---

SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2006

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 12, 2007 was 57,808,112.

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

---



ALPHARX, INC.

FORM 10-QSB

DECEMBER 31, 2006

TABLE OF CONTENTS

|Unaudited Interim Consolidated Balance Sheets
    as of December 31               |   
|--------------------------------------------------------------------------------- | --
|2006 and September 30,
    2006                                                   | 3 
|                                                                                  |   
|Unaudited Interim Consolidated Statements of
    Operations for the three months  |   
|ended December 31, 2006
    and December 31, 2005                                 | 4 
|                                                                                  |   
|                                                                                  |   
|Unaudited Interim Consolidated Statements of
    Changes in Shareholders' Deficit | 5 
|                                                                                  |   
|Unaudited Interim Consolidated Statements of
    Cash Flow for the three months   |   
|ended December 31, 2006
    and December 31, 2005                                 | 6 
|                                                                                  |   
|Condensed Notes to Unaudited Interim
    Consolidated Financial Statements        | 7 
|                                                                                  |   
|Management's Discussion and Analysis of
    Financial Condition and Plan          | 13
|of Operation                                                                      |   
|                                                                                  |   
|Other Information                                                                 | 19

2

---



ALPHARx, INC. 
INTERIM CONSOLIDATED BALANCE SHEETS 
AS AT DECEMBER 31, 2006 AND SEPTEMBER 30,2006 
(UNAUDITED) 
(All amounts in US Dollars)

|                                                           | December 31, | September 30,
|---------------------------------------------------------- | ------------ | -------------
|                                                           |              | 2006         
|CURRENT ASSETS                                             |              |              
|                                                           |              |              
|Cash and Cash Equivalents                                  | $            | 1,018,493    
|Marketable Securities                                      |              | -            
|Accounts Receivable, net                                   |              | 22,694       
|Prepaid Expenses and Other Assets                          |              | 3,478        
|Discontinued Operations (note 3)                           |              | 4,291        
|TOTAL CURRENT ASSETS                                       |              | 1,048,956    
|                                                           |              |              
|PROPERTY, PLANT & EQUIPMENT, net                           |              | 254,773      
|OTHER ASSETS                                               |              |              
|Licensing Right                                            |              | 1            
|TOTAL ASSETS                                               |              | 1,303,730    
|                                                           |              |              
|CURRENT LIABILITIES                                        |              |              
|Accounts Payable and Accrued Liabilities                   |              | 509,628      
|Notes Payable (note 4)                                     |              | 1,074,612    
|Discontinued Operations (note 3)                           |              | 48,254       
|Deferred Revenue                                           |              | 75,000       
|TOTAL CURRENT LIABILITIES                                  |              | 1,707,494    
|                                                           |              |              
|MINORITY INTEREST (note 5)                                 |              | 145,248      
|                                                           |              |              
|SHAREHOLDERS' EQUITY/(DEFICIT)                             |              |              
|Common Stock: $ 0.0001 par value,                          |              |              
|Authorized: 250,000,000 shares;
    Issued and outstanding |              |              
|December 31, 2006- 57,808,112
    (September 30, 2006-     |              |              
|57,508,112) (Notes 6-8)                                    |              | 5,782        
|Additional paid-in capital                                 |              | 14,573,899   
|Accumulated Other Comprehensive Loss                       |              | (3,679)      
|Deficit                                                    |              | (15,125,014) 
|                                                           |              |              
|TOTAL SHAREHOLDERS'
    EQUITY/(DEFICIT)                   |              | (549,012)    
|                                                           |              |              
|TOTAL LIABILITIES AND
    SHAREHOLDERS'                    |              |              
|EQUITY/(DEFICIT)                                           | $            | 1,303,730    

See condensed notes to consolidated financial statements

3

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ALPHARx, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONS 
FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005

