disclosure of contingent assets and liabilities at the date of the consolidated
      financial statements and the reported amount of revenues and expenses during
      the
      reporting period. Actual results may differ from these estimates under different
      assumptions or conditions. At least quarterly, management reevaluates its
      judgments and estimates which are based on historical experience, current trends
      and various other assumptions that are believed to be reasonable under the
      circumstances.




The
      Company has identified significant accounting policies that, as a result of
      the
      judgments, uncertainties, uniqueness and complexities of the underlying
      accounting standards and operations involved could result in material changes
      to
      its financial condition or results of operations under different conditions
      or
      using different assumptions. The Company believes its most significant
      accounting policies are related to the following areas: revenue recognition,
      translation of foreign currency, valuation of long lived assets and intangible
      assets. Details regarding the Company’s use of these policies and the related
      estimates are described fully in the Company’s 2005 Form 10-K. During 2006,
      there have been no material changes to the Company’s significant accounting
      policies that impacted the Company’s financial condition or results of
      operations.




25


**RESULTS
      OF OPERATIONS**




The
      financial information set forth in the following discussion should be read
      in
      conjunction with and qualified in its entirety by the financial statements
      of
      our Company presented elsewhere herein.




Actual
                Results for the Six Months Ended
              June
                30,
            
            Pro
                Forma Results for the Six Months Ended June 30,
            
            Actual
                Results for the Three Months Ended
              June
                30,
            
            Pro
                Forma Results for the Three Months Ended June 30,2006
            
            2005
            
            2005
            
            2006
            
            2005
            
            2005Net
                revenues
            
            **$**
            **41,554**
            
            $
            11,178
            
            $
            37,032
            
            **$**
            **20,142**
            
            $
            8,501
            
            $
            17,987Cost
                of sales
            
            
            **25,639**
            
            
            8,399
            
            
            28,454
            
            
            **12,528**
            
            
            5,864
            
            
            13,169Gross
                profit
            
            
            **15,915**
            
            
            2,779
            
            
            8,578
            
            
            **7,614**
            
            
            2,637
            
            
            4,818Operating
                expenses:Research
                and development
            
            
            **1,167**
            
            
            947
            
            
            947
            
            
            **485**
            
            
            590
            
            
            590General
                andadministrative
            
            
            **15,261**
            
            
            6,426
            
            
            9,125
            
            
            **10,531**
            
            
            4,585
            
            
            5,447Selling
            
            
            **3,274**
            
            
            174
            
            
            844
            
            
            **2,032**
            
            
            40
            
            
            419Depreciation
            
            
            **3,052**
            
            
            716
            
            
            3,145
            
            
            **1,538**
            
            
            555
            
            
            1,908Amortization
                of intangible assets
            
            
            **879**
            
            
            409
            
            
            1,511
            
            
            **443**
            
            
            362
            
            
            789Total
                operating expenses
            
            
            **23,633**
            
            
            8,672
            
            
            15,572
            
            
            **15,029**
            
            
            6,132
            
            
            9,153Loss
                before interest and financing costs and extraordinary gain
            
            
            **(7,718**
            **)**
            
            (5,893
            )
            
            (6,994
            )
            
            **(7,415**
            **)**
            
            (3,495
            )
            
            (4,335
            )Interest
                and financing costs
            
            
            **4,720**
            
            
            6,146
            
            
            4,602
            
            
            **2,430**
            
            
            1,534
            
            
            2,827Net
                loss before provision for income taxes and extraordinary
                gain
            
            
            **(12,438**
            **)**
            
            (12,039
            )
            
            (11,596
            )
            
            **(9,845**
            **)**
            
            (5,029
            )
            
            (7,162
            )Provision
                for income taxes
            
            
            **-**
            
            
            -
            
            
            791
            
            
            **-**
            
            
            -
            
            
            362Extraordinary
                gain, net of taxes
            
            
            **-**
            
            
            917
            
            
            917
            
            
            **-**
            
            
            917
            
            
            917Net
                loss
            
            **$**
            **(12,438**
            **)**
            
            (11,222
            )
            
            (9,888
            )
            **$**
            **(9,845**
            **)**
            
            (4,112
            )
            
            (5,883
            )




**NET
      REVENUES**




Our
      revenues are derived from pharmaceutical manufacturing revenues, product
      marketing and commercialization fees, and product formulation and development
      outsourcing services, including product stability, commercial scale-up, and
      validation and regulatory support for our clients’ products. Such revenues are
      dependent upon our clients maintaining or obtaining regulatory approval for
      the
      sale of their products in their designated markets.




Revenue
      is recognized when products are shipped and are recorded at the invoiced value
      of goods supplied to customers net of discounts, sales tax and value-added
      tax.
      Development revenue in the form of products and services is recognized using
      the
      proportional-performance model, whereby revenue is recognized as performance
      occurs based on the relative value of the performance that has occurred to
      that
      point in time. Our Company fulfills obligations for development revenue over
      a
      period of time as we believe that our customers receive value throughout the
      performance period.





26


Net
      revenues for the three months ended June 30, 2006 increased by approximately
      $11.6 million or 137% to approximately $20.1 million as compared to net revenues
      of $8.5 million for the same period in the prior year. Pro forma net revenues
      amounted to $18.0 million for the three months ended June 30, 2005.




Net
      revenues for the six months ended June 30, 2006 increased by approximately
      $30.4
      million or 272% to approximately $41.6 million from net revenues of
      approximately $11.2 million for the six months ended June 30, 2005. Pro forma
      net revenues amounted to $37.0 million for the six months ended June 30, 2005.




The
      increase in net revenues for the three and six months ended June 30, 2006,
      as
      compared to the three and six months ended June 30, 2005, is primarily
      attributable to the addition of the Ashton business and the commencement of
      the
      Exaeris business to our operations, neither of which contributed to our net
      revenues and results of operation during the same periods in 2005.




The
      Ashton business is currently our largest operation and, as a result of our
      increasing business development activities and overall business scope, we expect
      that business to continue to expand with the addition of new customers, new
      products and additional volume at the site, especially in the sterile and dry
      powder inhaler areas of the business.




We
      also
      believe that the Exaeris operation will continue to grow as a result of our
      current business development activities and the increasing industry awareness
      of
      our capabilities to assist our clients direct their respective products to
      specific and targeted markets.




Additionally,
      during the three and six months ended June 30, 2005, we commenced certain
      contract development and product commercialization activities at all of our
      manufacturing sites, including technology transfers for a number of existing
      and
      new customers, which are included in our results of operations. Such
      manufacturing commercialization activities include product manufacturing site
      transfers, scale-up and industrialization technical and regulatory support,
      product development and testing work and commercial manufacturing support for
      our customers. We also expect that for those customers with which we do not
      currently have a long term manufacturing relationship, these activities will
      lead to long term manufacturing contracts as a result of the associated product
      manufacturing site registration process that is regulated in our industry.




We
      also
      continue to expand the commercial manufacture of hydrofluoroalkane (“HFA”)
      non-ozone depleting MDIs at both our Inyx USA and Inyx Pharma manufacturing
      sites. We are currently commercializing and manufacturing at least ten HFA
      products for our customers; during the same period in 2005, we were involved
      in
      only four such products. We believe that as the Montreal Protocol continues
      to
      be implemented around the world, and most importantly in the U.S. market, our
      expertise in converting from CFC to CFC-free aerosol pharmaceuticals, and the
      commercialization and production of HFA and hydrocarbon foam products, should
      continue to generate increasing business, especially at our Inyx Pharma and
      Inyx
      USA manufacturing sites where we are currently focused on such
      technologies.




