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SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

FORM 10-KSB/A

[X] Annual Report Pursuant
      to Section 13 or 15(d) of the Securities and Exchange Act of1934 for the fiscal year
      ended: September 30, 2004[ ] Transition Report
      Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of1934 for the transition
      period from to


Commission File Number: 000-30813

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)200-168 Konrad Crescent,
      Markham, Ontario, Canada L3R 9T9(Address of principal executive
      offices)(905) 479-3245(Registrant's telephone number,
      including area code)Securities registered pursuant
      to Section 12(b) of the Exchange Act:Title of Each Class
      Name of Exchange on Which RegisteredCommon Stock ($0.0001 par value)
      None


Check whether the issuer: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES __X__ NO _____

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and that no disclosure will be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]

Issuer's revenues for its most
recent fiscal year ended September 30, 2004 were $ 383,824.

The aggregate market value of the
issuer's common stock (the only class of voting stock), held by non-affiliates
was approximately $ 5,750,811 based on the average closing bid and ask price for
the common stock on July 1, 2005.

As of July 7, 2005 there were
57,508,112 shares outstanding of the issuer's common stock.

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AlphaRx, Inc.
FORM 10-KSB/AFor the Year Ended September 30, 2004INDEX

|PART I       |                                                                    |   
|------------ | ------------------------------------------------------------------ | --
|Item
    1.  | Description of
    Business                                        | 3 
|Item
    2.  | Description of
    Property                                        | 17
|Item
    3.  | Legal Proceedings                                                  | 17
|Item
    4.  | Submission of
    Matters to a Vote of Security Holders            | 18
|             |                                                                    |   
|PART II      |                                                                    |   
|Item
    5.  | Market for Common
    Equity and Related Stockholder Matters       | 19
|Item
    6.  | Management
    Discussion and Analysis of Financial Condition      | 20
|Item
    7.  | Financial
    Statements, as restated                              | 24
|Item
    8.  | Changes in and
    Disagreements with Accountants on Accounting    | 24
|             | and Financial
    Disclosure                                       |   
|Item
    8A  | Controls and
    Procedures                                        | 25
|Item
    8B  | Other Information                                                  | 25
|PART III     |                                                                    |   
|Item
    9.  | Directors,
    Executive Officers, Promoters and Control Persons;  | 26
|             | Compliance with
    Section 16(a) of the Exchange Act.             |   
|Item
    10. | Executive
    Compensation                                         | 28
|Item
    11. | Security
    Ownership of Certain Beneficial Owners and Management | 30
|Item
    12. | Certain
    Relationships and Related Transactions                 | 31
|Item
    13. | Exhibits and
    Reports on Form 8-K                               | 31
|Item
    14. | Controls and
    Procedures                                        | 31
|             |                                                                    |   
|SIGNATURES   | 32                                                                
|             |                                                                    |   
|EXHIBITS     |                                                                    | 34

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PART IITEM 1. DESCRIPTION OF BUSINESS
COMPANY BACKGROUND

In this annual report on Form 10-KSB/A, the "Company," "AlphaRx," "we," "us,"
and "our," refer to AlphaRx, Inc. and AlphaRx Canada Limited, its wholly-owned
subsidiary.

AlphaRx, Inc., formerly known as Logic Tech International Inc., was
incorporated in Delaware on August 8, 1997 as an intellectual property holding
company whose mission was to identify, acquire and develop new technologies or
products and devise commercial applications to be taken to market through
licensing or joint venture partners. Logic Tech International Inc. was renamed
AlphaRx, Inc. on January 28, 2000 and our common stock commenced trading on the
OTC Pink Sheets under the symbol "AHRX" on July 25, 2000. On October 12, 2000,
AlphaRx, Inc. common stock ceased trading on the Pink Sheets L.L.C. and began
trading on the Over The Counter Bulletin Board ("OTCBB") under the same symbol.
Subsequent to March 19, 2002, AlphaRx, Inc.'s symbol was changed to "ALRX" after
a consolidation of its common stock on a 1 for 5 basis. All references to
AlphaRx, Inc. common stock have been retroactively restated.

Effective July 1, 2003 AlphaRx, Inc. acquired all of the shares of AlphaRx
Canada Limited for nominal value of $1. AlphaRx Canada Limited was dormant until
this time. AlphaRx Canada Limited was incorporated under the laws of Ontario in
order to streamline sales of the Company's products in the Canadian market.
Prior to this time AlphaRx Canada Limited had no material assets or any
liabilities and was wholly-owned by the President & CEO of AlphaRx, Inc. The
annual report contained herein and the consolidated financial statements reflect
the activities of AlphaRx, Inc. and of AlphaRx Canada Limited - its wholly-owned
subsidiary.

COMPANY OVERVIEW

We are a pharmaceutical company, engaged in the research, development and
marketing of innovative therapeutic products using advanced drug delivery
technologies, which we believe, can be combined with a broad range of
therapeutic products.

In January 2003, we acquired the world-wide exclusive commercialization
rights of VT1, a potential cancer therapeutic compound, from Select Therapeutics
Inc. Given our recent experience with Flexogan, Indaflex and our new focus on
drug delivery products and plans to evolve into a sales and marketing
organization, we have decided VT1 no longer meets our strategic objective and
the VT1 program has been terminated.

In August 2003, we out licensed Indaflex, our lead
pharmaceutical product, to Industria Farmaceutica Andromaco, S.A. de C.V. ("Andromaco")
for commercialization in Mexico. Subject to the terms of the Agreement,
Andromaco will have the exclusive and non-transferable manufacturing rights and
distribution rights of Indaflex and we will receive 15% royalties of the gross
revenue from future product sales. Furthermore, Andromaco will be responsible
for funding and completing any clinical and regulatory activities in support of
Indaflex marketing registration in Mexico. The Agreement shall be for an initial
term of five (5) years commencing on the effective date, and it shall
automatically be renewed on terms as provided in the Agreement and shall not be
terminated without cause. In November, 2004, Andromaco received approval from
Mexico Food and Drug Administration to manufacture, market and distribute
Indaflex in Mexico. We are also attempting to establish other international
licensing and

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distribution arrangements to generate revenues from our existing and future
proprietary pharmaceutical products.

In August 2003, we delivered our first purchase order of Flexogan to Loblaws
Group, one of the largest mass market retailers in Canada. This and other orders
for our product are initiated via issuance of a purchase order from our
customers. We continue to make limited progress on Flexogan sales in Canada.

We intend to use our proprietary drug delivery technologies in collaborative
arrangements with pharmaceutical companies to formulate their existing
commercialized drugs as well as drugs under development by them. By improving
drug efficacy and reducing side effects, we believe our drug delivery
technologies will provide pharmaceutical companies with the opportunity to
enhance the commercial value of their existing products and new drug candidates.
We also intend to develop either independently or jointly certain off-patent and
over-the-counter ("OTC") products utilizing our proprietary drug delivery
technologies.

PRINCIPAL PRODUCT AND SERVICES AND PRINCIPAL MARKETS

Drug delivery companies apply proprietary technologies to create new
pharmaceutical products utilizing drugs developed by others. These products are
generally novel, cost-effective dosage forms that may provide any of several
benefits, including better control of drug concentration in the blood, improved
safety and efficacy, and ease of use and improved patient compliance. We believe
drug delivery technologies can provide pharmaceutical companies with a means of
developing new products as well as extending existing patents.

The increasing need to deliver medication to patients efficiently and with
fewer side effects has accelerated the development of new drug delivery systems.
Today, medication can be delivered to a patient through many different means of
delivery, including transdermal (through the skin), injection, implant and oral
methods. These delivery methods, however, continue to have certain limitations.
Transdermal patches are often inconvenient to apply can be irritating to the
skin and the rate of release can be difficult to control. Injections are
uncomfortable for most patients. Implants generally are administered in a
hospital or physician's office and frequently are not suitable for home use.
Oral administration remains the preferred method of administering medication.
Conventional oral drug administration, however, also has limitations in that
capsules and tablets have limited effectiveness in providing controlled drug
delivery, resulting frequently in drug release that is too rapid (causing
incomplete absorption of the drug), irritation to the gastrointestinal (GI)
tract and other side effects. In addition capsules and tablets cannot provide
localized therapy. Insoluble or poorly soluble drugs are a major problem for the
pharmaceutical industry, with over one-third of the drugs listed in the United
States' Pharmacopoeia being insoluble or poorly soluble in water. Further, most
approaches used to overcome insolubility result in clinical problems ranging
from poor and erratic bioavailability to serious side effects.

We are engaged in developing novel formulations of existing drugs that are
insoluble or poorly soluble in water, utilizing our proprietary Bioadhesive
Colloidal Dispersion (BCD) (henceforth, "BCD")drug delivery systems. Our
strategy is to develop patentable improved formulations of such drugs that are
soluble in human medicines. Our BCD drug delivery technology includes two
different approaches to improve the effectiveness of insoluble drugs and provide
new methods of delivery, namely, (i) CLD (Colloidal Lipid Dispersion System) and
(ii) SECRET (Self Emulsifying Controlled Release Tablet System).

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The BCD drug delivery technology is designed to develop drugs with major
medical advantages, such as lower dosing, fewer side effects and alternative
dosage forms, as well as commercial advantages, such as extended patent
protection and broader use. We have a number of drugs under development, certain
of which have been successfully reformulated, utilizing our BCD technology. Our
central strategy is to seek alliances with pharmaceutical companies which will
assist us in completing the reformulation and development of the drugs and which
will initiate clinical trials and commercialize the products.

PRODUCT PIPLELINE

The following is a list of some of our products in the product pipeline:

|Brand Name                         | Application            | Delivery | Stage                  
|---------------------------------- | ---------------------- | -------- | -----------------------
|                                   |                        | Route    |                        
|Pharmaceuticals                   
|2.5% Indaflex                      | Osteoarthritis         | Topical  | Phase I completed*     
|Rifampicin SLN                     | Tuberculosis           | Oral     | Preclinical underway **
|Gentamicin SLN                     | Sepsis                 | Oral     | Preclinical underway** 
|Consumer Health (over-the-counter)
|Flexogan                           | Analgesic              | Topical  | Market*                
|CoQ10ER                            | Nutritional Supplement | Oral     | Market*                
|NuProm                             | Acne Control           | Topical  | Preclinical underway** 
|V-Relief                           | Anti-fungal            | Topical  | Preclinical underway** 

* Indaflex is approved for sale in Mexico, but must undergo FDA approval for
sale in United States and other countries. CoQ10ER and Flexogan is approved for
sale in Canada.

** Preclinical activities include basic in vitro and in vivo
research attempting to adopt our Bioadhesive Colloidal Dispersion delivery
system to the respective drug while maintaining or improving efficacy and
effectiveness of the active ingredients. We anticipate that clinical trials, if
they take place at all, will initially be conducted in Canada, at test sites
which are pre-approved by both Health Canada and FDA.

Indaflex is a topical NSAID (Non-Steroidal Anti-inflammatory Drug)
formulation intended to be used in the treatment of arthritis. Indaflex's active
ingredient, Indomethacin, has a long-standing and proven clinical treatment
record. With our enhanced proprietary delivery system, its clinical
effectiveness is thought to be significantly enhanced. Topical Indaflex delivery
is intended to circumvent the significant GI side-effects found with orally
ingested NSAID's. We completed a Phase I human trial for Indaflex in Canada and
are planning to initiate a Phase II human trial in the third calendar quarter of
2005.

Rifampicin SLN is encapsulating Rifampicin, an antibiotic mainly used to
treat tuberculosis, in the Company's colloidal drug delivery platform for
intracellular delivery. This early stage drug candidate is currently going
through in-vitro and in-vivo studies including biodistribution study, evaluation
of the efficacy in murine infection models and toxicologicalstudies.

Gentamicin SLN is encapsulating Gentamicin, a broad spectrum antibiotic, in
the Company's colloidal drug delivery platform for intracellular delivery. This
early stage drug candidate is currently going through in-vitro and in-vivo
studies including biodistribution study, evaluation of the efficacy in murine
infection models and toxicological studies.

Flexogan is a series of topical pain relief creams available over-the-counter
at major drug chain stores

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across Canada. Flexogan has a unique delivery formulation that significantly
increases the speed, volume, and sustained duration of drug penetration through
the skin in animal studies.

CoQ10 ER is a novel formulation incorporating the Company's
drug delivery process which completely disperses CoQ10 ER into sub-micron oil
droplets in the GI tract. The average size of these oil droplets is less than
200 nanometers. These oil droplets can easily penetrate the bilayer of human
cells and increase serum Coenzyme Q10 concentration according to one human trail
conducted by the Company.

NuProm is formulated with solubilized Benzoyl Peroxide for effective delivery
to target sites underneath the skin for maximum therapeutic effect. Undissolved
Benzoyl Peroxide powder may not penetrate deep into pores to kill bacteria and
instead merely stays on the skin surface causing severe dryness and irritation.
NuProm is currently going through in-vitro study for formulation optimization.

V-Relief is the Company's drug candidate for mild fungal infection treatment.
This product is currently going through in-vitro study for formulation
optimization.

BIOADHESIVE COLLOIDAL DISPERSION (BCD) SYSTEMS

Our proprietary BCD oral and transdermal drug delivery technologies permit
formulations of drug-containing polymeric units that allow controlled delivery
of an incorporated hydrophobic drug (this process is referred to as our "BCD
Systems"). Although our formulations are proprietary, the polymers utilized in
our BCD Systems are commonly used in the food and drug industries. By using
different formulations of the polymers, we believe our BCD Systems are able to
provide continuous, controlled delivery of drugs of varying molecular complexity
and solubility.

The BCD Systems are designed to provide orally and transdermally
administered, conveniently dosed, cost-effective drug therapy in a continuous,
controlled delivery over a multihour period. We believe our BCD Systems may
provide one or more of the following therapeutic advantages over conventional
methods of drug administration:

1. Enhanced Safety and Efficacy. We believe our BCD Systems may
improve the ratio of therapeutic effect to toxicity by decreasing the initial
peak concentrations of a drug, associated with toxicity, while maintaining
levels of the drug at therapeutic, subtoxic concentrations for an extended
period of time. Many drugs demonstrate optimal efficacy when concentrations are
maintained at therapeutic levels over an extended period of time. When a drug is
administered intermittently, the therapeutic concentration is often exceeded for
some period of time, and then rapidly drops below effective levels. Excessively
high concentrations are a major cause of side effects, while subtherapeutic
concentrations are ineffective.

2. Greater Patient and Caregiver Convenience. We believe our BCD
Systems may permit once-daily dosing for certain drugs that are currently
required to be administered several times daily, thereby promoting compliance
with dosing regimens. Patient noncompliance with dosing regimens has been
associated with increased costs by prolonging treatment duration, increasing the
likelihood of secondary or tertiary disease manifestation and contributing to
over-utilization of medical personnel and facilities. By improving patient
compliance, providers and third-party payors may reduce unnecessary expenditures
and improve therapeutic outcomes.