|December 31,                         |   | 2006       |   | 2005       
|------------------------------------ | - | ---------- | - | -----------
|                                     |   |            |   |            
|LICENSE FEES AND ROYALTIES           |   | 11,329     |   | 5,274      
|                                     |   |            |   |            
|GENERAL AND ADMINISTRATIVE EXPENSES  |   | 177,271    |   | 167,138    
|STOCK BASED COMPENSATION EXPENSE AND |   |            |   |            
|WARRANT AMORTIZATION                 |   | 137,834    |   | 499,811    
|RESEARCH AND DEVELOPMENT EXPENSES    |   | 246,018    |   | 353,725    
|SALES AND MARKETING EXPENSES         |   | 3,750      |   | -          
|DEPRECIATION                         |   | 20,018     |   | 14,925     
|LOSS FROM OPERATIONS                 |   | (584,891)  |   | (1,030,325)
|                                     |   |            |   |            
|OTHER INCOME AND EXPENSES            |   |            |   |            
|                                     |   |            |   |            
|INTEREST (EXPENSE)/INCOME, NET       |   | (24,743)   |   | (1,410)    
|                                     |   |            |   |            
|LOSS BEFORE INCOME TAXES             |   | (598,305)  |   | (1,031,735)
|                                     |   |            |   |            
|INCOME TAX                           |   | -          |   | -          
|                                     |   |            |   |            
|LOSS BEFORE MINORITY INTEREST        |   | (598,305)  |   | (1,031,735)
|MINORITY INTEREST                    |   | 16,035     |   | -          
|LOSS BEFORE DISCONTINUED OPERATIONS  |   | (582,270)  |   | (1,031,735)
|LOSS FROM OPERATIONS OF DISCONTINUED |   |            |   |            
|COMPONENT (note 4)                   |   | (8,507)    |   | (10,718)   
|NET LOSS                             |   | (590,777)  |   | (1,042,453)
|CUMULATIVE TRANSLATION ADJUSTMENT    |   | 1,650      |   | -          
|COMPREHENSIVE LOSS                   | $ | (589,127)  | $ | (1,042,453)
|                                     |   |            |   |            
|NET LOSS PER COMMON SHARE, BASIC &   |   |            |   |            
|DILUTED                              |   | $(0.01)    |   | $(0.02)    
|                                     |   |            |   |            
|WEIGHTED AVERAGE NUMBER OF COMMON    |   |            |   |            
|SHARES OUTSTANDING                   |   | 57,641,808 |   | 57,508,112 

See condensed notes to consolidated financial statements

4

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ALPHARx, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
FOR THE PERIOD ENDED DECEMBER 31, 2006 
(All amounts in US Dollars)

|                      | Common Stock |        |             |             |              
|--------------------- | ------------ | ------ | ----------- | ----------- | -------------
|                      |              |        |             | Accumulated |              
|                      |              |        | Additional  | Other Com-  |              
|                      | Number of    |        | Paid in     | prehensive  |              
|                      | Shares       | Amount | Capital     | Loss        | (Deficit)    
|                      |              |        |             |             |              
|Balance, as of        |              |        |             |             |              
|September 30, 2005    | 57,508,112   | $5,752 | $12,163,243 | -           | $(12,011,944)
|Issuance of stock     |              |        |             |             |              
|options for           |              |        |             |             |              
|consulting services   |              |        | 233,838     |             |              
|Stock based           |              |        |             |             |              
|compensation          |              |        | 483,279     |             |              
|Unamortized           |              |        |             |             |              
|warrant discount      |              |        | 504,495     |             |              
|                      |              |        |             |             |              
|Net Loss for the year |              |        |             |             | (2,522,293)  
|Subsidiary common     |              |        |             |             |              
|stock issuance        |              |        | 1,094,227   |             |              
|Foreign currency      |              |        |             |             |              
|translation           |              |        |             | (5,329)     |              
|Balance, as of        |              |        |             |             |              
|September 30, 2006    | 57,508,112   | $5,752 | $14,479,082 | $(5,329)    | $(14,534,237)
|Issuance of stock for |              |        |             |             |              
|consulting services   | 300,000      | 30     | 29,970      |             |              
|Unamortized           |              |        |             |             |              
|warrant discount      |              |        | 54,127      |             |              
|Stock based           |              |        |             |             |              
|compensation          |              |        | 10,720      |             |              
|Net Loss for the      |              |        |             |             |              
|period                |              |        |             |             | (590,777)    
|Foreign currency      |              |        |             |             |              
|translation           |              |        |             | 1,650       |              
|Balance as of         |              |        |             |             |              
|December 31, 2006     | 57,808,112   | $5,782 | $14,573,899 | $(3,679)    | $(15,125,014)

