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SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended: September 30, 2005 
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from __________ to __________

Commission File Number: 000-30813

AlphaRx, Inc.

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

(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, 2005
were $ 68,549.

The aggregate market value of the issuer's common stock (the
only class of voting stock), held by non-affiliates was approximately $4,025,568
based on the average closing bid and ask price for the common stock on December
20, 2005.

As of December 20, 2005 there were 57,508,112 shares outstanding of the
issuer's common stock.

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AlphaRx, Inc.

FORM 10-KSB

For the Year Ended September 30, 2005

INDEX

|PART I     |                                                                    |   
|---------- | ------------------------------------------------------------------ | --
|Item 1.    | Description of
    Business                                        | 3 
|Item 2.    | Description of
    Property                                        | 18
|Item 3.    | Legal Proceedings                                                  | 18
|Item 4.    | Submission of Matters
    to a Vote of Security Holders            | 18
|           |                                                                    |   
|PART II    |                                                                    |   
|Item 5.    | Market for Common
    Equity and Related Stockholder Matters       | 18
|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                                        | 24
|Item 8B    | Other Information                                                  | 25
|PART III   |                                                                    |   
|Item 9.    | Directors, Executive
    Officers, Promoters and Control Persons;  | 27
|           | Compliance with
    Section 16(a) of the Exchange Act.             |   
|Item 10.   | Executive Compensation                                             | 27
|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   |                                                                    | 35

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY BACKGROUND

In this annual report on Form 10-KSB, 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 and
development of innovative therapeutic products using advanced drug delivery
technologies, which we believe, can be combined with a broad range of
therapeutic products to improve their effectiveness.

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.

We have one product in Phase II clinical trial and several products in
different stages of preclinical development.

With only limited financial resources available to us, and with significant
competition in the over the counter arthritis and muscle pain relief category,
we have decided not to continue pursuing direct sales and marketing of Flexogan.
We will focus our resources on development of products and attempting to
establish local and international licensing and distribution arrangements and
joint ventures for our existing over the counter products. As we develop new
products additional offerings will become available.

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

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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.

We will recognize royalty revenues from distribution, licensing and joint
venture arrangements only when collection of funds becomes imminent.

In August 2003, we out licensed Indaflex, our lead
pharmaceutical product under development, 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 in Mexico for Indaflex and we
receive 15% royalties of the gross revenue from product sales. Furthermore,
Andromaco is responsible for funding and completing any clinical and regulatory
activities in support of Indaflex registration in Mexico. The Agreement has 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 June, 2005, Andromaco launched Indaflex into the
Mexican market. In accordance with our agreement we recognized $4,302 in royalty
revenues for the year ended September 30, 2005. We are also attempting to
establish other international licensing and distribution arrangements to
generate revenues from our existing and future proprietary pharmaceutical
products.

We established AlphaRx International Holdings Limited ("AIH") in June, 2005
in order to pursue sales activities in the Asia Pacific region with experienced
and established partners. AIH entered into a joint venture agreement with Basin
Industrial Limited (a Hong Kong based corporation  "Basin"), whereby AIH and
Basin will be equal holders of AlphaAP Inc., a company established in order to
manufacture and sell our existing and certain future products. AlphaRx, through
AIH, is to provide the products, manufacturing and distribution rights, whereas
Basin is to provide funding, manufacturing and marketing expertise.

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

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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).

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.

PRODUCTS AND PRODUCT PIPLELINE

The following is a list of our products and products in the product pipeline
as well as their current stage of development:

|Brand Name                         | Application            | Delivery | Stage                  
|---------------------------------- | ---------------------- | -------- | -----------------------
|                                   |                        | Route    |                        
|Pharmaceuticals                    |                        |          |                        
|2.5% Indaflex                      | Osteoarthritis         | Topical  | Phase II*              
|Rifamsolin                         | Tuberculosis           | Oral     | Preclinical underway **
|Vansolin                           | Sepsis                 | I.V.     | Preclinical underway** 
|Zysolin                            | Pneumonia              | I.V.     | Preclinical underway** 
|Ocusolin                           | Ocular Infection       | Topical  | Preclinical underway** 
|Acusolin                           | Cataracts              | Topical  | Preclinical underway** 
|Binoxan                            | Ocular Inflammation    | Topical  |                        
|Consumer Health (over-the-counter) |                        |         
|Flexogan                           | Analgesic              | Topical  | Market ready*          
|CoQ10ER                            | Nutritional Supplement | Oral     | Market ready*          

* 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 our only prescription drug at the clinical trial stage. As of
November, 2005 Phase II clinical trials have commenced. 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 drug delivery system, we believe its clinical effectiveness to be
significantly enhanced. Topical Indaflex delivery is intended to circumvent the
significant GI side-effects found with orally ingested NSAID's. We completed

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a Phase I human trial for Indaflex in Canada during March, 2005.