3. Expanding the Types of Drugs Capable of Oral Delivery.Some
drugs, including certain proteins (complex organic compounds of high molecular
weight containing numerous amino acids) and peptides (low molecular weight
compounds consisting of two or more amino acids), because of their large
molecular size and susceptibility to degradation in the GI tract, must currently
be administered by

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injection or by continuous infusion, which is typically done in a hospital or
other clinical setting. We believe our BCD Systems may permit some of these
drugs to be delivered orally and/or transdermally.

4. Proprietary
Reformulation of Generic Products.We believe our BCD Systems offer the potential to produce improved
proprietary formulations of off-patent drugs, differentiated from the existing
generic products by reduced dosing requirements, improved efficacy, decreased
toxicity or additional indications.

DISTRIBUTION METHODS OF THE PRODUCTS AND SERVICES

We intend to have the BCD Systems used with as many pharmaceutical products
as possible. Our primary strategy is to establish collaborative relationships
with pharmaceutical and biotechnology companies to develop improved therapeutic
products utilizing our BCD Systems technology. The products will be jointly
developed, with the collaborative partner having primary responsibility to
clinically test, manufacture, market and sell the product, and we retaining
ownership of our technologies. We believe that our partnering strategy will
enable it to reduce our cash requirements while developing a larger potential
product portfolio. By providing new formulations of existing products using the
BCD Systems, We believes it will not only be able to offer our partners improved
products but also may provide them with the ability to extend the life of their
patents on such products, especially attractive to pharmaceutical companies
whose patents on existing products are close to expiration. Collaborations with
pharmaceutical and biotechnology companies are expected to provide near-term
revenues from sponsored development activities and future revenues from license
fees and royalties relating to the sale of products.

We have identified as potential partners three top tier drug companies we
believe have drugs which can derive potential benefits utilizing the BCD Systems
and have initiated preliminary discussions with some of these companies. There
can be no assurance that any of these discussions will lead to our entering into
a development agreement with a collaborative partner or, if such agreement is
entered into, that such collaboration will lead to the successful development of
a product.

We also intend to develop over-the-counter (OTC) and/or off-patent drug
products utilizing our BCD Systems, either independently or jointly by entering
into collaborative partnerships with pharmaceutical, biotechnology or other
healthcare companies. To reduce costs and time-to-market, we intend to select
those products that treat indications with clear-cut clinical end-points and
that are reformulations of existing compounds already approved by the FDA. We
believe that products utilizing the BCD Systems will provide favorable product
differentiation in the highly competitive generic and OTC drug product markets
at costs below those of other drug delivery systems, thereby enabling We and our
collaborative partners to compete more effectively in marketing improved
off-patent and OTC drug products. We are also seeking to establish alliances
with overseas sales and marketing partners for the initial sale of our future
generic products. We believe that due to the more favorable regulatory
environments in some foreign countries, it may be able to generate revenues from
these markets while awaiting FDA approval in the United States.

COMPETITION

There are other companies that have oral drug delivery technologies that
compete with the BCD Systems. The competitors have oral tablet products designed
to release the incorporated drugs over time. Each of these companies has a
patented technology with attributes different from ours, and in some cases with
different sites of delivery to the GI tract. We believe that we are the only
drug delivery company that is currently using polymeric based colloidal
dispersion controlled release technologies to develop products for oral and
transdermal drug delivery systems for enhanced solubility and bioavailability
for drugs that

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are not readily water soluble. We believe that this combination of oral and
transdermal drug delivery technologies differentiates us from other oral drug
delivery companies and will enable us to attract pharmaceutical companies to
incorporate their proprietary drugs into the BCD Systems and also to
differentiate any OTC and/or off-patent drugs that utilize the BCD Systems from
those of other drug delivery companies.
Competition in the areas of pharmaceutical products and drug delivery systems
is intense and is expected to become more intense in the future. Competing
technologies may prove superior, either generally or in particular market
segments, in terms of factors such as cost, consumer satisfaction or drug
delivery profile. Our principal competitors in the business of developing and
applying drug delivery systems have substantially greater financial,
technological, marketing, personnel and research and development resources than
us. In addition, we may face competition from pharmaceutical and biotechnology
companies that may develop or acquire drug delivery technologies. Many of our
potential collaborative partners have devoted and are continuing to devote
significant resources in the development of their own drug delivery systems and
technologies. Products incorporating our technologies will compete both with
products employing advanced drug delivery systems and with products in
conventional dosage forms. New drugs or future developments in alternate drug
delivery technologies may provide therapeutic or cost advantages over any
potential products which utilize the BCD Systems. There can be no assurance that
developments by others will not render any potential products utilizing the BCD
Systems non-competitive or obsolete. In addition, our competitive success will
depend heavily on entering into collaborative relationships on reasonable
commercial terms, commercial development of products incorporating the BCD
Systems, regulatory approvals, protection of intellectual property and market
acceptance of such products.

PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS

It is our policy to file patent applications in the United States and certain
foreign jurisdictions. We currently have one issued United States patent under
the title "Toothpaste comprising

No assurance can be given that our patent applications will be approved or
that any issued patents will provide competitive advantages for the BCD System
or our technologies or will not be challenged or circumvented by competitors.
With respect to any patents which may be issued from our applications, there can
be no assurance that claims allowed will be sufficient to protect our
technologies. Patent applications in the United States are maintained in secrecy
until a patent issues and we cannot be certain that others have not filed patent
applications for technology covered by our pending applications or that we were
the first to file patent applications for such technology. Competitors may have
filed applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds or processes that may
block our patent rights or compete without infringing our patent rights. In
addition, there can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or commercial advantage to us.

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We also rely on trade secrets and proprietary know-how which it seeks to
protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that we will have adequate remedies for
any such breach or that our trade secrets will not otherwise become known or be
independently developed by competitors. Although potential collaborative
partners, research partners and consultants are not given access to our
proprietary trade secrets and know-how until they have executed confidentiality
agreements, these agreements may be breached by the other party thereto or may
otherwise be of limited effectiveness or enforceability.

Trademarks

We have registered the following trademarks in Canada: "BCD", "Flexogan", "Indaflex","AlphaRx",
"PhytoScience", "NuProm", and "LipoLette". We have registered the following
trademarks in the United States: "Flexogan", "Indaflex", "LipoBloc", "NuProm", "Oralife".
We have also registered "Flexogan" in the Peoples' Republic of China. In
connection with our Internet web site, we have registered with Network
Solutions, Inc., the internet domain name "AlphaRx.com" for our corporate
website.

Proprietary Information

Much of our technology is dependent upon the knowledge, experience and skills
of key scientific and technical personnel. To protect the rights to our
proprietary technology, our policy requires all employees and consultants to
execute confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside of us. These agreements also require disclosure
and assignment to us of discoveries and inventions made by such persons while
devoted to Company activities.

MANUFACTURING, MARKETING AND SALES

We do not have and do not intend to establish in the foreseeable future
internal manufacturing capabilities. Rather, we intend to use the facilities of
our collaborative partners or those of contract manufacturers to manufacture
products using the BCD Systems. Our dependence on third parties for the
manufacture of products using the BCD Systems may adversely affect our ability
to develop and deliver such products on a timely and competitive basis. There
may not be sufficient manufacturing capacity available to us when, if ever, it
is ready to seek commercial sales of products using the BCD Systems. In
addition, we expect to rely on our collaborative partners or to develop
distributor arrangements to market and sell products using the BCD Systems. We
may not be able to enter into manufacturing, marketing or sales agreements on
reasonable commercial terms, or at all, with third parties. Failure to do so
would have a material adverse effect on us.

Applicable good manufacturing practices ("GMP") requirements and other rules
and regulations prescribed by foreign regulatory authorities will apply to the
manufacture of products using the BCD Systems. We will depend on the
manufacturers of products using the BCD Systems to comply with current good
manufacturing practices ("cGMP") and applicable foreign standards. Any failure
by a manufacturer of products using the BCD Systems to maintain cGMP or comply
with applicable foreign standards could delay or prevent their commercial sale.
This could have a material adverse effect on us.

We rely on Canadian Custom Packaging Inc., Patheon Inc. and Industria
Farmaceutica Andromaco, S.A. de C.V. located in Mexico ("Andromaco") to
manufacture our products.

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We have only one written contract with the above mentioned manufacturers -
namely Patheon Inc.. Other manufacturing runs commence upon receipt of a
purchase order from us.

GOVERNMENT REGULATION

We are subject to regulation under various federal laws regarding
pharmaceutical products and also various Canadian federal and provincial laws
regarding, among other things, occupational safety, environmental protection,
hazardous substance control and product advertising and promotion. In connection
with our research and development activities, AlphaRx is subject to federal,
provincial and local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials and wastes. We believe that we have complied with
these laws and regulations in all material respects and we have not been
required to take any action to correct any material non-compliance.

In the United States, pharmaceutical products, including any drugs utilizing
the BCD System, are subject to rigorous regulation by the FDA. If a company
fails to comply with applicable requirements, it may be subject to
administrative or judicially imposed sanctions such as civil penalties, criminal
prosecution of our officers and employees, injunctions, product seizure or
detention, product recalls, total or partial suspension of production, FDA
withdrawal of approved applications or FDA refusal to approve pending new drug
applications, premarket approval applications, or supplements to approved
applications.

Prior to commencement of clinical studies involving human beings, preclinical
testing of new pharmaceutical products is generally conducted on animals in the
laboratory to evaluate the potential efficacy and the safety of the product. The
results of these studies are submitted to the FDA as a part of an IND
application, which must become effective before clinical testing in humans can
begin. Typically, clinical evaluation involves a time consuming and costly
three-phase process.

OTC products that comply with monographs issued by the FDA are subject to
various FDA regulations such as cGMP requirements, general and specific OTC
labelling requirements (including warning statements), the restriction against
advertising for conditions other than those stated in product labelling, and the
requirement that in addition to approved active ingredients OTC drugs contain
only safe and suitable inactive ingredients. OTC products and manufacturing
facilities are subject to FDA inspection, and failure to comply with applicable
regulatory requirements may lead to administrative or judicially imposed
penalties. If an OTC product differs from the terms of a monograph, it will, in
most cases, require FDA approval of an NDA for the product to be marketed.

In Canada and the United States, the manufacture and sale of
pharmaceutical products is rigorously controlled by the Canadian Health Products
and Food Branch ("HPFB") and the United States Food and Drug Administration
("FDA"), respectively. The laws of both countries require appropriate
manufacturing facilities and carefully controlled research, manufacturing and
testing of products. Pharmaceutical companies must establish control over
manufacturing and testing of their products, through the use of good
manufacturing practices ("GMP") before being allowed to market their products.
The safety and efficacy of a new product must be demonstrated through clinical
trials of the drug carried out under procedures acceptable to the HPFB and FDA.

In Canada, new in vivoproducts must pass through a number of testing stages including
pre-clinical testing and clinical trial testing. Pre-clinical testing usually
involves evaluating the product's pharmacokinetics, pharmacology and toxicology
in animals. Successful results (that is, potentially valuable pharmacological
activity combined with an acceptable level of toxicity) can lead to
Investigational New Drug ("IND") status. This enables the manufacturer of the
new product to begin clinical trials on humans.

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In order to achieve IND status in Canada, a clinical trial
application ("CTA") must be filed with the HPFB. The submission must contain
specified information including the results of the preclinical tests completed
at the time of the submission together with any available data on testing in
humans. In addition, since the method of manufacture may affect the efficacy and
safety of a product, information on manufacturing methods and standards and the
stability of the substance and dosage form must be presented to enable the HPFB
to evaluate whether the product that may eventually be sold to the public has
been shown to be comparable to that determined to be effective and safe in the
clinical trials. Production methods and quality control procedures must be in
place to ensure that a product meets its specifications for identity and purity
and other parameters for assessing product quality. The submission must also
provide details on the testing that is to be performed, including who will be
performing the testing and where it will be performed.

Once the HPFB clears a CTA, clinical trials can begin.
Clinical trials are generally carried out in three phases. Phase I involves
studies to evaluate safety in humans. The new product is administered to
consenting subjects to determine the safety profile and prevalence of adverse
side effects. In many Phase I studies the effects of dosing and scheduling are
also studied. Phases II and III involve efficacy studies. Phase II trials seek
clues to clinical efficacy, while furthering the safety profile in patients with
the condition the product is intended to treat. In Phase III, controlled
clinical trials are conducted in which the product is administered to a large
number of patients who may receive benefit from the product. In Phase III, the
effectiveness of the new product is usually compared to that of a control or
accepted methods of treatment or best standard of care, in the anticipation that
significant clinical efficacy can be demonstrated. After clearance of the
initial CTA application, the manufacturer has certain reporting responsibilities
to the HPFB.

If the clinical studies are successful, the manufacturer
submits a New Drug Submission ("NDS") (referred to in the United States as a New
Drug Application or "NDA" or Biologics Licence Application or "BLA") to the HPFB
for marketing approval. The NDS contains all information pertaining to the
proposed claims about the product's performance including the results of the
pre-clinical and clinical studies. Information about a substance contained in an NDS includes its proper name, its chemical name, details on its method of
manufacturing and purification and its biological, pharmacological and
toxicological properties. The NDS also gives information about the dosage form
of the product including the quantitative listing of all ingredients used in the
formulation, its method of manufacture, packaging and labelling, the results of
stability tests, its diagnostic or therapeutic claims and side effects as well
as details of the clinical studies to support the safety and efficacy of the
product. All aspects of the NDS are critically reviewed by the HPFB. Where an
NDS is found satisfactory and the manufacturing establishment(s) is found
satisfactory a Notice of Compliance is issued permitting the substance to be
sold.

The controls of a new product do not cease once it is on the
market. For example, a manufacturer of a new product must report any new
information received concerning serious side effects, including the failure of
the product to produce desired effects. In addition, if it is determined to be
in the interest of the public health, a Notice of Compliance for a new product
may be suspended and the new product may be removed from the market.

The requirements for in
vivoproducts outlined for Canada are similar to those in all major
pharmaceutical markets and while the tests carried out for Canada are likely to
be acceptable for all other countries, supplementary testing may be requested by
individual regulatory authorities during their assessment of any submissions by
the Company.

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In the United States, a manufacturer must prepare and file an
IND submission with the FDA before testing can begin on humans. An application
contains a variety of information about the products, including the results of
previous animal and human studies, the basic chemistry of the product and
manufacturing information. The submission also provides details on the testing
that is to be performed, including who will be performing the testing and where
it will be performed. As in Canada, human studies are characterized as Phase I,
Phase II or Phase III studies. Phase I studies focus on the safety profile of
the product, Phase II seeks clues as to efficacy, and Phase III seeks to
statistically confirm in larger trials the efficacy of the product.