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, 2006 AND 2005 
(UNAUDITED) 
(All amounts in US Dollars)

|Three months ended December 31,                                     |   | 2006      |   | 2005       
|------------------------------------------------------------------- | - | --------- | - | -----------
|                                                                    |   |           |   |            
|CASH FLOWS FROM OPERATING
    ACTIVITIES                            |   |           |   |            
|Net Loss                                                            | $ | (590,777) | $ | (1,042,453)
|Adjustments to reconcile net loss to net cash used
    in operating |   |           |   |            
|activities:                                                         |   |           |   |            
|Depreciation and amortization                                       |   | 20,018    |   | 14,925     
|Warrant amortization                                                |   | 127,114   |   | -          
|Stock based compensation expense                                    |   | 10,720    |   | 448,889    
|Options issued for services rendered                                |   | -         |   | 50,922     
|Issuance of common stock for services rendered                      |   | 30,000    |   | -          
|Changes in assets and liabilities:                                  |   |           |   |            
|Decrease in marketable securities                                   |   | 176,418   |   | -          
|Increase in accounts receivable                                     |   | (11,924)  |   | (14,664)   
|Decrease (Increase) in prepaid expenses                             |   | 6,028     |   | 7,019      
|Increase (Decrease) in accounts payable and
    accrued liabilities |   | (22,881)  |   | 234,424    
|Accrued interest on notes payable                                   |   | 9,786     |   | -          
|Increase in deferred revenue                                        |   | 75,000    |   | -          
|Discontinued operations (Note 3)                                    |   | (3,781)   |   | (26,089)   
|                                                                    |   |           |   |            
|NET CASH USED IN OPERATING
    ACTIVITIES                           |   | (174,279) |   | (327,027)  
|                                                                    |   |           |   |            
|CASH FLOWS FROM INVESTING
    ACTIVITIES                            |   |           |   |            
|                                                                    |   |           |   |            
|Purchase of Machinery &
    Equipment, net of disposals             |   | 7,888     |   | 298        
|                                                                    |   |           |   |            
|NET CASH PROVIDED BY (USED IN)
    INVESTING ACTIVITIES             |   | 7,888     |   | 298        
|                                                                    |   |           |   |            
|CASH FLOWS FROM FINANCING
    ACTIVITIES                            |   |           |   |            
|Minority interest                                                   |   | (16,035)  |   | -          
|Discount on issuance of Notes Payable                               |   | 54,127    |   | -          
|Issuance (repayment) of Notes Payable, net                          |   | 157,389   |   | 188,889    
|                                                                    |   |           |   |            
|NET CASH PROVIDED BY (USED IN)
    FINANCING ACTIVITIES             |   | 195,481   |   | 188,889    
|                                                                    |   |           |   |            
|NET INCREASE (DECREASE) IN CASH                                     |   | 29,090    |   | (137,840)  
|FOREIGN EXCHANGE TRANSLATION                                        |   | 1,650     |   | -          
|CASH, and cash equivalents,
    beginning of period                 |   | 987,753   |   | 193,458    
|                                                                    |   |           |   |            
|CASH, and cash equivalents, end
    of period                       | $ | 1,018,493 | $ | 55,618     
|                                                                    |   |           |   |            
|Taxes Paid                                                          | $ | 0         | $ | 0          
|Interest Paid                                                       | $ | 17,115    | $ | 0          
|                                                                    |   |           |   |            

See condensed notes to consolidated financial statements

6

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ALPHARX INC. 
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006

(UNAUDITED)
NOTE 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSThe 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, 2007. 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 human therapeutic
products using proprietary drug delivery technologies.
Effective June 30, 2006, AlphaRx International Holdings
Limited. ("AIH") acquired 100% of AlphaRx Life Sciences Ltd. ("ALS") for a
nominal amount and the assumption of approximately $63,000 of related party
liabilities. ALS is involved in obtaining necessary regulatory approvals for the
manufacture and distribution of the Company's products in the Asian market.
Effective June 22, 2006, New Super Limited, an independent
Hong Kong based corporation, subscribed for 1,500 shares of common stock of
AlphaRx International Holdings Ltd. ("AIH"), previously a wholly-owned
subsidiary of the Company.
Effective April 22, 2005 AlphaRx International Holdings Limited (a British
Virgin Island company and an 85% 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., is involved in manufacturing and
marketing of certain of the Company's existing products.
The Company holds an indirect 42.5% interest in AlphaAP Inc.("AAP"), a joint
venture established between the Company (via its AIH subsidiary) and Basin
Industrial Limited (an independent third party). As the Company contributes no
funds, and does not provide management or direction to the joint venture, the
Company's interest in the joint venture is not consolidated into the financial
statements. AIH will receive a 5% royalty on all revenues generated by AAP.
The consolidated financial statements reflect the activities of the Company,
100% of AlphaRx Canada Limited and 85% of AlphaRx International Holdings Limited
and AlphaRx Life Sciences Ltd. (AIH's wholly owned subsidiary). 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.
7
NOTE 3. DISCONTINUED OPERATIONS

