---

SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

FORM 10-QSB

[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934. 
For the quarterly period ended: December 31, 2004

OR

[_] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934. 
For the transition period from: to

Commission File Number: 000-030813

AlphaRx, Inc.(Name of Small Business Issuer in its Charter)

|Delaware                            | 98-0177440                              
|----------------------------------- | ----------------------------------------
|(State
    or other jurisdiction of | (I.R.S.
    Employer Identification No.)
|incorporation or organization)      |                                         

168 Konrad Crescent, Suite 200 
Markham, Ontario, Canada L3R 9T9 
(Address of principal executive offices)

Registrant's telephone number, including area
code: (905) 479-3245

Securities registered pursuant to Section 12(b)
of the Act: None

Securities registered pursuant to Section 12(g)
of the Act: 
Common Stock, 
$.0001 par value (Title of Class)

Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

The number of outstanding shares of registrant's Common Stock
on February 14, 2006 was 57,508,112.

Transitional Small Business Disclosure Format. Yes [ ] No [X]

1

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ALPHARX, INC.

FORM 10-QSB

DECEMBER 31, 2005

TABLE OF CONTENTS

|Unaudited Interim Consolidated Balance Sheets
    as of December                 |   
|-------------------------------------------------------------------------------- | --
|31, 2005 and
    September 30, 2005                                              | 3 
|                                                                                 |   
|Unaudited Interim Consolidated Statements of
    Operations for the three months |   
|ended December 31,
    2005 and December 31, 2004                                | 4 
|                                                                                 |   
|Unaudited Interim Consolidated Statements of
    Changes in Shareholders' Equity |   
|(Deficiency)                                                                     | 5 
|                                                                                 |   
|Unaudited Interim Consolidated Statements of
    Cash Flow for the three months  |   
|ended December 31,
    2005 and December 31, 2004                                | 6 
|                                                                                 |   
|Condensed Notes to Unaudited Interim
    Consolidated Financial Statements       | 7 
|                                                                                 |   
|Management's Discussion and Analysis of
    Financial Condition and Plan         | 11
|of Operation                                                                     |   
|                                                                                 |   
|Other Information                                                                | 15

2

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ALPHARx, INC. 
INTERIM CONSOLIDATED BALANCE SHEETS 
AS AT DECEMBER 31, 2005 AND SEPTEMBER 30,2005 
(UNAUDITED)

|                                                    | December 31, | September 30,
|--------------------------------------------------- | ------------ | -------------
|                                                    | 2005         |              
|CURRENT ASSETS                                      |              |              
|                                                    |              |              
|Cash and Cash Equivalents                           | $ 55,618     |              
|Accounts Receivable, net                            | 56,120       |              
|Prepaid Expenses                                    | 10,024       |              
|Inventory                                           | 73,724       |              
|                                                    |              |              
|TOTAL CURRENT ASSETS                                | 195,486      |              
|                                                    |              |              
|                                                    |              |              
|PROPERTY, PLANT & EQUIPMENT, net                    | 217,752      |              
|OTHER ASSETS                                        |              |              
|Licensing Right (Note 3)                            | 1            |              
|                                                    |              |              
|TOTAL ASSETS                                        | 413,239      |              
|                                                    |              |              
|CURRENT LIABILITIES                                 |              |              
|Accounts Payable and
    Accrued Liabilities        | 584,941      |              
|Notes Payable (Note 4)                              | 188,889      |              
|Litigation Liabilities
    (Note 5 )                | 25,000       |              
|TOTAL CURRENT LIABILITIES                           | 798,830      |              
|                                                    |              |              
|                                                    |              |              
|SHAREHOLDERS' EQUITY (DEFICIENCY)                   |              |              
|Common Stock: $ 0.0001 par value,                   |              |              
|Authorized 250,000,000
    shares; issued and       |              |              
|outstanding December 31,
    2005 and September 30, |              |              
|2005: 57,508,112                                    | 5,752        |              
|Additional paid-in capital                          | 12,663,054   |              
|Deficit                                             | (13,054,397) |              
|                                                    |              |              
|TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)             | (385,591)    |              
|                                                    |              |              
|TOTAL LIABILITIES AND SHAREHOLDERS'                 |              |              
|EQUITY (DEFICIENCY)                                 | $ 413,239    |              