After acceptance of the initial IND application, the
manufacturer has certain reporting responsibilities to the FDA including the
submission of yearly updates on the product's safety. As the testing progresses
into Phases II and III, the focus shifts to the efficacy of the product and the
clinical studies that will enable the manufacturer to receive FDA approval for
the marketing of the product.

The process of completing clinical testing and obtaining
regulatory approval for a new product is, in general, likely to take a number of
years and require the expenditure of substantial resources. If an application is
submitted, there can be no assurance that the HPFB or FDA will review and
approve the marketing application in a timely manner. Even after initial
approval has been obtained, further studies may be required by an agency to
provide additional data or may be voluntarily conducted to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. Also, the HPFB and FDA require
post-market surveillance programs to monitor a product's side effects. Results
of post-marketing programs may limit or expand the further marketing of
products. It is not possible to accurately predict the time required for new
product approval or the extent of clinical testing and documentation that may be
required by regulatory authorities. Any delays in obtaining, or failing to
obtain, regulatory approvals would significantly delay the development of
markets and the receipt of revenues from the sale of these products.

In addition to the regulatory product approval framework,
pharmaceutical companies are subject to regulation under provincial, state and
federal law, including requirements regarding occupational safety, laboratory
practices, the use, handling and disposition of radioactive materials,
environmental protection and hazardous substance control, and may be subject to
other present and future local, provincial, state, federal and foreign
regulation, including possible future regulation of the biotechnology field.

Furthermore, even if required FDA approval has been obtained with respect to
a product, foreign regulatory approval of a product must also be obtained prior
to marketing the product internationally. Foreign approval procedures vary from
country to country and the time required for approval may delay or prevent
marketing. In certain instances we or our collaborative partners may seek
approval to market and sell certain of our products outside of the U.S. before
submitting an application for U.S. approval to the FDA. The regulatory
procedures for approval of new pharmaceutical products vary significantly among
foreign countries. The clinical testing requirements and the time required to
obtain foreign regulatory approvals may differ from that required for FDA
approval. Although there is now a centralized EU approval mechanism in place,
each EU country may nonetheless impose our own procedures and requirements, many
of which are time consuming and expensive, and some EU countries require price
approval as part of the regulatory process. Thus, there can be substantial
delays in obtaining required approval from both the FDA and foreign regulatory
authorities after the relevant applications are filed, and approval in any
single country may not be a meaningful indication that the product will
thereafter be approved in another country.

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The foreign regulatory approval process includes all of the
risks associated with obtaining FDA approval set forth above, and approval by
the FDA does not ensure approval by the health authorities of any other country,
nor does the approval by foreign health authorities ensure approval by the FDA.

We presently have a licensed manufacturer and distributor in
Mexico - Industria Farmaceutica Andromaco S.A. de C.V. ("Andromaco"). We rely on
Andromaco to complete, maintain and adhere to the required regulatory processes
and procedures needed to manufacture and distribute our product in Mexico.
Andromaco is a large pharmaceutical manufacturer in Mexico with more than 50
years of experience in manufacture, marketing and distribution of drugs. We will
attempt to complete licensing and distribution arrangements in foreign countries
and in the United States with larger, experienced organizations to ensure that
regulatory processes and country-specific regulations are being observed and
maintained.

RESEARCH AND DEVELOPMENT

We conduct our research and development activities in house and through
collaborative arrangements with universities, contract research organizations
and independent consultants. We are also dependent upon third parties to conduct
clinical studies, obtain FDA and other regulatory approvals and manufacture and
market a finished product.

We anticipate incurring significant development expenditures
in the future as we continue our efforts to develop our present technologies and
new formulations and as we begin to research other technologies and to expand
clinical studies of certain products.

PRODUCT LIABILITY AND OTHER INSURANCE

Our business involves exposure to potential product liability risks that are
inherent in the production and manufacture of pharmaceutical products. Any such
claims could have a material adverse effect on us.

Although we currently maintain product liability insurance, principally
through third party insurers, that provides coverage for product liability
claims, there can be no assurance that:

- we will be able to maintain product liability insurance on acceptable
  terms;
- we will be able to secure increased coverage as the commercialization of
  the BCD Systems proceeds; or
- any insurance will provide adequate protection against potential
  liabilities.

We have obtained Directors and Officers Liability insurance
coverage in the amount of CDN $1,000,000 in order to be able to attract
additional independent directors. There is no assurance, however, that such
coverage would be adequate to protect us in the event of a claim.

EMPLOYEES

We have seven full time employees, and three part time consultants on staff.
None of our staff is represented by a collective bargaining agreement, nor have
we experienced any work stoppage. We believe that our relations with our staff
are excellent.

RISK FACTORS

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We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.

We have significant historical losses and may continue to incur losses in the
future.

We have incurred annual operating losses since our inception. As a result, at
September 30, 2004, we had an accumulated deficit, as restated, of approximately
$ 7,159,820. Our gross revenues for the years ended September 30, 2004 and
September 30, 2003 were $ 383,834 and $52,925 respectively. However, our
revenues have not been sufficient to sustain our operations. Revenue for 2004
consisted primarily of revenue from sales of Flexogan in Canada. In order to
achieve profitability our marketing activities will have to increase as well as
our sales and there is no assurance that sales can increase to such a level. We
might never be profitable.

We will require additional financing to sustain our operations, and our
ability to secure additional financing is uncertain.

We may be unable to raise on acceptable terms, if at all, the
substantial capital resources necessary to conduct our operations. If we are
unable to raise the required capital, we may be forced to limit some or all of
our research and development programs and related operations, curtail
commercialization of our product candidates and, ultimately, cease operations.
Our future capital requirements will depend on many factors, including:

> - continued scientific progress in our research programs;
>   - progress with preclinical studies and clinical trials; 
>   - the magnitude and scope of our research and development programs;
>   - our ability to establish corporate partnerships and licensing arrangements;
>   - our ability to sell and market our products;
>   - the time and costs involved in obtaining regulatory approvals;
>   - the costs involved in preparing, filing, prosecuting, maintaining, defending
>   and enforcing patent claims;
>   - the potential need to develop, acquire or license new technologies and
>   products;
>   - the continued ability to source demand loans from our private lenders; and
>   - other factors beyond our control.

At September 30, 2004, we had working capital of approximately $ 2,183,913.
Based on our current estimates our working capital will sustain operations for
approximately 18 months. The independent auditors' report for the year ended
September 30, 2004 includes an explanatory paragraph stating that our recurring
losses from operations and working capital levels raise substantial doubt about
our ability to continue as a going concern.

We believe that satisfying our long-term capital requirements will require at
least the successful commercialization of one of our over-the-counter health
care products. However, our products may never become commercially successful.

We face significant competition in the over-the-counter health care market.

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The over-the-counter health care market is highly competitive and is
characterized by the frequent introduction of new products, including the
migration of prescription drugs to the over-the-counter market, often
accompanied by major advertising and promotional support. These introductions
may adversely affect our business, especially because we compete in categories
in which product sales are highly influenced by advertising and promotions. Our
competitors include large over-the-counter pharmaceutical companies such as
Pfizer, Inc. and Johnson & Johnson, consumer products companies such as Procter
& Gamble Co., many of which have considerably greater financial and other
resources than we do and are not as highly leveraged as we are. These
competitors are thus better positioned to spend more on research and
development, employ more aggressive pricing strategies, utilize greater
purchasing power, build stronger vendor relationships and develop broader
distribution channels than we. In addition, our competitors may use aggressive
spending on trade promotions and advertising as a strategy for building market
share, at the expense of their competitors, including us. If we are unable to
introduce new and innovative products that are attractive to consumers, or are
unable to allocate sufficient resources to effectively advertise and promote our
products so that they achieve wide spread market acceptance, we may not be able
to compete effectively, and our operating results and financial condition may be
adversely affected.

If our pharmaceutical products receive regulatory approval, our competitors
may eventually include large pharmaceutical companies with superior resources.

We are engaged in a rapidly changing and highly competitive field. To date,
we have concentrated our efforts primarily on one pharmaceutical product --
Indaflex - for treating osteoarthritis and other inflammatory indications. Like
the market for any pharmaceutical product, the market for treating arthritis and
these other indications has the potential for rapid, unpredictable and
significant technological change. Competition is intense from specialized
biotechnology companies, major pharmaceutical and chemical companies and
universities and research institutions. We currently have no products approved
for sale in the U.S. If we are successful in obtaining approval for one of our
products, our future competitors will have substantially greater financial
resources, research and development staffs and facilities, and regulatory
experience than we do. Major companies in the field of osteoporosis treatment
include Novartis, Wyeth, Merck, Eli Lilly, Aventis and Procter & Gamble Co. Any
one of these potential competitors could, at any time, develop products or a
manufacturing process that could render our technology or products
non-competitive or obsolete.

Our success depends upon our ability to protect our intellectual property
rights.

We filed applications for U.S. patents relating to proprietary drug delivery
technologies and formulations that we have invented in the course of our
research. To date, one U.S. patent has been issued and other applications are
pending. We have also made patent application filings in selected foreign
countries. We face the risk that any of our pending applications will not issue
as patents. In addition, our patents may be found to be invalid or
unenforceable. Our business also is subject to the risk that our issued patents
will not provide us with significant competitive advantages if, for example, a
competitor were to independently develop or obtain similar or superior
technologies. To the extent we are unable to protect our patents and patent
applications, our investment in those technologies may not yield the benefits
that we expect.

We also rely on trade secrets to protect our inventions. Our policy is to
include confidentiality obligations in all research contracts, joint development
agreements and consulting relationships that provide access to our trade secrets
and other know-how. However, parties with confidentiality obligations could
breach their agreements causing us harm. If a secrecy obligation were to be
breached, we may not have the financial resources necessary for a legal
challenge. If licensees, consultants or other third parties use

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technological information independently developed by them or by others in the
development of our products, disputes may arise from the use of this information
and as to the ownership rights to products developed using this information.
These disputes may not be resolved in our favour.

We are not aware of infringing on any third party's patents, nor are we aware
of any third party infringing on any of our patents or patent applications.

Our technology or products could give rise to product liability claims.

Our business exposes us to the risk of product liability claims that are a
part of human testing, manufacturing and sale of pharmaceutical products. The
administration of drugs to humans, whether in clinical trials or commercially,
can result in product liability claims even if our products are not actually at
fault for causing an injury. Furthermore, our products may cause, or may appear
to cause, adverse side effects or potentially dangerous drug interactions that
we may not learn about or understand fully until the drug is actually
manufactured and sold. Product liability claims can be expensive to defend and
may result in large judgments against us. Even if a product liability claim is
not successful, the adverse publicity, time, and expense involved in defending
such a claim may interfere with our business. We may not have sufficient
resources to defend against or satisfy these claims. We currently maintain
$5,000,000 in product liability insurance coverage and plan to increase this
coverage as our products advance. However, these amounts may not be sufficient
to protect us against losses or may be unavailable in the future on acceptable
terms, if at all.

We may be unable to retain key employees or recruit additional qualified
personnel.

Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical, and managerial personnel. There
is intense competition for qualified personnel in our business. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. The loss of the services of existing personnel, as
well as the failure to recruit additional key scientific, technical, and
managerial personnel in a timely manner would harm our research and development
programs and our business.

The market price of our common stock is volatile.

The market price of our common stock has been, and we expect it to continue
to be, highly unstable. Factors, including our announcement of technological
improvements or announcements by other companies, regulatory matters, research
and development activities, new or existing products or procedures, signing or
termination of licensing agreements, concerns about our financial condition,
operating results, litigation, government regulation, developments or disputes
relating to agreements, patents or proprietary rights, and public concern over
the safety of activities or products have had a significant impact on the market
price of our stock. We expect such factors to continue to impact our market
price for the foreseeable future.

Our common stock is classified as a "penny stock" under SEC rules which may
make it more difficult for our stockholders to resell our common stock.

Our common stock is traded on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it was
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because AlphaRx common stock is not traded on a stock exchange
or on Nasdaq, and the market price of the

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common stock is less than $5.00 per share, the common stock is classified as
a "penny stock." Rule 15g-9 of the Securities Exchange Act of 1934 imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination that investments in
penny stocks are suitable for the customer and must make special disclosures to
the customer concerning the risks of penny stocks. Application of the penny
stock rules to our common stock could adversely affect the market liquidity of
the shares, which in turn may affect the ability of holders of our common stock
to resell the stock.

Lack of Independent Directors

We cannot guarantee that our Board of Directors will have a majority of
independent directors in the future. In the absence of a majority of independent
directors, our executive officers, who are also principal stockholders and
directors, could establish policies and enter into transactions without
independent review and approval thereof. This could present the potential for a
conflict of interest between the Company and its stockholders generally and the
controlling officers, stockholders or directors.

Ownership of our Common Stock by Current Officers and Directors

The present officers and directors own approximately 16.5% of the outstanding
shares of common stock, and are therefore no longer in a position to elect all
of our Directors and otherwise control the Company. With the Company's recent
private placement described under Item 5 below, the largest single external
shareholder owns approximately 4.5% of the outstanding common stock and hence
the Company can no longer be controlled by any single shareholder or the
management group as a whole. Shareholders have no cumulative voting rights. (See
Security Ownership of Certain Beneficial Owners and Management)

ITEM 2. DESCRIPTION OF PROPERTY

We lease approximately 2,930 square feet in Markham, Ontario, under a lease
which expires on November 30, 2008 for approximately $2,600 a month. We believe
that our existing properties are sufficient for our administrative, research and
development needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Farhad Walji has filed suit against AlphaRx, Inc. and AlphaRx Canada Limited
in the Supreme Court of British Columbia on August 23, 2002. Farhad Walji has
filed a claim asking for $20,000 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 liability.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the quarter ended September 30, 2004 the holders of a
majority of our outstanding stock acted by written consent to: (a) authorize the
Board of Directors to amend our restated certificate of incorporation to
increase the number of shares of common stock we are authorized to issue from
100,000,000 to 250,000,000 shares; and (b) to authorize the adoption of a new
option plan so that we may issue up to an

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additional 24,000,000 shares of common stock to our
management. This written consent was solicited from record holders of our
outstanding common stock as of July 15, 2004 through an information statement.
The number of shares voting for these proposals were 8,640,726, or 50.8% of
total outstanding common shares, while none voted against the proposal and none
abstained.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our common stock is traded over-the-counter and its quotations are carried in
the Electronic Bulletin Board of the National Association of Securities Dealers,
Inc.