Rifamsolin 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 toxicological studies.

Vansolin is encapsulating Vancomycin, a broad spectrum antibiotic, in the
Company's nanoparticulate 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.

Zysolin is encapsulating Gentamicin, a broad spectrum antibiotic, in the
Company's nanoparticulate 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.

Ocusolin is a topical ophthalmic solution utilizing Gentamicin, in a
nanoparticulate formulation, that may be effective against a broad spectrum of
bacteria including strains resistant to more than one antibiotic. This early
stage drug candidate is currently going through in-vivo studies including
biodistribution study, evaluation of the efficacy in murine infection models and
toxicological studies.

Acusolin is a topical ophthalmic solution intended to treat senile cataracts.
This early stage drug candidate is currently going through in-vivo studies
including biodistribution study, evaluation of the efficacy in cataract animal
models and toxicological studies.

Binoxan is a topical, non-acidic, non-steroidal anti-inflammatory pro-drug in
a colloidal formulation intended for the treatment of ocular inflammation, eye
pain and photophobia. This early stage drug candidate is currently going through
in-vivo studies including biodistribution study, evaluation of the efficacy in
murine infection models and toxicological studies.

Flexogan is a series of topical arthritis and muscle pain relief creams.
Flexogan has a unique delivery formulation that 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.

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.

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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 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 us to reduce our cash requirements while developing a larger potential
product portfolio. By providing new formulations of existing products using the
BCD Systems, we believe 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

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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 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 this is expected to continue 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

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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 comprisingbioadhesive submicron emulsion for
improved delivery of antibacterial and anticaries agents" for the use of certain
oral care products which has never been developed. This patent was issued on
September 12, 2000 and will expire on June 17, 2019. We also have four United
States patent pending applications as follows: "Vehicle for topical delivery of
anti-inflammatory compounds" for the use of Indaflex to increase efficacy of non
steroidal anti-inflammatory drugs, "Colloidal solid lipid vehicle for
pharmaceutical application" for the use of Rifamsolin, Zysolin, Vansolin &
Ocusolin to treat Tuberculosis and other infectious diseases, "Topical
composition for acne treatment" and "Stabilization of benzoyl peroxide in
solution" for the use of NuProm to treat acne. We have also applied for patents
in Mexico, Japan and China under the title "Vehicle for topical delivery of
anti-inflammatory compounds" for the use of Indaflex to increase efficacy of non
steroidal anti-inflammatory drugs which are still pending.

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.

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

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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
Andromaco to manufacture our products on a when needed basis. There are no
outstanding manufacturing orders or any conditional obligations outstanding to
any of these parties.

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.

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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.

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

11

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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.

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

12

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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.

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 - 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

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

Although we currently maintain product liability insurance of approximately
$5,000,000 through third party insurers that provides coverage for product
liability claims, there can be no assurance that:

- 

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. Renewal of
this insurance is unlikely as the cost is prohibitive for the amount of coverage
obtained.

EMPLOYEES

We have six 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

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, 2005, we had an accumulated deficit of approximately $ 12,011,944.
Our gross revenues for the years ended September 30, 2005 and September 30, 2004
were $ 68,549 and $383,834 respectively. Our revenues have not been sufficient
to sustain our operations. Revenue for 2005 and 2004 consisted primarily of
revenue from sales of Flexogan in Canada. In order to achieve profitability our
revenue streams will have to increase and there is no assurance that revenues
can increase to such a level. We may 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:

14

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- 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;
- 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;
- our ability to sell and market our products; and
- other factors beyond our control.

At September 30, 2005, we had a working capital deficiency of approximately
$75,925 as compared to positive working capital of $2,183,913 as at September
30, 2004. The independent auditors' report for the year ended September 30, 2005
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.

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 us. 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.

15

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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 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
CAD$3,000,000 in product liability insurance coverage and CAD$3,000,000 in
umbrella coverage including product liability. 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.

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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 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 16.55% 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. The Company can no
longer be controlled by any single shareholder or the management group as a

17

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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, 2005 no matters were submitted to a
vote of security holders.

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, 2005) | 0.13   | 0.07 
|Third Quarter  | (Ended June 30, 2005)      | 0.14   | 0.09 
|Second Quarter | (Ended March 31, 2005)     | 0.16   | 0.12 
|First Quarter  | (Ended December 31, 2004)  | 0.37   | 0.09 
|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 

18

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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, 2005,
there were approximately 90 record holders of our common stock. As of December
20, 2005 there were approximately 93 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.