See condensed notes to consolidated financial statements

3

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ALPHARx, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 
(UNAUDITED)

|Three months ended
    December 31,     |             | 2005              |           | 2004          
|--------------------------------------- | ----------- | ----------------- | --------- | --------------
|                                        |             |                   |           |               
|SALES                                   |             | $  
    21,812    |           | $   
    8,946
|                                        |             |                   |           |               
|COST OF SALES                           |             | 7,436             |           | 4,428         
|                                        |             |                   |           |               
|GROSS MARGIN                            |             | 14,376            |           | 4,518         
|                                        |             |                   |           |               
|                                        |             |                   |           |               
|GENERAL AND
    ADMINISTRATIVE EXPENSES |             | 181,483           |           | 145,468       
|STOCK BASED
    COMPENSATION EXPENSE    |             | 499,811           |           | -             
|RESEARCH AND
    DEVELOPMENT EXPENSES   |             | 353,725           |           | 154,012       
|SALES AND MARKETING
    EXPENSE         |             | 5,475             |           | 147,848       
|DEPRECIATION                            |             | 14,925            |           | 11,044        
|LOSS FROM OPERATIONS                    | (1,041,043) |                   | (454,260)
|                                        |             |                   |           |               
|OTHER INCOME AND
    EXPENSES           |             |                   |           |               
|                                        |             |                   |           |               
|Interest Income/(Expense), net          |             | (1,410)           |           | 9,826         
|                                        |             |                   |           |               
|                                        |             |                   |           |               
|LOSS BEFORE INCOME TAXES                | (1,042,453) |                   | (444,434)
|                                        |             |                   |           |               
|INCOME TAX                              |             | -                 |           | -             
|                                        |             |                   |           |               
|NET LOSS                                |             | $
    (1,042,453) |           | $ (444,434)   
|                                        |             |                   |           |               
|NET LOSS PER COMMON
    SHARE, BASIC &  |             |                   |           |               
|DILUTED                                 |             | (0.02)            |           | (0.01)        
|                                        |             |                   |           |               
|WEIGHTED AVERAGE
    NUMBER OF COMMON   |             |                   |           |               
|SHARES OUTSTANDING                      |             | 57,508,112        |           | 56,490,117    
|                                        |             |                   |           |               

See condensed notes to consolidated financial statements

4

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ALPHARx, INC. 
INTERIM CONSOLIDATED STATEMENTS OF CHANGES 
IN SHAREHOLDERS' EQUITY (DEFICIT) 
(UNAUDITED)

|                        | Common Stock | Additional | Retained    | Total        
|----------------------- | ------------ | ---------- | ----------- | -------------
|                        | Number of    |            | Paid-in     | Earnings     
|                        | Shares       | Amount     | Capital     | (Deficit)    
|                        |              |            |             |              
|Balance as of           |              |            |             |              
|September 30,           |              |            |             |              
|2004                    | 52,304,642   | $5,232     | $9,580,035  | $(7,159,820) 
|                        |              |            |             |              
|Conversion of           |              |            |             |              
|Promissory              |              |            |             |              
|Notes                   | 5,203,470    | 520        | 510,988     |              
|                        |              |            |             |              
|Issuance of             |              |            |             |              
|Stock Options           |              |            |             |              
|for consulting services |              | 62,300     |             | 62,300       
|                        |              |            |             |              
|Stock Based             |              |            |             |              
|compensation expense    |              | 2,009,920  |             | 2,009,920    
|                        |              |            |             |              
|Net Loss for            |              |            |             |              
|the year                |              |            |             | (4,852,124)  
|                        |              |            |             |              
|Balance as of           |              |            |             |              
|September 30,           |              |            |             |              
|2005                    | 57,508,112   | $5,752     | $12,163,243 | $(12,011,944)
|                        |              |            |             |              
|Issuance of             |              |            |             |              
|Stock Options           |              |            |             |              
|for consulting services |              | 50,922     |             | 50,922       
|                        |              |            |             |              
|Stock Based             |              |            |             |              
|compensation expense    |              | 448,889    |             | 448,889      
|                        |              |            |             |              
|Net Loss for            |              |            |             | (1,042,453)  
|the period              |              |            |             |              
|                        |              |            |             |              
|Balance as of           |              |            |             |              
|December 31,            |              |            |             |              
|2005                    | 57,508,112   | $5,752     | $12,663,054 | $(13,054,397)

