**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 March 31, 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 filer o
            Accelerated
                filer o
            Non-accelerated
                filer ý





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
      May 4,
      2006, the registrant had outstanding 50,389,860 shares of par value $0.001
      common stock.









**INYX,
      INC.**


**QUARTERLY
      REPORT ON 10-Q**


**FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2006**




**TABLE
      OF CONTENTS**










PART
                  I — FINANCIAL INFORMATIONItem
                  1.
              Financial
                  Statements
              1Consolidated
                  Balance SheetsConsolidated
                  Statements of OperationsConsolidated
                  Statements of Cash FlowsNotes
                  to Financial StatementsItem
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              20Item
                  3.
              Quantitative
                  and Qualitative Disclosure about Market Risk
              36Item
                  4.
              Controls
                  and Procedures
              36PART
                  II — OTHER INFORMATIONItem
                  6.
              Exhibits
              37














**PART
      I—FINANCIAL INFORMATION**




**ITEM
      1.** **FINANCIAL STATEMENTS**




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


**Consolidated
      Balance Sheets**


**(Expressed
      in thousands of U.S. dollars except for share amount)**





**March
                  31,**
              
              **December
                  31,****2006**
              
              **2005****(unaudited)****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              **$**
              **1,588**
              
              $
              1,023Accounts
                  receivable, net
              
              
              **22,241**
              
              
              19,782Inventory,
                  net
              
              
              **10,974**
              
              
              11,331Prepaid
                  expenses and other current assets
              
              
              **2,928**
              
              
              2,589Total
                  current assets
              
              
              **37,731**
              
              
              34,725Property,
                  plant and equipment, net
              
              
              **40,725**
              
              
              40,781Deferred
                  financing costs, net
              
              
              **1,384**
              
              
              1,434Deferred
                  costs and deposits
              
              
              **2,808**
              
              
              431Purchased
                  intangible assets, net
              
              
              **14,817**
              
              
              14,782**59,734**
              
              
              57,428Total
                  assets
              
              **$**
              **97,465**
              
              $
              92,153**Liabilities
                  and Stockholders' Deficit**Current
                  liabilities:Borrowings
                  under working capital lines of credit
              
              **$**
              **30,839**
              
              $
              30,011Accounts
                  payable
              
              
              **14,523**
              
              
              11,589Accrued
                  expenses and other current liabilities
              
              
              **10,402**
              
              
              9,557Deferred
                  tax liability
              
              
              **1,809**
              
              
              1,858Deferred
                  revenues
              
              
              **76**
              
              
              -Loan
                  payable to Seller of Ashton
              
              
              **14,147**
              
              
              14,014Current
                  portion of long-term debt
              
              
              **9,255**
              
              
              9,288Total
                  current liabilities
              
              
              **81,051**
              
              
              76,317Long
                  term debt, net of current portion
              
              
              **44,185**
              
              
              46,236Total
                  liabilities
              
              
              **125,236**
              
              
              122,553Commitments
                  and contingenciesStockholders'
                  deficit:Preferred
                  stock - $0.001 par value, 10,000,000 sharesauthorized
                  - 0 shares issued and outstanding
              
              
              -
              
              
              -Common
                  stock - $0.001 par value, 150,000,000 sharesauthorized
                  -47,996,994shares issued and outstandingat
                  March 31, 2006 net of 600,366 treasury stock:43,389,922
                  shares issued and outstanding at December 31, 2005
              
              
              **48**
              
              
              43Additional
                  paid-in capital
              
              
              **38,070**
              
              
              33,315Accumulated
                  deficit
              
              
              **(63,936**
              **)**
              
              (61,343
              )Subscriptions
                  receivable
              
              
              **(293**
              **)**
              
              (293
              )Accumulated
                  other comprehensive loss -foreign
                  currency translation adjustment
              
              
              **(1,660**
              **)**
              
              (2,122
              )Total
                  stockholders' deficit
              
              
              **(27,771**
              **)**
              
              (30,400
              )Total
                  liabilities and stockholders' deficit
              ****
              **$**
              **97,465**
              
              $
              92,153





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




F-1


**INYX,
      INC.**


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


**(Expressed
      in thousands of U.S. dollars, except per share amounts)**





**For
                the Three Months Ending****March
                31,****2006**
            
            **2005****(unaudited)**Net
                revenues
            
            **$**
            **21,412**
            
            $
            2,677Cost
                of sales
            
            
            **13,111**
            
            
            2,535Gross
                profit
            
            
            **8,301**
            
            
            142Operating
                expenses:Research
                and development
            
            
            **682**
            
            
            357General
                and administrative
            
            
            **4,730**
            
            
            1,841Selling
            
            
            **1,242**
            
            
            134Depreciation
            
            
            **1,514**
            
            
            161Amortization
                of intangible assets
            
            
            **436**
            
            
            47Total
                operating expenses
            
            
            **8,604**
            
            
            2,540Loss
                before interest and financing costs
            
            
            **(303**
            **)**
            
            (2,398
            )Interest
                and financing costs
            
            
            **2,290**
            
            
            4,612Net
                loss
            
            **$**
            **(2,593**
            **)**
            $
            (7,010
            )Basic
                and fully diluted loss per share
            ****
            **$**
            **(0.06**
            **)**
            $
            (0.18
            )Weighted-average
                number of shares used in computingbasic
                and fully diluted loss per share amounts
            
            
            **45,867,546**
            
            
            38,296,035








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








F-2


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


**Consolidated** **Statements
      of Cash Flows**


**(Expressed
      in thousands of U.S. dollars)**





**For
                  the Three Months Ending****March
                  31,****2006**
              
              **2005****(unaudited)**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              **(2,593**
              **)**
              $
              (7,010
              )Adjustments
                  to reconcile net loss to net cash provided byoperating
                  activities-Depreciation
              
              
              **1,514**
              
              
              161Amortization
                  of financing costs and debt discount
              
              
              **160**
              ****
              
              2,096Amortization
                  of intangible assets
              
              
              **436**
              ****
              
              47Provision
                  for bad debts
              
              
              **(687**
              **)**
              
              24Reserve
                  for inventory obsolescence
              
              
              **185**
              ****
              
              64Compensation
                  expense on stock options issued to employees
              
              
              **157**
              ****
              
              66Warrants
                  issued for financing and consulting fees
              
              
              **-**
              
              
              162Change
                  in assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              **(1,960**
              **)**
              
              811Decrease
                  in inventory
              
              
              **63**
              ****
              
              142(Increase)
                  decrease in prepaid and other current assets
              
              
              **(355**
              **)**
              
              1,427Increase
                  in deferred financing costs
              
              
              **(110**
              **)**
              
              -Increase
                  in deferred revenue
              
              
              **76**
              ****
              
              -Increase
                  in customer advance
              
              
              **-**
              
              
              3,392Increase
                  in accounts payable and accrued expenses
              
              
              **3,919**
              
              
              1,704Other,
                  net
              
              
              **(218**
              **)**
              
              16Total
                  adjustments
              
              
              **3,180**
              
              
              10,112Net
                  cash provided by operating activities
              
              
              **587**
              ****
              
              3,102CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property, plant and equipment
              
              
              **(1,158**
              **)**
              
              (120
              )Increase
                  in deferred acquisition costs
              
              
              **(2,687**
              **)**
              
              -Acquisition
                  of Aventis Pharmaceuticals, Puerto Rico
              
              
              **-**
              
              
              (597
              )Net
                  cash used in investing activities
              
              
              **(3,845**
              **)**
              
              (717
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Borrowings
                  under working capital lines of credit
              
              
              **928**
              
              
              -Proceeds
                  from issuance of long term debt
              
              
              **246**
              ****
              
              -Repayment
                  of long term debt
              
              
              **(2,297**
              **)**
              
              -Proceeds
                  from issuance of demand notes to shareholders
              
              
              **-**
              
              
              600Repayment
                  of demand note to shareholders
              
              
              **-**
              
              
              (67
              )Proceeds
                  from issuance of common stock and warrants
              
              
              **4,577**
              
              
              -Costs
                  related to issuance of stock
              
              
              **(13**
              **)**
              
              -Cost
                  of registering stock (SB2 registration)
              
              
              **-**
              
              
              (82
              )Proceeds
                  from exercise of stock options
              
              
              **5**
              ****
              
              -Repayment
                  of capital lease obligation
              
              
              **-**
              
              
              (42
              )Net
                  cash provided by financing activities
              
              
              **3,446**
              
              
              409Effect
                  of exchange rate changes on cash
              
              
              **377**
              ****
              
              147Net
                  increase in cash and cash equivalents
              
              
              **565**
              ****
              
              2,941CASH
                  AND CASH EQUIVALENTS, at beginning of the period
              
              
              **1,023**
              
              
              336CASH
                  AND CASH EQUIVALENTS, at end of the period
              
              $
              **1,588**
              
              $
              3,277SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for interest
              
              $
              **2,078**
              
              $
              644







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





F-3


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**


**Note
      1** **.**   **Business
      Description**




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 and manufacturing of prescription and over-the-counter aerosol
      pharmaceutical products and drug delivery technologies for the treatment of
      respiratory, allergy, cardiovascular and dermatological and topical 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.