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    | Weighted-Average   | Number of securities remaining        
|------------ | ----------------------- | ------------------ | --------------------------------------
|             | to be issued upon       | Exercise Price of  | available for future issuance         
|             | exercise of outstanding | outstanding        | under equity compensation plans       
|             | options, warrants, and  | options, warrants, | (excluding securities reflected
    in
|             | rights                  | and rights         | the first two columns)                
|             |                         |                    |                                       
|Equity       | 25,720,000              | $0.16              | None                                  
|Compensation |                         |                    |                                       
|Plans        |                         |                    |                                       
|Approved by  |                         |                    |                                       
|Security     |                         |                    |                                       
|Holders      |                         |                    |                                       
|             |                         |                    |                                       
|Equity       | None                    | None               | None                                  
|Compensation |                         |                    |                                       
|Plans Not    |                         |                    |                                       
|Approved by  |                         |                    |                                       
|Security     |                         |                    |                                       
|Holders      |                         |                    |                                       
|             |                         |                    |                                       
|             |                         |                    |                                       
|Total        | 25,720,000              | $0.16              | None                                  

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Under the new 2004 Stock Option Plan approved by our
stockholders in July, 2004, 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 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.

On October 17, 2005 we issued options to purchase up to
3,290,000 shares of common stock to employees of the Company including directors
and one external consultant. These options have an exercise price of $0.075,
vest 100% on October 17, 2006 and expire on October 17, 2015. There are no
options remaining to be granted under the 2004 Option Plan.

RECENT SALES OF UNREGISTERED SECURITIES

We did not issue any unregistered securities during the year ended September
30, 2005.

During the three months ended December 31, 2004 we issued 5,203,470 shares of
common stock pursuant to the conversion of $520,437 in convertible debt. We also
issued warrants to purchase 10,406,940 shares of common stock at $0.30 per share
in connection with the conversion of debt. These securities were registered
pursuant to an SB-2 filed in September, 2004 and related amendments filed
periodically until August, 2005.

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.

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.

20

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During 2003 we initiated commercialization of our products commencing with
sales of Flexogan in the Canadian market. It became evident during 2005 that we
required more substantial financial resources to pursue Flexogan marketing
strategy. We determined that completion of Phase II clinical trials was the best
course of action with the resources remaining. Should we be successful in
raising additional funding we will continue to pursue completion of Phase II
trials as our primary objective.
We signed a licensing agreement with Andromaco in August 2003
for the commercialization of our lead pharmaceutical products "Indaflex" in
Mexico. Mexican health authorities gave approval to Andromaco to start sales of
Indaflex in Mexico. We collected our first royalties from Indaflex sales in the
year ended September 30, 2005.
We established a wholly-owned subsidiary  AlphaRx
International Holdings Limited in April, 2005 and entered into a Joint Venture
Agreement with Basin Industrial Limited (a wholly-owned subsidiary of Advance
Pharmaceutical Co. Ltd.). The joint venture  AlphaAP Inc., will be involved in
the manufacture and marketing of certain existing and future products in the far
east. AlphaAP remains inactive until local health authorities in Hong Kong and
China grant approval to commence over the counter sales of certain products.
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, Phase II underway as of November, 2005), and several pharmaceutical drugs
in the preclinical stage.
The costs incurred for each of these initiatives to date
cannot be readily determined because (i) there is no clear distinction between
initiatives in order to be able to differentiate between them; (ii) all
initiatives have a common goal and that is to adopt our Bioadhesive Colloidal
Dispersion drug delivery system to the specific drug in order to improve that
drug's effectiveness; and (iii) we do not maintain a time control system to
differentiate research and development activities.
The nature, timing and estimated costs to complete a project
and anticipated completion dates cannot be estimated because: (i) the nature of
research is experimental and we could encounter unforeseen situations which
could significantly delay project completion or require us to abandon the
project; (ii) timing to complete a project depends, to a certain extent, on
financial resources and we cannot predict with any degree of certainty that
financial resources will be available when needed to complete any specific
project and (iii) cost estimates cannot be predicted with any acceptable degree
of accuracy due to unforeseen issues arising during the clinical stages or the
approval stages of any specific initiative.
If we cannot complete our research and development
initiatives on a timely basis consequences to our operations could be
significant to the point where the initiative would be delayed or even
abandoned. We would also face the risk of competitors developing the same or
similar products and being first to market. Finally, our failure to develop
products on a timely basis could substantially impair our ability to generate
revenues and materially harm our financial position.
We cannot predict the timing of material net cash inflows
from significant projects due to a number of factors including (i) availability
of financial resources required to market a new product, (ii) our lack of
experience in bringing a new product to market successfully and gaining market
share; (iii) competitors' products and the nature and timing of their marketing
initiatives.
We intend to continue investing in the further development of our drug
delivery technologies and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating our
drug delivery systems. Depending upon a variety of factors, including
collaborative
21arrangements, 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, 2005 as compared to year ended September 30, 2004 as
restated
Gross Revenue and Gross Margin