The following table sets forth the range of high and low bid quotations for
our common stock for the periods indicated from sources we deem reliable.

|               |                            | High $ | Low $
|-------------- | -------------------------- | ------ | -----
|Fourth Quarter | (Ended September 30, 2004) | 0.47   | 0.28 
|Third Quarter  | (Ended June 30, 2004)      | 0.53   | 0.37 
|Second Quarter | (Ended March 31, 2004)     | 0.50   | 0.14 
|First Quarter  | (Ended December 31, 2003)  | 0.45   | 0.14 
|Fourth Quarter | (Ended September 30, 2003) | 0.35   | 0.30 
|Third Quarter  | (Ended June 30, 2003)      | 0.48   | 0.45 
|Second Quarter | (Ended March 31, 2003)     | 0.41   | 0.36 
|First Quarter  | (Ended December 31, 2002)  | 0.56   | 0.51 

The foregoing quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.

Records of our stock transfer agent indicate that as of September 30, 2004,
there were approximately 113 record holders of our common stock. As of July 5,
2005 there were approximately 97 record holders of our common stock. This does
not include an indeterminate number of shareholders who may hold their shares in
"street name".

DIVIDENDS

We have never declared any cash dividends and do not anticipate paying such
dividends in the near future. We anticipate all earnings, if any, over the next
twelve (12) to twenty - four (24) months will be retained for future investments
in business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon our results of
operations, financial conditions, contractual restrictions, and other factors
deemed relevant by the Board of Directors. We are under no contractual
restrictions in declaring or paying dividends to our common shareholders.

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The future sale of presently outstanding "unregistered" and "restricted"
common stock of the Company by present members of management and persons who own
more than five percent of the outstanding voting securities of the Company may
have an adverse effect on the public market for our common stock.

Equity Compensation Plan Information

|                                                               | Number of Securities to | Weighted-Average     | Number of securities remaining        
|-------------------------------------------------------------- | ----------------------- | -------------------- | --------------------------------------
|                                                               | be issued upon exercise | Exercise Price of    | available for future issuance         
|                                                               | of outstanding options, | outstanding options, | under equity compensation plans       
|                                                               | warrants, and rights    | warrants, and rights | (excluding securities reflected
    in
|                                                               |                         |                      | the first two columns                 
|                                                               |                         |                      |                                       
|                                                               |                         |                      |                                       
|Equity Compensation Plans Approved by
    Security Holders     | 22,430,000              | $0.17                | 3,290,000                             
|                                                               |                         |                      |                                       
|Equity Compensation Plans Not Approved by
    Security Holders | None                    | None                 | None                                  
|                                                               |                         |                      |                                       
|Total                                                          | 22,430,000              | $0.17                | 3,290,000                             

Under the new 2004 Stock Option Plan recently approved by our
stockholders, 24,000,000 shares of common stock were made available as
management options. Under the new 2004 Option Plan we issued the following
options on November 15, 2004: options to purchase up to 12,720,000 shares of
common stock with an exercise price of $0.15 per share; options to purchase up
to 250,000 shares of common stock with an exercise price of $0.40 per share;
options to purchase up to 110,000 shares of common stock with an exercise price
of $0.45 per share; and options to purchase up to 140,000 shares of common

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stock with an exercise price of $0.50 per share. A total of
13,220,000 options were issued, all of which expire on November 15, 2014. These
options were issued to management, directors and consultants and vest 100% on
November 15, 2005 as to 12,720,000 options and November 15, 2004 as to the
remaining 500,000 options which were allocated to our consultants. On January
10, 2005 we issued 7,000,000 options under this plan with an exercise price of
$0.16 per share. These options were issued to management and vest 100% on
January 10, 2006.

On February 8, 2005 we issued options to purchase up to
390,000 shares of common stock to employees and consultants of the Company.
These options have an exercise price of $0.15, vest 100% on February 8, 2006,
and expire on February 8, 2015. On May 25, 2005 we issued options to purchase up
to 100,000 shares of common stock to a consultant of the Company. These options
have an exercise price of $0.13, vest 100% on May 25, 2005 and expire on May 25,
2010. There remain up to 3,290,000 options to be issued under the 2004 Option
Plan.

RECENT SALES OF UNREGISTERED SECURITIES

The following is a list of all unregistered securities issued by AlphaRx
during our fiscal year ended September 30, 2004 including where applicable, the
identity of the person who purchased the securities, title of the securities,
the exemption relied upon for the issuance and the date issued are outlined
below.

On November 20, 2003 we issued 50,000 shares of our common stock to an
individual in reliance upon the exemption from registration afforded by Rule 506
of Reguation D. The consideration for these shares consisted of services
rendered to us. The deemed value of these services was equal to $0.30 per share.
We also issued 50,000 shares of our common stock in accordance with S-8 at $0.30
per share. These shares are registered pursuant to a registration statement
filed with the Securities and Exchange Commission.

On February 28, 2004, we issued promissory notes convertible into our common
stock to 10 individuals in reliance upon the exemption from registration
afforded by Rule 506 of Regulation D. The conversion rate for these convertible
promissory notes was equal to $0.10 per share of common stock. We paid
commissions in connection with this issuance of 1,313,543 shares of our common
stock and 2,287,669 warrants to purchase common stock at $0.30 per share to our
placement agent. Subsequent to this issuance, on July 21, 2004, $375,234 of
promissory notes were converted into 3,752,339 shares of common stock.

On July 21, 2004 and September 2, 2004, we issued 27,224,034 shares of our
common stock to 38 parties in reliance upon the exemption from registration
afforded by Rule 506 of Regulation D. The consideration consisted of $0.15 per
share. We paid commissions in connection with this issuance of 2,994,644 shares
of our common stock and 2,994,644 warrants to purchase common stock at $0.15 per
share to our placement agent.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes included in Item 8 of this report. 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.

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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 also started to focus on commercialization of our
products commencing with sales of Flexogan in the Canadian market.

We acquired the world-wide exclusive commercialization rights of VT-1 from
Select Therapeutics Inc. in January 2003. Given our recent national launch with
Flexogan in Canada and our new focus on drug delivery products and plans to
evolve into a sales and marketing organization, we have decided VT1 no longer
meets our strategic objective and the VT1 program has been terminated.

We launched Flexogan, a series of over-the-counter topical
analgesics, in Canada in August 2003. In order to support national sales of
Flexogan in Canada, we expect to continue to incur significant marketing
expenditures in 2005.

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 products "Indoflex" in Mexico. The Company will receive
royalties from product sales. Mexican health authorities have given approval to
Andromaco to start sales of Indaflex in Mexico.

Please refer to the table under Product Pipeline, Item 1 for
the current status of our product research and development activities. We have
one pharmaceutical drug in the clinical trial stage (Phase 1 completed in March,
2005), and two pharmaceutical drugs in the preclinical stage. We also have two
over the counter topical 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. Finally, our failure to develop
products on a timely basis could substantially impair our ability to generate
revenues and materially harm our financial position.

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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

Year ended September 30, 2004, as restated, compared to year ended September
30, 2003

Gross Revenue and Gross Margin

Gross revenue for the year ended September 30, 2004 increased to $383,824
from $52,925 for the year ended September 30, 2003, an increase of 625%. The
increase is attributable to our first full year of commercial sales of Flexogan
products in Canada coupled with marketing programs which started to increase
consumer awareness and acceptance of Flexogan. .

The gross margins on sales of Flexogan products was $ 230,501 or 60% of gross
sales for the year ended September 30, 2004 as compared to $ 33,415 or 63% of
gross sales for the year ended September 30, 2003. Gross margins as a percentage
of sales have decreased due to increased competition in the pain relief segment.
The increased competition placed pricing pressure on our products which, in
turn, required price reductions to remain competitive. We anticipate further
competitive pressures to continue.

Net Loss, as restated

Net loss, as restated, for the year ended September 30, 2004 increased to
$2,933,840 from $1,414,597 for the comparable period ended September 30, 2003,
an increase of $1,519,243 or 107%. This increase in net loss, as restated, is
attributable to an increase in Flexogan marketing activities when compared to
prior year. Also included in the net loss, as restated, was interest expense in
the amount of $1,161,000 related to the issuance of convertible debt with no
comparable expense for the same period a year ago.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of sales and marketing
expenditures, personnel costs related to management functions, finance, office
overheads, insurance, and professional fees related to legal, and audit, and tax
matters. Selling and administrative expenses for the year ended September 30,
2004 increased to $1,383,557 from $ 1,225,140 for the year ended September 30,
2003, an increase of $158,417 or approximately 13%. The increase is primarily
due to the increase in sales and marketing expenses, related to the Canadian
roll-out of Flexogan.

For the year ended September 30, 2004 we incurred approximately $786,243 in
sales and marketing expenditures as compared to $322,603 incurred for the same
period a year ago, an increase of $463,640 or 144%. The increase is primarily
due to a full year of marketing Flexogan in Canada as compared to less than six
months of marketing initiatives during the same period a year ago. We also
commenced marketing research activities in the U.S., and sales activities in
Asia with no comparable activities in the prior year.

22

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Administration expenses totalled $597,314 for the year ended September 30,
2004 as compared to $902,537 incurred in the same period a year ago, a decrease
of approximately $305,223 or 34%. We did not incur any expenses related to stock
option granting during the year ended September 30, 2004 as compared to $280,594
incurred in stock option expenses for the year ended September 30, 2003.

Research and Development Expenses

Research and development expenses include costs for scientific personnel,
supplies, equipment, outsourced clinical and other research activities,
consultants, and other costs directly related to research and development of new
and existing products.

Research and development expenses for the year ended September 30, 2004
totaled $360,467 as compared to $186,241 incurred for the same period a year
ago, an increase of $174,226 or approximately 94%. In preparation for clinical
trials of our topical cream - Indaflex, we incurred approximately $192,000 for
the year ended September 30, 2004. Research and development for our other
topical creams continued during fiscal 2004 at a pace similar to 2003.

Depreciation Expense

We incurred $36,447 in depreciation expense for the year ended September 30,
2004 as compared to $26,764 for the same period a year ago, an increase of
$9,683 or approximately 36%. We purchased approximately $139,000 of research and
development machinery and equipment during fiscal 2004 as well as about $12,500
in other capital assets for a total capital asset purchase of $151,445 as
compared to $36,197 in capital asset purchases for the same period a year ago.
This, in turn, generated substantially all of the incremental depreciation
expense.

Other Income and Expenses

Other income and expenses totaled $1,383,870 net expense for the year ended
September 30, 2004 as compared to $ 9,867 net expense for the same period a year
ago, an increase of $1,374,003. During fiscal 2004 we wrote off previously
acquired VT-1 commercialization rights in the amount of $229,999.
Commercialization of VT-1 was prohibitive from a cost perspective, and attempts
to resell these rights have not been successful. There was no comparable expense
in the previous year.

Also included in other income and expenses was interest
expense of $1,161,000 related to the issuance of convertible debt, which was
convertible into common stock and warrants to purchase common stock. At the time
of issuance the quoted value of our stock exceeded the conversion price of
$0.10, requiring this interest expense to be reflected in accordance with EITF
98-5 and EITF 00-27. There was no comparable expense in the previous year.

Net Loss, as restated

The above mentioned income and expenses resulted in a net loss, as restated,
of $2,933,840 for the year ended September 30, 2004 as compared to a net loss of
$1,414,597 incurred in the same period a year ago.

Liquidity And Capital Resources

23

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As of September 30, 2004 the Company had working capital of $2,183,913
compared to a working capital deficiency of $556,784 at September 30, 2003.

Since inception, we have financed operations primarily from the issuance of
common stock and 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 all of our proposed products or to carry out our business
strategy. Therefore, we will likely need to raise additional capital to fund our
operations sometime in the future. We cannot be certain that any financing will
be available when needed. Any additional equity financings may 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. sales and marketing activities; and 
4. regulatory processes.

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 our own sales and marketing
capabilities or to seek 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.

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 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 7. FINANCIAL STATEMENTS, AS RESTATED

The financial statements, as restated, required by Item 7 are set forth on
pages F-1 through F-16.

24

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On December 29, 2003, we dismissed Philip K. Yeung, ("Yeung") the principal
accountant previously engaged to audit AlphaRx's financial statements and on
December 31, 2003 retained Schwartz Levitsky Feldman LLP ("Schwartz") as the
principal accountants to replace Yeung. The Company's board of directors
approved the change of accountants from Yeung to Schwartz.

The audit reports of Yeung on AlphaRx's financial statements for the fiscal
years ending September 30, 2002 and September 30, 2001 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles, except such reports were
modified to include an explanatory paragraph for a going concern uncertainty.

In connection with the audits of the fiscal years ending September 30, 2002
and September 30, 2001 including the subsequent interim periods since engagement
through December 29, 2003, the date of dismissal, the Company had no
disagreements with Yeung with respect to accounting or auditing issues of the
type discussed in Item 304(a)(iv) of Regulation S-B. Had there been any
disagreements that were not resolved to their satisfaction, such disagreements
would have caused Yueng to make reference in connection with their opinion to
the subject matter of the disagreement. In addition, during that time there were
no reportable events (as defined in Item 304(a)(1)(iv) of Regulation S-B).

During the fiscal years ending September 30, 2002 and September 30, 2001
including the subsequent interim periods since engagement through December 29,
2003, the date of Yeung's dismissal, and prior to the appointment of Schwartz,
AlphaRx (or anyone on its behalf) did not consult with Schwartz regarding any of
the accounting or auditing concerns stated in Item 304(a)(2) of Regulation S-B.
Since there were no disagreements or reportable events (as defined in Item
304(a)(2) of Regulation S-B), we did not consult Schwartz in respect to these
matters during the time periods detailed herein.

ITEM 8A. CONTROLS AND PROCEDURES

The Company's chief executive officer and the Company's chief financial
officer are responsible for establishing and maintaining disclosure controls and
procedures for the Company.

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of September 30, 2004, the chief executive
officer and the chief financial officer have concluded that the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended) are effective to ensure that
information required to be disclosed by the Company in reports that the Company
files or submits under the Securities Exchange Act, as amended is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.