See condensed notes to consolidated financial statements

5

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ALPHARx, INC. 
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 
(UNAUDITED)

|Three months ended December 31,                                     |               | 2005        |   | 2004     
|------------------------------------------------------------------- | ------------- | ----------- | - | ---------
|                                                                    |               |             |   |          
|CASH FLOWS FROM OPERATING ACTIVITIES                                |               |             |   |          
|Net Loss                                                            | $ (1,042,453) | $ (444,434)
|Adjustments to reconcile
    net loss to net cash used in operating |               |             |   |          
|activities:                                                         |               |             |   |          
|Depreciation and
    amortization                                   |               | 14,925      |   | 11,450   
|Stock based compensation
    expense                                |               | 499,811     |   | -        
|Changes in assets and liabilities:                                  |               |             |   |          
|(Increase)/decrease in Inventory                                    |               | 7,442       |   | (59,573) 
|Increase in Accounts Receivable                                     |               | (14,237)    |   | (853)    
|Decrease in Prepaid Expenses                                        |               | 7,019       |   | 16,843   
|Increase in Accounts Payable and Accrued Liabilities                |               | 200,466     |   | 71,273   
|                                                                    |               |             |   |          
|NET CASH USED IN OPERATING ACTIVITIES                               |               | (327,027)   |   | (405,294)
|                                                                    |               |             |   |          
|CASH FLOWS FROM INVESTING ACTIVITIES                                |               |             |   |          
|                                                                    |               |             |   |          
|Purchase of Machinery & Equipment, net                              |               | 298         |   | (26,348) 
|                                                                    |               |             |   |          
|NET CASH PROVIDED BY (USED IN) INVESTING
    ACTIVITIES             |               | 298         |   | (26,348) 
|                                                                    |               |             |   |          
|CASH FLOWS FROM FINANCING ACTIVITIES                                |               |             |   |          
|                                                                    |               |             |   |          
|Issuance (repayment) of Notes Payable                               |               | 188,889     |   | (665,900)
|Proceeds from Issuance of Common Stock (net)                        |               | -           |   | 511,508  
|                                                                    |               |             |   |          
|NET CASH PROVIDED BY (USED IN) FINANCING
    ACTIVITIES             |               | 188,889     |   | (154,392)
|                                                                    |               |             |   |          
|NET DECREASE IN CASH                                                |               | (137,840)   |   | (586,034)
|                                                                    |               |             |   |          
|CASH, and cash equivalents, beginning of
    period                 |               | 193,458     |   | 2,856,042
|                                                                    |               |             |   |          
|CASH, and cash equivalents, end of period                           | $             | 55,618      | $ | 2,270,008
|                                                                    |               |             |   |          
|                                                                    |               |             |   |          
|                                                                    |               |             |   |          
|Income Tax Paid                                                     | $             | 0           | $ | 0        
|Interest Paid                                                       | $             | 0           | $ | 0        

See condensed notes to consolidated financial statements

6

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ALPHARX INC. 
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2005 
(UNAUDITED)

NOTE 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of all recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the year ended September 30, 2006. Interim financial statements
should be read in conjunction with the Company's annual audited financial
statements.

NOTE 2. NATURE OF BUSINESS AND GOING CONCERN

ALPHARX, INC. (the Company) was incorporated under the laws
of the State of Delaware on August 7, 1997. The company is an emerging
pharmaceutical company specializing in the formulation of therapeutic products
using proprietary drug delivery technologies. The company was formally known as
LOGIC TECH INTERNATIONAL, INC., and had its corporate name changed during the
fiscal year of 2000.

Effective April 22, 2005 AlphaRx International Holdings Limited (a British
Virgin Island company and a wholly-owned subsidiary of AlphaRx Inc.) entered
into a Joint Venture agreement with Basin Industrial Limited (a British Virgin
Islands Company and a wholly-owned subsidiary of Advance Pharmaceutical Co.
Ltd.). The Joint Venture, AlphaAP Inc., will be involved in manufacturing and
marketing of certain of the Company's existing products and certain future
products in the far east. Alpha AP Inc. remains inactive as of December 31,
2005.

The consolidated financial statements reflect the activities of the Company,
AlphaRx Canada Limited and AlphaRx International Holdings Limited  its wholly
owned subsidiaries. All material inter-company accounts and transactions have
been eliminated.

The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, they
do not include any adjustments relating to the realization of the carrying value
of assets or the amounts and classification of liabilities that might be
necessary should the company be unable to continue as a going concern.
Continuance of the company as a going concern is dependent on its future
profitability and on the on-going support of its shareholders, affiliates and
creditors.