Gross revenues for the year ended September 30, 2005 decreased to $68,549
from $383,824 generated a year ago, a decrease of $315,275 or 82%. Based on the
funds available to us we determined not to continue with aggressive and costly
marketing programs related to direct sales of Flexogan, and focus our financial
resources on completing Phase I and initiating Phase II for Indaflex clinical
trials. Introduction of new products from major drug companies also increased
competition in the pain relief category. We will continue to utilize existing
distribution partners and seek out new distribution partners for Flexogan and
other products in order to generate royalty revenues, and will not for the
foreseeable future, pursue direct sales via marketing and advertising programs.
We generated $4,302 in royalty revenues for the year ended September 30, 2005
with no comparable royalty revenues in the prior year.
Gross margin for the year ended September 30, 2005 was $39,441 or about 58%
of sales versus $230,501 or about 60% of sales for the prior year. Excluding
royalty revenue of $4,302 our gross margin on direct sales was $35,139 or about
55%. We reduced our pricing in late fiscal 2004 to remain competitive, and the
full year of reduced pricing as compared to 2004 was the major cause of reduced
gross margin.
General and Administrative Expenses

General and administrative expenses were $851,310 for the year ended
September 30, 2005 as compared to $597,313 for the prior year, an increase of
$253,997 or about 43%. Legal fees related primarily to patent applications
increased to about $162,000 from about $74,000 in the prior year and increase of
about $88,000. Stock based compensation expense related to granting of options
to consultants was $62,300 with no comparable expense in the prior year. We also
entered into a financial services advisory agreement during 2005, incurring an
expense of $80,000 with no comparable expense in the prior year. Finally,
investor relations expenses increased to about $47,700 from $20,025 incurred in
the prior year, an increase of about $27,675.
Stock Based Compensation Expense

We decided to adopt the fair value accounting method for
employee stock options as per SFAS 123(R) using the modified retrospective
application method, effective April 1, 2005. Resultingly, we recorded $2,009,920
in stock based compensation expense related to employee options granted during
the year. There was no comparable expense in the prior year.
Research and Development Expense

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, 2005
totalled $1,337,503 as compared to $ 360,467 incurred for the same period a year
ago, an increase of $977,036 or approximately 271%. We completed Phase 1
clinical trials and initiated Phase II clinical trials for Indaflex during the
22
year ended September 30, 2005. We incurred about $1,170,000 for Indaflex
trials for the year ending September 30, 2005 inclusive of test batch
manufacture, salaries, benefits, consulting expense, and equipment leasing as
compared to about $192,000 incurred for the prior year  an increase of about
$978,000. Additional development expenditures will consume most of our financial
resources until the trials have been completed.
Sales and Marketing Expense

Sales and marketing expenses were $661,559 for the year ended
September 30, 2005 as compared to $786,243 incurred for the same period a year
ago, a decrease of $124,684 or about 16%. With limited funding available, and
increased competition from new products, we curtailed marketing expenditures
during our fourth quarter and focused our remaining resources on Indaflex
clinical trials.
Depreciation

Depreciation was $54,077 for the year ended September 30,
2005 as compared to $36,447 for the same period a year ago, an increase of
$17,630 or about 48%. Additional research equipment purchases of about $103,000
during the latter half of fiscal 2004 and about $45,000 during 2005 have served
to increase depreciation expense during 2005.
Interest income/expense

We generated interest income of $22,804 for the year ended
September 30, 2005 as compared to net interest expense incurred of $1,154,000
for the same period a year ago. Included in net interest expense for 2004 is
$1,161,000 in interest charges related to the issuance of convertible debt with
a beneficial conversion feature in March, 2004. The Company generated interest
income from term deposits as a result of a private placement completed in
September, 2004 in the amount of $3,410,027, net of issuance expenses.
Net Loss

The above income and expenses resulted in a net loss of $4,852,124 for the
year ended September 30, 2005 as compared to a net loss, as restated, of $
2,933,840 for the same period a year ago.
Liquidity And Capital Resources

As of September 30, 2005 the Company had a working capital
deficiency of $75,925 as compared to positive working capital or $2,183,913 at
September 30, 2004. We are actively seeking additional capital to continue Phase
II clinical trials and maintain operations.
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 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:
231. 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 FOR 2005 AND AS RESTATED FOR 2004