On
      March
      31, 2005, the Company’s Inyx USA operation acquired the business assets of
      Aventis Pharmaceuticals Puerto Rico, Inc. (“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 $20.7 million
      as a
      total purchase price. 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).




On
      August
      31, 2005, the Company through its wholly-owned United Kingdom subsidiary, Inyx
      Europe, completed the purchase of all of the outstanding shares of Celltech
      Manufacturing Services Limited, (“CMSL”), a United Kingdom pharmaceutical
      manufacturing company, from UCB Pharma Limited (“UCB Pharma”), for approximately
      $40.7 million, thereby assuming possession and control of the operations of
      CMSL
      effective September 1, 2005. On September 9, 2005, the Company changed the
      “CMSL” name to Ashton Pharmaceuticals Limited. Ashton currently operates as a
      wholly-owned subsidiary of Inyx Europe, and its operating results are included
      in the Company’s consolidated results of operations effective September 1, 2005
      (the day after completion of the acquisition of all of the outstanding stock
      of
      Ashton).




On
      March
      29, 2005, Exaeris Inc. (“Exaeris”), a Delaware corporation, was incorporated as
      the Company’s wholly-owned subsidiary to manage and operate the Company’s
      product promotion and marketing activities, including those through
      collaborative agreements with other companies.




Inyx
      currently manages and operates its business as one operating segment.




F-4


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**




**Note
      2** **.**   **Basis
      of Presentation**




The
      financial information presented herein should be read in conjunction with our
      consolidated financial statements for the year ended December 31, 2005. The
      accompanying consolidated financial statements for the three months ended March
      31, 2006 and 2005 are unaudited but, in the opinion of management, include
      all
      necessary adjustments (consisting of normal, recurring in nature) for a fair
      presentation of the financial position, results of operations and cash flows
      for
      the interim periods presented. The results of operations for the three months
      ended March 31, 2006, however, are not necessarily indicative of operating
      results to be expected for the year.




Significant
      accounting policies are detailed in our annual report on Form 10-K for the
      year
      ended December 31, 2005.




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




Certain
      amounts from prior consolidated financial statements and related notes have
      been
      reclassified to conform to the current period presentation




**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 $20.7 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 loan, three term loans and a
      mezzanine loan, together referred to as the “First Westernbank Credit Facility”
(see Note 14,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:









F-5
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
          amounts are expressed in thousands of U.S. dollars except per share
          amounts)**






**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 on an
      accelerated period of ten years.




**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 loan, three term loans and a
      mezzanine loan, together referred to as the “Second Westernbank Credit Facility”
(see Note 14,  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:




F-6
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
            amounts are expressed in thousands of U.S. dollars except per share
            amounts)**









**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







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




Accounts
      receivable consist of the following:




**March
                31, 2006**
              **(Unaudited)**
            
            **December
                31, 2005**Trade
                receivables
            
            **$**
            **22,620**
            
            $
            20,824Less
                allowance for doubtful accounts
            
            
            **(379**
            **)**
            
            (1,042
            )**$**
            **22,241**
            
            $
            19,782







For
      the
      three months ended March 31, 2006, there was a release of bad debt provision
      of
      approximately $687,000 related to the subsequent collection of an aged debt.
      In
      comparison, for the three months ended March 31, 2005 there was a bad debt
      expense of approximately $24,000.




As
      of
      March 31, 2006 the Company had billed certain customers approximately $14.6
      million in advance for raw materials and for services to be provided pursuant
      to
      arrangements under contract manufacturing and product support and services
      agreements that it has in place. Such advance invoicing has allowed the Company
      to acquire certain raw materials and components that have longer lead times
      and
      are required to manufacture such customers’ production requirements on a timely
      basis. Such amounts have been offset against deferred revenue for financial
      statement presentation purposes.




F-7


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**




**Note
      6.**   **Inventory,
      Net**




Inventory
      is comprised of the following:




**March
                31, 2006**
              **(Unaudited)**
            
            **December
                31, 2005**Finished
                goods
            
            **$**
            **1,498**
            
            $
            1,244Work
                in process
            
            
            **4,057**
            
            
            3,145Raw
                materials
            
            
            **8,209**
            
            
            8,000**13,764**
            
            
            12,389Less
                provision for obsolescence
            
            
            **(2,790**
            **)**
            
            (1,058
            )**$**
            **10,974**
            
            $
            11,331




**Note
      7.**   **Prepaid
      Expenses and Other Current Assets**




Prepaid
      expenses and other current assets consist of the following:




**March
                31, 2006**
              **(Unaudited)**
            
            **December
                31, 2005**Prepaid
                vendor invoices
            
            **$**
            **2,207**
            
            $
            1,501Prepaid
                legal and consulting fees
            
            
            **169**
            
            
            67Prepaid
                rent, property and sales tax
            
            
            **226**
            
            
            85Prepaid
                insurance
            
            
            **13**
            
            
            289Other
                prepaid expenses
            
            
            **104**
            
            
            292Other
                non-trade receivables
            
            
            **209**
            
            
            355**$**
            **2,928**
            
            $
            2,589







F-8


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**
  **ote
      8.**  **Property,
      Plant and Equipment, Net**




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




**March
                31, 2006 (Unaudited)**
            
            **December
                31, 2005**Land
            
            **$**
            **2,681**
            
            $
            2,662Buildings
            
            
            **9,306**
            
            
            9,144Machinery,
                equipment and office furniture
            
            
            **29,408**
            
            
            26,152Computer
                hardware and software
            
            
            **1,215**
            
            
            1,156**42,610**
            
            
            39,114Less
                accumulated depreciation
            
            
            **(5,726**
            **)**
            
            (4,201
            )**36,884**
            
            
            34,913Equipment
                held for future use(a)
            
            
            **1,541**
            
            
            1,541Construction
                in progress(b)
            
            
            **2,300**
            
            
            4,327**$**
            **40,725**
            
            $
            40,781





(a)
      The
      equipment held for future use consists of a manufacturing line which the Company
      is in the process of developing. Management expects to incur approximately
      $500,000 in additional costs to equip this manufacturing line for the filling
      and gassing of non-CFC aerosol pharmaceutical products.




(b)
      The
      construction in progress relates 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 $11.0 million over the next two years.




For
      the
      three months ended March 31, 2006, depreciation of property, plant and equipment
      was approximately $1.5 million and for the same period in 2005 it was
      approximately $161,000.




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




As
      of
      March 31, 2006, the deferred financing costs, net, are comprised of bank fees
      and legal costs incurred in connection with obtaining the First and Second
      Westernbank Credit Facility. 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 three months ended March 31, 2006, the Company incurred an additional
      amount of $110,000 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:




**March
                31, 2006**
              **(Unaudited)**
            
            **December
                31, 2005**Deferred
                financing costs
            
            **$**
            **1,867**
            
            $
            1,757Less
                accumulated amortization
            
            
            **(483**
            **)**
            
            (323
            )**$**
            **1,384**
            
            $
            1,434




F-9


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**
 
 **Note** **10.****Deferred
        Costs and Deposits**
  Deferred
        costs and deposits consist of the following:
 
 **March
                  31, 2006**
                **(Unaudited)**
              
              
              **December
                  31, 2005**Deferred
                  acquisition costs(a)
              
              **$**
              **2,162**
              
              $
              407Deposits
                  and other
              
              
              **646**
              
              
              24**$**
              **2,808**
              
              $
              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.
  **Note
        11.**  **Purchased
        Intangible Assets, Net**
  Purchased
        intangible assets consist of the following:
  **March
                  31, 2006**
                **(Unaudited)**
              
              
              **December
                  31, 2005**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 transactions
              
              
              **(18**
              **)**
              
              (116
              )Less
                  accumulated amortization
              
              
              **(2,118**
              **)**
              
              (1,671
              )Intangible
                  assets, other(a)
              
              
              **1,384**
              
              
              1,000**14,817**
              
              
              14,782
  (a)
              This
                  amount relates to deposits made towards an intellectual property
                  purchase
                  which is in the process of being acquired and developed. The Company
                  expects to incur additional costs and expenses to complete this
                  project.
                  Such
                  costs are not currently being
                  amortized.


Purchased
      intangible assets are carried at cost less accumulated amortization. For the
      three months ended March 31, 2006 and 2005, amortization expense related to
      intangible assets totaled approximately $436,000 and $47,000, respectively.
      The
      aggregate estimated amortization expense for intangible assets as of March
      31,
      2006 for the remainder of this year, each of the following four years and
      thereafter is as follows:




F-10


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**


9
                months ending December 31, 2006
            
            $
            1,348Year
                ending December 31, 2007
            
            
            1,766Year
                ending December 31, 2008
            
            
            1,534Year
                ending December 31, 2009
            
            
            1,251Year
                ending December 31, 2010
            
            
            1,223Thereafter
            
            
            6,311$
            13,433




**Note
      12.**  **Borrowings
      under Working Capital Lines of Credit**




On
      March
      31, 2005, the Company, through its wholly owned subsidiary Inyx USA, Ltd.,
      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 million. On September 1, 2005, the limit was increased
      to
      $15 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 million, and 60% of eligible inventory which shall not exceed
      a
      sub-limit of $5 million for such inventory.  As of March 31, 2006, total
      advances under this facility amounted to approximately $13.2
      million.