The Company terminated direct sales and marketing program for Flexogan during
the year ended September 30, 2006. Substantially more funding for sales and
marketing would be required than was available in order to grow sales.
Accordingly direct sales and marketing activity ceased. The statements of income
and loss and balance sheet items related to the discontinued operations are as
follows:

|Income Statements for three months ended
    December 31, | 2006       |  | 2005      
|--------------------------------------------------------- | ---------- |  | ----------
|                                                          |            |  |           
|Sales                                                     | $ 877      |  | $16,538   
|Cost of Sales                                             | -          |  | 7,436     
|Gross Margin                                              | 877        |  | 9,102     
|                                                          |            |  |           
|General and Administrative Expenses                       | 8,650      |  | 14,345    
|Sales and Marketing Expenses                              | 734        |  | 5,475     
|Income Taxes                                              | -          |  | -         
|Loss from discontinued operations                         | $(8,507)   |  | $(10,718) 
|                                                          |            |  |           
|Balance Sheets                                            | December   |  | September 
|                                                          | 31, 2006   |  | 30, 2006  
|                                                          |            |  |           
|Other assets                                              | $4,291     |  | $ 4,474   
|Total Current Assets                                      | 4,291      |  | 4,474     
|                                                          |            |  |           
|Accounts Payable and Accrued Liabilities                  | 48,254     |  | 52,218    
|Total Current Liabilities                                 | 48,254     |  | 52,218    
|                                                          |            |  |           
|Net Assets (Liabilities)                                  | $ (43,963) |  | $ (47,744)

NOTE 4. NOTES PAYABLE

The Company issued $211,516 in promissory notes, before a discount of $54,127
during the three months ended December 31, 2006. These notes bear interest at
12% per annum and are repayable on the first anniversary date of issuance.
Prepayment of these notes prior to the first anniversary date is permitted.

In conjunction with these promissory notes, the Company
issued warrants (See also Note 8  Warrants). This in turn required a discount
to be established in the amount of $54,127. This discount is being amortized
over the life of the promissory notes.

AlphaRx Life Sciences Ltd. (an indirect 85% subsidiary of the Company) also
repaid promissory notes owing in the amount of $52,928 (including $17,115 in
accrued interest) from funds available in that subsidiary.

|Promissory Notes Issued:      | $1,179,281
|----------------------------- | ----------
|Discount on Promissory Notes: | (558,622) 
|Interest Accrued              | 75,119    
|Discount Amortized:           | 378,834   
|                              |           
|Promissory Notes Payable      |           
|December 31, 2006:            | $1,074,612

There remains $179,788 in discount to be amortized over the life of the
promissory notes. See also Note 10  subsequent events for additional new
promissory notes issued subsequent to December 31, 2006.

8

---

We have extended the repayment of approximately $136,000 of
promissory notes including accrued interest for an indeterminate amount of time.
Interest continues to accrue on the principal amount at 12% per annum. See also
note 9  Related Party Transactions.
NOTE 5. MINORITY INTEREST

Effective June 22, 2006, AlphaRx International Holdings Ltd. ("AIH") issued
1,500 shares of its common stock to New Super Limited ("NSL") at a price of
approximately $HK 6,667 per share or $HK 10 million in cash. (USD $1,288,826).
There are now 10,000 common shares outstanding of which 8,500 or 85% belong to
the Company. Prior to the transaction the Company owned 100% of AIH. With the
consolidation of only 85% of AIH, a minority interest was established,
representing net amounts owing to the minority shareholder. The capital infusion
into AIH is accounted for as additional paid in capital on the consolidated
financial statements of the Company.
NOTE 6. COMMON STOCK
The Company is authorized to issue 250,000,000 shares of common stock. As of
December 31, 2006, there remains issued and outstanding 57,808,112 shares of
such common stock which has a stated par value of $0.0001 per share.
There were 300,000 shares issued of restricted common stock during the three
months ended December 31, 2006 in exchange for financial consulting services
rendered in the amount of $30,000. (No shares were issued during three months
ended December 31, 2005).
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. A majority of shareholders approved the 2006 Option Plan at the
Annual General Meeting held March 29, 2006. Under this Plan up to 5,000,000
options may be granted. As of December 31, 2006 no options have been granted
under the 2006 Option Plan. As each Plan exhausted the options available for
granting, a successor Plan was established. Outstanding stock options granted
under the old Plans 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 various Plan's stock option
activity is as follows:

|2001 Plan (succeeded
    by 2003 Plan)     | Number
    of | Weighted
|------------------------------------------ | ------------- | --------
|                                           | Shares        | Average 
|                                           |               | Exercise
|                                           |               | Price   
|Options outstanding
    and exercisable at |               |         
|December 31, 2006                          | 1,150,000     | $0.10   
|                                           |               |         
|                                           |               |         
|2003 Plan (succeeded
    by 2004 Plan)     | Number
    of | Weighted
|                                           | Shares        | Average 
|                                           |               | Exercise
|                                           |               | Price   
|Outstanding at
    February 10, 2003       | 0             |         
|Granted during fiscal
    2003             | 645,000       | $0.63   
|Exercised                                  | 0             | $0.00   
|Cancelled                                  | 75,000        | $0.63   

|Options outstanding and
    exercisable at |            |         
|------------------------------------------ | ---------- | --------
|December 31, 2006                          | 570,000    | $0.63   
|                                           |            |         
|                                           |            |         
|2004 Plan (succeeded by 2006
    Plan)     | Number of  | Weighted
|                                           | Shares     | Average 
|                                           |            | Exercise
|                                           |            | Price   
|Outstanding at July 24, 2004               | 0          |         
|Granted during fiscal 2004                 | 0          |         
|Granted during fiscal 2005                 | 20,710,000 | $0.16   
|Granted during fiscal 2006                 | 3,290,000  | $0.075  
|Granted during Q1, fiscal 2007             | 0          |         
|Exercised/Cancelled                        | 0          |         
|Options outstanding and
    exercisable at |            |         
|December 31, 2006                          | 24,000,000 | $0.157  

9

---

Additional information with respect to the 2004 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 |           

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. The Company recorded $10,720 in stock based
compensation expense during the three months ended December 31, 2006 ($499,811
for the three months ended December 31, 2005). The Black-Scholes option pricing
model was used to calculate this expense. There are no further stock based
compensation expenses to be recorded under the completed Plans. Stock based
compensation expense will be recorded in regards to the 2006 Plan as options are
granted. See also Note 10  subsequent events for options granted subsequent to
December 31, 2006.

NOTE 8. WARRANTS

The Company has the following warrants outstanding to purchase common stock
at December 31, 2006:

10

---



|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 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
|                                                                      |           
|Warrants issued in conjunction with the
    issuance of Promissory    |           
|Notes during fiscal 2006. One warrant
    entitles the holder to      |           
|purchase one share of common stock at an
    exercise price of $0.10, |           
|expiring February 13 and September 30, 2008.                          | 5,524,453 
|                                                                      |           
|Warrants issued in conjunction with the
    issuance of Promissory    |           
|Notes during December, 2006. One warrant
    entitles the holder to   |           
|purchase one share of common stock at an
    exercise price of $0.10, |           
|expiring December 31, 2008                                            | 1,500,000 
|                                                                      |           
|                                                                      |           
|Total Warrants Outstanding                                            | 61,112,691

NOTE 9: RELATED PARTY TRANSACTIONS

The Company sources some of its funding in the form of promissory notes from
directors. The directors loaned the Company approximately $62,200 during the
three months ended December 31, 2006 ($183,289 during the three months ended
December 31, 2005). Total loans outstanding to directors as of December 31, 2006
were approximately $368,000 including accrued interest of approximately $30,000.
These loans bear interest at 12% per annum and are unsecured.

NOTE 10: SUBSEQUENT EVENTS

The Company has issued an additional CAD $5,000 (approximately USD $4,291) in
promissory notes subsequent to December 31, 2006 for working capital purposes.
These promissory notes bear interest at the rate of 12% per annum and are due on
the first anniversary date of issuance. Prepayment of these notes prior to the
first anniversary date is permitted.

The Company granted 90,000 options exercisable at $0.10 per share of common
stock to independent consultants and advisors of the Company subsequent to
December 31, 2006 under the 2006 Option Plan.

11

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NOTE 11: RECLASSIFICATIONS

Certain amounts in prior year's financial statements have
been restated to conform to current year presentation.