The financial statements for the fiscal year ending September 30, 2005 and,
as restated for the fiscal year ending September 30, 2004, required by Item 7
are set forth on pages F-1 through F-18.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable
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
24
Based on their evaluation as of September 30, 2005, 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
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.
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 20, 2005, the name, age, and
position of each of our executive officers and directors:

|Name                         | Age | Position                               | Term           
|---------------------------- | --- | -------------------------------------- | ---------------
|                             |     |                                        |                
|Michael M. Lee               | 42  | Chairman of the Board of
    Directors
|                             |     | Chief Executive Officer                | Since 8/8/1997 
|                             |     |                                        |                
|Marcel Urbanc, C.A.          | 49  | Chief Financial Officer and            |                
|                             |     | Principal Accounting Officer           |                
|                             |     |                                        |                
|Joseph Schwarz, Ph.D         | 51  | Chief Scientist                        |                
|                             |     |                                        |                
|Michael Weisspapir, MD, Ph.D | 49  | Chief Medical Officer                  |                
|                             |     |                                        |                
|Sandro Persia                | 35  | Secretary/Treasurer                    |                
|                             |     |                                        |                
|Dr. David Milroy             | 54  | Director                               | Since 4/15/2003
|                             |     |                                        |                
|Dr. Ford Moore               | 54  | 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.

25

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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 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.

26

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Board of Directors Committees

We were not able to attract an independent director with financial experience
to sit on our board or our audit committee. The two independent board members
who sat on the audit committee had no financial experience. It was determined
that the audit committee be disbanded until appropriate qualified independent
directors can be located. Based on the size of the organization  six full time
employees, and 3 part time consultants, effective financial controls can still
be maintained without an audit committee.

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, 2005, 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, 2005, 2004 and 2003
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        | 2005 | 45,510     | 0         | 13,000,000  
|President & C.E.O.(1) | 2004 | 29,531     | 0         | --          
|                      | 2003 | 83,652     | 0         | 150,000     
|Joseph Schwarz        | 2005 | 125,267    | 0         | 3,000,000   
|Chief Scientist (1)   | 2004 | 22,731     | 0         | --          
|                      | 2003 | 56,992     | 0         | 80,000      

27

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|Michael Weisspapir              | 2005 | 114,534 | 0 | 3,000,000
|------------------------------- | ---- | ------- | - | ---------
|Chief
    Medical Scientist (1) | 2004 | 59,100  | 0 | --       
|                                | 2003 | 46,992  | 0 | 80,000   
|Marcel Urbanc                   | 2005 | 52,664  | 0 | 270,000  
|Chief
    Financial Officer     | 2004 | 36,218  | 0 | --       
|                                | 2003 | 13,000  | 0 | 80,000   

1. The above officers accepted 392,500 restricted shares in lieu of their
salary between 10/1/2002 and 3/31/2003.

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, 2005 by the named
executive officers. Value of unexercised options is considered to be the
difference between exercise price and market price of $0.09 per share on
September 30, 2005. No options were exercised by the named executive officers
during fiscal 2005.

|Name               | Number of Exercisable Options
    at | Value of Unexercised
    In-The-Money
|------------------ | ------------------------------------ | -------------------------------------
|                   | Fiscal Year-End (#)                  | Options at Fiscal Year-End
    (#)   
|                   | Exercisable/Unexercisable            | Exercisable/Unexercisable            
|                   |                                      |                                      
|Michael M. Lee     | 6,550,000/7,000,000                  | $0/$0                                
|Marcel Urbanc      | 100,000/250,000                      | $0/$0                                
|Joseph Schwarz     | 330,000/3,000,000                    | $0/$0                                
|Michael Weisspapir | 280,000/3,000,000                    | $0/$0                                

On October 17, 2005 the following options were granted to the above named
executive officers: M. Lee  800,000; M Urbanc  200,000; J. Schwarz  200,000
and M. Weisspapir  200,000. These options are not included in the table above
as they were granted subsequent to our fiscal year end.

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

28

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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 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. On October 17, 2005 the Company granted 3,290,000
options to employees and directors of the Company as well as to one external
consultant. There are no options remaining to be granted under the 2004 Plan.

Equity Compensation Plan Information

|                 | Number of Securities | Weighted-         | Number of securities  
|---------------- | -------------------- | ----------------- | ----------------------
|                 | to be issued upon    | Average           | remaining available   
|                 | exercise of          | Exercise Price of | for future issuance   
|                 | outstanding options, | outstanding       | under equity          
|                 | warrants, and rights | options,          | compensation plans    
|                 |                      | warrants, and     | (excluding securities 
|                 |                      | rights            | reflected in the first
|                 |                      |                   | two columns           
|                 |                      |                   |                       
|Equity           | 25,720,000           | $0.16             | None                  
|Compensation     |                      |                   |                       
|Plans Approved   |                      |                   |                       
|by Security      |                      |                   |                       
|Holders          |                      |                   |                       
|                 |                      |                   |                       
|Equity           | None                 | None              | None                  
|Compensation     |                      |                   |                       
|Plans Not        |                      |                   |                       
|Approved by      |                      |                   |                       
|Security Holders |                      |                   |                       
|                 |                      |                   |                       
|Total            | 25,720,000           | $0.16             | None                  

29

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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%     
|Ford Moore(3)              | 492,579 shares       | 0.86%     
|Michael Weisspapir(2)      | 457,500 shares       | 0.80%     
|David Milroy(3)            | 350,000 shares       | 0.60%     
|Marcel Urbanc(2)           | 20,000 shares        | 0.03%     
|Sandro Persia(2)           | 16,000 shares        | 0.03%     
|All directors and officers | 9,519,305 shares     | 16.55%    
|as a group (7 persons)     |                      |           

(1)

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
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,
which is incorporated herein by reference.