On
      August
      31, 2005, the Company, through its wholly owned subsidiary Inyx Europe Limited,
      obtained an additional three-year 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 shall not exceed $11.7 million plus a reserve of $500,000,
      and 60% of eligible inventory which shall not exceed a sub-limit of $5 million
      for such inventory. On
      January 19, 2006, this facility was increased to $16.7 million. As of
      March 31, 2006, total advances under this facility amounted to approximately
      $13.0 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 March 31, 2006, total advances
      under
      this facility amounted to approximately $4.6 million.




Borrowings
      under the above facilities bear interest at Westernbank’s prime rate (7.5% as of
      March 31, 2006) 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 March 31, 2006, 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
      13.**  **Loan
      Payable to Seller of Ashton**




As
      of
      March 31, 2006 the Company owed the previous owner of Ashton, UCB Pharma,
      approximately $9.6 million (€8.0 million) relating to a deferred purchase price
      of that business. The Company also owes approximately $4.5 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”).




The
      deferred purchase price is non-interest bearing and is payable by the Company
      to
      UCB in six monthly payments commencing at the end of May 2006, which may be
      extended by mutual agreement between the parties. 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 share purchase
      agreement of Ashton. As security collateral for the purchase price deferral,
      and
      to be released upon full payment of such deferral, the Company granted UCB
      a
      secondary security position over the Company’s assets behind Westernbank’s
      current first security position. Westernbank and UCB have also agreed to an
      inter-creditor agreement to be terminated upon full payment of the purchase
      price deferral. The excess working capital adjustment amounting to approximately
      $4.5 million, is interest bearing at Barclay’s Bank base rate.




F-11


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**
  Note
      14.  **Long
      Term Debt, Net of Current Portion**




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




**March
                31, 2006**
              **(Unaudited)**
            
            **December
                31, 2005**Prime+
                2% Secured Term Promissory Note A issue to Westernbank(1)
            
            **$**
            **2,561**
            
            $
            2,315Prime+
                2% Secured Term Promissory Note B issue to Westernbank(1)
            
            
            **12,070**
            
            
            12,780Prime+
                2% Secured Term Promissory Note C issue to Westernbank(1)
            
            
            **11,210**
            
            
            11,40715%
                Secured Term Loan D Promissory Note issued to Westernbank(1)
            
            
            **4,250**
            
            
            4,500Prime+
                2% Secured Term Promissory Note A issue to Westernbank by Inyx Europe(2)
            
            
            **2,934**
            
            
            2,983Prime+
                2% Secured Term Promissory Note B issue to Westernbank by Inyx Europe(2)
            
            
            **9,147**
            
            
            9,637Prime+
                2% Secured Term Promissory Note C issue to Westernbank by Inyx Europe(2)
            
            
            **2,800**
            
            
            2,95015%
                Secured Term Loan D-Europe Promissory Note issued to Westernbank
                by Inyx
                Europe(2)
            
            
            **8,400**
            
            
            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)
            
            
            **68**
            
            
            102**53,440**
            
            
            55,524Less
                current portion
            
            
            **(9,255**
            **)**
            
            (9,288
            )**$**
            **44,185**
            
            $
            46,236




(1)
            On
                March 31, 2005 the Company secured a non-dilutive asset based secured
                credit facility from Westernbank originally totaling $46 million,
                and then
                subsequently increased to $51 million and $56 million in aggregate
                by
                Westernbank on September 1, 2005 and November 22, 2005 respectively
                (the
                “First Westernbank Credit Facility”). The First Westernbank Credit
                Facility is comprised of a revolving loan (see Note 12) of up to$15
                million including a reserve of $500,000,
                a
                SOFA line of up to $5.0 million (see Note 12), capital expenditure
                loan
                Term Note “A” of up to $5 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 Loan “D”) amounting in
                aggregate to up to $31 million for 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 loans 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 + 2%. The mezzanine loan (Term Loan “D”) bears interest at the
                rate of 15% 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
                Loan “A”, “B”, “C” and “D”), amounting in aggregate up to $24.8 million,
                and utilized to help fund the acquisition of all the outstanding
                shares of
                Ashton. 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%.
                Term Loan “D” bears interest at the rate of 15% per annum, 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-12




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Tabular
      amounts are expressed in thousands of U.S. dollars except per share
      amounts)**


(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: for the nine month period ending December 31, 2006-$6.9 million, for
      the year ending December 31, 2007-$9.6 million, and for the year ending December
      31, 2008-$36.9 million. 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.




**Note
      15.**   **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 March 31, 2006 and December 31, 2005, the Company had common stock
      equivalents of approximately 11,717,852 and 3,043,172 shares respectively,
      related to options and warrants.




**Note
      16.**  **Commitments
      and Contingencies**




***Leases***




The
      Company has commitments under various long-term operating lease agreements
      for
      various premises. For the three months ended March 31, 2006 and 2005, total
      rent
      of office space was approximately $64,000 and $40,000, respectively. In addition
      to rent, the Company and its subsidiaries are responsible for operating costs,
      real estate taxes and insurance. As of March 31, 2006, future minimum annual
      rental commitments under operating leases are as follows:




9
                months ending December 31, 2006
            
            $
            843Year
                ending December 31, 2007
            
            
            977Year
                ending December 31, 2008
            
            
            715Year
                ending December 31, 2009
            
            
            424Year
                ending December 31, 2010
            
            
            220Thereafter
            
            
            31$
            3,210




F-13




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Tabular
      amounts are expressed in thousands of U.S. dollars except per share
      amounts)**


***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 March 31, 2006, the Company’s three top current
      customers in
      aggregate accounted
      for approximately $12.7 million of revenue or approximately 59% of total net
      revenues. In comparison, for the three months ended March 31, 2005, the
      Company’s top three customers in aggregate accounted for approximately $1.4
      million in net revenues or approximately 51% 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.




**Note
      17.**  **Subsequent
      Events**




Subsequent
      to March 31, 2006, the Company granted 420,000 stock options to purchase 420,000
      shares of the Company’s common stock. The fair value of these shares
      approximating $634,000 was evaluated using the Black-Scholes option pricing
      model with the following assumptions: a risk free interest rate of 4.8%, an
      expected life of four years, a volatility factor of 64.4% and a dividend yield
      of 0%.




Subsequent
      to March 31, 2006, the Company issued 1,782,405 shares of its restricted common
      stock upon the exercise of 1,782,405 warrants at prices per share ranging from
      $1.00 to $1.50 for total cash proceeds of approximately $1.8 million. All such
      proceeds were used for operating activities and working capital. In addition,
      pursuant to certain cashless exercise of warrants 10,095 shares of common stock
      were returned into treasury.




**Note
      18.**  **Stockholders’
      Deficit**




During
      the three months ended March 31, 2006, the Company recorded approximately
      $157,000 of additional paid-in capital resulting from stock option compensation
      costs incurred during the period. The fair value was calculated using the
      Black-Scholes option pricing model with the following assumptions: a risk free
      interest rate of 3.14% to 4.20%, an expected life of four years, a volatility
      factor of 53% to 77%, and a dividend yield of 0%. This amount is included in
      general and administrative expenses in the consolidated statement of
      operations.




During
      the three months ended March 31, 2006 the Company issued 5,000 shares of its
      common stock with a value of approximately $6,000 for exercising stock options
      at a price of $1.10 per share.




For
      the
      three months ended March 31, 2006, the Company charged approximately $13,000
      to
      additional paid in capital for stock offering costs.




F-14




**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**


During
      the three months ended March 31, 2006, the Company received approximately $4.6
      million in cash proceeds from the exercise of 4,602,072 warrants at prices
      per
      share ranging from $0.81 to $2.60. All such proceeds were used for operating
      activities and working capital. In addition, pursuant to certain cashless
      exercise of warrants, approximately 391,000 shares of common stock were returned
      into treasury.




**Note
      19.**  **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 price 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 months ended March 31, 2006, the Company granted 277,000 stock options
      to
      purchase 277,000 shares of the Company’s common stock. The fair value of these
      shares approximating $371,000 was evaluated using the Black-Scholes option
      pricing model with the following assumptions: a risk free interest rate of
      4.2%,
      an expected life of four years, a volatility factor of 53% to 67% and a dividend
      yield of 0%.




During
      the three months ended March 31, 2006 the Company issued 5,000 shares of its
      common stock with a value of approximately $6,000 for exercising stock options
      at a price of $1.10 per share.




For
      the
      three months ended March 31, 2006 and 2005, 310,000 and 400,000 stock options
      respectively were forfeited and cancelled.