12

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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 condensed Notes
thereto, appearing in this Form 10-QSB. For additional information and complete
financial statement note disclosure as of September 30, 2006, reference should
be made to the annual Form 10KSB filed during December, 2006. 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 human 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 gastro intestinal 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. We are no longer pursuing
direct marketing and sales of our market ready products, nor do we intend to
pursue direct marketing and commercialization of any newly developed products.
The absence of marketing expertise, and significant ongoing funding required to
introduce and promote a product successfully into the market are the principal
factors limiting our ability to directly market our proprietary products. We are
and will continue to seek out established collaborative partners, distributors
and licensees to commercialize and market our products in exchange for milestone
payments and royalties.

The costs incurred for individual research and development
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 separately classify research and development activities
between similar initiatives.

The nature, timing and estimated costs to complete a research
and development initiative 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 research initiative
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 initiative; (iii) we cannot significantly influence our
partners and licensees as to timing and completion of collaborative efforts, 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 could also face the risk of competitors developing the same or
similar products and being first to market. 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 initiatives due to a number of factors including (i)
availability of financial resources required to market a new product via a
partner, (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.

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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.
Recent Developments

Collaboration with our partner Proprius Pharmaceuticals Inc.
on Indaflex Phase II trials continues on schedule. Enrolment for Phase II is
complete with 230 subjects. We expect to complete subject testing and to receive
top-line biostatistical results by the end of March, 2007. Under the terms of
our agreement, Proprius will undertake completion of clinical trials for
Indaflex and will have exclusive global rights (except for Asia and Mexico) to
sell and or sublicense Indaflex and any successor NSAID products developed by
us. Should clinical trials for Indaflex be successful and sales commence, we
will receive clinical trial completion milestone payments and sales milestone
payments including a milestone payment of $3 million for the successful
completion of the Phase II trials. In addition to the milestone payments, we
will receive royalty payments on sales of Indaflex by Proprius, its affiliates
and its sublicensees. We anticipate commencement of pivotal Phase III trials
later this year.
Our 85% owned subsidiary AlphaRx International Holdings Ltd.
("AIH"), through its wholly-owned subsidiary AlphaRx Life Sciences Ltd. has
commenced several research initiatives in Beijing, and in Moscow. Research
initiatives have commenced with Streptomycin for Tuberculosis, Levoflaxicin for
infection and we are continuing our research with Doxorubicin to address hepatic
cancer. Other initiatives slated for pre-clinical development include
amoxicillin and clarithromycin to address heli pylori bacteria, a common cause
of ulcers. Reduced costs and labor rates in China as compared to North America
allows us to expand research and development activities more efficiently even
when taking increased travel into account.
Preclinical research continues in Canada on rifamsolin 
tuberculosis, vansolin  sepsis, Zysolin  pneumonia and sepsis, and ocusolin 
ocular infection. We are also continuing with our formulation activities on
three products for a global pharmaceutical company based in the U.S. The
adoption or rejection of our formulations will not be determined until after our
fiscal year end in September, 2007.
In June, 2006 AIH issued 1,500 shares of its common stock to
New Super Limited ("NSL") in accordance with an agreement concluded during
April, 2006. The shares were issued for total cash consideration of $HK 10
million (USD $1,288,826). These funds are being utilized for research and
development initiatives in China and in Russia. There are presently 10,000
shares of common stock issued and outstanding, of which 85% are owned by us. In
accordance with SAB No. 51, we have accounted for the issuance of our
subsidiary's stock as a capital transaction. Considering that AIH is essentially
a non-operating entity, and that the capital infusion was meant for commencement
of research and development in Asia region, gain recognition was not
appropriate.
On May 1, 2006 we announced that AIH has entered into an
agreement with China Lianyungang City Golden Enterprises Limited ("China Party")
to establish a Joint Venture in mainland China. The Joint Venture intends to
establish a manufacturing facility in Lianyungang City, Jiangsu Province and a
distribution network in order to manufacture and market pharmaceutical products
licensed by AIH. In addition AIH will help to develop branded generic products
in lieu of capital payment into the Joint Venture. China Party has agreed to
inject working capital of RMB 250 million (approximately $31 million) into the
Joint Venture in the form of equity. AIH will own 30% of the Joint Venture
common stock and China Party will own 70%. AIH is also to receive a 5% royalty
on all AIH licensed product sales generated by the Joint Venture.
We signed a licensing agreement with Industria Farmaceutica
Andromaco, S.A. de C.V. ("Andromaco") in August 2003 for the commercialization
of our lead pharmaceutical product "Indaflex" in Mexico. Mexican health
authorities gave approval to Andromaco to start sales of Indaflex in Mexico. We
collected our first