Changes in Internal Controls

Despite the restatement of financial information reported in this amended
annual report, as of September 30, 2004, the chief executive officer and the
chief financial officer have concluded that there were no significant changes in
the Company's internal controls over financial reporting or in any other areas
that could significantly affect the Company's internal controls subsequent to
the date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

25

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ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table sets forth, as of December 9, 2004, the name, age, and
position of each of our executive officers and directors: (There has been no
change in officers and directors up to July 7, 2005.)

|Name                             | Age | Position                               | Term           
|-------------------------------- | --- | -------------------------------------- | ---------------
|                                 |     |                                        |                
|Michael M. Lee                   | 41  | Chairman of the
    Board of Directors |                
|                                 |     | Chief Executive
    Officer            | Since 8/8/1997 
|                                 |     |                                        |                
|Marcel Urbanc,
    C.A.          | 48  | Chief Financial
    Officer            |                
|                                 |     |                                        |                
|Joseph Schwarz,
    Ph.D         | 50  | Chief Scientist                        |                
|                                 |     |                                        |                
|Michael
    Weisspapir, MD, Ph.D | 48  | Chief Medical
    Officer              |                
|                                 |     |                                        |                
|Sandro Persia                    | 34  | Secretary/Treasurer                    |                
|                                 |     |                                        |                
|Dr. David Milroy                 | 53  | Director                               | Since 4/15/2003
|                                 |     |                                        |                
|Dr. Ford Moore                   | 53  | Director                               | Since 4/15/2003

Michael M. Lee: Mr. Lee is a founder of the Company. Mr. Lee
has over 15 years of business experience in the areas of high tech development,
marketing and corporate finance. Mr. Lee holds a B.Sc. in Applied Mathematics
from the University of Western Ontario. Mr Lee founded the company in August
1997.

Marcel Urbanc, C.A:Mr. Urbanc
obtained his Chartered Accountant designation in 1985 after articling with
Arthur Andersen & Co. for 3 years. Prior to joining the Company, Mr. Urbanc
served as Controller and then VP Finance & CFO of Oasis Technology Ltd., a
software company involved in transaction processing from 1994 to 2002. During
his tenure at Oasis private equity funding of approximately $45,000,000 was
raised. Mr Urbanc has been with the company since March, 2003.

Joseph Schwarz, Ph.D.:Dr.
Schwarz is the chief scientist of the Company. Dr. Schwarz has extensive
experience in the research and development of controlled release drug delivery
systems, his areas of expertise cover controlled delivery of drugs, colloidal
and microcorpusculate drug delivery systems, submicron emulsions (SME),
transdermal delivery (topical and systemic). Dr. Schwarz has published more than
40 articles in various scientific journals and has written over 20 patents and
patent applications. Dr. Schwarz was the senior scientist at Pharmos Ltd., a
publicly traded U.S. pharmaceuticals company from 1991 to 1995. From 1995 to
1997 he was the senior scientist in the research and development department of
TEVA Pharmaceuticals Ltd. From 1997 to 1998, Dr. Schwarz was the senior
scientist of

26

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D-PHARM, a pharmaceuticals concern located in Israel. From 1998 to 1999 Dr.
Schwarz served as a part time consultant to the Company and has been with the
company since that time.

Michael Weisspapir, M.D.: Ph.D.Dr. Weisspapir has 19 years of
successful experience in experimental medicine and extensive experience in
interdisciplinary research and development in experimental pharmacology,
immunopharmacology, toxicology and neuroscience. Prior to joining the Company,
Dr. Weisspapir held a variety of research positions at the University of Tel
Aviv and Rabin Medical Center, Israel and the University Health Network,
University of Toronto, Canada.

Sandro Persia: Mr. Persia joined Logic Tech Corp. in 1989 as Marketing
Manager and promoted to Vice President in 1996. Mr. Persia has extensive
business experience in high tech marketing and sales. Mr. Persia holds a diploma
in business administration from the Seneca College.

David Milroy, D.D.S. M.R.C.D. (C): Dr. Milroy is a Certified Oral &
Maxillofacial Surgeon and has been in private practice in Richmond Hill,
Woodbridge, and Port Hope, Ontario for the past twenty years. He graduated from
the University of Toronto, Faculty of Dentistry with a Doctor of Dental Surgery
degree in 1976 and a Residency in Oral & Maxillofacial Surgery at the University
of Toronto, Toronto General and Toronto Doctor's Hospitals in 1982.

Ford Moore, D.D.S. F.R.C.D. (C): Dr. Moore is a a certified Oral &
Maxillofacial Surgeon, is engaged in a full-time private practice in Newmarket,
Ontario which he established in 1981. Dr. Moore graduated from the University of
Toronto with a Doctor of Dental Surgery degree in 1976, and completed a hospital
Residency in Oral Surgery and Anesthesia at Toronto General Hospital, Toronto
Doctor's Hospital and the University of Toronto in 1980.

All directors will hold office until the next annual stockholder's meeting
and until their successors have been elected or qualified or until their death,
resignation, retirement, removal, or disqualification. Vacancies on the board
will be filled by a majority vote of the remaining directors. Officers of the
Company serve at the discretion of the board of directors.

Compensation of Directors

Effective as of March 29, 2005, non-management directors
receive an annual fee of CDN $3,000 as well as meeting attendance fees of CDN
$500 or CDN $250. Directors are reimbursed for direct out-of-pocket expenses for
attendance at meetings of the Board of Directors and for expenses incurred for
and on behalf of the Company.

Board of Directors Committees

The board of directors has established an audit committee effective December
1, 2004. The audit committee is comprised of two independant board members - Dr.
Ford Moore and Dr. David Milroy. We do not have a financial expert serving on
our audit committee as we have not yet been able to source such a qualified
person willing to serve on our board and audit committee. A third independent
board member with public company experience and financial expertise is being
sought to serve on our board and the audit committee. At the outset, our audit
committee will review and approve our financial statements prior to board
meetings, act on and report to the board of directors with respect to various
auditing and accounting matters, including the recommendations of our
independent auditors, review the scope of the annual audits, and fees to be paid
to the independent auditors. As the Audit Committee becomes more established it
will also review and approve any material internal accounting and financial
control policies and procedures and ensure compliance with all required
governance procedures and policies. Finally, the

27

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audit committee will establish procedures for the receipt, retention, and
treatment of complaints received by the Company regarding accounting, internal
controls and auditing.

The board of directors has not yet established a compensation committee.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act requires directors,
officers and persons who own more than 10% of a registered class of our equity
securities to file reports of ownership and change in ownership with the
Securities and Exchange Commission. Directors, officers and greater than 10%
shareholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.

Based solely upon our review of the copies of such forms that
we received during the fiscal year ended September 30, 2004, we believe that
each person who at any time during the fiscal year was a director, officer, or
beneficial owner of more than ten percent of our common stock complied with all
Section 16(a) filing requirements during such fiscal year.

CODE OF ETHICS

We have not adopted a code of ethics at this time, as our
focus has been on our growth and product development. Our board of directors is
currently reviewing and evaluating a proposal to adopt a comprehensive code of
ethics for our executive officers and directors.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation

The table below summarizes the compensation received by the Company's Chief
Executive Officer for the fiscal years ended September 30, 2004, 2003 and 2002
and each other executive officer of the Company who received compensation in
excess of $40,000 for services rendered during any of those years ("named
executive officers").

|                        |      |            |           | LONG TERM   
|----------------------- | ---- | ---------- | --------- | ------------
|                        |      |            |           | COMPENSATION
|                        |      |            |           | SECURITIES  
|NAME AND                |      |            |           | UNDERLYING  
|PRINCIPAL POSITION      | YEAR | SALARY ($) | BONUS ($) | OPTION (#)  
|Michael M. Lee          | 2004 | 29,531     | 0         | --          
|President & C.E.O.      | 2003 | 83,652     | 0         | 150,000     
|                        | 2002 | 230,000    | 0         | --          
|Joseph Schwarz          | 2004 | 22,731     | 0         | --          
|Chief Scientist         | 2003 | 56,992     | 0         | 80,000      
|                        | 2002 | 150,000    | 0         | --          
|Michael
    Weisspapir  | 2004 | 59,100     | 0         | --          
|Chief Medical Scientist | 2003 | 46,992     | 0         | 80,000      
|                        | 2002 | 114,000    | 0         | --          
|Marcel Urbanc           | 2004 | 36,218     | 0         | --          
|Chief Financial Officer | 2003 | 13,000     | 0         | 80,000      
|                        | 2002 | 0          | 0         | --          

28

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1. The above officers accepted
672,000 restricted shares in lieu of their salary for fiscal year 2000, 2001 and
the 3 months ended December 31, 2001.2. The above officers accepted
780,000 restricted shares in lieu of their salary between 1/1/2002 and
9/30/2002.3. The above officers accepted
392,500 restricted shares in lieu of their salary between 10/1/2002 and
3/31/2003.

There were no options granted during the fiscal year ended September 30,
2004.

Aggregated Option Exercises In Last Fiscal Year 
and Fiscal Year End Option Values

The following table sets forth certain information regarding exercises of
stock options during the fiscal year ended September 30, 2004 by the named
executive officers. Value of unexercised options is considered to be the
difference between exercise price and market price of $0.31 per share on
September 30, 2004. No options were exercised by the named executive officers
during fiscal 2004.

|Name                   | Number of
    Exercisable Options at | Value of
    Unexercised In-The-Money
|---------------------- | ------------------------------------ | -------------------------------------
|                       | Fiscal
    Year-End (#)              | Optionsat Fiscal Year-End (#)        
|                       | Exercisable/Unexercisable            | Exercisable/Unexercisable            
|                       |                                      |                                      
|Michael M. Lee         | 450,000/100,000                      | $84,000/$0                           
|Marcel Urbanc          | 80,000/0                             | $0/$0                                
|Joseph Schwarz         | 276,667/53,333                       | $52,500/$0                           
|Michael
    Weisspapir | 226,667/53,333                       | $42,000/$0                           

2003 Stock Option Plan

The 2003 Plan is administered by the board of directors, which determines
which directors, officers, employees, consultants, scientific advisors and
independent contractors of the Corporation are to be granted options, the number
of shares subject to the options granted, the exercise price of the options, and
certain terms and conditions of the options. No options may be granted under the
2003 Plan more than ten years after the date the 2003 Plan is adopted by the
board of directors, and no options granted under the 2003 Plan may be exercised
after the expiration of ten years from date of grant. The board of directors may
delegate administration of the 2003 Plan, including the power to grant options
to persons who are not officers or directors of the Corporation, to a Stock
Option Committee, composed of members of the board of directors.

We have reserved 1,500,000 common shares under the 2003 Plan for issuance
under option or restricted stock purchase agreements. As of January 26, 2004
there were 645,000 options granted under this Plan. The 2003 Stock Option Plan
was considered no longer adequate for our future needs and hence the Company
adopted the 2004 Plan described below.

2004 Stock Option Plan

The 2004 Plan is administered by the board of directors, which determines
which directors, officers, employees, consultants, scientific advisors and
independent contractors of the Company are to be granted options, the number of
shares subject to the options granted, the exercise price of the options, and
certain terms and conditions of the options. The board of directors may delegate
administration of the 2004 Plan, including the power to grant options to persons
who are not officers or directors of the Corporation, to a Stock Option
Committee, composed of members of the board of directors. The board of
directors, in its

29

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sole discretion, may amend, modify or terminate the 2004 Plan at any time
without restriction. However, no amendment may, without stockholder approval,
increase the total number of shares of stock which may be issued under the 2004
Plan (other than increases to reflect stock dividends, stock splits or other
relevant capitalization changes). There are 24,000,000 authorized shares of our
Common Stock that are not issued or outstanding, reserved for implementation of
the 2004 Plan.

On November 15, 2004 the Company granted 13,220,000 options under the 2004
Plan to 14 individuals including officers, directors and consultants. On January
10, 2005 the Company granted 7,000,000 options under the 2004 Plan to Michael
Lee - President. On February 8, 2005 the Company granted 390,000 options under
the 2004 Plan to 5 individuals including officers, employees and consultants. On
May 25, 2005 the Company granted 100,000 options under the 2004 Plan to a
consultant of the Company.



|                                                               | Number of Securities to | Weighted-Average     | Number of securities remaining        
|-------------------------------------------------------------- | ----------------------- | -------------------- | --------------------------------------
|                                                               | be issued upon exercise | Exercise Price of    | available for future issuance         
|                                                               | of outstanding options, | outstanding options, | under equity compensation plans       
|                                                               | warrants, and rights    | warrants, and rights | (excluding securities reflected
    in
|                                                               |                         |                      | the first two columns                 
|                                                               |                         |                      |                                       
|                                                               |                         |                      |                                       
|Equity Compensation Plans Approved by
    Security Holders     | 22,430,000              | $0.17                | 3,290,000                             
|                                                               |                         |                      |                                       
|Equity Compensation Plans Not Approved by
    Security Holders | None                    | None                 | None                                  
|                                                               |                         |                      |                                       
|Total                                                          | 22,430,000              | $0.17                | 3,290,000                             

30

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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information with respect to ownership of the
Company's securities by its officers and directors and by any person (including
any "group") who is the beneficial owner of more than 5% of the Company's common
stock. The total number of shares authorized is 250,000,000 shares of common
stock, each of which has a par value of $0.0001. As of July 7, 2005 there were
57,508,112 shares of common stock issued and outstanding.

|Name and Address             | Amount and Nature
    of | Percent of
|---------------------------- | ------------------------ | ----------
|Of Owner                     | Beneficial Owner         | Class     
|                             |                          |           
|Michael Lee(1)               | 7,580,726 shares         | 13.18%    
|Joseph Schwarz(2)            | 602,500 shares           | 1.05%     
|Michael
    Weisspapir(2)    | 457,500 shares           | 0.80%     
|Sandro Persia(2)             | 16,000 shares            | 0.03%     
|Ford Moore(3)                | 492,579 shares           | 0.86%     
|Marcel Urbanc(2)             | 20,000 shares            | 0.03%     
|David Milroy(3)              | 300,000 shares           | 0.52%     
|All directors and officers   | 9,469,305 shares         | 16.47%    
|as a group (7
    persons)   |                          |           
|                             |                          |           
|(1)
    Director and Officer |                          |           
|(2)
    Officer              |                          |           
|(3)
    Director             |                          |           

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as disclosed in this annual report, during the past two years, there
have been no material transactions, series of similar transactions or currently
proposed transactions, to which the Company was or is to be a party, in which
the amount involved exceeds $60,000 and in which any director or executive

31

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officer, or any security holder who is known to the Company to own of record
or beneficially more than five percent of the Company's common stock, or any
member of the immediate family of any of the foregoing persons, had a material
interest.ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K(a) Exhibits. Exhibits required to be attached by Item 601 of Regulation S-B
are listed in the Index to Exhibits beginning on page 28 of this Form 10-KSB-A,
which is incorporated herein by reference. 
(b) On September 9, 2004 we filed a Current Report on Form 8-K regarding
completion of a private placement of common stock and warrants to purchase
common stock.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees :For
the year ended September 30, 2004 we incurred approximately $20,650 in external
audit fees, and quarterly reviews in connection with statutory and regulatory
filings to our principal accountants as compared to approximately $18,378 for
the year ended September 30, 2003.