Total
      compensation costs relating to stock options granted to employees, officers,
      directors, and other persons approximated $157,000 for the three months ended
      March 31, 2006 and $66,000 for the three months ended March 31, 2005. These
      amounts are included in general and administrative expenses in the consolidated
      statement of operations, as the Company expects that it will continue to issue
      stock options to such persons.




**Note
      20.**  **Accumulated
      Comprehensive Loss**




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




**Note
      21** **.**  **Warrants**




During
      the three months ended March 31, 2006, the Company received approximately $4.6
      million in cash proceeds from the exercise of 4,602,072 warrants at prices
      per
      share ranging from $0.81 to $2.60. All such proceeds were used for operating
      activities and working capital. In addition, pursuant to certain cashless
      exercise of warrants, approximately 391,000 shares of common stock were returned
      into treasury.




F-15


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Tabular
        amounts are expressed in thousands of U.S. dollars except per share
        amounts)**


Comparatively,
      during the three months ended March 31, 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 waived 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%, and a
      dividend yield of 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 three months ended March 31, 2005.




**Note
      22** **.**  **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 March 31, 2006 and 2005, the Company charged Karver $9,375
      and $9,000, respectively, for the sublease of furnished office space. In
      addition, the Company charged Karver $7,500 for the three months ended March
      31,
      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 March 31,
      2005.




During
      the three months ended March 31, 2006, the Company entered into a short-term
      lease agreement with Karver for sublease of an office space in Miami, Florida
      on
      a month to month basis. Monthly rent payments amount to $2,500. For the three
      month period, the Company paid a total of $5,000 to Karver for sublease of
      this
      office space.


**Note** **23.****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 which
      is due within the next twelve months.




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




1)
      Income
      generated from its recent acquisitions - the Ashton business, that the Company
      acquired, 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 profits from its
      manufacturing facility in Puerto Rico that it acquired on March 31, 2005, and
      from its Inyx Pharma facility as two previously delayed major customer contracts
      have now commenced in late 2005. Additionally, the Company’s Exaeris subsidiary
      commenced operations in January 2006, and the Company believes that it can
      establish new sources of revenue by marketing its own proprietary pharmaceutical
      products or selected clients’ products through collaborative agreements with its
      clients such as its September 8, 2005 product marketing and collaborative
      agreements with King Pharmaceuticals, Inc.




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 million. In addition, in January 2006, the Company received an additional
      $5 million increase to its limit under the Second Westernbank Credit
      Facility.




3)
      Issuance of equity or debt securities to assist funding its operations and
      growth strategies.




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




F-16


**UNAUDITED
      PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS**




The
      following unaudited consolidated pro forma statements of operations presented
      herein for the three months ended March 31, 2005 and the year ended December
      31,
      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 March 31, 2005 and year ended December
      31, 2005, as summarized below, include the actual results of the Company
      combined with the results of the acquired businesses of Aventis PR and CMSL
      (n/k/a Ashton) for the three months ended March 31, 2005.




The
      pro
      forma results for the year ended December 31, 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 eight months
      ended August 31, 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 back-out 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.




F-17




**Unaudited
      Consolidated Pro Forma Statement of Operations**


**For
      the Three Months Ended March 31, 2005**




Aventis
                Pharma-ceuticals Puerto Rico, Inc.
            
            Adjustments(1)
            
            Aventis
                Puerto Rico (Acquired)(1a)
            
            CMSL
                (n/k/a Ashton) (Acquired)(2)
            
            Inyx,
                Inc.
            
            Aventis
                PR Pro Forma Adjustments
            
            CMSL
                (n/k/a Ashton) Pro Forma Adjustments
            
            CombinedNet
                revenues
            
            $
            15,575
            
            $
            (11,905
            )
            $
            3,670
            
            $
            12,699
            
            $
            2,677
            
            $
            -
            
            $
            -
            
            $
            19,046Cost
                of sales
            
            
            12,242
            
            
            (10,261
            )
            
            1,981
            
            
            10,770
            
            
            2,535
            
            
            -
            
            
            -
            
            
            15,286Gross
                profit
            
            
            3,333
            
            
            (1,644
            )
            
            1,689
            
            
            1,929
            
            
            142
            
            
            -
            
            
            -
            
            
            3,760Operating
                expenses:Research
                and development
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            357
            
            
            -
            
            
            -
            
            
            357General
                and administrative
            
            
            2,609
            
            
            (1,729
            )
            
            880
            
            
            956
            
            
            1,841
            
            
            -
            
            
            -
            
            
            3,677Selling
            
            
            -
            
            
            12
            
            
            12
            
            
            279
            
            
            134
            
            
            -
            
            
            -
            
            
            425Depreciation
            
            
            -
            
            
            71
            
            
            71
            
            
            941
            
            
            161
            
            
            (29
            (3a)
            
            93
            (4a)
            
            1,237Amortization
                of intangible assets
            
            
            -
            
            
            226
            
            
            226
            
            
            165
            
            
            47
            
            
            57
            (3b)
            
            227
            (4b)
            
            722Total
                Operating expenses
            
            
            2,609
            
            
            (1,420
            )
            
            1,189
            
            
            2,341
            
            
            2,540
            
            
            28
            
            
            320
            
            
            6,418Income
                (loss) from operations before interest and financing costs and income
                tax
                benefit
            
            
            724
            
            
            (224
            )
            
            500
            
            
            (412
            )
            
            (2,398
            )
            
            (28
            )
            
            (320
            )
            
            (2,658
            )Interest
                (benefit) expense
            
            
            (1,159
            )
            
            1,524
            
            
            365
            
            
            -
            
            
            4,612
            
            
            (3,778
            (3c)
            
            576
            (4c)
            
            1,775Restructuring
                expense (benefit)
            
            
            7,965
            
            
            (7,965
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -(Loss)
                profit before income tax benefit
            
            
            (6,082
            )
            
            6,217
            
            
            135
            
            
            (412
            )
            
            (7,010
            )
            
            3,750
            
            
            (896
            )
            
            (4,433
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            160
            
            
            -
            
            
            -
            
            
            269
            
            
            429Net
                (loss) income
            
            $
            (6,082
            )
            $
            6,217
            
            $
            135
            
            $
            (252
            )
            $
            (7,010
            )
            $
            3,750
            
            $
            (627
            )
            $
            (4,004
            )







**Unaudited
      Consolidated Pro Forma Statement of Operations**


**For
      the Twelve Months Ended December 31, 2005**







Aventis
                Pharma-ceuticals Puerto Rico, Inc.
            
            Adjustments(1)
            
            Aventis
                Puerto Rico (Acquired)(1a)
            
            CMSL
                (n/k/a Ashton) (Acquired)(2)
            
            Inyx,
                Inc.
            
            Aventis
                PR Pro Forma Adjustments
            
            CMSL
                (n/k/a Ashton) Pro Forma Adjustments
            
            CombinedNet
                revenues
            
            $
            15,575
            
            $
            (11,905
            )
            $
            3,670
            
            $
            28,042
            
            $
            49,565
            
            $
            -
            
            $
            -
            
            $
            81,277Cost
                of sales
            
            
            12,242
            
            
            (10,261
            )
            
            1,981
            
            
            22,127
            
            
            34,859
            
            
            -
            
            
            -
            
            
            58,967Gross
                profit
            
            
            3,333
            
            
            (1,644
            )
            
            1,689
            
            
            5,915
            
            
            14,706
            
            
            -
            
            
            -
            
            
            22,310Operating
                expenses:Research
                and development
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,406
            
            
            -
            
            
            -
            
            
            3,406General
                and administrative
            
            
            2,609
            
            
            (1,729
            )
            
            880
            
            
            2,401
            
            
            24,575
            
            
            -
            
            
            -
            
            
            27,856Selling
            
            
            -
            
            
            12
            
            
            12
            
            
            635
            
            
            3,005
            
            
            -
            
            
            -
            
            
            3,652Depreciation
            
            
            -
            
            
            71
            
            
            71
            
            
            2,690
            
            
            3,283
            
            
            220
            (3a)
            
            248
            (4a)
            
            6,512Amortization
                of intangible assets
            
            
            -
            
            
            226
            
            
            226
            
            
            440
            
            
            1,387
            
            
            89
            (3b)
            
            605
            (4b)
            
            2,747Total
                Operating expenses
            
            
            2,609
            
            
            (1,420
            )
            
            1,189
            
            
            6,166
            
            
            35,656
            
            
            309
            
            
            853
            
            
            44,173Income
                (loss) from operations before interest and financing costs and income
                tax
                benefit
            
            
            724
            
            
            (224
            )
            
            500
            
            
            (251
            )
            
            (20,950
            )
            
            (309
            )
            
            (853
            )
            
            (21,863
            )Interest
                (benefit) expense
            
            
            (1,159
            )
            
            1,524
            
            
            365
            
            
            -
            
            
            10,059
            
            
            (3,061
            (3c)
            
            1,728
            (4c)
            
            9,091Restructuring
                expense (benefit)
            
            
            7,965
            
            
            (7,965
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -(Loss)
                profit before income tax benefit
            
            
            (6,082
            )
            
            6,217
            
            
            135
            
            
            (251
            )
            
            (31,009
            )
            
            2,752
            
            
            (2,581
            )
            
            (30,954
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            98
            
            
            -
            
            
            -
            
            
            774
            
            
            872Net
                (loss) income
            
            $
            (6,082
            )
            $
            6,217
            
            $
            135
            
            $
            (153
            )
            $
            (31,009
            )
            $
            2,752
            
            $
            (1,807
            )
            $
            (30,082
            )


F-18


**Notes
      to Unaudited Pro Forma Consolidated Statement of
      Operations**




*For
      the Three Months Ended March 31, 2005 and for the Year Ended December 31,
      2005*




(1)
            Reflects
                adjustments to back out 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 for each year. 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.