We
      do not
      currently derive any of our revenues from the sale of our own products. Our
      revenues are, therefore, dependent upon our clients maintaining or obtaining
      regulatory approval for the sale of their products in their designated markets.
      Although our net revenues improved between the comparative periods of 2006
      and
      2005 as a result of the additional business noted above, certain existing and
      new business we expected during the six months ended June 30, 2006 has been
      delayed into the fourth quarter of 2006 and early 2007, due to additional
      regulatory documentation and testing procedures that a number of our customers
      have had to complete as they commercialize their products or transfer their
      products into our sites. We expect to make up a majority of this delayed
      business in the second half of 2006 as a result of the timely completion of
      the
      regulatory approval processes for other new products being introduced at our
      sites, additional contract commercialization and manufacturing projects, the
      commercialization of our own proprietary products, and from certain business
      and
      corporate development opportunities we believe we can complete by the fourth
      quarter of 2006.




27


For
      the
      three months ended June 30, 2006, our three top customers in the aggregate
      accounted for approximately $11.4 million or 57% of our total net revenues.
      During this period, these three customers accounted
      for approximately $7.9 million, or 39% of total revenues; approximately $2.8
      million, or 14% of total revenues; and approximately $671,000, or 3% of total
      revenues, respectively.




In
      comparison, for the three months ended June 30, 2005, our three top customers
      in
      the aggregate accounted for approximately $5.8 million, or 68% of our total
      net
      revenues. During this period, these three customers accounted for approximately
      $3.7 million, or 44% of total revenues; approximately $1.5 million, or 18%
      of
      total revenues; and approximately $495,000, or 6% of total revenues,
      respectively.




As
      noted
      above, a delay in
      the production for any one of our top three clients or the loss of any such
      client would have a material adverse affect on our revenues and profitability
      opportunities. As part of our strategic growth objectives, we continue to
      broaden our business scope, customer base and distribution channels to mitigate
      the risk of our economic dependence on any one client. We also believe that
      as
      we continue to expand our product commercialization, manufacturing, production,
      testing and regulatory support and product marketing and distribution
      infrastructure, we will be able to draw additional business and new clients
      who
      will want to leverage that infrastructure to reduce their own supply chain
      costs.




Additionally,
      although we do not currently derive any of our revenues from the sale of our
      own
      products, we believe that we can also increase our revenues and achieve greater
      margins through the addition of our own product lines in selected pharmaceutical
      market sectors, with marketing to be conducted through alliances and
      partnerships with certain strategic customers or directly through Exaeris.
      We
      expect that these types of revenues would include direct sales, royalty payments
      and marketing and licensing fees for our planned products.




***Co-Promotion
      and Strategic Alliance Arrangements*** ****





Our
      Company has entered into co-promotion and strategic alliance arrangements to
      co-promote certain respiratory products in the United States. Pursuant to these
      arrangements, we utilize Exaeris’ U.S. based sales force to promote such
      products. As noted above, Exaeris’ sales force has initially been established
      through a commercial relationship with a pharmaceutical contract sales
      representative organization.




In
      January 2006, under the King marketing and collaboration agreements, Exaeris
      commenced co-promoting and marketing Intal ® and
      Tilade ® (both
      non-steroidal anti-inflammatory respiratory MDIs), to the respiratory specialist
      market.




In
      April
      2006, Exaeris also entered into a co-promoting and co-marketing agreement with
      Teamm to market and promote MD TurboTM to respiratory specialists in the United
      States. The MD TurboTM was commercially launched in June 2006.




**COST
      OF GOODS SOLD**




Cost
      of
      goods sold is associated with manufacturing and development revenues and
      includes materials, labor, factory overheads and technical affairs, including
      quality control and quality assurance regulatory support functions.




28


Cost
      of
      sales for the three months ended June 30, 2006 amounted to approximately $12.5
      million, or 62% of net revenues. In
      comparison, for the three months ended June 30, 2005, cost
      of
      goods sold amounted to approximately $5.9 million, or 69% of net revenues.
      On a
      pro forma basis, for the three months ended June 30, 2005, pro forma cost of
      goods sold amounted to approximately $13.2 million or 73% of pro forma net
      revenues.




Cost
      of
      sales for the six months ended June 30, 2006 amounted to approximately $25.6
      million, or 62% of net revenues. For
      the
      six months ended June 30, 2005, cost
      of
      goods sold amounted to approximately $8.4 million, or 75% of net revenues.
      On a
      pro forma basis, for the six months ended June 30, 2005, pro forma cost of
      goods
      sold amounted to approximately $28.5 million or 77% of pro forma net revenues.




The
      improvement in cost of goods sold as a percentage of net revenues between the
      respective reporting periods is primarily attributable to more efficiencies
      gained from the increasing utilization of our product commercialization, and
      manufacturing capacities and resources; and secondly, through the addition
      of
      more profitable business as a result of the inclusion of Exaeris and Ashton
      in
      our results of operation during the first half of 2006. Exaeris’ costs are
      primarily sales and administrative costs while Ashton has traditionally had
      a
      lower cost of sales in comparison to our Inyx Pharma and Inyx USA
      operations.




We
      do
      expect to further reduce our cost of sales, as a percentage of net revenues,
      as
      we continue to add more business at our facilities and further increase the
      utilization of our manufacturing capacities and resources companywide as well
      as
      grow our Exaeris operations.




**GROSS
      PROFIT**




Gross
      profit for the three months ended June 30, 2006 increased by approximately
      $5.0
      million to approximately $7.6 million, or 38% of net revenues of $20.1 million.
      In comparison, for the three months ended June 30, 2005, we had a gross profit
      of approximately $2.6 million on net revenues of approximately $8.5 million.
      Pro
      forma gross profit for the three months ended June 30, 2005 amounted to
      approximately $4.8 million, or 27% of pro forma net revenue.




Gross
      profit for the six months ended June 30, 2006 amounted to approximately $15.9
      million on net revenues of $41.6 million, or 38% of net revenues. In comparison,
      the gross profit for the six months ended June 30, 2005 amounted to
      approximately $2.8 million on net revenues of approximately $11.2 million,
      or
      25% of net revenues. On a pro forma basis, gross profits amounted to $8.6
      million for the six months ended June 30, 2006, or 23% of pro forma net
      revenue.




The
      improvement in gross profitability between the comparative periods is the result
      of several factors, including the achievement of development milestones during
      the three and six months ended June 30, 2006 on several new customer contracts
      related to high-margin, technical transfer work required prior to the
      commencement of commercial manufacturing. Additionally, production volumes
      from
      commercial supply contracts with our larger current European customers have
      increased due to regulatory approvals in certain European markets having been
      granted for their respiratory products. This has all resulted in increased
      utilization of product development and manufacturing capacity at our facilities
      in the United States and United Kingdom. In turn, we have been able to absorb
      more of our fixed overhead and labor costs, thereby improving our overall gross
      profit margins.




We
      believe that we can further improve our gross profit margins as we continue
      to
      add more business at our facilities and through the addition of our own
      pharmaceutical product lines, which offer greater profit margins than those
      provided by contract manufacturing services. We also continue to pursue product
      in-licensing opportunities, including those in collaboration with other
      pharmaceutical companies. Although we do not currently derive any revenues
      from
      the sale or marketing of our own products, we believe that we can commence
      to
      market our own proprietary products before the end of 2006.




29


**OPERATING
      EXPENSES**




Our
      operating expenses consist of product research and development costs, general
      and administrative, selling, depreciation as well as amortization of intangible
      assets expenses.