14

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We established a wholly-owned subsidiary  AlphaRx
International Holdings Limited ("AIH") 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., is involved
in the manufacture and marketing of certain of the Company's existing products
in the Asia region. No royalties have been collected to date and should this
continue we will attempt to restructure the agreement to make it a non-exclusive
agreement. This would allow us to approach other organizations in an attempt to
license our market ready products  Flexogan and COQ10.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006, AS
COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2005

The Company incurred a net loss before discontinued
operations of $582,270 for the three month period ended December 31, 2006 as
compared to a net loss before discontinued operations of $1,031,735 incurred for
the same period a year ago, a decrease of $449,465 or approximately 44%. The
decrease stems primarily from a decrease in stock based compensation expense and
warrant amortization of about $362,000 and a decrease in research and
development expenses of about $108,000 for the three months ended December 31,
2006 when compared to the same period a year ago.

Revenues

Revenues represent royalties earned from Andromaco from the
sales in Indaflex in Mexico. Total revenues for the three month period ended
December 31, 2006 were $11,329 as compared to $5,274 generated for the same
period a year ago, an increase of $6,055. Sales of Flexogan in the Hong Kong
market via our joint venture partner AlphaAP Inc. have commenced, however, until
initial royalties are collected from AlphaAP Inc. revenues will not be
recognized as they do not meet our revenue recognition criteria.

General and Administrative Expenses

General and Administrative expenses consist primarily of
personnel costs related to general management functions, finance, office
overheads, as well as insurance costs and professional fees related to legal,
audit and tax matters. General and Administrative expenses for the three month
period ended December 31, 2006 were $177,271 as compared to $167,138 incurred
for the same period a year ago, an increase of $10,133 or approximately 6%. We
spent approximately $16,000 less in legal fees for the three month period ended
December 31, 2006 as compared to the same period a year ago. We realized a
foreign exchange gain of about $37,000 for the three month period ended December
31, 2006 which was an improvement of about $40,000 when compared to a foreign
exchange loss of about $3,000 incurred in the same period a year ago. Finally,
administrative expenses incurred in our 85% owned subsidiary AlphaRx Life
Sciences Ltd. were about $66,000 for the three month period ended December 31,
2006 with no comparable expense in the same period a year ago.

Stock Based Compensation Expense and Warrant Amortization

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. Based on the significance of this expense we have
disclosed these items separately from general and administrative expenses. We
expensed $10,720 in stock based compensation and $127,114 in warrant
amortization during the three months ended December 31, 2006 for a total of
$137,834 in this expense category. This compares to $499,811 in stock based
compensation expensed during the same period a year ago. Stock based
compensation expense decreased significantly as all options issued previously
are now fully vested and all related stock based compensation expense has been
recognized.

15

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We also issued warrants during the three months ended
December 31, 2006 in conjunction with the issuance of promissory notes. This, in
turn, required a discount to be established and to be amortized over the life of
the promissory notes. We amortized $127,114 of the discount during the three
months ended December 31, 2006 with no comparable expense in the same period a
year ago. There remains $179,788 in unamortized discount to be expensed as at
December 31, 2006.

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, 2006 were $246,018 as compared to $353,725 incurred for the same
period a year ago, a decrease of $107,707 or about 30%. Proprius Pharmaceuticals
Inc., in accordance with our agreement, absorbed all Phase II Indaflex clinical
trial expenses effective April 10, 2006. Partially offsetting the reduction of
research and development expenses in North America, was the commencement of
research and development initiatives in China and Russia via our indirect 85%
owned subsidiary  AlphaRx Life Sciences Ltd. ("ALS"). We incurred about $48,000
in research and development in ALS for the three month period ended December 31,
2006 with no comparable expense in the same period a year ago.

Sales and Marketing

Sales and marketing expenses for the three months ended
December 31, 2006 totalled $3,750 with no comparable expense in the same period
a year ago. We have one marketing consultant based in the U.S. responsible for
sourcing marketing partners and distributors for our market ready products.

Depreciation

Depreciation totalled $20,018 for the three months ended
December 31, 2006 as compared to $14,925 incurred during the same period a year
ago, an increase of $5,093 or about 34%. The increase stems from additional
capital expenditures incurred during 2006, which are now being depreciated at
maximum depreciation rates as compared to one half of the maximum depreciation
rate in the year of acquisition.