F-19


**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 Canada Inc. (“Inyx Canada”), 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 .
      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 and so 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.




Exaeris
      is led by its President, Stephen Beckman, who we hired on September 1, 2005.
      Mr.
      Beckman has more than 15 years experience in the sales, marketing and
      commercialization of pharmaceutical products. Exaeris is currently building
      its
      management team and sales force.





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 planned proprietary products in the respiratory, allergy,
      dermatological, topical and cardiovascular treatment market sectors. Exaeris
      is
      currently organizing its management team and sales force, which is being
      established initially through a commercial relationship with a pharmaceutical
      contract sales representative organization.




In
      addition to continuing to develop a sales force, 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 (“AMC”), comprised of three senior
      executives from each company who will plan, administer and monitor the
      activities of parties under the noted agreements. Under the King marketing
      and
      collaboration agreements, Exaeris will commence co-promoting and marketing
      Intal ® and
      Tilade ® in
      2006.




20




*Acquisition
      of Celltech Manufacturing Services Limited*




On
      August
      31, 2005, our Company through our wholly-owned United Kingdom subsidiary, Inyx
      Europe, completed the purchase of all of the outstanding shares of Celltech
      Manufacturing Services Limited (“CMSL”), a United Kingdom pharmaceutical
      manufacturing company, from UCB Pharma Limited (“UCB Pharma”), for approximately
      $40.7 million comprised 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, an amount equivalent
      to
      $4.6 million representing the excess working capital over the targeted working
      capital at closing agreed to between the parties and direct transaction costs
      of
      approximately $2.4 million, and thereby assumed possession and control of the
      operations of CMSL effective September 1, 2005. On September 9, 2005, the
      Company changed the “CMSL” name to Ashton Pharmaceuticals Limited. Ashton
      currently operates as a wholly-owned subsidiary of Inyx Europe, and its
      operating results are included in the Company’s consolidated results of
      operations effective September 1, 2005 (the day after completion of the
      acquisition of all of the outstanding stock of Ashton).




Ashton
      has over 50 years of experience in pharmaceutical development and manufacturing,
      and currently produces a portfolio of branded and non-branded products for
      third
      party customers including UCB, its previous parent company. Before its
      acquisition by the UCB Group in 2004, the Ashton business was part of the
      Celltech Group PLC.




Ashton
      operates a 152,000 square foot cGMP (current Good Manufacturing Practice)
      facility approved to manufacture pharmaceuticals products for the United
      Kingdom, Europe and Asia. The site is regulated by the United Kingdom MHRA
      (Medicines and Healthcare products Regulatory Agency) and the EMEA (the European
      Agency for the Evaluation of Medicinal Products). The manufacturing site is
      comprised of a complex of pharmaceutical manufacturing, laboratory and product
      support, storage space, and administrative office premises located on an
      approximately 7.3-acre piece of land in Ashton, near Manchester, in the North
      West of England, and approximately one hour away by car from our Company’s other
      United Kingdom operation, Inyx Pharma Limited, located in Runcorn, Cheshire.
      Ashton currently has approximately 300 employees consisting of management,
      commercial and finance, production, quality control and testing and technical
      and distribution support staff.




The
      Ashton facility is approved to produce pharmaceuticals, including solid dose,
      sterile and dry powder inhaler products, for the United Kingdom, Europe and
      Asia. Through the Ashton Site, the Company also manufactures steroids, hormonal
      products and highly potent product formulations. The Ashton site also possesses
      a controlled drug license from the MHRA.




Revenues
      at the Ashton site consist of product manufacturing and support services for
      the
      Celltech-UCB group, under a new five-year exclusive manufacturing contract,
      and
      contracts and purchase orders from other pharmaceutical companies, as well
      as
      the sales of three of its own products, consisting of three major hormonal
      products and currently sold through third parties.




*Acquisition
      of the Business Assets of Aventis PR*




On
      March
      31, 2005, Inyx USA acquired the business assets of Aventis Pharmaceuticals
      Puerto Rico, Inc. (“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 $20.7 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).




21


The
      Aventis PR business assets that we acquired are located on a 9.5 acre property
      in Manatí, Puerto Rico comprised of a 140,000 square foot pharmaceutical
      manufacturing operation with supporting equipment, laboratories, warehouse
      and
      office space. We retained 145 employees and the operation currently manufactures
      dermatological, respiratory and allergy products, including niche aerosol
      pharmaceutical products.




Prior
      to
      our acquisition of its manufacturing assets, Aventis PR previously produced
      pharmaceutical products in accordance with a contract manufacturing agreement
      with its parent company, Aventis Pharmaceuticals.


**Consolidated
        Results**
  The
        accompanying consolidated financial information includes the accounts of
        Inyx
        and its wholly-owned subsidiaries, Inyx Pharma, Inyx Canada, Inyx USA, Inyx
        Europe, including Inyx Europe’s wholly-owned subsidiary Ashton Pharmaceuticals,
        and Exaeris. All 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 months ended March 31, 2005, along with our Company’s other
        operations.
 
 22


**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
                (unaudited)**
            
            **Pro
                Forma****For
                the three months ended**
              **March
                31,**
            
            **For
                the three months ended**
              **March
                31,****2006**
            
            **2005**
            
            **2005**Net
                revenues
            
            **$**
            **21,412**
            
            $
            2,677
            
            $
            19,046Cost
                of sales
            
            
            **13,111**
            
            
            2,535
            
            
            15,286Gross
                profit
            
            
            **8,301**
            
            
            142
            
            
            3,760Operating
                expenses:Research
                and development
            
            
            **682**
            
            
            357
            
            
            357General
                and administrative
            
            
            **4,730**
            
            
            1,841
            
            
            3,677Selling
            
            
            **1,242**
            
            
            134
            
            
            425Depreciation
            
            
            **1,514**
            
            
            161
            
            
            1,237Amortization
                of intangible assets
            
            
            **436**
            
            
            47
            
            
            722Total
                operating expenses
            
            
            **8,604**
            
            
            2,540
            
            
            6,418Loss
                before interest and financing costs and income tax benefit
            
            
            **(303**
            **)**
            
            (2,398
            )
            
            (2,658
            )Interest
                and financing costs
            
            
            **2,290**
            
            
            4,612
            
            
            1,775Income
                tax benefit
            
            
            **-**
            
            
            -
            
            
            429Net
                loss
            
            **$**
            **(2,593**
            **)**
            $
            (7,010
            )
            $
            (4,004
            )




**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
      dependant upon our clients maintaining or obtaining regulatory approval for
      the
      sale of their products in their designated markets.




Net
      revenues for the three months ended March 31, 2006 were approximately $21.4
      million as compared to net revenues of approximately $2.7 million for the three
      months ended March 31, 2005. Net revenues increased by $18.7 million or
      approximately 693% for the comparative three months. On a pro forma basis,
      net
      revenues for the three months ended March 31, 2005 amounted to approximately
      $19.0 million.




The
      increase in net revenues for the three months ended March 31, 2006, as compared
      to the three months ended March 31, 2005, is primarily attributable to the
      addition of the Inyx USA, Ashton and Exaeris businesses to our operations,
      none
      of which were included in our operating results in the first quarter of 2005.
      Additionally, during the three months ended March 31, 2006, we commenced a
      number of contract development and product commercialization activities,
      including technology transfer, for a number of existing and new customers.
      We have also started to commercially manufacture hydrofluoroalkane (“HFA”)
      non-ozone depleting metered dose inhalers for two of our larger customers at
      our
      Inyx Pharma site. We believe our expertise in converting from CFC to CFC-free
      aerosol pharmaceuticals, particularly the production of HFA aerosol
      pharmaceutical products, should continue to generate increasing business as
      the
      Montreal Protocol continues to be implemented around the world, and most
      importantly, the U.S. market.




23


In
      January 2006, our commercial marketing subsidiary, Exaeris, commenced formal
      operations. During the three months ended March 31, 2006, we received a revenue
      contribution of approximately $428,000 from that operation as a result of our
      co-marketing collaboration with King, with respect to King’s
      Intal ® and
      Tilade ® products .
      We
      expect Exaeris to start to materially contribute to our revenues commencing
      in
      the second half of 2006 as a result of the King collaboration agreement and
      other strategic initiatives we are pursuing through Exaeris.