(b) On December 16, 2004 we reported the issuance of a press release
regarding the manufacture of test batches for our Indaflex clinical trials.

On May 13, 2005 we informed the SEC of the necessity to
restate certain prior periods based on the beneficial conversion feature related
to the issuance of senior convertible debt during the period February to April,
2004.

30

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On May 16, 2005 we filed an amended 8K regarding the original 8K filed May
13, 2005.

On May 18, 2005 we filed an 8K regarding the entry into a
material definitive agreement between AlphaRx International Holdings Limited ("AIH"),
a wholly owned subsidiary, and Basin Industrial Ltd., an independent, wholly
owned subsidiary of Advanced Pharmaceutical Ltd..

On June 3, 2005 we filed an 8K regarding a press release issued on June 2,
2005 commenting on Indaflex Phase 1 clinical trial results.

On June 6, 2005 we filed an 8K regarding a Joint Venture
established between AIH and Basin Industrial Ltd. AlphaAP Inc., the Joint
Venture to be established, will be used to market certain products in the Asia
Pacific Region.

On June 17, 2005 we filed an 8K regarding the official launch
of Indaflex in Mexico. Indaflex must complete further clinical trials in Canada
and the United States to be able to market Indaflex in those countries.

On June 28, 2005 we filed an 8K reporting that the test batches for our
Indaflex clinical trials were completed.

On June 29, 2005 we filed an 8K describing in more detail,
the Joint Venture agreement between AIH (our wholly owned subsidiary) and Basin
Industrial Ltd. (a wholly owned subsidiary of Advanced Pharmaceutical Ltd.).
Both parties will own 50% of AlphaAP Inc., a company to be established.

On July 13, 2005 we released an 8K indicating that Health Canada provided
approval for Phase 2 human trials with Indaflex.

On July 14, 2005 we filed an 8K regarding board approval to allow AlphaAP
Inc. (50% owned Joint Venture) to buy up to 10% of our outstanding common stock
in the open market.

On July 18, 2005 we filed an 8K regarding a press release, providing an
update on our antibiotic development program.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees : For the year ended September 30, 2005 we
incurred approximately $22,073 in external audit fees, and quarterly reviews in
connection with statutory and regulatory filings to our principal accountants as
compared to approximately $20,650 for the year ended September 30, 2004.

Audit-Related Fees: For the year ended September 30, 2005
we incurred no fees for assurance and related services by the principal
accountant. Similarly we incurred no fees for the year ended September 30, 2004.

Tax Fees: For the year ended September 30, 2005 we incurred approximately
$3,230 in tax related fees to our principal accountant as compared to
approximately $2,993 for the year ended September 30, 2004.

All Other Fees: For the year ended September 30, 2005 and 2004 we paid no
other fees to our principal accountant.

31

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Audit Committee's Pre-Approval Policies and Procedures: 
The Company currently does not have a designated Audit Committee, and
accordingly, the Company's Board of Directors policy is to pre-approve all audit
and permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. The independent auditors and management are required to
periodically report to the Company's Board of Directors regarding the extent of
the services to be provided. Pre-approval is generally provided prior to the
service commencing.

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: December 29, 2005

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


32

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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: December 29, 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 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: December 29, 2005

/s/ Michael Lee

Michael 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 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: December 29, 2005

/s/ Marcel Urbanc

Marcel 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 for the
period ending September 30, 2005 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 report fully complies with the requirements of Section 13(a)
>   of the Exchange Act; and
>   2. The information contained in this 10-KSB 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 
December 29, 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 for the
period ending September 30, 2005 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 report fully complies with the requirements of Section 13(a)
  of the Exchange Act; and
  2. The information contained in this 10-KSB 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 
December 29, 200538

---

ALPHARx, INC.