Operating
      expenses for the three months ended June 30, 2006 amounted to approximately
      $15.0 million, or 75% of net revenues of $20.1 million. In comparison, for
      the
      three months ended June 30, 2005, our operating expenses amounted to
      approximately $6.1 million, or 72% of net revenues of $8.5 million. On a pro
      forma basis, operating expenses for the three months ended June 30, 2005
      amounted to approximately $9.2 million, or 51% of pro forma net revenues of
      $18.0 million.




Operating
      expenses for the six months ended June 30, 2006 amounted to approximately $23.6
      million, or 57% of net revenues of $41.6 million. In comparison, operating
      expenses for the six months ended June 30, 2005 amounted to approximately $8.7
      million, or 78% of net revenues of $11.2 million. On a pro forma basis,
      operating expenses for the six months ended June 30, 2005 amounted to
      approximately $15.6 million, or 42% of pro forma net revenues of $37.0 million.




The
      increase in our operating expenses for the three and six months ended June
      30,
      2006 is the result of significantly increased general and administrative,
      selling and depreciation expenses as compared to the same periods in 2005 due
      to
      the addition of the Inyx USA and Ashton facilities and operations, and Exaeris’
selling costs to our overall business. In
      addition, for
      the
      three and six months ended June 30, 2006, we have been involved in a number
      of
      corporate and business development activities which has resulted in greater
      general and administrative costs, including travel and third-party costs that
      we
      are now expensing in anticipation of completing such activities. For
      example, for the three months ended June 30, 2006, we have expensed
      approximately $3.0 million in one-time, non-recurring due diligence, travel
      and
      other transaction-associated costs related to these pending business development
      and corporate development activities.




**Research
      and Development Costs**




Research
      and development costs for the three months ended June 30, 2006 were
      approximately $485,000, or 3% of our operating expenses and 2% of our net
      revenues for the period. In comparison, for the three months ended June 30,
      2005, our research and development costs amounted to approximately $590,000,
      or
      10% of our operating expenses and 7% of our net revenues for the comparable
      period. On a pro forma basis, research and development costs for the three
      months ended June 30, 2005 amounted to approximately $590,000, or 6% of pro
      forma operating expenses and 3% of pro forma net revenues.




Research
      and development costs for the six months ended June 30, 2006 were approximately
      $1.2 million, or 5% of our operating expenses and 3% of our net revenues. In
      comparison, research and development costs for the six months ended June 30,
      2005 were approximately $947,000, or 11% of our operating expenses and 8% of
      our
      net revenues. On a pro forma basis, research and development costs for the
      six
      months ended June 30, 2005 amounted to approximately $947,000, or 6% of pro
      forma operating expenses and 3% of pro forma net revenues.




As
      part
      of our strategy to evolve into a specialty pharmaceutical company with our
      own
      proprietary products, we will continue to incur research and development costs
      as part of operating expenses. We also expect research and development costs
      to
      generally increase as we increase our activities in these areas over the next
      twenty-four months. Such costs include intellectual property development costs,
      salaries for required technical staff, fees to consultants and costs associated
      with the use of external laboratory facilities, as may be required. We believe
      that even though research and development costs may increase our operating
      expenses in the short term, in the long term, these costs should be offset
      by
      the higher profit margins derived from the manufacturing and sale of our own
      proprietary products as compared to the operating margins of our contract
      manufacturing services. We plan to distribute our proprietary products through
      our own customers’ distribution channels or in collaboration with other
      strategic marketing partners as well as through Exaeris’ sales and distribution
      channels.




30


We
      are
      focusing our product development efforts on inhalation-therapy drug delivery
      devices and methods, and generic prescription and over-the-counter aerosol
      pharmaceutical products for respiratory, dermatological, topical, and
      cardiovascular applications. We also believe that we can enhance our competitive
      position through the acquisition of regulatory-approved pharmaceutical products
      and drug delivery devices, including those through the acquisition of other
      pharmaceutical companies. One such example is our acquisition of a lipid-binding
      matrix for delivering incompatible or unstable drug substances. We plan to
      use
      this technology to develop our own proprietary metered dose inhalers (“MDIs”)
      for the treatment of asthma and other respiratory diseases, as well as across
      a
      broad-spectrum of other inhalation-therapy treatments, including acute and
      chronic pain management.




We
      have
      not yet commercialized any of our own proprietary products, although we do
      have
      a number of aerosol pharmaceutical products already under development or in
      late
      planning stages. These consist of single molecule and combination HFA
      respiratory inhalants, non-CFC propelled oral sprays for cardiovascular
      ailments, wound irrigation and cleansing sprays utilizing novel barrier
      technologies, and anti-inflammatory nasal pumps. Our initial two proprietary
      products, a wound-care spray and an anti-inflammatory nasal pump, are expected
      to be ready for commercial marketing in late 2006.




During
      2006, we also expect to complete the acquisition of targeted pharmaceutical
      product lines that will assist in expanding our sales and marketing, product
      management and distribution infrastructure and capabilities. We believe that
      these types of capabilities are critical to our plans to evolve into a
      fully-integrated specialty pharmaceutical company with extensive distribution
      channels.




**General
      and Administrative Expenses**




Our
      general and administrative expenses include management and staff compensation;
      corporate overhead costs; administrative support; business and corporate
      development expenses including travel costs; property, business and liability
      insurance; and business support costs incurred by Company.




General
      and administrative expenses for the three months ended June 30, 2006 amounted
      to
      approximately $10.5 million, or 70% of our operating expenses and 52% of our
      net
      revenues for the period. In comparison, for the three months ended June 30,
      2005, our general and administrative expenses amounted to approximately $4.6
      million, or 75% of our operating expenses and 54% of our net revenues for the
      comparable period. On a pro forma basis, general and administrative expenses
      for
      the three months ended June 30, 2005 amounted to approximately $5.4 million,
      or
      60% of our pro forma operating expenses and 30% of pro forma net
      revenues.




General
      and administrative expenses for the six months ended June 30, 2006 amounted
      to
      approximately $15.3 million, or 65% of our operating expenses and 37% of net
      revenues. In comparison, general and administrative expenses for the six months
      ended June 30, 2005 were approximately $6.4 million, or 74% of operating
      expenses and 57% of our net revenues for the comparative period. On a pro forma
      basis, general and administrative expenses for the six months ended June 30,
      2006 amounted to approximately $9.1 million, or 59% of our pro forma operating
      expenses and 25% of pro forma net revenues.




The
      increase in our general and administrative expenses for the three and six months
      ended June 30, 2006 as compared to the same periods in 2005 is primarily due
      to
      the larger scope of our business as a result of the addition of the Inyx USA,
      Ashton and Exaeris operations. As a result, we are incurring additional salary,
      employee benefit and administrative support costs, including those due to the
      addition of senior business and financial executives to our management team
      in
      order to help manage our operations and business integration activities. For
      the
      three months ended June 30, 2006, we incurred approximately $3.5 million for
      salaries and benefits. Other general and administrative costs for the three
      months ended June 30, 2006 includes insurance costs of approximately $1.0
      million, travel expenses of approximately $1.3 million, building and rent
      expenses of approximately $800,000, and legal, audit and outside consulting
      expenses of approximately $590,000.




31


In
      addition, for
      the
      three and six months ended June 30, 2006, we have been involved in a number
      of
      corporate and business development activities in both Europe and the U.S. that
      have resulted in an increase in general and administrative costs. These costs
      include travel, due diligence and other non-recurring charges relating to
      acquisitions, which amounted to approximately $1.7 million for
      the
      three months ended June 30, 2006.