Loss from Operations

Loss from operations were $584,891 for the three months ended
December 31, 2006 as compared to a loss of $1,030,325 incurred for the same
period a year ago, a decrease of $445,434 or approximately 43%. Reduced stock
based compensation and warrant amortization expense, and a reduction in research
and development expenses as explained above, were primarily responsible for the
reduced loss.

Interest Expense

Interest expense for the three months ended December 31, 2006
was $24,743 as compared to net interest expense of $1,410 generated during the
same period a year ago. The increase in promissory notes from about $189,000 as
at December 31, 2005 to approximately $1,075,000 as at December 31, 2006 has
caused the increase in interest expense.

Minority Interest

We reflected minority interest of $16,035 for the three
months ended December 31, 2006, representing our minority shareholder's
proportionate interest in our 85% owned subsidiary  AIH. The minority interest
resulted in the investment in our subsidiary AlphaRx International Holdings Ltd.
by an independent third party  New Super Ltd. during June, 2006. Previous to
this investment we owned 100% of all of our subsidiaries.

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LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2006 the Company had working capital
deficiency of $(658,538) as compared to a working capital deficiency of
$(176,129) as at September 30, 2006. The Company also has a shareholders'
deficiency of $(549,012) as at December 31, 2006 as compared to a shareholders'
deficiency of $(54,732) as at September 30, 2006). We issued approximately
$212,000 in promissory notes during the three months ended December 31, 2006
before discount of about $54,000. We intend to continue to issue such promissory
notes until we can source more permanent funding or until cash flows improve. We
have issued additional financing in the form of promissory notes in the amount
of CAD $5,000 (approximately US $4,300) subsequent to December 31, 2006. These
notes are repayable within one year and bear interest at 12% per annum. We also
issued warrants in conjunction with these promissory notes.
We have a licensing arrangement with Andromaco which provides
us with a small royalty stream. We have received a non-refundable deposit of
$75,000 from a U.S. based pharmaceutical company to formulate new products which
may or may not be accepted for commercialization. We also have licensing
arrangements with Proprius Pharmaceuticals Inc. and a joint venture agreement
with AlphaAP Inc. which may provide us with milestone payments and/or royalty
streams in the future. There is no assurance that such payments or royalty
streams will materialize.
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
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 require additional stock to be issued
and/or involve restrictive covenants on our business.
We expect to continue to spend capital on:
research and development programs;
  preclinical studies and clinical
  trials;
  regulatory processes; and
  third party licensees and
  distribution partners to manufacture and market our products for us.The amount of capital we may need will depend on many
factors, including:
the progress, timing and scope of
  our research and development programs;
  the progress, timing and scope of
  our preclinical studies and clinical trials;
  the time and cost necessary to
  obtain regulatory approvals;
  the time and cost necessary to
  establish or to retain sales and marketing partners to market our products;
  the time and cost necessary to
  respond to technological and market developments; and
  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.

17

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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, 2006. 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.

18

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PART II:         OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS

There are currently no legal proceedings against the Company
or any of its subsidiaries.
ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES

We issued 300,000 shares of common stock in lieu of cash
payments of $30,000 for financial consulting services during the three months
ending December 31, 2006. (Nil for the three months ended December 31, 2005). We
also issued 1,500,000 warrants in conjunction with the promissory notes issued
during the three months ended December 31, 2006. (Nil during the three month
period ended December 31, 2005). These warrants entitle the holder to purchase
common stock at $0.10 per share and expire in December, 2008.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

N/A
ITEM 4 - OTHER INFORMATION

None.
ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(i) 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.(ii)        REPORTS ON FORM 8-K
(a)
On November 6, 2006, we filed an 8K
reporting on a Feasibility and Option Agreement with a global pharmaceutical
company based in U.S.

Under the agreement, we granted them an exclusive option to acquire an
exclusive worldwide license to our nanoparticle delivery systems for the
development, manufacture and commercialization of certain products in certain
indications. In return, they agreed to pay us an upfront fee, as well as
additional payments upon the achievement of specified milestones and royalty
payments from future product sales that utilize our delivery systems. They will
have the sole responsibility for obtaining all regulatory approvals necessary
for commercialization of these products at their own expense.

(b)      On December 21, 2006 we filed an 8K
summarizing our fiscal 2006 year end results. This was filed in conjunction with
the filing of our annual Form 10KSB.

19

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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 12, 2007

| | 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                   

20

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