CONSOLIDATED FINANCIAL STATEMENTS AND AUDIT REPORT
SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004, AS RESTATED
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR 2005, AND AS PAGE(S)
RESTATED FOR 2004

|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM                            | F-2   
|-------------------------------------------------------------------------------------- | ------
|                                                                                       |       
|CONSOLIDATED BALANCE SHEETS FOR 2005, AND AS
    RESTATED FOR 2004                     | F-3   
|                                                                                       |       
|CONSOLIDATED STATEMENTS OF OPERATIONS FOR
    2005, AND AS RESTATED FOR 2004           | F-4   
|                                                                                       |       
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
    EQUITY FOR 2005, AND AS RESTATED FOR 2004 | F-5   
|                                                                                       |       
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
    2005, AND AS RESTATED FOR 2004           | F-6   
|                                                                                       |       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                             | F-7-17

F - 1

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets
of AlphaRx, Inc. (incorporated in the State of Delaware) as at September 30,
2005 and 2004 and the related consolidated statements of operations, cash flows
and stockholders' equity for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of AlphaRx, Inc. as at September 30, 2005 and 2004 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 consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the 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 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.

|                             | "SCHWARTZ LEVITSKY FELDMAN LLP"
|---------------------------- | -------------------------------
|                             |                                
|Toronto, Ontario,
    Canada |                                
|December 9, 2005             | Chartered Accountants          

F - 2

---



ALPHARx, INC.

CONSOLIDATED BALANCE SHEETS

AS AT SEPTEMBER 30, 2005 AND 2004, AS RESTATED
(Note 18)

|                                                               |   | 2005         |   | 2004       
|-------------------------------------------------------------- | - | ------------ | - | -----------
|CURRENT ASSETS                                                 |   |              |   |            
|                                                               |   |              |   |            
|Cash and Cash Equivalents                                      | $ | 193,458      | $ | 2,856,042  
|Accounts Receivable, net (note
    3)                          |   | 41,883       |   | 49,930     
|Prepaid Expenses                                               |   | 17,043       |   | 67,640     
|Inventory (note 4)                                             |   | 81,166       |   | 180,272    
|                                                               |   |              |   |            
|TOTAL CURRENT
    ASSETS                                       |   | 333,550      |   | 3,153,884  
|                                                               |   |              |   |            
|                                                               |   |              |   |            
|PROPERTY, PLANT & EQUIPMENT, net (note 5)                      |   | 232,975      |   | 241,533    
|OTHER ASSETS                                                   |   |              |   |            
|Licensing Right (note 6)                                       |   | 1            |   | 1          
|                                                               |   |              |   |            
|TOTAL ASSETS                                                   |   | 556,526      |   | 3,395,418  
|                                                               |   |              |   |            
|CURRENT LIABILITIES                                            |   |              |   |            
|Accounts Payable and Accrued
    Liabilities (note 7)          |   | 384,475      |   | 279,071    
|Notes Payable (note 8 and 18)                                  |   | -            |   | 665,900    
|Litigation Liabilities (note 9)                                |   | 25,000       |   | 25,000     
|TOTAL CURRENT
    LIABILITIES                                  |   | 409,475      |   | 969,971    
|                                                               |   |              |   |            
|CONTINGENCIES & COMMITMENTS (note 9 and 10)                    |   |              |   |            
|                                                               |   |              |   |            
|SHAREHOLDERS' EQUITY                                           |   |              |   |            
|Common Stock: $ 0.0001 par value,                              |   |              |   |            
|Authorized: 250,000,000 shares 2005 and 2004;
    Issued       |   |              |   |            
|and outstanding: 57,508,112; (2004 
    52,304,642) (note 11) |   | 5,752        |   | 5,232      
|Additional paid-in capital                                     |   | 12,163,243   |   | 9,580,035  
|Deficit                                                        |   | (12,011,944) |   | (7,159,820)
|                                                               |   |              |   |            
|TOTAL SHAREHOLDERS' EQUITY                                     |   | 157,051      |   | 2,425,447  
|                                                               |   |              |   |            
|TOTAL LIABILITIES AND SHAREHOLDERS'                            |   | $ 556,526    | $ | 3,395,418  
|EQUITY                                                         |   |              |   |            

F - 3

---



ALPHARx, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND
2004, AS RESTATED

|                                            | 2005          |  | 2004         
|------------------------------------------- | ------------- |  | -------------
|                                            |               |  |              
|SALES                                       | $ 68,549      |  | $ 383,824    
|                                            |               |  |              
|COST OF SALES                               | 29,108        |  | 153,323      
|                                            |               |  |              
|GROSS MARGIN                                | 39,441        |  | 230,501      
|                                            |               |  |              
|                                            |               |  |              
|GENERAL AND ADMINISTRATIVE EXPENSE          | 851,310       |  | 597,313      
|STOCK BASED COMPENSATION EXPENSE            | 2,009,920     |  | -            
|RESEARCH AND DEVELOPMENT EXPENSE            | 1,337,503     |  | 360,467      
|SALES AND MARKETING EXPENSE                 | 661,559       |  | 786,243      
|DEPRECIATION                                | 54,077        |  | 36,447       
|LOSS FROM OPERATIONS                        | (4,874,928)   |  | (1,549,970)  
|                                            |               |  |              
|OTHER INCOME AND EXPENSES                   |               |  |              
|                                            |               |  |              
|Interest income/(expense), net              | 22,804        |  | (1,153,871)  
|Write down of Licensing Rights
    (note 6) | -             |  | (229,999)    
|                                            | 22,804        |  | (1,383,870)  
|                                            |               |  |              
|LOSS BEFORE INCOME TAXES                    | (4,852,124)   |  | (2,933,840)  
|                                            |               |  |              
|INCOME TAX (note 12)                        | --            |  | --           
|                                            |               |  |              
|NET LOSS                                    | $ (4,852,124) |  | $ (2,933,840)
|                                            |               |  |              
|NET LOSS PER COMMON SHARE, BASIC &          |               |  |              
|DILUTED                                     | (0.08)        |  | (0.13)       
|                                            |               |  |              
|WEIGHTED AVERAGE NUMBER OF COMMON           |               |  |              
|SHARES OUTSTANDING                          | 57,251,521    |  | 22,741,117   