Although
      we have been incurring additional general and administrative costs due to our
      corporate development activities, we believe that once we begin to introduce
      our
      own proprietary products and acquired products, we can continue to improve
      our
      revenue stream and subsequent gross profit margins, and that such improved
      margins will thereby offset any incremental general and administrative costs
      that we may have to incur as a result of our strategic development plans and
      overall business expansion.




**Selling
      Expenses**




Selling
      expenses consist primarily of salaries, commissions and marketing costs,
      including those associated with Exaeris, the commercial and marketing operation
      of our business.




Selling
      expenses for the three months ended June 30, 2006 amounted to approximately
      $2.0
      million, or 14% of our operating expenses and 10% of our net revenues for the
      period. In comparison, for the three months ended June 30, 2005, our selling
      expenses amounted to approximately $40,000, or 1% of our operating expenses
      and
      0.5% of our net revenues for the comparable period. On a pro forma basis,
      selling expenses for the three months ended June 30, 2005 amounted to
      approximately $419,000 or 5% of pro forma operating expenses and 2% of pro
      forma
      net revenues.




Selling
      expenses for the six months ended June 30, 2006 were approximately $3.3 million,
      or 14% of our operating expenses and 8% of net revenues. In comparison, selling
      expenses for the six months ended June 30, 2005 were approximately $174,000,
      or
      2% of operating expenses and 2% of net revenues for the comparable period.
      On a
      pro forma basis, selling expenses for the six months ended June 30, 2005
      amounted to approximately $844,000, or 5% of pro forma operating expenses and
      2%
      of pro forma net revenues.




The
      increase in selling expenses is primarily attributable to the commencement
      of
      our Exaeris operation, and enhanced sales and marketing activities across all
      of
      our operations as we continue to increase our business and revenue base. We
      also
      expect our selling expenses to increase concomitantly with expected revenue
      increases as we continue to ramp-up our business development and commercial
      activities.




Although
      we continue to expand our own proprietary product development programs, we
      have
      not yet commercialized or marketed our own products or drug delivery
      applications. Our sales and marketing functions have, therefore, been primarily
      focused on expanding our pharmaceutical manufacturing and development business
      with existing or potential clients.




Under
      Exaeris, we continue to build a sales force through a contract services
      organization. Although part of this cost will be offset as a result of our
      collaboration agreement with King, a larger sales force will add to our selling
      expenses in 2006. We
      believe that we can offset such additional costs by the new revenue stream
      that
      this sales force is expected to generate, including through expected revenues
      from product in-licensing opportunities that we are actively pursuing.




32


**Depreciation**




The
      value
      of our property, plant and equipment is stated at cost. Depreciation is computed
      using the straight-line method based on the estimated useful lives of the
      assets, which range from 25 years for buildings and 3-10 years for equipment.




Depreciation
      expenses for the three months ended June 30, 2006 amounted to approximately
      $1.5
      million, or 10% of our operating expenses. In comparison, for the three months
      ended June 30, 2005, depreciation expenses amounted to $555,000 or 9% of
      operating expenses for the comparable period in the prior year. On a pro forma
      basis, depreciation expenses for the pro forma three months ended June 30,
      2005
      amounted to approximately $1.9 million, or 21% of pro forma operating
      expenses.




Depreciation
      expenses for the six months ended June 30, 2006 were approximately $3.1 million,
      or approximately 13% of operating expenses. In comparison, depreciation expenses
      for the six months ended June 30, 2005 were approximately $716,000 or
      approximately 8% of operating expenses for the comparable period in the prior
      year. On a pro forma basis, depreciation expenses for the pro forma six months
      ended June 30, 2005 amounted to approximately $3.1 million or 20% of pro forma
      operating expenses.




The
      increase in depreciation expenses for the three months ended June 30, 2006
      is
      primarily attributable to depreciation expenses of approximately $944,000
      relating to the addition of the Ashton facility to our operations. This
      primarily consists of building, and machinery and equipment in the amount of
      $4.8 million and $18.1 million, respectively. In addition, depreciation expense
      increased between the comparative periods as a result of additional office
      furniture and fixtures acquired to accommodate our growth.




The
      increase in depreciation expenses for the six months ended June 30, 2006 is
      primarily attributable to the depreciation expense of approximately $2.3 million
      relating to addition of the Inyx USA and Ashton facilities to our operations.
      This primarily consists of building, and machinery and equipment in the amount
      of $8.6 million and $24.8 million, respectively. The increase also consists
      of a
      depreciation expense relating to HFA manufacturing equipment held for use that
      has now been placed in service during the current six-month period to
      commercially manufacture products for two of our larger customers at our Inyx
      Pharma site. In
      addition, depreciation expense increased between the comparative six-month
      periods as a result of additional office furniture and fixtures acquired to
      accommodate our growth.




**Amortization
      of Intangible Assets**




The
      fair
      values assigned to the intangible assets acquired are based on estimates and
      assumptions provided and other information compiled by management, including
      independent valuations that utilize established valuation techniques appropriate
      for the industry in which our Company operates. Amortization
      expenses for intangible assets relate to acquired intangible assets, which
      include trade marks, trade names, customer relationships, customer contracts,
      customer lists, product licenses, know-how, and a technology patent acquired
      by
      our Company.




The
      amortization expense for intangible assets for the three months ended June
      30,
      2006 was approximately $443,000, or 3% of operating expenses for the period.
      In
      comparison, for the three months ended June 30, 2005, the amortization expense
      for intangible assets amounted to approximately $362,000 or 6% of operating
      expenses for the comparable period in the prior year. On a pro forma basis,
      such
      amortization expense amounted to approximately $789,000, or 9% of pro forma
      operating expenses for the three months ended June 30, 2005.




33


The
      amortization expense for intangible assets for the six months ended June 30,
      2006 was approximately $879,000, or 4% of our operating expenses. In comparison,
      the amortization expense for the six months ended June 30, 2005 was
      approximately $409,000 or 5% of operating expenses for the comparable six month
      period in the prior year. On a pro forma basis, such amortization expense
      amounted to approximately $1.5 million, or 10% of pro forma operating expenses
      for the six months ended June 30, 2005.




The
      increase in amortization expenses for the three months ended June 30, 2006
      is
      attributable to amortization
      expense of approximately $128,000 relating to the
      addition of the Ashton facility to our operations. This primarily consists
      of
      customer relationships and product licenses in the amount of $5.7 million and
      $1.2 million, respectively.




The
      increase in amortization expense for the six months ended June 30, 2006 is
      primarily attributable to the amortization expense of approximately $474,000
      relating to the addition of the Inyx USA and Ashton facilities to our
      operations. This
      primarily consists of customer contracts, customer relationships and product
      licenses in the amount of $1.4 million, $10.8 million and $1.2 million,
      respectively.




These
      intangible assets are amortized on a straight line basis over their estimated
      remaining useful lives in proportion to the underlying cash flows that were
      used
      in determining the acquired value.




**INTEREST
      AND FINANCING COSTS**




Interest
      and financing costs consist of interest expense related to borrowings under
      working capital lines of credit and long term debt.




For
      the
      three months ended June 30, 2006, interest and financing costs were
      approximately $2.4 million as compared to approximately $1.5 million for the
      three months ended June 30, 2005. For the pro forma three months ended June
      30,
      2005, pro forma interest and financing costs amounted to approximately $2.8
      million.