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.




For
      the
      three months ended March 31, 2006, our three top customers in aggregate
      accounted for approximately $12.7 million or approximately 59% of our total
      net
      revenues. During this period, these three customers accounted
      for approximately $8.7 million, or 41% of total revenues; approximately $2.0
      million, or 9% of total revenues; and approximately $2.0 million, or 9% of
      total
      revenues, respectively.




In
      comparison, for the three months ended March 31, 2005, our three top customers
      in aggregate accounted for approximately $1.4 million or approximately 51%
      of
      our total net revenues. During this period, these three customers accounted
      for
      approximately $662,000, or 25% of total revenues; approximately $357,000, or
      13%
      of total revenues; and approximately $350,000, or 13% of total revenues,
      respectively.




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 customer base and distribution channels to mitigate the risk of
      our
      economic dependence on any one client.




**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.




Cost
      of
      sales for the three months ended March 31, 2006 amounted to approximately $13.1
      million, or approximately 61% of net revenues. In
      comparison, for the three months ended March 31, 2005, cost
      of
      goods sold amounted to approximately $2.5 million, or approximately 95% of
      net
      revenues of $2.7 million. On a pro forma basis, cost of sales for the three
      months ended March 31, 2005 was approximately $15.3 million, or approximately
      80% of pro forma net revenues.




The
      improvement in cost of goods sold as a percentage of net revenues is primarily
      attributable to increasing business at our sites, including the noted technology
      transfers, and the addition of more profitable business as a result of the
      inclusion of Exaeris and Ashton in the first quarter of 2006, where we
      experienced overall lower manufacturing costs as a percentage of revenues.




**Gross
      Profit**




Gross
      profit for the three months ended March 31, 2006 amounted to approximately
      $8.3
      million on net revenues of $21.4 million or approximately 39% of net revenues. In
      comparison, gross profit for the three months ended March 31, 2005 amounted
      to
      approximately $142,000 on net revenues of approximately $2.7 million or
      approximately 5% of net revenues. Pro forma gross profit for the three months
      ended March 31, 2005 amounted to approximately $3.8 million, or approximately
      20% of pro forma net revenues.




24


The
      improvement in gross profitability is the result of several factors, including
      the achievement of development milestones in the quarter 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 two of our larger current customers have
      increased due to regulatory approvals in certain markets having been granted
      for
      their respiratory products. This has all resulted in increased utilization
      of
      product development and manufacturing outsourcing capacity at our facilities
      in
      the United States and United Kingdom. Therefore, 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 our initial two
      proprietary products should be ready for commercial marketing before the end
      of
      2006.




**Operating
      Expenses**




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




Operating
      expenses for the three months ended March 31, 2006 amounted to approximately
      $8.6 or approximately 40% of net revenues of $21.4 million. In comparison,
      operating expenses for the three months ended March 31, 2005 amounted to
      approximately $2.5 million or approximately 95% of net revenues of $2.7 million.
      On a pro forma basis, operating expenses amounted to approximately $6.4 million,
      or 34%, of pro forma net revenues for three months ended March 31, 2005.




The
      increase to our operating expenses for the three months ended March 31, 2006
      is
      the result of higher general and administrative, selling and depreciation and
      amortization expenses as compared to the same period in 2005. This is primarily
      due to the addition of the Inyx USA, Ashton and Exaeris operations to our
      overall business. However, the increase in net revenues and resultant gross
      profit we had for the three months ended March 31, 2006 as compared to the
      three
      months ended March 31, 2005 was substantially higher than the increase in
      operating expenses, resulting, respectively, in operating expenses as a
      percentage of revenues being significantly reduced and the majority of our
      increased operating expenses being absorbed.




*Research
      and Development Costs*




Research
      and development costs for the three months ended March 31, 2006 were
      approximately $682,000 or approximately 8% of our operating expenses and 3%
      of
      our net revenues. In comparison, research and development costs for the three
      months ended March 31, 2005 were approximately $357,000 or 14% of our operating
      expenses and 13% of our net revenues. On a pro forma basis, research and
      development costs for the three months ended March 31, 2005 also amounted to
      approximately $357,000, which constituted 6% of our pro forma operating expenses
      and 2% of our pro forma net revenues.




25


As
      part
      of our strategy to evolve into a specialty pharmaceutical company with its
      own
      proprietary products, we will continue to incur research and development costs
      as part of our operating expenses. We also expect our 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.




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 and 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 for respiratory, dermatological, topical and
      cardiovascular medication applications or such products in development,
      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.




At
      this
      time, we have not 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.




*General
      and Administrative Expenses*




Our
      General and Administrative expenses include corporate overhead costs such as
      salaries and benefits, insurance costs, administrative support, business and
      corporate development expenses, as well as business support costs incurred
      by
      our wholly owned subsidiaries.




General
      and administrative expenses amounted to approximately $4.7 million or
      approximately 22% of net revenues of approximately $21.4 million for the three
      months ended March 31, 2006 compared to general and administrative expenses
      of
      approximately $1.9 million or approximately 69% of net revenues of approximately
      $2.7 million for the three months ended March 31, 2005. Pro forma general and
      administrative expenses for the three months ended March 31, 2005 amounted
      to
      approximately $3.7 million, or approximately 19% of pro forma net revenues
      for
      the period.




The
      increase in general and administrative expenses is primarily due to the addition
      of the Inyx USA, Ashton and Exaeris operations, and included: approximately
      $2.5
      million for salaries and benefits; insurance costs of approximately $866,000;
      building and rent expenses of approximately $807,000; legal, audit and outside
      consulting expenses of approximately $340,000 and travel expenses of
      approximately $213,000.




As
      we
      continue to implement our corporate development and growth strategy, we expect
      to incur additional salary and benefit, and administrative support costs due
      to
      the addition of senior business and financial executives to our management
      team
      in order to help manage our expanding operations. Subsequently, as we continue
      to grow our business and also begin to introduce our own proprietary products,
      we believe that we can continue to achieve better gross profit margins and
      that
      such improved margins will offset these administrative incremental costs.




26


*Selling
      Expenses*




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




Selling
      expenses were approximately $1.2 million or approximately 6% of net revenues
      of
      $21.4 million for the three months ended March 31, 2006 compared to $134,000
      or
      approximately 5% of net revenues of approximately $2.7 million for the three
      months ended March 31, 2005. On a pro forma basis, selling expenses for the
      three months ended March 31, 2005 amounted to approximately $425,000, or
      approximately 2% of pro forma net revenues for the period.




The
      increase in selling expenses is primarily attributable to the addition of our
      Exaeris marketing operation and enhanced sales and marketing activities across
      all of our operations as we continue to our efforts to improve the capacity
      utilization of our facilities.




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. Therefore, our selling expenses have remained relatively
      consistent on a percentage basis over the comparative periods. Our sales and
      marketing functions have been primarily focused on expanding our pharmaceutical
      manufacturing business with existing or potential clients. As we continue to
      ramp-up our business development and commercial activities, we expect our
      selling expenses to increase concomitantly with expected revenue expansion.




In
      addition, now under Exaeris, we have started to build a sales force through
      a
      contract services organization. Although part of this cost will be off-set
      as a
      result of our collaboration agreement with King, a larger sales force (which
      as
      of March 31, 2006 consisted of twenty-five sales representatives) 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 as a result of the product in-licensing
      opportunities that we are currently actively pursuing.




*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 were approximately $1.5 million or 7% of net revenues of $21.4 million
      for the three months ended March 31, 2006 as compared to $161,000 or 6% of
      net
      revenues of approximately $2.7 million for the three months ended March 31,
      2005. Pro forma depreciation expenses for the three months ended March 31,
      2005
      amounted to approximately $1.2 million, or approximately 6% of pro forma net
      revenues for the period.




The
      higher depreciation expenses for the three months ended March 31, 2006 are
      attributable to the addition of the Inyx USA and Ashton facilities to our
      operations.




*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 the Company operates in.




27




Amortization
      expenses for intangible assets for the three months ended March 31, 2006 were
      approximately $436,000 compared to $47,000 for the three months ended March
      31,
      2005. Pro forma amortization expenses for intangible assets were approximately
      $722,000 for the three months ended March 31, 2005.




For
      the
      three months ended March 31, 2006, the amortization expenses for intangible
      assets relates 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 the
      Company.




The
      increase in amortization expenses related to intangible assets between the
      comparative periods ended March 31, 2006 and 2005 is due to the acquisition
      of
      identifiable intangible assets associated with the acquisition of certain
      business assets of Aventis PR, now the Inyx USA operation, and the acquisition
      of all of the outstanding shares of Ashton (“CMSL”) in 2005.




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.