NOTE 3. LICENSING RIGHTS

The Company acquired world-wide exclusive commercialization rights for VT-1
from Select Therapeutics Inc. in January 2003 with the intention of
commercializing this drug. Having unsuccessfully attempted to resell these
commercialization rights, they have been written down to a nominal value due
primarily to prohibitive development costs, and the fact that there is no market
for these rights.

NOTE 4. NOTES PAYABLE

The Company issued approximately $188,000 in promissory notes during the
three months ended December 31, 2005. These notes bear interest at 12% per annum
and are repayable on the first anniversary date of issuance.

7

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During the three months ended December 31, 2004, the Company converted
$520,347 in convertible promissory notes into 5,203,470 shares of common stock
plus warrants to purchase 10,406,940 shares of common stock at an exercise price
of $0.30 per share. These warrants expire during September and October, 2007.
The remaining notes outstanding after conversion were repaid with proceeds from
the private placement completed during September, 2004.

NOTE 5. LITIGATION LIABILITY

The Company is a defendant in a lawsuit filed by a prospective investor
alleging breach of contract, which seeks damages totalling $25,000. The Company
believes the suit is without merit, however, to remain conservative, the entire
claim has been accrued in the financial statements.

NOTE 6. COMMON STOCK

The Company is authorized to issue 250,000,000 shares of common stock. As of
December 31, 2005, there remains issued and outstanding 57,508,112 shares of
such common stock which has a stated par value of $0.0001 per share.

There were no shares issued during the three months ended December 31, 2005.
During the three months ended December 31, 2004, $520,347 of convertible
promissory notes were converted into 5,203,470 shares of common stock at $0.10
per share and 10,406,940 warrants to purchase shares of common stock at an
exercise price of $0.30 per share.

NOTE 7. STOCK OPTION PLANS

The Company has a Stock Option Plan (the "Plan") under which officers, key
employees, certain independent contractors, and non-employee directors may be
granted options to purchase shares of the Company's authorized but unissued
common stock. This Plan was terminated during fiscal 2001. Under this Plan, the
option exercise price is $0.10. Outstanding stock options granted under the Plan
will remain in effect until the expiration date specified in those options.
Options currently expire no later than 10 years from the grant date and
generally vest within five years. Proceeds received by the Company from
exercises of stock options are credited to common stock and additional paid-in
capital. Additional information with respect to the Plan's stock option activity
is as follows:

|                                       | Number of | Weighted
|-------------------------------------- | --------- | --------
|                                       | Shares    | Average 
|                                       |           | Exercise
|                                       |           | Price   
|Options outstanding and exercisable at |           |         
|December 31, 2005                      | 1,150,000 | $0.10   

The Company adopted a new option plan on February 10, 2003 under which
options to purchase 1,500,000 common shares will be granted to certain key
employees, consultants and directors. Under the Plan, the option exercise price
and its fair market value are determined to be $0.50 -$0.69. All options will
expire on February 10, 2008 and will vest, and become exercisable in three
instalments. Proceeds received by the Company from exercises of stock options
are credited to common stock and additional paid-in capital. Additional
information with respect to the Plan's stock option activity is as follows:

---



|                                                     | Number of | Weighted
|---------------------------------------------------- | --------- | --------
|                                                     | Shares    | Average 
|                                                     |           | Exercise
|                                                     |           | Price   
|                                                     | 8         |         
|Outstanding at February 10, 2003 (plan
    adoption) | 0         |         
|Granted during fiscal 2003                           | 645,000   | $0.63   
|Exercised                                            | 0         | $0.00   
|Cancelled                                            | 75,000    | $0.63   
|Outstanding as of December 31, 2005                  | 570,000   | $0.63   
|Options exercisable at December 31, 2005             | 570,000   | $0.63   

The Company granted 645,000 stock options to consultants
during fiscal 2003. We recognized $280,594 in administrative expenses related to
the granting of these options during fiscal 2003. The fair value of each option
granted during 2003 was determined using the Black-Scholes Option Pricing
Method.