For
      the
      six months ended June 30, 2006, interest and financing costs were approximately
      $4.7 million as compared to approximately $6.1 million for the six months ended
      June 30, 2005. For the pro forma six months ended June 30, 2005, pro forma
      interest and financing costs amounted to approximately $4.6
      million.




Interest
      and financing costs for the three months ended June 30, 2006 included
      approximately $2.2 million in interest payments to Westernbank and approximately
      $171,000 in amortization of deferred financing charges.




Interest
      and financing costs for the six months ended June 30, 2006 included
      approximately $4.3 million in interest payments to Westernbank and approximately
      $332,000 in amortization of deferred financing charges. During the six months
      ended June 30, 2005, our Company incurred interest on debt, debt discount,
      beneficial conversion feature relating to a convertible debt, and amortization
      of interest costs in the amounts of approximately $2.3 million, $1.4 million,
      $1.7 million and $716,000 relating to the repayment of debt, respectively.




The
      higher interest and financing costs for the three months ended June 30, 2006
      are
      related to the asset-based funding that Westernbank has provided the Aventis
      PR
      and Ashton acquisitions, and our operations of those sites to date. As of June
      30, 2006, the weighted average interest rate on outstanding loans during the
      period amounted to approximately 10.24%.




34




**EXTRAORDINARY
      GAIN**




On
      March
      31, 2005, Sanofi-Aventis advanced our Company, on a one time basis, $3.5 million
      for manufacturing, product support and business transition services to be
      provided from our Puerto Rico site. For the three months ended June 30, 2005,
      our Company recorded extraordinary income, net of costs and accrued interest,
      of
      approximately $917,000 for the services provided under the advance. As of June
      30, 2005, approximately $1.2 million of the advance remained deferred and was
      subsequently repaid as services were not provided.




**NET
      LOSS**




The
      net
      loss for the three months ended June 30, 2006 was approximately $9.8 million
      as
      compared to a net loss of approximately $4.1 million for the three months ended
      June 30, 2005. For the pro forma three months ended June 30, 2005, the pro
      forma
      net loss was approximately $5.9 million.




The
      net
      loss for the six months ended June 30, 2006 was approximately $12.4 million
      as
      compared to a net loss of $11.1 million for the six months ended June 30, 2005.
      For the pro forma six months ended June 30, 2005, the pro forma net loss was
      approximately $9.9 million.




Although
      our net revenues and gross profits continue to grow, the increase in our net
      loss for the three and six months ended June 30, 2006 is the result of our
      increased general and administrative, selling and depreciation expenses as
      compared to the same periods in 2005 due to the recent addition and integration
      of the Inyx USA and Ashton facilities and operations into our business, and
      a
      result of the addition of Exaeris’ administrative and selling costs on our
      overall business. Although Exaeris’ costs are partly offset as a result of our
      collaboration agreement with King, we expect that it will take until the end
      of
      2006 before Exaeris’ revenue stream, including as a result of the King
      collaboration, the MD TurboTM co-promotion agreement, and any revenues we are
      expecting from product in-licensing and acquisition opportunities that we are
      actively pursuing, will totally offset its administrative and selling costs.




In
      addition, as noted earlier, for
      the
      three and six months ended June 30, 2006, we have been involved in a number
      of
      corporate and business development activities that has resulted in greater
      general and administrative costs, including travel and third-party costs that
      we
      are now expensing in anticipation of completing such activities. For
      example, for the three months ended June 30, 2006, we have expensed
      approximately $3.0 million in one-time, non-recurring due diligence, travel
      and
      other transaction-associated costs related to these pending business development
      and corporate development activities.




Subsequently,
      we do expect to continue benefiting from our recent acquisitions as a result
      of
      the diverse client base, commercial collaborations and business development
      opportunities that we believe these business assets are starting to provide
      to
      our overall operations in 2006, and that we
      believe should contribute increasingly in future years.
      We believe that once we fully integrate these new acquisitions and continue
      to
      ramp-up our business and marketing efforts, we can obtain new contracts and
      purchase orders from existing and new customers. This should allow us to
      continue to improve the capacity utilization of our facilities, thereby
      improving our profitability and allowing us to absorb more of our fixed
      expenses, overhead costs, and interest and financing charges.




We
      also
      expect our profitability opportunities to improve once we have commercialized
      for sale our own proprietary products that we are currently developing or
      acquiring, or those through collaborative or in-licensing agreements with other
      pharmaceutical companies. We believe that we can continue to enhance our
      competitive position through the acquisition of additional regulatory-approved
      pharmaceutical products and drug delivery devices for respiratory,
      dermatological, topical and cardiovascular drug delivery applications or such
      products in development, including those through the acquisition of other
      pharmaceutical companies.




35




**LIQUIDITY
      AND CAPITAL RESOURCES**




**General**




We
      are
      financing our operations primarily through our credit facilities with our
      lenders, revenues from multi-year contract manufacturing and product development
      contracts and purchase orders, and as may be required, the sale of equity
      securities, proceeds from option and warrant exercises, stockholder loans and
      capital lease financing.




As
      of
      June 30, 2006, we had approximately $102.1 million in loan obligations (short
      term and long term debt) that are due through 2008, including approximately
      $88.9 million relating to our credit facilities with Westernbank which are
      automatically renewable on maturity in March 2008, on a year-to-year basis,
      unless terminated by us or Westernbank. The balance of the obligations includes
      approximately $13.1 million due within the next 12 months relating to amounts
      owed related to our purchase of the Ashton business.




As
      of
      June 30, 2006, our current assets, including cash and cash equivalents, accounts
      receivable (net of $23.4 million deferred revenue), inventory and other current
      assets amounted to approximately $37.7 million. Current liabilities amounted
      to
      approximately $92.4 million and include approximately $37.9 million in
      borrowings under working capital lines of credit (which automatically renew
      on
      maturity in March 2008, on a year-to-year basis unless terminated by either
      party); approximately $26.6 million in accounts payable and other current
      liabilities; approximately $9.4 million for the current portion of our long
      term
      debt obligations; approximately $13.1 in a loans repayable related to our
      acquisition of the Ashton business; and approximately $1.9 million as a deferred
      tax liability.




We
      believe that we can continue to adequately service our debt with Westernbank
      and
      fund our operations through the business generated from our recent acquisitions
      and expanded business base. Our expanded business base has contributed
      significantly to our revenues, cash flows and profitability opportunities as
      it
      has diversified and grown our client base, enhanced our product development,
      manufacturing and marketing capabilities, and enlarged our overall scope of
      operations.




Ashton
      has historically been a highly profitable operation but for certain
      non-recurring items and is expected to continue to be so. Customer production
      demand at Ashton continues to be strong in both the sterile and dry powder
      inhaler areas, which traditionally provide higher margins. We expect that our
      Inyx USA facility will be profitable due to the increasing demand for
      respiratory, allergy and cardiovascular products from that facility, as the
      Montreal Protocol is implemented in the United States, and due to new contracts
      commencing at this facility. In addition, the HFA line at our Inyx Pharma site
      is currently running at fully capacity as we ramp-up production for our
      customers in that area of our business.




We
      also
      expect Exaeris, which commenced formal operations in January 2006, to start
      to
      materially contribute to our revenues prior to the end of 2006 as a result
      of
      the King collaboration agreement, the MD
      TurboTM
co-promotion agreement, and
      other
      strategic initiatives that we are currently pursuing with Exaeris.




We
      also
      expect to achieve profitability by continuing to intensify our sales and
      marketing efforts to increase the number of customer purchase orders and
      contracts for our development and manufacturing services, especially as our
      recent acquisitions have significantly strengthened and enlarged our Company’s
      operating scope. Additionally, these acquisitions have led to new and profitable
      multi-year exclusive manufacturing contracts with large pharmaceutical
      clients.