**Operating
      Loss before Interest and Financing Costs**




Loss
      from
      operations before interest and financing costs amounted to approximately
      $303,000 for the three months ended March 31, 2006 compared to a loss of $2.4
      million for the three months ended March 31, 2005. On a pro forma basis, loss
      from operations before interest and financing costs and income tax benefit
      amounted to approximately $2.7 million.




As
      noted
      above, our operating loss of approximately $303,000 for the three months ended
      March 31, 2006 includes approximately $2.0 million of non-cash depreciation
      and
      amortization expenses. The growth of our overall business and the resultant
      improved gross profits of our operations have allowed us to absorb more of
      our
      operating expenses than we had been able to do in the past. We expect that
      as we
      continue to enhance our business by increasing the capacity utilization of
      our
      facilities and introducing our own proprietary products, including those
      products we acquire through in-licensing and collaboration agreements, we will
      continue to grow our revenues and improve our profitability opportunities and
      thereby continue to offset our operating expenses.




**Interest
      and Financing Costs**




Interest
      and financing costs consist of interest expense related to the long term debt.
      For the three months ended March 31, 2006, interest and financing costs totaled
      approximately $2.3 million or 11% of net revenues of $21.4 million compared
      to
      interest and financing costs of approximately $4.6 million or 170% of net
      revenues of $2.7 million for the three months ended March 31, 2005. On a pro
      forma basis, for the three months ended March 31, 2005, interest and financing
      costs totaled approximately $1.8 million, or approximately 9% of pro forma
      net
      revenues of $19.0 million for the period.




Interest
      and financing costs for the three months ended March 31, 2006 included
      approximately $2.1 million in interest payments to Westernbank and approximately
      $160,000 in amortization of deferred financing charges. As
      of
      March 31, 2006, the weighted average interest rate on outstanding loans during
      the period amounted to approximately 10.0%.




The
      higher interest and financing costs 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.




28


**Net
      Loss**




The
      net
      loss for the three months ended March 31, 2006 was approximately $2.6 million
      or
      approximately 12% of net revenues of $21.4 million compared to a net loss of
      $7.0 million or approximately 260% of net revenues of $2.7 million for the
      three
      months ended March 31, 2005. Pro forma net loss for the three months ended
      March
      31, 2005 amounted to approximately $4.0 million, or approximately 21% of pro
      forma net revenues for the period.




Our
      net
      loss of approximately $2.6 million for the three months ended March 31, 2006
      includes approximately $2.0 million of depreciation and amortization expenses
      and interest charges of approximately $2.3 million.




We
      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
      operation in 2006, and that we
      believe should contribute increasingly in future years.
      We believe that once we fully integrate these new business 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 opportunities and allowing us to absorb more of
      our
      depreciation and amortization expenses and interest and financing
      charges.




We
      also
      expect our profitability opportunities to improve once we have commercialized
      for sale our own proprietary products or those through collaborative or
      in-licensing agreements with other pharmaceutical companies. 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.




**LIQUIDITY
      AND CAPITAL RESOURCES**




We
      are
      financing our operations primarily through credit facilities, revenues from
      multi-year contract manufacturing and product development contracts and purchase
      orders, sale of equity securities, stockholder loans and capital lease
      financing.




For
      the
      three months ended March 31, 2006 we received net proceeds from the exercise
      of
      stock purchase warrants and stock options amounting to approximately $4.6
      million which were used for operating activities and working capital. Subsequent
      to March 31, 2006, we received further net proceeds of approximately $1.8
      million from the exercise of stock purchase warrants and stock
      options.




As
      of
      March 31, 2006, we had approximately $98.4 million in loan obligations
      (short-term and long-term debt) that are due through 2008, including
      approximately $84.2 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 $14.1 million due within the next 12 months relating
      to
      amounts owed related to our purchase of the Ashton business.




As
      of
      March 31, 2006, our current assets, including cash and cash equivalents,
      accounts receivable (net of $14.6 million deferred revenue), inventory and
      other
      current assets amounted to approximately $37.7 million. Current liabilities
      amounted to approximately $81.1 million and include approximately $30.8 million
      in borrowings under working capital lines of credit (which automatically renews
      on maturity in March 2008, on a year-to-year basis unless terminated by either
      party); approximately $24.9 million in accounts payable and other current
      liabilities, approximately $9.3 million for the current portion of our long-term
      debt obligations, approximately $14.1 in a loans repayable related to our
      acquisition of the Ashton business, and approximately 1.8 million as a deferred
      tax liability.




29


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 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 two large multi-year
      contracts that have been delayed at our Inyx Pharma facility have now commenced
      and our HFA lines at that facility are now in full production.




We
      also
      expect Exaeris, which commenced formal operations in January 2006 to start
      to
      materially contribute to our revenues commencing in the second half of 2006
      as a
      result of the King collaboration agreement and other strategic initiatives
      we
      are pursuing through 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
      two
      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.




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. Based on pharmaceutical industry profit margins for these
      types
      of proprietary products, we expect that the King Pharmaceuticals collaboration
      and product development agreements, including the promotion and marketing of
      King’s Intal ® and
      Tilade ® lead
      respiratory products, and the successful commercialization and marketing of
      our
      own proprietary products that should offer similar high profit margins, will
      provide us with greater operating cash flow and improve our performance and
      overall profitability.




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.


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
      March 31, 2006, our total indebtedness outstanding (including current
      portion and amounts due to Seller of Ashton) was approximately $98.4 million,
      consisting of approximately $84.2 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 $14.1 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 $9.6 million relating to deferred purchase price, to be repaid in
      six
      monthly installments commencing May 2006. The balance of approximately $4.5
      million is related to additional net current assets acquired not considered
      when
      the purchase price was negotiated with UCB Pharma, interest on which is accrued
      and payable at Barclay’s Bank base rate. For a more detailed discussion of our
      credit facilities with Westernbank and the loan from UCB Pharma see “Financing
      Activities” below.




30




As
      of
      March 31, 2006, our annual long term debt service requirements are approximately
      $14.5 million (which includes approximately $5.3 million of interest.) Such
      debt
      is collateralized by all the existing and future assets of the 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 months ended March 31, 2006, the Company received approximately $4.6
      million in cash proceeds from the exercise of 4,602,072 warrants at prices
      per
      share ranging from $0.81 to $2.60. All such proceeds were used for operating
      activities and working capital. In addition, pursuant to certain cashless
      exercise of warrants, approximately 391,000 shares of common stock were returned
      into treasury.




We
      believe that the funding provided by these 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 $30
      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, 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
      the Company’s operating needs and planned capital expenditures for at least the
      next twelve months.




**Analysis
      of Cash Flows**




At
      March
      31, 2006, we had cash of approximately $1.6 million as compared to cash of
      $3.3
      million at March 31, 2005.




31


***Cash
      Flows from Operating Activities***




The
      net
      cash provided by operating activities for three months ended March 31, 2006
      was
      approximately $587,000 compared to $3.1 million for the three months ended
      March
      31, 2005.




For
      the
      three months ended March 31, 2006, the net cash provided by operating activities
      included a net loss of $2.6 million adjusted for non-cash charges totaling
      $1.8
      million consisting primarily of $1.5 million in depreciation, $436,000 of
      amortization of intangible assets, a $185,000 provision for inventory
      obsolescence, $160,000 for amortization of financing costs and a compensation
      expense on stock options of $157,000. These charges were offset by a release
      of
      bad debt provision of approximately $687,000. Net cash provided by changes
      in
      working capital of approximately $1.4 million resulted primarily from an
      increase in accounts payable and accrued liabilities of $3.9 million offset
      by
      an increase in accounts receivable of $2.0 million, increase in prepaid expenses
      and other assets of $355,000 and increase in deferred financing costs of
      $110,000 and increase in other net assets of $218,000.




For
      the
      three months ended March 31, 2005, the net cash provided by operating activities
      included a net loss of $7 million adjusted for non-cash charges totaling $2.6
      million consisting primarily of $2.1 million of amortization of financing cost
      and debt discounts and $161,000 of depreciation, an additional $64,000 provision
      for inventory obsolescence and $90,000 of all other changes. Working Capital
      changes provided net funds of $7.5 million resulting primarily from reductions
      to pre-paid of $1.4 million an increase in accounts payable and accrued
      liabilities of $1.7 million, an increase of $3.4 million in customer advance
      attributable to business development activities with Sanofi-Aventis and a
      decrease in accounts receivable of $811,000.




***Cash
      Flows from Investing Activities***




The
      net
      cash used in investing activities for the three months ended March 31, 2006
      amounted to approximately $3.8 million compared to approximately $717,000 for
      the comparative period in 2005.




For
      the
      three months ended March 31, 2006, there were capital expenditures of
      approximately $1.2 million consisting of approximately $700,000 for production
      machinery and equipment, $365,000 for construction in progress costs and
      approximately $88,000 for office furniture, computer hardware and building
      and
      leasehold improvements.




***Cash
      Flows from Financing Activities***




For
      the
      three months ended March 31, 2006, the net cash provided by financing activities
      approximated $3.4 million compared to approximately $409,000 for the three
      months ended March 31, 2005.