Audit-Related Fees:

Tax Fees:

All Other Fees:

Audit Committee's Pre-Approval Policies and Procedures:

The audit committee is in the process of establishing procedures for the
receipt, retention, and treatment of complaints received by the Company
regarding accounting, internal controls and auditing.

32

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: July 8, 2005

ALPHARx, INC.By: /s/ Michael M. LeeMichael M. Lee, President andChief Executive OfficerBy: /s/ Marcel UrbancMarcel UrbancChief Financial Officer andPrincipal Accounting Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant, in
the capacities, and on the dates, indicated.

DATED: July 8, 2005

ALPHARx, INC.Directors:/s/ Michael M. LeeMichael M. Lee, Director andChairman of the Board/s/ David MilroyDavid Milroy, Director/s/ Ford MooreFord Moore, Director


33

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|                      |      |                                                                                                                                                                                  
|--------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|INDEX TO
    EXHIBITS
|                      |      |                                                                                                                                                                                  
|EXHIBIT               | PAGE |                                                                                                                                                                                  
|NO.                   | NO.  | DESCRIPTION                                                                                                                                                                      
|                      |      |                                                                                                                                                                                  
|3(i)(a)               | *    | Certificate of Incorporation dated August 8, 1997 (incorporated by reference
    to the Form 10-SB filed on June 16, 2000).                                                      
|3(i)(b)               | *    | Amendment to Certificate of Incorporation dated January 26, 2000
    (incorporated by reference to the Form 10-SB filed on June 16, 2000).                                       
|3(i)(c)               | *    | Amended and Restated Certificate of Incorporation dated July 20, 2000
    (incorporated by reference to the Form 10-KSB filed on December 31, 2001).                             
|3(ii)                 | *    | Bylaws dated August 11, 1997 (incorporated by reference to the Form 10-KSB
    filed on June 16, 2000).                                                                          
|10.1                  | *    | 2000
    Stock Option Plan adopted June 20, 2000 (incorporated by reference to the
    Form 10-KSB filed on December 31, 2001).                                                  
|10.2                  | *    | Manufacturing and Distribution License Agreement with Industria Farmaceutica
    Andromaco, S.A. de C.V. (incorporated by reference to the Form 10KSB filed
    on July 8, 2005).
|31.1                  | 35   | Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.                                                                                           
|31.2                  | 36   | Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.                                                                                           
|32.1                  | 37   | Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of Title
    18 United States Code.                                                                          
|32.2                  | 38   | Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of
    Title 18 United States Code.                                                                        

34

---



EXHIBIT 31.1

I, Michael Lee, President and Chief Executive Officer of AlphaRx, certify
that:

> 1. I have reviewed this annual report on Form
>   10-KSB/A of AlphaRx, Inc.;
>   2. Based on my knowledge, this annual report does
>   not contain any untrue statement of a material fact or omit to state a
>   material fact necessary to make the statements made, in light of the
>   circumstances under which such statements were made, not misleading with
>   respect to the period covered by this annual report;
>   3. Based on my knowledge, the financial
>   statements, and other financial information included in this annual report,
>   fairly present in all material respects the financial condition, results of
>   operations and cash flows of the registrant as of, and for, the periods
>   presented in this annual report;
>   4. I am responsible for establishing and
>   maintaining disclosure controls and procedures (as defined in Exchange Act
>   Rules 13a-14 and 15d-14) for the registrant and have:
>   a) designed such disclosure controls and
>     procedures to ensure that material information relating to the registrant,
>     including its consolidated subsidiaries, is made known to me by others
>     within those entities, particularly during the period in which this annual
>     report is being prepared;
>     b) evaluated the effectiveness of the
>     registrant's disclosure controls and procedures as of a date within 90 days
>     prior to the filing date of this annual report (the "Evaluation Date"); and
>     c) presented in this annual report my
>     conclusions about the effectiveness of the disclosure controls and
>     procedures based on my evaluation as of the Evaluation Date;
>   5. We have disclosed, based on my most recent
>   evaluation, to the registrant's auditors and the audit committee of
>   registrant's board of directors (or persons performing the equivalent
>   functions):
>   a) all significant deficiencies in the design or
>     operation of internal controls which could adversely affect the registrant's
>     ability to record, process, summarize and report financial data and have
>     identified for the registrant's auditors any material weaknesses in internal
>     controls; and
>     b) any fraud, whether or not material, that
>     involves management or other employees who have a significant role in the
>     registrant's internal controls; and
>   6. I have indicated in this annual report whether
>   there were significant changes in internal controls or in other factors that
>   could significantly affect internal controls subsequent to the date of my most
>   recent evaluation, including any corrective actions with regard to significant
>   deficiencies and material weaknesses.

Date: July 8, 2005

/s/ Michael LeeMichael Lee, President and Chief Executive Officer

35

---

EXHIBIT 31.2

I, Marcel Urbanc, Principal Accounting Officer and Chief Financial Officer of
AlphaRx, certify that:

> 1. I have reviewed this annual report on Form
>   10-KSB/A of AlphaRx, Inc.;
>   2. Based on my knowledge, this annual report does
>   not contain any untrue statement of a material fact or omit to state a
>   material fact necessary to make the statements made, in light of the
>   circumstances under which such statements were made, not misleading with
>   respect to the period covered by this annual report;
>   3. Based on my knowledge, the financial
>   statements, and other financial information included in this annual report,
>   fairly present in all material respects the financial condition, results of
>   operations and cash flows of the registrant as of, and for, the periods
>   presented in this annual report;
>   4. I am responsible for establishing and
>   maintaining disclosure controls and procedures (as defined in Exchange Act
>   Rules 13a-14 and 15d-14) for the registrant and have:
>   a) designed such disclosure controls and
>     procedures to ensure that material information relating to the registrant,
>     including its consolidated subsidiaries, is made known to me by others
>     within those entities, particularly during the period in which this annual
>     report is being prepared;
>     b) evaluated the effectiveness of the
>     registrant's disclosure controls and procedures as of a date within 90 days
>     prior to the filing date of this annual report (the "Evaluation Date"); and
>     c) presented in this annual report my
>     conclusions about the effectiveness of the disclosure controls and
>     procedures based on my evaluation as of the Evaluation Date;
>   5. We have disclosed, based on my most recent
>   evaluation, to the registrant's auditors and the audit committee of
>   registrant's board of directors (or persons performing the equivalent
>   functions):
>   a) all significant deficiencies in the design or
>     operation of internal controls which could adversely affect the registrant's
>     ability to record, process, summarize and report financial data and have
>     identified for the registrant's auditors any material weaknesses in internal
>     controls; and
>     b) any fraud, whether or not material, that
>     involves management or other employees who have a significant role in the
>     registrant's internal controls; and
>   6. I have indicated in this annual report whether
>   there were significant changes in internal controls or in other factors that
>   could significantly affect internal controls subsequent to the date of my most
>   recent evaluation, including any corrective actions with regard to significant
>   deficiencies and material weaknesses.

Date: July 8, 2005

/s/ Marcel UrbancMarcel Urbanc, Chief Financial Officer and Principal Accounting Officer

36

---



EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of AlphaRx, Inc. on Form 10-KSB/A for
the period ending September 30, 2004 as filed with the Securities and Exchange
Commission on the date hereof, Michael Lee, as chief executive officer of
AlphaRx, Inc., does hereby certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of his knowledge:

> 1. This 10-KSB/A report fully complies with the
>   requirements of Section 13(a) of the Exchange Act; and
>   2. The information contained in this 10-KSB/A
>   report fairly presents, in all material respects, the financial condition and
>   result of operations of AlphaRx, Inc.

/s/ Michael LeeMichael Lee 
President and Chief Executive Officer 
July 8, 2005

37

---



EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of AlphaRx, Inc. on Form 10-KSB/A for
the period ending September 30, 2004 as filed with the Securities and Exchange
Commission on the date hereof, Marcel Urbanc, as chief financial officer and
principal accounting officer of AlphaRx, Inc., does hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of his knowledge:

> 1. This 10-KSB/A report fully complies with the
>   requirements of Section 13(a) of the Exchange Act; and
>   2. The information contained in this 10-KSB/A
>   report fairly presents, in all material respects, the financial condition and
>   result of operations of AlphaRx, Inc.

/s/ Marcel UrbancMarcel Urbanc 
Chief Financial Officer and Principal Accounting Officer 
July 8, 2005

38

---



ALPHARx, INC.

CONSOLIDATED FINANCIAL STATEMENTS AND AUDIT REPORT

SEPTEMBER 30, 2004, AS RESTATED, AND SEPTEMBER 30, 2003

TABLE OF CONTENTS

|CONSOLIDATED FINANCIAL STATEMENTS, AS
    RESTATED               | PAGE(S)
|---------------------------------------------------------------- | -------
|                                                                 |        
|                                                                 |        
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM      | F-2    
|                                                                 |        
|CONSOLIDATED BALANCE SHEETS, AS RESTATED                         | F-3    
|                                                                 |        
|CONSOLIDATED STATEMENTS OF OPERATIONS, AS
    RESTATED           | F-4    
|                                                                 |        
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
    EQUITY, AS RESTATED | F-5    
|                                                                 |        
|CONSOLIDATED STATEMENTS OF CASH FLOWS, AS
    RESTATED           | F-6    
|                                                                 |        
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
    AS RESTATED      | F-7-18 

F - 1

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of AlphaRx, Inc.

We have audited the accompanying restated consolidated
balance sheets of AlphaRx, Inc. (incorporated in the State of Delaware) as at
September 30, 2004 and 2003 and the related restated consolidated statements of
operations, cash flows and stockholders' equity for the years then ended. These
restated consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
restated consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the restated consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of AlphaRx, Inc. as at September 30, 2004 and 2003 and the
results of its operations and its cash flows for the years then ended in
accordance with generally accepted accounting principles in the United States of
America.

The accompanying restated consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the restated consolidated financial statements, the
Company has suffered recurring losses from operations that raise substantial
doubt about its ability to continue as a going concern. The restated
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Should the Company be unable to
continue as a going concern, certain assets and liabilities will have to be
adjusted to their liquidation values.

The previous Report of Independent Registered Public
Accounting Firm has been withdrawn. The restated consolidated financial
statements have been adjusted as discussed in note 18.

|                                             | "SCHWARTZ LEVITSKY FELDMAN LLP"
|-------------------------------------------- | -------------------------------
|                                             |                                
|Toronto, Ontario,
    Canada                 |                                
|November 12, 2004
    (except for note 18,   |                                
|which is as of
    May 13, 2005 and notes 2, |                                
|13 and 17 which
    are as of June 30, 2005) | Chartered Accountants          

F - 2

---



|                                                               |   |             |   |            
|-------------------------------------------------------------- | - | ----------- | - | -----------
|ALPHARx, INC.                                                 
|                                                               |   |             |   |            
|CONSOLIDATED
    BALANCE SHEETS                               
|                                                               |   |             |   |            
|AS AT
    SEPTEMBER 30, 2004, AS RESTATED (NOTE 18) AND 2003  
|                                                               |   |             |   |            
|                                                               |   |             |   |            
|September 30,                                                  |   | 2004        |   | 2003       
|CURRENT ASSETS                                                 |   |             |   |            
|                                                               |   |             |   |            
|Cash and Cash Equivalents                                      | $ | 2,856,042   | $ | 24,520     
|Accounts Receivable, net (note 3)                              |   | 49,930      |   | 27,662     
|Prepaid Expenses                                               |   | 67,640      |   | 3,690      
|Inventory (note 4)                                             |   | 180,272     |   | 141,905    
|                                                               |   |             |   |            
|TOTAL CURRENT ASSETS                                           |   | 3,153,884   |   | 197,777    
|                                                               |   |             |   |            
|                                                               |   |             |   |            
|PROPERTY, PLANT &
    EQUIPMENT, net (note 5)                  |   | 241,533     |   | 126,535    
|OTHER ASSETS                                                   |   |             |   |            
|Licensing Right (note 6)                                       |   | 1           |   | 230,000    
|                                                               |   |             |   |            
|TOTAL ASSETS                                                   |   | 3,395,418   |   | 554,312    
|                                                               |   |             |   |            
|CURRENT
    LIABILITIES                                        |   |             |   |            
|Accounts Payable and Accrued Liabilities (note 7)              |   | 279,071     |   | 254,724    
|Notes Payable (note 8 and 17)                                  |   | 665,900     |   | 474,837    
|Litigation Liabilities (note 9)                                |   | 25,000      |   | 25,000     
|TOTAL CURRENT LIABILITIES                                      |   | 969,971     |   | 754,561    
|                                                               |   |             |   |            
|CONTINGENCIES &
    COMMITMENTS (note 9 and 10)                |   |             |   |            
|                                                               |   |             |   |            
|SHAREHOLDERS'
    EQUITY (DEFICIENCY)                          |   |             |   |            
|Common Stock: $ 0.0001 par value,                              |   |             |   |            
|Authorized 250,000,000 shares; issued and                      |   |             |   |            
|outstanding 52,304,642 shares (2003 - 100,000,000              |   | 5,232       |   | 1,692      
|authorized; 16,920,082 issued and outstanding) (note 11)       |   |             |   |            
|Additional paid-in capital                                     |   | 9,580,035   |   | 4,024,039  
|Deficit                                                        |   | (7,159,820) |   | (4,225,980)
|                                                               |   |             |   |            
|TOTAL
    SHAREHOLDERS' EQUITY (DEFICIENCY)                    |   | 2,425,447   |   | (200,249)  
|                                                               |   |             |   |            
|TOTAL
    LIABILITIESAND
    SHAREHOLDERS' EQUITY (DEFICIENCY) | $ | 3,395,418   | $ | 554,312    

F - 3

---



ALPHARx, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2004, AS RESTATED, AND 2003

|                                                         |   |             |   |            
|-------------------------------------------------------- | - | ----------- | - | -----------
|Year ended
    September 30,                             |   | 2004        |   | 2003       
|                                                         |   |             |   |            
|SALES                                                    | $ | 383,824     | $ | 52,925     
|                                                         |   |             |   |            
|COST OF SALES                                            |   | 153,323     |   | 19,510     
|                                                         |   |             |   |            
|GROSS MARGIN                                             |   | 230,501     |   | 33,415     
|                                                         |   |             |   |            
|                                                         |   |             |   |            
|SELLING AND
    ADMINISTRATIVE EXPENSES                  |   | 1,383,557   |   | 1,225,140  
|RESEARCH AND
    DEVELOPMENT EXPENSES                    |   | 360,467     |   | 186,241    
|DEPRECIATION                                             |   | 36,447      |   | 26,764     
|LOSS FROM
    OPERATIONS                                 |   | (1,549,970) |   | (1,404,730)
|                                                         |   |             |   |            
|OTHER INCOME AND
    EXPENSES                            |   |             |   |            
|                                                         |   |             |   |            
|Other Income                                             |   | -           |   | 10,130     
|Interest income/(expense), net                           |   | (1,153,871) |   | 3          
|Write down of Licensing Rights (note 6)                  |   | (229,999)   |   | -          
|Loss on Investment                                       |   | -           |   | (20,000)   
|                                                         |   | (1,383,870) |   | (9,867)    
|                                                         |   |             |   |            
|LOSS BEFORE
    INCOME TAXES, AS RESTATED                |   | (2,933,840) |   | (1,414,597)
|                                                         |   |             |   |            
|INCOME TAX (note
    12)                                 |   | --          |   | --         
|                                                         |   |             |   |            
|NET LOSS, AS
    RESTATED                                | $ | (2,933,840) | $ | (1,414,597)
|                                                         |   |             |   |            
|NET LOSS PER
    COMMON SHARE, BASIC & DILUTED           |   | (0.13)      |   | (0.09)     
|                                                         |   |             |   |            
|WEIGHTED AVERAGE
    NUMBER OF COMMON SHARES OUTSTANDING |   | 22,741,117  |   | 15,858,421 