The Company did not grant any stock options during fiscal
2004. The Company, via written consent from a majority of the holders of common
stock, approved the adoption of a new option plan during July, 2004. Under this
plan the Company can issue up to 24,000,000 options to purchase common stock.
Under this plan the Company granted the following options to employees and
consultants during fiscal 2005 and during the first quarter of fiscal 2006
ending December 31st, 2005:

|                                             | Number of  | Weighted
|-------------------------------------------- | ---------- | --------
|                                             | Shares     | Average 
|                                             |            | Exercise
|                                             |            | Price   
|Outstanding at July 24, 2004 (plan adoption) | 0          |         
|Granted during fiscal 2004                   | 0          |         
|Granted during fiscal 2005                   | 20,710,000 | $0.16   
|Granted during Q1, fiscal 2006               | 3,290,000  | $0.075  
|Exercised/Cancelled                          | 0          |         
|Outstanding as of December 31, 2005          | 24,000,000 | $0.15   
|Options exercisable at December 31, 2005     | 13,320,000 | $0.16   

Additional information with respect to the Plan's stock option activity is as
follows:

|Grant Date | Quantity   | Option | Expiry  | Fair Value | Risk   | Expected | Expected   | Expected
|---------- | ---------- | ------ | ------- | ---------- | ------ | -------- | ---------- | --------
|           | Granted    | Price  |         |            | Free   | Life     | Volatility | Dividend
|           |            |        |         |            | Rate   |          |            |         
|Nov 15,    | 13,220,000 | $0.15  | Nov 15, | $1,448,922 | 2.32%  | 10       | 185%       | NIL     
|2004       |            | to     | 2014    |            |        | years    |            |         
|           |            | $0.50  |         |            |        |          |            |         
|Jan 10,    | 7,000,000  | $0.15  | Feb 8,  | $1,045,056 | 2.02%  | 10       | 177%       | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|Feb 8,     | 390,000    | $0.15  | Feb 8,  | $53,894    | 1.93%  | 10       | 156%       | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|May 25,    | 100,000    | $0.13  | May 25, | $7,627     | 2.00%  | 10       | 70%        | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|Oct 17,    | 3,290,000  | $0.075 | Oct 17, | $244,559   | 4.50 % | 10       | 75%        | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|           | 24,000,000 |        |         | $2,800,058 |        |          |            |         

Of these options, 600,000 which were granted to consultants vest immediately,
and the remaining 23,400,000 vest on the first anniversary of the grant date.

9

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The Company has adopted the fair value accounting for employee stock options
as per SFAS 123(R) using the modified retrospective application method,
effective April 1, 2005. Resultingly, the Company recorded $2,009,920 in stock
based compensation expense during fiscal 2005 and $499,811 during the three
months ended December 31, 2005 using the Black-Scholes option pricing model. The
Company also recorded $62,300 in administrative expenses during 2005 related to
the options granted to consultants using the Black-Scholes option pricing model.
There remains $228,027 in stock compensation to be expensed over the vesting
period of these options.

Had the Company continued to use APB 25, and not reflected employee stock
based compensation expense, net loss and net loss per share both pre-tax and
after tax basis would have been as follows:

|                                 | As reported using | Pro Forma per
|-------------------------------- | ----------------- | -------------
|                                 | SFAS 123(R)       | APB 25       
|                                 |                   |              
|Stock Based compensation         | $ 499,811         | $ 1,857      
|                                 |                   |              
|Net Loss (pre-tax/after tax)     | $(1,042,453)      | $(544,499)   
|                                 |                   |              
|Basic and Diluted Loss per share | $(0.02)           | $(0.01)      

NOTE 8. WARRANTS

The Company has the following warrants outstanding to purchase common stock
at December 31, 2005:

| | Warrants issued in conjunction with financing
    costs whereby one   |           
| | --------------------------------------------------------------------- | ----------
| | warrant entitles the holder to purchase one
    share of common stock |           
| | at an exercise price of $1.10, expiring
    December 19, 2007.        | 670,275   
| |                                                                       |           
| | Warrants issued in conjunction with financing
    costs whereby one   |           
| | warrant entitles the holder to purchase one
    share of common stock |           
| | at an exercise price of $0.65 expiring June
    17, 2006.             | 75,524    
| |                                                                       |           
| | Warrants issued in return for financial
    advisory services whereby |           
| | one warrant entitles the holder to purchase
    one share of common   |           
| | stock at an exercise price of $0.05, expiring
    September 1, 2007.  |           
| | This warrant can only be exercised after
    January 29, 2005.        | 3,000,000 
| |                                                                       |           
| | Warrants issued in conjunction with financing
    costs whereby one   |           
| | warrant entitles the holder to purchase one
    share of common stock |           
| | at an exercise price of $0.15, expiring
    September 1, 2007.        | 2,994,642 
| |                                                                       |           
| | Warrants issued in conjunction with financing
    costs whereby one   |           
| | warrant entitles the holder to purchase one
    share of common stock |           
| | at an exercise price of $0.30, expiring
    September 1, 2007.        | 2,287,669 
| |                                                                       |           
| | Warrants issued in conjunction with
    conversion of promissory      |           
| | notes and in conjunction with the private
    placement completed     |           
| | during July and September, 2004. One warrant
    entitles the holder  |           
| | to purchase one share of common stock at an
    exercise price of     |           
| | $0.30. Expiry dates: July 21, 2007 
    27,505,378; September 1,     |           
| | 2007  12,426,114; October 13, 2007 
    5,204,160.                  | 45,135,652
| |                                                                       |           
| |                                                                       | 54,163,762