36


We
      also
      believe that we can establish new sources of revenue by marketing our own
      proprietary pharmaceutical products or selected clients’ products through
      collaborative agreements, such as our recent collaborative agreement with King
      Pharmaceuticals and the MD TurboTM co-promotion agreement. Based on
      pharmaceutical industry profit margins for these types of proprietary products,
      we expect that such types of agreements and the successful commercialization
      and
      marketing of our own proprietary products should offer higher profit margins
      and
      will thereby improve our performance and overall profitability, and provide
      us
      with greater operating cash flow.




As
      a
      result, we cannot predict exactly if, or when, additional funds will be needed.
      We may obtain funds through a public or private financing, including equity
      financing, debt financing, a combination of debt and equity financing, and/or
      through collaborative arrangements. Additionally, we cannot predict whether
      any
      such financing will be available on acceptable terms. If our funding
      requirements are not met, we may have to delay, reduce in scope or to raise
      additional funds through additional borrowings or the issuance of additional
      debt or equity securities.




Therefore,
      until that time, we will continue to depend on our Westernbank credit
      facilities, contract manufacturing and product support customer revenues, and
      any required placements of equity and debt securities to assist us with our
      working capital requirements and the implementation of our business development
      strategies, capital expenditure plans, and proprietary product development
      and
      commercialization initiatives.




**Capital
      Resources**




As
      of
      June 30, 2006, our total indebtedness outstanding (including current portion
      and
      amounts due to Seller of Ashton) was approximately $102.1 million, consisting
      of
      approximately $88.9 million under two credit facilities with Westernbank
      Business Credit, a division of Westernbank Puerto Rico, (“Westernbank”) related
      to the two acquisitions made in 2005, and $13.1 million related to our
      acquisition of Ashton (f/k/a Celltech Manufacturing Services Limited). The
      sum
      owed to UCB Pharma is comprised of a non-interest bearing amount of
      approximately $8.4 million (€6.7 million) relating to deferred purchase price,
      plus approximately $4.7 million (£2.6 million) in indebtedness related to the
      additional net current assets acquired but not considered when the purchase
      price was negotiated. For a more detailed discussion of our credit facilities
      with Westernbank and the loan from UCB Pharma see “Financing Activities” below.




As
      of
      June 30, 2006, our annual long term debt service requirements are approximately
      $14.4 million (which includes approximately $5.1 million of interest.) Such
      debt
      is collateralized by all the existing and future assets of our Company and
      its
      subsidiaries. In the event we are unable to generate sufficient cash flow from
      our operations or use proceeds derived from our financing efforts including
      through issuance of debt or equity securities, we may face difficulties in
      servicing our substantial debt load.




During
      the three and six months ended June 30, 2006, our Company received approximately
      $1.8 million and $6.4 million, respectively, in cash proceeds from the exercise
      of 1,839,905 and 6,441,977 warrants, respectively, at exercise prices per share
      ranging from $0.81 to $2.60. All such proceeds were used for operating
      activities and working capital. In addition, for the three and six months ended
      June 30, 2006, pursuant to certain cashless exercise of warrants, approximately
      10,000 and 401,000 shares of common stock were returned into treasury,
      respectively.




Subsequent
      to June 30, 2006, our Company received approximately $3.0 million in cash
      proceeds from the exercise of 2,659,290 warrants at prices per share ranging
      from $0.95 to $1.35. All such proceeds were used for operating activities and
      working capital.




37


We
      believe that the funding provided by our current asset-based facilities provide
      us with the necessary capital to fund our core operations, including raw
      material and component purchases, research and development and business
      development activities, and capital expenditures and debt servicing
      requirements. On a short term basis, these financings have provided us with
      sufficient capital to fund all of our present operations, including our
      immediate capital expenditure plans and the commercialization of our first
      two
      proprietary products, which we plan to commence marketing by the end of 2006.
      On
      a longer term basis, over the next three years, we will require additional
      funding of approximately $8.6 million to continue to implement our business
      development strategies, capital expenditure plans and the development and
      commercialization of our own proprietary pharmaceutical products. We intend
      to
      raise such funds through the issuance of debt or equity securities at the time
      we require such funding, although no such financing plans have been formalized
      at this time.




Additionally,
      we believe that we can enhance our competitive position through the acquisition
      of regulatory-approved pharmaceutical products and drug delivery devices for
      respiratory, dermatological, and topical and cardiovascular drug delivery
      applications or such products in development, including those through the
      acquisition of other pharmaceutical companies. We are actively pursuing or
      are
      involved in acquisitions that require substantial capital resources. In the
      event that we make such acquisitions or change our capital structure, we may
      be
      required to raise funds through additional borrowings or the issuance of
      additional debt or equity securities.




Furthermore,
      as we need additional funds to expand our sales and marketing activities and
      fully develop, manufacture, market and sell our potential products, we may
      have
      to delay our product development or reduce in scope, commercialization and
      marketing programs if we are unable to continue to obtain the necessary capital
      to fund these operations. We expect to meet our short term liquidity
      requirements through net cash provided by operations and borrowings under the
      debt agreements with Westernbank. We believe that these sources of cash will
      be
      sufficient to meet our Company’s operating needs and planned capital
      expenditures for at least the next twelve months.




**Analysis
      of Cash Flows**




At
      June
      30, 2006, we had cash of approximately $1.3 million as compared to cash of
      $1.1
      million at June 30, 2005.




***Cash
      Flows from Operating Activities for the*** ***Six
      Months Ended June 30, 2006 and 2005***




The
      net
      cash used in operating activities for six months ended June 30, 2006 was
      approximately $3.2 million compared to approximately $4.5 million for the six
      months ended June 30, 2005.




Our
      net
      cash used in operations was primarily the result of a $12.4 million net loss,
      adjusted by non-cash charges including amortization of financing costs and
      debt
      discount of approximately $332,000, depreciation of approximately $3.1 million,
      a reversal of reserve for bad debts of approximately $517,000 and provision
      for
      obsolete inventory amounting to approximately $392,000, amortization of
      intangible assets of approximately $879,000 and compensation expense on stock
      options issued to employees of approximately $442,000. Working capital changes
      reducing cash flow from operations were due to increases to our accounts
      receivables amounting to approximately $3.7 million, an increase to our prepaid
      deposits and other current assets amounting to approximately $899,000, and
      an
      increase of $160,000 in deferred financing costs, and other, net, of
      approximately $1.1 million. Working capital changes increasing cash flow from
      operations were due primarily to a decrease to inventory amounting to
      approximately $622,000, an increase in accounts payable and accrued liabilities
      of approximately $6.3 million, and an increase in deferred revenue of
      approximately $3.6 million.





38




***Cash
      Flows from Investing Activities for the Six Months Ended June 30, 2006 and
      2005***




The
      net
      cash used in investing activities for the six months ended June 30, 2006
      amounted to approximately $7.3 million compared to approximately $23.2 million
      for the comparative period in 2005.




For
      the
      six months ended June 30, 2006, there were capital expenditures of approximately
      $2.2 million consisting of approximately $1.6 million for production machinery
      and equipment and construction in progress costs, and approximately $656,000
      for
      office furniture, computer hardware and building and leasehold
      improvements.




***Cash
      Flows from Financing Activities for the Six Months Ended June 30, 2006 and
      2005***




For
      the
      six months ended June 30, 2006, the net cash provided by financing activities
      approximated $8.9 million compared to approximately $28.4 million for the six
      months ended June 30, 2005.