The
      cash
      provided by financing activities for the three months ended March 31, 2006
      included net proceeds from the exercise of warrants and stock options of
      approximately $4.6 million, net proceeds from borrowings under working capital
      lines of credit of approximately $928,000 and net proceeds of $246,000 under
      the
      First Westernbank Credit Facility, relating to a promissory note issued to
      Westernbank for financing of capital expenditures and purchases of new
      equipment. These proceeds were offset by payments of principal of approximately
      $2.3 million on our Westernbank term loans.




**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 million (the “First Westernbank Credit Facility"), the
      aggregate limit of this facility was increased to $51 million and then again
      to
      $56 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
      loans (the "Term Loans") and a mezzanine loan of $5 million, secured by all
      assets of the Company and its subsidiaries whether now owned or thereafter
      to be
      acquired.




32




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 Loans 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 Loans mature on August 31, 2008
      and
      are automatically renewed on a year-to-year basis unless terminated by the
      Company or Westernbank. Payment of the amounts due under the Term Loans
      accelerates upon the occurrence of an event of default. As of March 31, 2006
      total loan balance under the First Westernbank Credit Facility approximated
      $48
      million.




The
      availability under the First Westernbank Credit Facility allowed the 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.




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 loans (Term Loan “A”, “B”, “C” and “D”)
      amounting in aggregate up to $24.8 million. On January 19, 2006, the limit
      available under this facility was increased by Westernbank from $5 million
      to
      $16.7 million thus increasing total availability under these facilities to
      $41.5
      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 loans associated with this credit facility are secured
      by
      all of the assets of the Company and its subsidiaries, Inyx Europe and Ashton,
      and a guaranteed by those parties pursuant to Guarantor General Security
      Agreement. In addition, the 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 Loans “A”, “B” and “C” bear interest at Westernbank
      prime rate plus 2% with principal payments having commenced December 1, 2005.
      Term Loan “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 Loans mature on August 31, 2008 and are automatically renewed on a
      year-to-year basis unless terminated by the Company or Westernbank. Payment
      of
      the amounts due under the Term Notes accelerates upon the occurrence of an
      event
      of default. As of March 31, 2006 total loan balance under the Second Westernbank
      Credit Facility approximated $36 million.




The
      Westernbank prime interest rate at March 31, 2006 was 7.5%.




33


***Certain
      Indebtedness and Other Matters***




As
      of
      March 31, 2006, in addition to our Westernbank Credit Facilities, we owed the
      previous owner of Ashton, UCB Pharma, approximately $9.6 million relating to
      deferred purchase price plus approximately $4.5 million in indebtedness related
      to the additional net current assets acquired but not considered when the
      purchase price was negotiated (“excess working capital
      adjustment”).




The
      purchase price deferral is non-interest bearing and is payable by us to UCB
      Pharma in six monthly payments commencing May 2006, which may be extended by
      mutual agreement between the parties. We are also entitled, at any time prior
      to
      payment in full of the purchase price deferral amount, to set off against any
      of
      that deferral amount still due, any unpaid claim we may have against UCB Pharma
      under the share purchase agreement of Ashton. As security collateral for the
      purchase price deferral, and to be released upon full payment of that deferral,
      we granted UCB Pharma a secondary security position over our Company’s assets
      behind Westernbank’s current first security position. Westernbank and UCB Pharma
      have also agreed to an inter-creditor agreement to be terminated upon full
      payment of the purchase price deferral.




In
      addition to indebtedness noted above, our Company’s stockholders have
      periodically advanced and received repayment of funds loaned to the 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.




For
      the
      three months ended March 31, 2006, our interest and financing charges totaled
      approximately $2.3 million. This amount included approximately $2.1 million
      in
      interest payments to Westernbank and approximately $160,000 in amortization
      of
      deferred financing charges. As
      of
      March 31, 2006, the weighted average interest rate on outstanding loans during
      the period amounted to approximately 10.0%.




In
      comparison, for the three months ended March 31, 2005, interest and financing
      costs amounted to approximately $4.6 million, which included the acceleration
      of
      deferred charges, debt discount, an early termination penalty and additional
      warrants issued to Laurus Funds totaling approximately $3.8 million and
      approximately $465,000 in fees related to the Company’s 2004 equity financing
      activities. The normalized interest expense for the period was approximately
      $324,000 for the notes payable to Laurus Funds, Stiefel, and the short-term
      loans obtained by the Company. The weighted average interest rate paid on the
      gross outstanding debt during the year was approximately 7.7%.




***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 March 31, 2006,  there
      were capital expenditures of approximately $1.2 million consisting of
      approximately $700,000 for production machinery and equipment, $365,000 for
      construction in progress costs and approximately $88,000 for office furniture,
      computer hardware and building and leasehold improvements.




***Future
      Commitments***




As
      of
      March 31, 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.




34


As
      of
      March 31, 2006, we had operating lease contractual obligations totaling
      approximately **$** 3.2
      million due to various vendors over the next ten years.




As
      of
      March 31, 2006 the Company has billed approximately $14.6 million for services
      to be provided. The revenue recognized into income as services are
      performed.




As
      a
      specialty pharmaceutical company, we are also involved in a number of business
      development projects including research and development activities that require
      the use of capital resources over extended periods of time. From time to time,
      these activities may also include the use of external resources that require
      prepayment or cash deposits for supplies, products or services that we require.
      As we 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.




**Subsequent
      Events**


On
        April
        3, 2006, we announced that we had reached an agreement in principle to acquire
        a
        German pharmaceutical production business from a pan-European specialty company,
        with which we are also entering into a strategic 10-year collaboration
        agreement, whereby we will become the exclusive manufacturing resources for
        the
        European company's therapeutic products. The acquisition is subject to the
        completion of customary due diligence and execution of definitive documents.
        We
        expect to close the acquisition by the end of the second quarter of 2006
        and to
        expense approximately $2.6 million in one-time costs and expenses related
        to the
        transaction.




Subsequent
      to March 31, 2006, the Company granted 420,000 stock options to purchase 420,000
      shares of the Company’s common stock. The fair value of these shares
      approximating $634,000 was evaluated using the Black-Scholes option pricing
      model with the following assumptions: a risk free interest rate of 4.8%, an
      expected life of four years, a volatility factor of 64.4% and a dividend yield
      of 0%.




Subsequent
      to March 31, 2006, the Company issued 1,782,405 shares of its restricted common
      stock upon the exercise of 1,782,405 warrants at prices per share ranging from
      $1.00 to $1.50 for total cash proceeds of approximately $1.8 million. All such
      proceeds were used for operating activities and working capital. In addition,
      pursuant to certain cashless exercise of warrants 10,095 shares of common stock
      were returned into treasury.




35


**ITEM** **3.
      QUANTITATIVE AND QUALITATIVE INFORMATION 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. 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. We neither hold nor issue financial instruments
      for
      trading purpose




**Interest
      Rate Risk**




The
      principal value of variable rate long-term debt as of March 31, 2006, including
      current maturities approximated $71.6 million. A hypothetical increase of one
      percentage point in the prime interest rate applicable to our long-term debt
      at
      March 31, 2006 would be approximately $716,000 per year in additional
      interest.




**Foreign
      Exchange Rate Risk**




Our
      functional currency is the U.S. dollar. The financial statements of the
      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 revenue 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. In the three months ended March 31, 2006, more than 84% of our
      consolidated sales were realized in Great Britain pounds, the balance of the
      consolidated sales were to customers in the European Union and realized in
      Euros.




While
      we
      incur expenses in those currencies, the impact of these expenses does not fully
      offset the impact of currency exchange rates on our revenues. As a result,
      currency exchange rate movements can have a considerable impact on our earnings.
      For the three month period ended March 31, 2006 a hypothetical 1% increase
      in
      the exchange rates between the U.S. dollar and the British pound would have
      a
      negative impact of approximately $104,000 on net revenues, or 0.5% of net
      revenues.




We
      do not
      currently engage in any hedging activities designed to stabilize the risks
      of
      foreign currency fluctuations. However, we intend to implement hedging
      transactions in the future.




**ITEM** **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
      Chief Financial Officer concluded that our disclosure controls and procedures
      are effective in timely alerting them to material information relating to the
      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 the 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.




36


**PART
      II — OTHER INFORMATION**




**ITEM** **6.  EXHIBITS**




31.1  Certification
      by CEO under SEC Rule 15d-14(a) as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.




31.2  Certification
      by CFO under SEC Rule 15d-14(a) as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.




32.1  Certification
      by CEO pursuant to 18 USC Section 1350 as adopted by Section 906 of the
      Sarbanes-Oxley Act of 2002.




32.2  Certification
      by CFO pursuant to 18 USC Section 1350 as adopted by Section 906 of the
      Sarbanes-Oxley Act of 2002.












37


**SIGNAT** **URES**




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.







INYX,
              INC.Date: May
              16,
              2006
            By:
            /s/ Rima
              GoldshmidtRima
              Goldshmidt,Vice
              President and Acting Chief Financial
              Officer




38