10

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NOTE 9: RECLASSIFICATIONS

Certain amounts in 2004 have been reclassified to conform to current year's
presentation.

NOTE 10: SUBSEQUENT EVENT

Subsequent to December 31, 2005 and up to February 13, 2006
the Company has issued Promissory Notes totalling approximately USD $73,340.
These Promissory Notes bear interest at the rate of 12% per annum and are due on
the first anniversary date of issuance.

11

---



ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION

The following discussion and analysis should be read in conjunction with the
Financial Statements, including the Notes thereto, appearing in this Form
10-QSB. Except for the historical information contained herein the foregoing
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those projected
in the forward-looking statements discussed herein.

General

AlphaRx is a drug delivery company specializing in the development of
innovative therapeutic products for the pharmaceutical and consumer health care
market. Our core competence is in the development of novel drug formulations for
therapeutic molecules or compounds that have exhibited poor G.I. absorption due
to poor solubility or have yet be administerable to the human body with an
acceptable delivery method. Our drug delivery system is versatile and offers
significant flexibility in the development of suitable dosage formulations (i.e.
oral, topical or parenteral) to meet the requirements of specific drug
molecules.

During 2003 we initiated commercialization of our products commencing with
sales of Flexogan in the Canadian market. It became evident during 2005 that we
required more substantial financial resources to pursue Flexogan marketing
strategy. We determined that completion of Phase II clinical trials was the best
course of action with the resources remaining. Should we be successful in
raising additional funding we will continue to pursue completion of Phase II
trials as our primary objective.

We signed a licensing agreement with Andromaco in August 2003 for the
commercialization of our lead pharmaceutical products "Indaflex" in Mexico.
Mexican health authorities gave approval to Andromaco to start sales of Indaflex
in Mexico. We collected our first royalties from Indaflex sales in the year
ended September 30, 2005.

We established a wholly-owned subsidiary  AlphaRx International Holdings
Limited in April, 2005 and entered into a Joint Venture Agreement with Basin
Industrial Limited (a wholly-owned subsidiary of Advance Pharmaceutical Co.
Ltd.). The joint venture  AlphaAP Inc., will be involved in the manufacture and
marketing of certain existing and future products in the far east.

We have one pharmaceutical drug in the clinical trial stage (Phase 1
completed in March, 2005, Phase II underway as of November, 2005), and several
pharmaceutical drugs in the preclinical stage.

The costs incurred for each of these initiatives to date cannot be readily
determined because (i) there is no clear distinction between initiatives in
order to be able to differentiate between them; (ii) all initiatives have a
common goal and that is to adopt our Bioadhesive Colloidal Dispersion drug
delivery system to the specific drug in order to improve that drug's
effectiveness; and (iii) we do not maintain a time control system to
differentiate research and development activities.

The nature, timing and estimated costs to complete a project and anticipated
completion dates cannot be estimated because: (i) the nature of research is
experimental and we could encounter unforeseen situations which could
significantly delay project completion or require us to abandon the project;
(ii) timing to complete a project depends, to a certain extent, on financial
resources and we cannot predict with any degree of certainty that financial
resources will be available when needed to complete any specific project and
(iii) cost estimates cannot be predicted with any acceptable degree of accuracy
due to unforeseen issues arising during the clinical stages or the approval
stages of any specific initiative.

If we cannot complete our research and development initiatives on a timely
basis consequences to our operations could be significant to the point where the
initiative would be delayed or even abandoned. We would also face the risk of
competitors developing the same or similar products and being first to market.