The
      cash
      provided by financing activities for the six months ended June 30, 2006 included
      net proceeds from the exercise of warrants and stock options of approximately
      $6.4 million, net proceeds from borrowings under working capital lines of credit
      of approximately $6.9 million net proceeds of approximately $246,000 from the
      issuance of long term debt, and proceeds of approximately $5,000 from the
      exercise of stock options. These proceeds were offset by payments of principal
      of approximately $4.6 million on our Westernbank term loans and costs of
      approximately $64,000 relating to the issuance and registering of
      stock.




**External
      Sources of Liquidity**




***Financing
      Activities***




On
      March
      31, 2005, we obtained a non-dilutive, asset based secured credit facility from
      Westernbank Business Credit Division of Westernbank Puerto Rico, Puerto Rico's
      second largest bank and a wholly owned subsidiary of W Holding Company, Inc.
      originally totaling $46.0 million (the “First Westernbank Credit Facility"), the
      aggregate limit of this facility was increased to $51.0 million and then again
      to $56.0 million on September 1, 2005 and November 22, 2005 respectively. The
      second increase of up to $5.0 million as a Secured Over Formula Advance
      (“SOFA”), this SOFA facility is utilized to fund prepayment of inventory
      purchases and is revolving in nature. The First Westernbank Credit Facility
      provides up to $15.0 million under a revolving line of credit (the "Revolver")
      secured by accounts receivables and inventory and up to $36.0 million under
      a
      series of three term notes (the "Term Notes") and a mezzanine loan of $5.0
      million, secured by all assets of our Company and its subsidiaries whether
      now
      owned or thereafter to be acquired.




The
      Revolver has a three-year term and bears interest at the Westernbank prime
      rate
      plus 1.0%. The availability on the Revolver is based on a percentage of our
      accounts receivable, unbilled finished good inventory and raw and in-process
      inventory. The three Term Notes bear interest at the Westernbank prime rate
      plus
      2.0% with monthly payments having commenced on July 1, 2005. The mezzanine
      term
      loan bears interest at the rate of 15.0% with monthly principal payments having
      commenced on July 1, 2005. All of the Term Notes mature on August 31, 2008
      and
      are automatically renewed on a year-to-year basis unless terminated by our
      Company or Westernbank. Payment of the amounts due under the Term Notes
      accelerates upon the occurrence of an event of default. As of June 30, 2006
      total loan balance under the First Westernbank Credit Facility approximated
      $48.9 million.




The
      availability under the First Westernbank Credit Facility allowed our Company
      to
      complete the acquisition of certain assets and business of Aventis
      Pharmaceuticals Puerto Rico Inc. from Aventis Pharmaceuticals, Inc., a member
      of
      the Sanofi-Aventis Group, to restructure debt by repaying the $12.4 million
      Credit Facility with the Laurus Funds and to provide funding for working capital
      requirements.




39


On
      August
      31, 2005, our Company, through our wholly owned subsidiary Inyx Europe Limited,
      obtained an additional non-dilutive asset based secured credit facility from
      Westernbank totaling $36.5 million (“the Second Westernbank Credit Facility”) to
      help fund its acquisition of Ashton. The Second Westernbank Credit Facility
      is
      comprised of a revolving loan of up to $11.7 million including a reserve of
      $500,000 plus a series of four term notes (Term Notes “A”, “B”, “C” and “D”)
      amounting in aggregate up to $24.8 million.  The
      limit
      available under the revolving loan was increased by Westernbank on January
      19,
      2006 by $5.0 million to $16.7 million and again during the three months ended
      June 30, 2006 to $20.0 million, thus increasing total availability under these
      facilities to $44.8 million. The revolving working capital line of credit
      associated with the Second Westernbank Credit Facility is secured by Ashton’s
      eligible receivables and inventory. The term notes associated with this credit
      facility are secured by all of the assets of our Company and its subsidiaries,
      Inyx Europe and Ashton, and a guaranteed by those parties pursuant to Guarantor
      General Security Agreement. In addition, our Company has pledged the stock
      of
      Inyx Europe, and Inyx Europe has pledged the stock of Ashton to Westernbank,
      as
      part of the collateral for the Credit Facility, in each case pursuant to a
      Pledge and Security Agreement. Term Note “A”, “B” and “C” bear interest at
      Westernbank prime rate plus 2% with principal payments having commenced December
      1, 2005. Term Note “D” bears interest at the rate of 15% per annum with
      principal payments based on an agreed upon formula having commenced January
      1,
      2006.




All
      of
      the Term Notes mature on August 31, 2008 and are automatically renewed on a
      year-to-year basis unless terminated by our Company or Westernbank. Payment
      of
      the amounts due under the Term Notes accelerates upon the occurrence of an
      event
      of default. As of June 30, 2006 total loan balance under the Second Westernbank
      Credit Facility approximated $40.0 million.




The
      Westernbank prime interest rate at June 30, 2006 was 8.0%.




***Certain
      Indebtedness and Other Matters***




During
      the three month period ended June 30, 2006, our Company settled
      approximately $1.6 million (£900,000) to the previous owner of Ashton, UCB
      Pharma, relating to a deferred purchase price of that business. As of June
      30,
      2006, the amount owed to UCB Pharma was approximately $8.4 million (€6.7
      million). Our Company also owes approximately $4.7 million (£2.6 million) as
      payment due for the additional net current assets acquired not considered when
      the purchase price was negotiated between the parties (“excess working capital
      adjustment”). This excess working capital adjustment is non-interest bearing.




Our
      Company is in the process of renegotiating the payment terms of the deferred
      purchase price which is non-interest bearing, and is due to commence on
      September 29, 2006, payable in four equal monthly installments, which may be
      extended by mutual agreement between the parties. Our Company is also entitled,
      at any time prior to payment of the balance of the purchase price, to set-off
      against any unpaid claim it may have against UCB under the Ashton share purchase
      agreement. As collateral for the deferred portion of the purchase price, our
      Company granted UCB a secondary security position over our Company’s assets
      behind Westernbank’s current first security position which is to be released
      upon full payment of the deferred purchase price. Westernbank and UCB have
      also
      agreed to an inter-creditor agreement to be terminated upon full payment of
      the
      deferred purchase price.




In
      addition to indebtedness noted above, our Company’s stockholders have
      periodically advanced and received repayment of funds loaned to our Company.
      We
      have utilized such stockholder loans to support operations, settle outstanding
      trade accounts payable, and for general working capital purposes. Such loans
      are
      usually advanced on a short term basis.




40


For
      the
      three and six months ended June 30, 2006, our interest and financing costs
      totaled approximately $2.4 million and $4.7 million respectively. These amounts
      included approximately $2.2 million and $4.3 million respectively in interest
      payments to Westernbank and approximately $171,000 and $332,000 respectively
      in
      amortization of deferred financing charges for the respective periods. As
      of
      June 30, 2006, the weighted average interest rate on outstanding loans during
      the period amounted to approximately 10.24%.




In
      comparison, for the three and six months ended June 30, 2005, interest and
      financing costs amounted to approximately $1.5 million and $6.1 million,
      respectively, which included the acceleration of deferred charges, debt
      discount, an early termination penalty and additional warrants issued totaling
      approximately $3.8 million and approximately $451,000 and $915,000,
      respectively, in fees related to our Company’s 2004 equity financing activities.
      As of June 30, 2005, the weighted average interest rate paid on the gross
      outstanding debt during the period was approximately 8.0%.