F - 4

---

ALPHARx, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
FOR THE YEARS ENDED SEPTEMBER 30, 2004, AS RESTATED,AND 2003

|                                    | Common Stock | Additional | Retained   | Total       
|----------------------------------- | ------------ | ---------- | ---------- | ------------
|                                    | Number of    |            | Paid-in    | Earnings    
|                                    | Shares       | Amount     | Capital    | (Deficit)   
|                                    |              |            |            |             
|Balance at                          | 15,327,341   | $1,533     | $2,897,277 | $(2,811,383)
|September 30,                       |              |            |            |             
|2002                                |              |            |            |             
|                                    |              |            |            |             
|Issuances of                        |              |            |            |             
|Common Stock                        | 1,592,741    | 159        | 846,168    |             
|                                    |              |            |            |             
|Issuance of Stock                   |              |            |            |             
|Options for
    consulting services |              |            | 280,594    |             
|                                    |              |            |            |             
|Net loss for the                    |              |            |            |             
|Year ending                         |              |            |            |             
|September 30,                       |              |            |            |             
|2003                                |              |            |            | (1,414,597) 
|                                    |              |            |            |             
|Balance at                          |              |            |            |             
|September 30,                       |              |            |            |             
|2003                                | 16,920,082   | 1,692      | 4,024,039  | (4,225,980) 
|Issuances of                        |              |            |            |             
|Common Stock                        |              |            |            |             
|for consulting,                     |              |            |            |             
|legal services                      | 100,000      | 11         | 29,990     |             
|                                    |              |            |            |             
|Conversion of                       |              |            |            |             
|Promissory Notes                    | 3,752,340    | 375        | 1,535,859  |             
|                                    |              |            |            |             
|Commission on                       |              |            |            |             
|Promissory Notes                    |              |            |            |             
|and Common                          |              |            |            |             
|Stock Issued                        | 4,308,186    | 431        | 580,120    |             
|                                    |              |            |            |             
|Issuances of                        |              |            |            |             
|Common Stock                        | 27,224,034   | 2,723      | 3,410,027  |             
|                                    |              |            |            |             
|Net Loss, as
    restated,          |              |            |            |             
|for the year
    ending             |              |            |            |             
|September 30,
    2004              |              |            |            | (2,933,840) 
|                                    |              |            |            |             
|Balance, as of                      |              |            |            |             
|September 30,                       |              |            |            |             
|2004                                | 52,304,642   | $5,232     | $9,580,035 | $(7,159,820)

F - 5

---

ALPHARx, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, AS RESTATED, AND 2003

|September 30,                                                    |   | 2004        |   | 2003       
|---------------------------------------------------------------- | - | ----------- | - | -----------
|                                                                 |   |             |   |            
|CASH FLOWS FROM
    OPERATING ACTIVITIES                         |   |             |   |            
|Net Loss, as restated                                            | $ | (2,933,840) | $ | (1,414,597)
|Adjustments to reconcile net loss to net cash used in operating  |   |             |   |            
|activities:                                                      |   |             |   |            
|Depreciation and amortization                                    |   | 36,447      |   | 26,764     
|Write down of licensing rights                                   |   | 229,999     |   |            
|Shares Issued For Services Rendered                              |   | 610,552     |   | 273,436    
|Options Issued For Services Rendered                             |   | -           |   | 280,594    
|Interest expense on convertible debt                             |   | 1,161,000   |   | -          
|Changes in assets and liabilities:                               |   |             |   |            
|Increase in Inventory                                            |   | (38,367)    |   | (89,764)   
|Increase in Accounts Receivable                                  |   | (22,268)    |   | (27,662)   
|(Increase) Decrease in Prepaid Expenses                          |   | (63,950)    |   | 25,695     
|Increase in Accounts Payable and Accrued Liabilities             |   | 24,347      |   | 230,044    
|                                                                 |   |             |   |            
|NET CASH USED IN
    OPERATING ACTIVITIES                        |   | (996,080)   |   | (695,490)  
|                                                                 |   |             |   |            
|CASH FLOWS FROM
    INVESTING ACTIVITIES                         |   |             |   |            
|                                                                 |   |             |   |            
|Purchase of Licensing Rights                                     |   | -           |   | (230,000)  
|Purchase of Machinery & Equipment                                |   | (151,445)   |   | (36,197)   
|                                                                 |   |             |   |            
|NET CASH USED IN
    INVESTING ACTIVITIES                        |   | (151,445)   |   | (266,197)  
|                                                                 |   |             |   |            
|CASH FLOWS FROM
    FINANCING ACTIVITIES                         |   |             |   |            
|Repayment of bank indebtedness                                   |   | -           |   | (9,202)    
|Issuance of Notes Payable, net (note 8 and 17)                   |   | 191,063     |   | 422,518    
|Proceeds from Issuance of Common Stock (net)                     |   | 3,787,984   |   | 572,891    
|                                                                 |   |             |   |            
|NET CASH PROVIDED
    BY FINANCING ACTIVITIES                    |   | 3,979,047   |   | 986,207    
|                                                                 |   |             |   |            
|NET INCREASE IN
    CASH                                         |   | 2,831,522   |   | 24,520     
|                                                                 |   |             |   |            
|CASH, beginning
    of year                                      |   | 24,520      |   | 0          
|                                                                 |   |             |   |            
|CASH, and Cash
    Equivalents, end of year                      | $ | 2,856,042   | $ | 24,520     
|SUPPLEMENTARY DISCLOSURE:                                        |   |             |   |            
|The statement of
    cash flows using indirect method as defined |   |             |   |            
|under Statement
    of Financial Accounting Standard of No. 95.  |   |             |   |            
|Income Tax Paid                                                  | $ | 0           | $ | 0          
|Interest Paid                                                    | $ | 154,674     | $ | 25,186     

F - 6

---

ALPHARX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004, AS RESTATED, AND 2003
NOTE 1. NATURE OF BUSINESS AND GOING CONCERN

ALPHARX, INC. (the "Company") was incorporated under the laws of the State of
Delaware on August 8, 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 amended during fiscal year 2000.

Effective July 1, 2003 the Company acquired all of the shares of AlphaRx
Canada Limited for nominal value of $1. AlphaRx Canada Limited was dormant until
this time. AlphaRx Canada Limited was incorporated under the laws of Ontario in
order to streamline sales of the Company's products in the Canadian market.
Prior to this time AlphaRx Canada Limited had no material assets or any
liabilities and was wholly owned by the President & CEO of the Company. The
consolidated financial statements reflect the activities of the Company and of
AlphaRx Canada Limited - its 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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of ALPHARX, INC. is presented
to assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management who is
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the preparation of the financial
statements.

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, amounts on deposit with
banks, and any other highly liquid investments purchased with a maturity of
three months or less. The carrying amount approximates fair value because of the
short maturity of those instruments.

Fair Value of Financial Instruments

The carrying amount of the Company's account receivables, accounts payable,
accrued liabilities, litigation liabilities and notes payable approximates fair
value because of the short maturity of these instruments.

F - 7

---

Long-Term Financial Instruments

The fair value of each of the Corporation's long-term financial assets is
based on the amount of future cash flows associated with each instrument
discounted using an estimate of what the Company's current borrowing rate for
similar instruments of comparable maturity would be.

It is of the management's opinion that the Company is not exposed to
significant interest rate risk, credit risk or currency risks arising from these
financial instruments.

Inventory

Inventory is recorded at the lower of cost and net realizable value. Cost is
determined on the first-in first-out basis.

Foreign Currency Translation

The Company maintains the books and records of the subsidiary in Canadian
dollars, its functional currency. The records of the Canadian subsidiary are
converted to US dollars, the reporting currency. The translation method used is
the current rate method which is the method mandated by SFAS 52 where the
functional currency is the foreign currency. Under the current rate method all
assets and liabilities are translated at the current rate, stockholder's equity
accounts are translated at historical rates and revenues and expenses are
translated at average rates for the year.

Earnings or Loss Per Share

The Company adopted FAS No.128, "Earnings per Share", which requires
disclosure on the financial statements of "basic" and "diluted" earnings (loss)
per share. Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the year.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding plus common stock
equivalents (if dilutive) related to stock options and warrants for each year.

Income Taxes

The Company accounts for income tax under the provision of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statement or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.

Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to tax expense in the period of enactment. Deferred
tax assets may be reduced, if deemed necessary based on a judgmental assessment
of available evidence, by a valuation allowance for the amount of any tax
benefits which are more likely, based on current circumstances, not expected to
be realized.

F - 8

---

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated by
using Modified Accelerated Cost Recovery System Method for financial reporting
as well as income tax purposes at rates based on the following estimated useful
lives:

|Furniture and
    Fixtures  | 7 years    
|--------------------------- | -----------
|Machinery and
    Equipment | 3 - 7 years
|Automobile                  | 5 years    
|Leasehold
    Improvements  | 10 years   

The Company capitalizes expenditures that materially increase assets' lives
and expenses ordinary repairs and maintenance to operations as incurred. When
assets are sold or disposed or otherwise fully depreciated, the cost and related
accumulated deprecation are removed from the accounts and any gain or loss is
included in the statement of income and retained earnings.

Research and Development

All research and development costs are charged to expense as incurred. These
costs include research and development, travel to explore and evaluate new
products, raw materials, lab supplies and other costs related directly to
research and development of new and existing products.

Revenue Recognition

Sales represent the invoiced value of goods supplied to customers. Revenues
are recognized upon the passage of title to the customers, provided that the
collection of the proceeds from sales are reasonably assured. A reserve for
returns is considered periodically based on actual or anticipated returns from
customers. The Company policy is not to accept returns, however, under certain
circumstances returns are accepted to maintain good customer relations.

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. These estimates are reviewed
periodically and as adjustments become necessary, they are reported in earnings
in the period in which they become known.

Long-Lived Assets

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
which has been superseded by SFAS No. 144. SFAS No. 144 requires that long-lived
assets to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management used its best estimate of the undiscounted
cash flows to evaluate the carrying amount and have determined that no
impairment has occurred.

F - 9

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Intangible Assets

Intangible assets with an indefinite useful economic life are tested annually
for impairment and periodically if events or circumstances warrant such a test
in accordance with SFAS 142. An impairment loss is recognized if the carrying
amount exceeds the fair value.

Concentrations of Credit Risks and Revenues

The Company's receivables are unsecured and are generally due in 30 Days.
Currently, the Company does not have a diverse customer base as approximately
75% of revenues were derived from two customers during the year ended September
30, 2004. The Company is however, continuously broadening its customer base in
order to increase revenues and reduce economic dependency on these two
customers. The majority of the Company's customers are blue chip, publicly
traded companies.

Recent Pronouncements

SFAS No. 144 - Accounting for the Impairment or Disposal of Long-Lived
Assets. This standard supercedes SFAS No. 121 - Accounting for the impairment of
long-lived assets and for Long-Lived Assets to be Disposed of. This standard
requires that businesses recognize impairment when the financial statement
carrying amount of long-lived asset or asset group exceeds its fair value and is
not recoverable. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.

SFAS No. 145 - Rescission of FASB Statements No.4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. SFAS 145 updates, clarifies
and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement
No.4, which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as extraordinary items, net of related
income tax effect. As a result, the criteria in APB Opinion No. 30 will now be
used to classify those gains and losses because Statement No. 4 has been
rescinded. Statement No. 44 was issued to establish accounting requirements for
the effects of transition to provisions of the Motor Carrier Act of 1980.
Because the transition has been completed, Statement No. 44 is no longer
necessary.

SFAS No. 146 - Accounting for Cost Associated with Exit or Disposal
Activities. SFAS 146 requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Previous accounting guidance was
provided by Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS 146
replaces EITF94-3. The Statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

SFAS No.147 - Acquisition of certain Financial Institutions, an amendment of SFAS 72 and 144 and SFAS interpretation number 9 issued October 2002 and relates
to acquisitions of financial institutions.

SFAS No. 148 - Accounting for Stock Based Compensation-Transition and
Disclosure, an amendment of SFAS 123 issued December 2002 and permits two
additional transition methods for entities that adopt the fair value based
method of accounting for stock based employee compensation to avoid the ramp-up
effect arising from prospective application. This statement also improves the
prominence and clarity of the pro-forma disclosures required by SFAS 123.

SFAS No. 149 - Amendment of SFAS 133 on derivative instruments and hedging
activities. This statement amends and clarifies financial accounting and
reporting for derivative instruments embedded in

F -10

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other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS 133, accounting for derivative instruments and hedging
activities.
SFAS No. 150- Accounting for certain financial instruments
with characteristics of both liabilities and equity. This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
The Company believes that the above standards would not have a material
impact on its financial position, results of operations or cash flows.

NOTE 3. ACCOUNTS RECEIVABLE

|                                          |   | 2004   |   | 2003  
|----------------------------------------- | - | ------ | - | ------
|                                          |   |        |   |       
|Accounts
    receivable                   | $ | 51,576 | $ | 29,742
|Less: Allowance
    for doubtful accounts |   | 1,646  |   | 2,080 
|                                          |   |        |   |       
|                                          | $ | 49,930 | $ | 27,662

The Company carries accounts receivable at the amounts it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best estimates.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that becomes uncollectible could differ from those
estimated.