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Finally, our failure to develop products on a timely basis could
substantially impair our ability to generate revenues and materially harm our
financial position.

We cannot predict the timing of material net cash inflows from significant
projects due to a number of factors including (i) availability of financial
resources required to market a new product, (ii) our lack of experience in
bringing a new product to market successfully and gaining market share; (iii)
competitors' products and the nature and timing of their marketing initiatives.

We intend to continue investing in the further development of our drug
delivery technologies and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating our
drug delivery systems. Depending upon a variety of factors, including
collaborative arrangements, available personnel and financial resources, we will
conduct or fund clinical trials on such products and will undertake the
associated regulatory activities.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005, AS
COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2004

The Company incurred a net loss of $1,042,453 for the three month period
ended December 31, 2005 as compared to a loss of $444,434 incurred for the same
period a year ago, an increase of $598,019 or approximately 135%. The increase
stems primarily from an increase in stock based compensation expense of $499,811
with no comparable expense in the same period a year ago. We are also focusing
on research and development activities related primarily to clinical trials of
Indaflex and preclinical activities for various new formulations.

Sales

Sales for the three months ended December 31, 2005 were $21,812 as compared
to $8,946 generated for the same period a year ago, an increase of $12,866 or
144%. We generated $5,273 in royalties during the three months ended December
31, 2005 with no comparable royalties during the same period a year ago. The
remaining increase resulted from repeat orders from existing customers.

Gross Margin

Cost of Sales for the three months ended December 31, 2005 was $7,436 as
compared to $4,428 incurred for the same period a year ago. Resulting Gross
Margin increased to $14,376 or approximately 66% of sales as compared to Gross
Margin of $4,518 or approximately 51% of sales for the same period a year ago.
Excluding royalties our gross margin for the three months ended December 31,
2005 was 55%.

General and Administrative Expenses

General and Administrative expenses consist primarily of personnel costs
related to general management functions, finance, inventory logistics, office
overheads, as well as insurance costs and professional fees related to legal,
audit and tax matters. General and Administrative expenses for the three months
ended December 31, 2005 were $181,483 as compared to $145,468 incurred for the
same period a year ago, an increase of $36,015 or approximately 25%. Financial
advisory fees of $30,000 were incurred during the three months ended December
31, 2005 with no comparable expense during the same period a year ago.

Stock Based Compensation Expense

We decided to adopt fair value accounting for employee stock options as per
SFAS 123(R) using the modified retrospective application method, effective April
1, 2005. As a result we expensed $499,811 in stock based compensation during the
three months ended December 31, 2005 with no comparable expense during the same
period a year ago. There remains $228,027 in stock based compensation to be
expensed over the vesting period of the options granted.

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Research and Development Expenses

Research and development expenses include costs for scientific personnel,
supplies, equipment, outsourced clinical and other research activities.

Research and development expenses for the three months ended December 31,
2005 were $353,725 as compared to $154,012 incurred for the same period a year
ago, an increase of $199,793 or about 130%. The increase relates primarily to
Phase II Indaflex clinical trials being undertaken, and ongoing research and
development of other over the counter products. We expect to increase research
and development expenses over the remainder of 2006 as we accelerate the
development and testing of our Indaflex drug candidate.

Sales and Marketing

We determined to curtail sales and marketing expenditures for Flexogan based
on increasing competition in the pain relief segment of the market and our
available financial resources. Sales and marketing expenditures were $5,475 for
the three months ended December 31, 2005 as compared to $147,848 incurred during
the same period a year ago, a decrease of $142,373 or about 96%. We continue to
seek collaborative partners to market and sell our Flexogan line of products.

Depreciation

Depreciation totalled $14,925 during the three months ended December 31, 2005
as compared to $11,044 incurred during the same period a year ago, an increase
of $3,881 or about 35%. The increase stems from increased capital expenditures
during fiscal 2005. There were no capital expenditures during the three month
period ended December 31, 2005.

Loss from Operations

Loss from operations were $1,041,043 for the three months
ended December 31, 2005 as compared to a loss of $454,260 incurred for the same
period a year ago, an increase of $586,783 or approximately 129%. Stock based
compensation expense of $499,811 with no comparable prior period expense was
primarily the cause of the increased loss from operations.

September 30, 2005 Financial Statements:

The September 30, 2005 Financial Statements filed with our annual 10K on
December 29, 2005 had Total Assets and Total Liabilities and Shareholders'
Equity reported as $556,526. The figure should have read $566,526.

LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2005 the Company had working capital deficiency of
$(603,344) compared to a working capital deficiency of $(75,925) as at September
30, 2005. We issued $188,000 in promissory notes during the three months ended
December 31, 2005 and intend to continue to issue such promissory notes until we
can source more permanent funding. We have issued additional financing in the
form of promissory notes in the amount of $73,340 from January 1, 2006 until
February 13, 2006. These notes are repayable within one year and bear interest
at 12% per annum.

Since inception, we have financed operations principally from the sale of
Common Stock and issuance of promissory notes and expect to continue this
practice to fund our ongoing activities.

We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our entire
business strategy. Therefore, we will likely need to raise substantial

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additional capital to fund our operations in the future. We cannot be certain
that any financing will be available when needed on acceptable terms or at all.
Any additional equity financings will be dilutive to our existing shareholders,
and debt financing, if available, may involve restrictive covenants on our
business.

We expect to continue to spend capital on:

1. research and development programs;
2. preclinical studies and clinical trials;
3. regulatory processes; and
4. third party manufacturers and marketing partners to manufacture and market
  our products for us.

The amount of capital we may need will depend on many factors, including:

1. the progress, timing and scope of our research and
  development programs;
2. the progress, timing and scope of our preclinical studies
  and clinical trials;
3. the time and cost necessary to obtain regulatory approvals;
4. the time and cost necessary to establish sales and marketing capabilities
  or to retain sales and marketing partners to market our products for us;
5. the time and cost necessary to respond to technological and market
  developments; and
6. new collaborative, licensing and other commercial relationships that we
  may establish.

The inability to raise capital would have a material adverse effect on the
Company. We currently have no capital commitments other than the payment of rent
on our facilities lease, and for certain research equipment.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain of the information contained in this document constitutes
"forward-looking statements", including but not limited to those with respect to
the future revenues, our development strategy, involve known and unknown risks,
uncertainties, and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the risks and uncertainties associated with a
drug delivery company which has not successfully commercialized our first
product, including a history of net losses, unproven technology, lack of
manufacturing experience, current and potential competitors with significant
technical and marketing resources, need for future capital and dependence on
collaborative partners and on key personnel. Additionally, we are subject to the
risks and uncertainties associated with all drug delivery companies, including
compliance with government regulations and the possibility of patent
infringement litigation, as well as those factors disclosed in our documents
filed from time to time with the United States Securities and Exchange
Commission.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer and Principal Accounting Officer,
has evaluated the effectiveness of the Company's disclosure controls and
procedures as of December 31, 2005. The Company's Chief Executive Officer and
Chief Financial Officer and Principal Accounting Officer concluded that the
Company's disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information the Company is required to disclose in
the reports it files under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms.

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Farhad Walji vs. AlphaRx, Inc. and AlphaRx Canada Limited filed in the
Supreme Court of British Columbia on August 23, 2002. Farhad Walji has filed a
claim asking for $25,000 plus interest for allegedly providing $20,000 pursuant
to a subscription agreement to purchase common shares of AlphaRx's stock and
damages resulting from lost opportunity. The Company has denied any liability in
this case and is currently defending this action vigorously. Nonetheless, the
value of the entire claim has been accrued in our financial statements as a
current liability.

ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES

We did not issue any stock during the three month period ending December 31,
2005. During the three months ended December 31, 2004 we issued 5,203,470 shares
of common stock pursuant to the conversion of $520,347 in convertible debt. We
also issued warrants to purchase 10,406,940 shares of common stock at $0.30 per
share in connection with the conversion of debt.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - OTHER INFORMATION

None.

ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

31.1 Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 
31.2 Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. 
32.1 Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code. 
32.2 Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code.

(b) REPORTS ON FORM 8-K

Not applicable

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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: February 14, 2006

| | ALPHARx, INC.                              
| | -------------------------------------------
| |                                            
| | By: /S/
    Michael M. Lee                 
| | Michael M. Lee, Chief
    Executive Officer
| |                                            
| |                                            
| | Directors:                                 
| |                                            
| | By:  /S/
    Michael M. Lee                
| | Michael M. Lee,
    Director               
| |                                            
| |                                            
| | By:  /S/ David
    Milroy                  
| | David Milroy, Director                     
| |                                            
| |                                            
| | By:  /S/ Ford
    Moore                    
| | Ford Moore, Director                       

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