***Capital
      Expenditures***




We
      continuously make capital improvements to our development and production
      facilities in order to improve operating efficiencies, increase automation,
      improve quality control and keep pace with regulatory requirements and market
      demand.




For
      the
      three months ended June 30, 2006, there were capital expenditures of
      approximately $1.1 million consisting of approximately $505,000 for production
      machinery and equipment and construction in process costs and approximately
      $568,000 for office furniture, computer hardware and building and leasehold
      improvements.




For
      the
      six months ended June 30, 2006, there were capital expenditures of approximately
      $2.2 million consisting of approximately $1.6 million for production machinery
      and equipment and construction in progress costs, and approximately $656,000
      for
      office furniture, computer hardware and building and leasehold
      improvements.




***Future
      Commitments***




As
      of
      June 30, 2006, we have commitments under various long term lease agreements
      for
      premises including those for our office and development and production
      facilities. These property leases range from one to fifteen years depending
      on
      the specific property. We also have a number of operating and capital leases
      for
      office equipment, fork lifts and staff automobiles in the United Kingdom.




As
      of
      June 30, 2006, we had operating lease contractual obligations totaling
      approximately **$** 3.1
      million due to various vendors over the next ten years.




As
      of
      June 30, 2006, our Company has billed approximately $27.0 million for services
      to be provided. The revenues are recognized into income as services are
      performed.




As
      an
      evolving specialty pharmaceutical company, we are also involved in a number
      of
      business development projects including research and development and equipment
      acquisition activities that require the use of capital resources over extended
      periods of time. Such activities may also include the use of external resources
      and third parties that require prepayment or cash deposits for supplies,
      equipment, and products or services that we may require from time to time.
      As we
      continue to grow our business and also intensify the development of our own
      proprietary products, our capital requirements and/or future commitments may
      increase accordingly. The profit margins on our proprietary products and
      consulting services are expected to be higher than our contract manufacturing
      services, although the time line for the commencement of revenues and earnings
      from these newly evolving business activities may be longer than that of our
      established contract manufacturing operations.





41


**Subsequent
      Events**





Subsequent
      to June 30, 2006, our Company issued 2,659,290 shares of its restricted common
      stock upon the exercise of 2,659,290 warrants at prices per share ranging from
      $0.95 to $1.35 for total cash proceeds of approximately $3.0 million. All such
      proceeds were used for operating activities and working capital.




On
      August
      3, 2006, our Company entered into an Asset Purchase Agreement with Advanced
      Medical Optics, Inc., (“AMO”) a Delaware corporation (the “AMO Agreement”).
      Under the terms of the AMO Agreement, our Company will acquire all of AMO’s
      right, title and interest in and to all of inventory, intellectual property,
      sales and marketing promotional materials and assigned contracts for an amount
      of $3,750,000. Our Company made an initial non-refundable payment of $750,000
      upon the effective date of the AMO Agreement, and an additional $3.0 million
      is
      required to be paid upon consummation of the transaction on August 31, 2006.
      Our
      Company intends to fund the balance of this transaction from working capital.
      In
      connection with the AMO Agreement, Inyx is acquiring six eyecare product
      licenses, including Lens Plus Aerosol; Lens Plus Rewetter Drops; Lens Plus
      Daily
      Cleaner; Hydrocare/Profree Fizzy Tablets (including Profree/GP); LC65 (including
      Liquinet and Lens Clear Wash); and Total Solution. We believe that in addition
      to expanding our business base, pharmaceutical distribution channels and
      profitability opportunities, these products should increase the utilization
      of
      our manufacturing capacities as we intend to ultimately manufacture all of
      these
      products at our sites.




**Item
      3. Q** **UANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




In
      the
      ordinary course of our business, we could be subjected to a variety of market
      risks, examples of which include, but are not limited to, interest rate
      movements as borrowings under our credit facilities bear interest based on
      prime
      rate and foreign currency fluctuations as we have operations in the United
      Kingdom and trade in the European community. We continuously assess these risks
      and have established policies and procedures to protect against the adverse
      effects of these and other potential exposures. Although we do not anticipate
      any material losses in these risk areas, no assurance can be made that material
      losses will not be incurred in these areas in the future.





42


**Foreign
      Exchange Rate Risk**




Our
      functional currency is the U.S. Dollar. The financial statements of our
      Company's operating subsidiaries with a functional currency other than U.S.
      dollars are translated into U.S. dollars using the current rate method.
      Accordingly, assets and liabilities are translated at period-end exchange rates,
      while revenues and expenses are translated at the period's average exchange
      rates. Adjustments resulting from these translations are accumulated and
      reported as a component of accumulated other comprehensive loss in stockholders'
      equity.




We
      neither hold nor issue financial instruments for trading purposes and we do
      not
      currently engage in any hedging activities designed to stabilize the risks
      of
      foreign currency fluctuations. Such fluctuations could adversely affect the
      value of our revenues and the results of our operations stated in U.S. Dollars.
      We are currently in the process of evaluating the potential benefits of
      implementing hedging strategies with a financial institution with expertise
      in
      this area.





**Interest
      Rate Risk**




The
      principal value of variable rate long term debt as of June 30, 2006, including
      current maturities approximated $77.0 million. A hypothetical increase of one
      percentage point in the prime interest rate applicable to our long term debt
      at
      June 30, 2006 would be approximately $770,000 per year in additional
      interest.




**I** **tem
      4. CONTROLS AND PROCEDURES**




Within
      the 90-day period prior to the date of this report, we carried out an
      evaluation, under the supervision and with the participation of our management,
      including the Chief Executive Officer and acting Chief Financial Officer, of
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
      "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and
      Acting Chief Financial Officer concluded that our disclosure controls and
      procedures are effective in timely alerting them to material information
      relating to our Company required to be included in our Exchange Act filings.
      The
      two Executive Officers responsible for the financial reporting and disclosure
      are in direct control of the books and records of our Company and are involved
      first-hand in the decision making process for material
      transactions.





There
      have been no significant changes in our internal controls or in other factors,
      which could significantly affect internal controls subsequent to the date we
      carried out our evaluation.






43


**PART
      II — OTHER INFORMATION**




**Item
      1A. RISK FACTORS**




Information
      about risk factors for the three and six months ended June 30, 2006, does not
      differ materially from that set forth in Part I, Item 1A, of Inyx’s 2005 Annual
      Report on Form 10-K.




**Item
      6.  EXHIBITS**


*10.40
              Asset
                  Purchase Agreement, dated August 3, 2006, between the Registrant
                  and
                  Advanced Medical Optics, Inc.*10.41
              Co-Promotion
                  Agreement, dated April 3, 2006, between Exaeris Inc. and TEAMM
                  Pharmaceuticals, Inc.10.42
              Consultancy
                  Agreement with Zircon Consultants LLC31.1
              Certification
                  of CEO under SEC Rule 15d-14(a) as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of CFO under SEC Rule 15d-14(a) as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of CEO pursuant to 18 USC Section 1350 as adopted by Section 906
                  of the
                  Sarbanes-Oxley Act of 2002.32.2
              Certification
                  of CFO pursuant to 18 USC Section 1350 as adopted by Section 906
                  of the
                  Sarbanes-Oxley Act of 2002.*
              Confidentiality
                  has been requested with respect to certain provisions of these
                  Agreements.




**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Date:  August
      21, 2006




INYX,
              INC.By:
            /s/ David
              ZinnDavid
                M. Zinn, CPA
              Vice
                President, Finance and
              Principal
                Accounting Officer







44