NOTE 4. INVENTORY

Inventory comprised the following:

|               |   | 2004    |   | 2003   
|-------------- | - | ------- | - | -------
|               |   |         |   |        
|Raw materials  | $ | 59,844  | $ | 26,757 
|Finished goods |   | 120,428 |   | 115,148
|               |   |         |   |        
|               | $ | 180,272 | $ | 141,905

NOTE 5. PROPERTY, PLANT & EQUIPMENT

|                                                |   | 2004    |   | 2003   
|----------------------------------------------- | - | ------- | - | -------
|                                                |   |         |   |        
|Leasehold
    Improvements                      | $ | 19,948  | $ | 1,837  
|Furniture &
    Fixtures                        |   | 25,089  |   | 11,656 
|Machinery &
    Equipment                       |   | 293,475 |   | 170,072
|Automobile                                      |   | --      |   | 22,067 
|                                                |   |         |   |        
|COST                                            |   | 338,512 |   | 205,632
|                                                |   |         |   |        
|Less: Accumulated
    depreciation/amortization |   |         |   |        
|Leasehold Improvements                          |   | 3,573   |   | 460    
|Furniture & Fixtures                            |   | 8,679   |   | 5,709  
|Machinery & Equipment                           |   | 84,727  |   | 59,496 
|Automobile                                      |   | --      |   | 13,432 
|                                                |   |         |   |        
|                                                |   | 96,979  |   | 79,097 
|                                                |   |         |   |        
|NET                                             | $ | 241,533 | $ | 126,535

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NOTE 6. LICENSING RIGHT

In January 2003, the Company entered into a sub-licence agreement with a
third party drug research company for the world-wide commercialization of an
experimental cancer drug. The cost of this sub-licence agreement was $230,000
which was paid by cash of $190,000 and shares with a value of $40,000. Costs to
bring this drug to market are currently prohibitive for the Company, and having
unsuccessfully attempted to resell these commercialization rights, they have
been written down to a nominal value.

NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the following:

|                           |   | 2004    |   | 2003   
|-------------------------- | - | ------- | - | -------
|                           |   |         |   |        
|                           |   |         |   |        
|Trade Accounts
    Payable | $ | 177,962 | $ | 205,654
|Accrued
    Liabilities    |   | 101,109 |   | 49,070 
|                           |   |         |   |        
|                           | $ | 279,071 | $ | 254,724

NOTE 8. NOTES PAYABLE

At September 30, 2004, the Company has notes payable including accrued
interest of $665,900.

(September 30, 2003 - $474,837). Of these notes, $520,347 are secured by a
first priority interest in all of the intellectual property and other assets of
the Company. These notes, bearing interest at 10% per annum, are convertible
into shares of common stock at a conversion price of $0.10. The remaining notes
are unsecured and bear interest at 0%-12% per annum. See also subsequent event
note below. All notes including accrued interest were repaid subsequent to year
end or converted into common stock plus warrants to purchase common stock.

EITF 98-5 and EITF 00-27 requires recognition of a conversion feature that is
in-the-money at issuance as additional paid in capital, measured by allocating a
portion of the proceeds equal to the intrinsic value of that feature. The senior
convertible notes were issued at a conversion price less than the quoted market
price on the date of issue. Accordingly interest expense of $1,161,000 has been
recognized and additional paid in capital has been increased by the same amount
via a restatement of previously reported amounts. See also Note 18 -
Restatement.

NOTE 9. LITIGATION LIABILITY

The Company is a defendant in a lawsuit, filed by a
prospective investor alleging breach of contract, which seeks damages totaling
$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 10. COMMITTMENTS

Leases

F -12

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The Company leases automobile and computer equipment as well as its main
premises. The aggregate minimum annual payments due under these leases are as
follows:

|Year | Amount     
|---- | -----------
|     |            
|2005 | $32,374    
|2006 | $32,374    
|2007 | $28,736    
|2008 | $28,406    
|2009 | $
    5,309

NOTE 11. COMMON STOCK

During July, 2004, the majority of the Company's stockholders, by written
consent, agreed to increase the authorized number of common shares to
250,000,000 from the existing authorization for 100,000,000.

The Company is hence authorized to issue 250,000,000 shares
of common stock. As of September 30, 2004, there remains issued and outstanding
52,304,642 shares of such common stock which has a stated par value of $0.0001
per share.

During the year, the Company issued 100,000 shares of common stock at a price
of $0.30 per share for consulting and legal services; $375,234 of convertible
promissory notes were converted into 3,752,340 shares of common stock at $0.10
per share; 1,313,542 shares were issued in lieu of cash commission for the
placement of promissory notes at a value of $131,354; 27,224,034 shares were
issued at $0.15 per share in connection with a private placement, and 2,994,644
shares were issued in lieu of cash commission at a value of $449,197 in
connection with the private placement of stock. Total proceeds from the private
placement, net of cash value of all commissions and other issuance expenses of
$90,304, was $3,412,750.

NOTE 12. INCOME TAXES

The tax effect of significant temporary differences representing deferred tax
assets is as follows:

|                                  |   | 2004      |   | 2003     
|--------------------------------- | - | --------- | - | ---------
|                                  |   |           |   |          
|Deferred tax
    assets:          |   |           |   |          
|Operating loss
    carry forwards | $ | 1,927,500 | $ | 1,455,175
|Valuation allowance               |   | 1,927,500 |   | 1,455,175
|                                  |   |           |   |          
|Net deferred tax assets           |   | 0         |   | 0        

These losses expire in varying amounts between 2010 and 2024.

NOTE 13. STOCK OPTION PLANS

The Company has a Stock Option Plan (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. Since the fiscal year of 2001, the option plan was terminated.

F -13

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Under this Plan, the option exercise price is US$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
    exercisable at September 30, 2003 and 2004 | 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 US$0.50 -US$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   
|Outstanding at
    February 10, 2003 (plan adoption) | 0         |         
|Granted during
    fiscal 2003                       | 645,000   | $0.63   
|Exercised                                            | 0         | $0.00   
|Cancelled during
    fiscal 2003                     | 75,000    | $0.63   
|Outstanding as of
    September 30, 2004             | 570,000   | $0.63   
|Options
    exercisable at September 30, 2004        | 406,667   | $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 following options were granted to consultants during the year ended
September 30, 2003:

|Date        | Quantity | Option | Expiry     | Fair     | Risk  | Expected | Expected   | Expected 
|----------- | -------- | ------ | ---------- | -------- | ----- | -------- | ---------- | ---------
|            |          | Price  |            | Value    | Free  | Life     | Volatility | Dividends
|            |          |        |            |          | Rate  |          |            |          
|February    | 405,000  | $0.63  | February   | $180,832 | 4.18% | 5 years  | 89%        | NIL      
|10, 2003    |          |        | 9, 2008    |          |       |          |            |          
|February    | 150,000  | $0.69  | February   | 7,798    | 4.18% | 5 years  | 89%        | NIL      
|10, 2003    |          |        | 9, 2008    |          |       |          |            |          
|May
    5,  | 20,000   | $0.55  | May
    4, | 65,639   | 3.72% | 5 years  | 103%       | NIL      
|2003        |          |        | 2008       |          |       |          |            |          
|May
    10, | 70,000   | $0.50  | May
    9, | 26,325   | 3.72% | 5 years  | 101%       | NIL      
|2003        |          |        | 2008       |          |       |          |            |          
|            | 645,000  |        |            | $280,594 |       |          |            |          

F -14

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Most of these options vest over a period of 3 years. The Company expensed the
entire fair value of the options in fiscal 2003, the year of grant.

The Company did not grant any stock options during fiscal 2004. There were no
stock options issued to employees as of September 30, 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. As
of September 30, 2004 no options under this plan had been formally allocated. No
further options will be granted under the previous two plans. See also
subsequent event note below.

NOTE 14. WARRANTS

The Company has the following warrants outstanding to purchase common stock
at September 30, 2004:

Warrants issued
      in conjunction with financing costs wherebyone warrant
      entitles the holder to purchase one share of commonstock at an
      exercise price of $1.10, expiring December 19, 2004.
      670,275Warrants issued
      in conjunction with financing costs wherebyone warrant
      entitles the holder to purchase one share of commonstock at an
      exercise price of $0.65 expiring June 17, 2006.
      75,524Warrants issued
      in return for financial advisory serviceswhereby one
      warrant entitles the holder to purchase one share ofcommon stock at
      an exercise price of $0.05, expiring September1, 2007. This
      warrant can only be exercised after January 29,2005.
      3,000,000Warrants issued
      in conjunction with financing costs wherebyone warrant
      entitles the holder to purchase one share of commonstock at an
      exercise price of $0.05, expiring January 1, 2005.
      250,000Warrants issued
      in conjunction with financing costs wherebyone warrant
      entitles the holder to purchase one share of commonstock at an
      exercise price of $0.15, expiring September 1,, 2007.
      2,994,642Warrants issued
      in conjunction with financing costs wherebyone warrant
      entitles the holder to purchase one share of commonstock at an
      exercise price of $0.30, expiring September 1, ,2007.
      2,287,669Warrants issued
      in conjunction with conversion of promissorynotes and in
      conjunction with the private placement completedduring July and
      September, 2004. One warrant entitles theholder to
      purchase one share of common stock at an exerciseprice of $0.30,
      expiring September 1, 2007.
      34,728,71244,006,822


F -15

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The Company also has an obligation to honor warrants which
result from conversion of certain remaining promissory notes. Upon conversion of
the remaining secured convertible promissory notes, the Company must issue
warrants whereby one warrant entitles the holder to purchase one share of common
stock at an exercise price of $0.30, expiring September 1, 2007. Should the
remaining convertible promissory notes be converted, the Company must issue
warrants to purchase 10,406,940 shares of common stock. See also subsequent
event note below. The remaining convertible promissory notes were converted
subsequent to year end.

NOTE 15. SEGMENTED INFORMATION

The Company, after reviewing its reporting systems, has determined that it
has one reportable segment and geographic segment. The Company's operations are
all related to the research, design, manufacture and sales of therapeutic
products. All revenue generated to date result from sales in Canada. All assets
of the business are located in Canada.

NOTE 16. RECLASSIFICATIONS

Certain amounts from prior year have been reclassified to conform with
current year's presentation.

NOTE 17. SUBSEQUENT EVENTS

On October 8, 2004 holders of $260,208 in convertible
promissory notes converted the notes into 2,602,083 shares of common stock plus
warrants to purchase 5,204,160 shares of common stock at an exercise price of
$0.30 per share. The warrants expire on September 1, 2007.

On October 28, 2004, holders of $260,139 in convertible
promissory notes converted the notes into 2,601,389 shares of common stock plus
warrants to purchase 5,202,780 shares of common stock at an exercise price of
$0.30 per share. The warrants expire September 1, 2007.

On October 29, 2004 all remaining unsecured promissory notes
totalling $145,554 were repaid by the Company. As a result of the above
mentioned conversions and repayments, all debt reflected on the balance sheet as
at September 30, 2004 has been extinguished.

On November 15, 2004 the Company issued 13,220,000 options to
purchase common stock to 14 individuals including management, directors and
consultants. Of these, 12,720,000 options were issued to management and
directors, are exercisable at $0.15 per share, and expire on November 15, 2014.
The remaining 500,000 options were issued to consultants, are exercisable
between $0.40 and $0.50 per share, and expire on November 15, 2014.

The Company recorded a stock-based compensation expense in
selling and administrative expenses in the amount of $54,673 during the six
month period ended March 31, 2005. This represents the entire fair value of
500,000 options granted to consultants mentioned above. The fair value of the
options was calculated using the Black-Sholes Option Pricing Method.

On February 8, 2005 the Company issued 390,000 options to
purchase common stock to 5 individuals including management and employees. These
options are excercisable at $0.15 per share and expire on February 8, 2015.

On a pro-forma basis, as per SFAS 123 and 148 an additional
stock-based compensation expense of $759,905 would have been recorded during the
six month period ending March 31, 2005, in regards to the 12,720,000 options
issued November 15, 2004 and 390,000 options issued February 8, 2005 to
employees

F -16

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of the Company. The fair value of the options was calculated using the Black-Sholes
Option Pricing Method.

On May 25, 2005 the Company issued 100,000 options to
purchase common stock to a consultant of the Company. These options are
exercisable at $0.13 per share, vest immediately, and expire on May 25, 2010.
The Company recorded a stock-based compensation expense in selling and
administrative expenses in the amount of $7,627 during the three-month period
ended June 30, 2005. This represents the entire fair value of the options
granted. The fair value of the options was calculated using the Black-Sholes
Option Pricing Method.

On February 1, 2005 the Company entered into a 12 month
agreement for the provision of financial advisory services. Compensation will be
in the form of 800,000 shares of common stock valued at $120,000 and to be
delivered after all services have been provided. The Company is accruing $10,000
monthly in regards to this agreement until $120,000 has been accrued.

Subsequent to year end the Company has entered into 3
operating leases for research equipment. The total minimum commitment regarding
these leases is $91,287 spread over 60 months commencing December 1, 2004 and
ending November 1, 2009.

During April, 2005, the Company, through its wholly-owned
subsidiary - AlphaRx International Holdings Limited ("AIH"), entered into a
Joint Venture Agreement with Basin Industrial Limited (a wholly-owned subsidiary
of Advance Pharmaceutical Co. Ltd.). The newly formed joint venture will be
named AlphaAP Inc.("AAP") and will be headquartered in Hong Kong. Basin will
provide debt financing to AAP of up to HK$1,250,000 quarterly for three years
which shall be repaid without interest as soon as AAP generates profits or upon
the completion of an initial public offering on a recognized stock exchange.
There is no firm target date for when, or even if, such a public offering will
be undertaken.

The Company will receive a royalty from AAP's gross sales.
The Company will also receive a one time licensing fee of USD $11,000,000 from
AAP, contingent upon completion of its initial public offering. To date, no
funding has been infused into the joint venture and no commercial activities
have commenced.

NOTE 18. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS

EITF 98-5 and EITF 00-27 requires recognition of a conversion
feature that is in-the-money at issuance as additional paid in capital, measured
by allocating a portion of the proceeds equal to the intrinsic value of that
feature including the value of the warrants, which was applicable in this
instance. The warrants were valued using Black -Scholes Pricing Method. The debt
discount on the beneficial conversion has been limited to the proceeds received
and has been amortized over the term of the convertible debt.

Previously reported results did not included recognition of a
conversion feature that is in-the-money at issuance as additional paid in
capital, measured by allocating a portion of the proceeds equal to the intrinsic
value of that feature. Restatement of previous periods is as follows:

|For the Period
    Ending:           | March 31, 2004 | June 30, 2004 | September 30, 2004
|------------------------------------ | -------------- | ------------- | ------------------
|                                     |                |               |                   
|Net Loss as
    previously reported: | $(671,368)     | $(1,175,529)  | $(1,772,840)      
|                                     |                |               |                   
|Interest expense
    per EITF 98-5   | (861,000)      | (1,161,000)   | (1,161,000)       
|and EITF 00-27:                      |                |               |                   
|                                     |                |               |                   
|Net Loss, as restated:               | $(1,532,368)   | $(2,336,529)  | $(2,933,840)      

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