F - 4

---



ALPHARx, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004, AS RESTATED

|                        | Common Stock | Additional |             | Total         
|----------------------- | ------------ | ---------- | ----------- | --------------
|                        | Number of    |            | Paid-in     |               
|                        | Shares       | Amount     | Capital     | (Deficit)     
|                        |              |            |             |               
|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) | (2,933,840)   
|                        |              |            |             |               
|Balance, as of          |              |            |             |               
|September 30,           |              |            |             |               
|2004                    | 52,304,642   | $5,232     | $9,580,035  | $(7,159,820)  
|                        |              |            |             |               
|Conversion of           |              |            |             |               
|Promissory Notes        | 5,203,470    | 520        | 510,988     |               
|                        |              |            |             |               
|Issuance of             |              |            |             |               
|Stock Options           |              |            |             |               
|for consulting services |              | 62,300     |             | 62,300        
|                        |              |            |             |               
|Stock Based             |              |            |             |               
|compensation expense    |              | 2,009,920  |             | 2,009,920     
|                        |              |            |             |               
|Net Loss for            |              |            |             |               
|the year                |              |            | (4,852,124) |               
|                        |              |            |             |               
|Balance, as of          |              |            |             |               
|September 30,           |              |            |             |               
|2005                    | 57,508,112   | $5,752     | $12,163,243 | $ (12,011,944)

F - 5

---



ALPHARx, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004, AS RESTATED

|                                                                    |             | 2005        |           | 2004       
|------------------------------------------------------------------- | ----------- | ----------- | --------- | -----------
|                                                                    |             |             |           |            
|CASH FLOWS FROM OPERATING ACTIVITIES                                |             |             |           |            
|Net Loss                                                            | $           | (4,852,124) | $         | (2,933,840)
|Adjustments to reconcile net
    loss to net cash used in operating |             |             |           |            
|activities:                                                         |             |             |           |            
|Depreciation and amortization                                       |             | 54,077      |           | 36,447     
|Write down of licensing rights                                      |             | -           |           | 229,999    
|Shares Issued For Services
    Rendered                             |             | -           |           | 610,552    
|Stock based compensation expense                                    |             | 2,009,920   |           | -          
|Options Issued For Services
    Rendered                            |             | 62,300      |           | -          
|Interest expense on convertible
    debt                            |             | -           |           | 1,161,000  
|Changes in
    assets and liabilities:                              |             |             |           |            
|(Increase)/Decrease in Inventory                                    |             | 99,106      |           | (38,367)   
|(Increase)/Decrease in Accounts Receivable                          |             | 8,047       |           | (22,268)   
|(Increase)/Decrease in Prepaid Expenses                             |             | 50,597      |           | (63,950)   
|Increase in
    Accounts Payable and Accrued Liabilities            |             | 105,404     |           | 24,347     
|                                                                    |             |             |           |            
|NET CASH USED IN OPERATING ACTIVITIES                               |             | (2,462,673) |           | (996,080)  
|                                                                    |             |             |           |            
|CASH FLOWS FROM INVESTING ACTIVITIES                                |             |             |           |            
|                                                                    |             |             |           |            
|Purchase of Machinery &
    Equipment                               |             | (45,519)    |           | (151,445)  
|                                                                    |             |             |           |            
|NET CASH USED IN INVESTING ACTIVITIES                               |             | (45,519)    |           | (151,445)  
|                                                                    |             |             |           |            
|CASH FLOWS FROM FINANCING ACTIVITIES                                |             |             |           |            
|Issuance
    (repayment) of Notes Payable, net (note 8)             |             | (154,392)   |           | 191,063    
|Proceeds from
    Issuance of Common Stock (net)                    |             | -           |           | 3,787,984  
|                                                                    |             |             |           |            
|NET CASH PROVIDED BY (USED IN) FINANCING
    ACTIVITIES             |             | (154,392)   |           | 3,979,047  
|                                                                    |             |             |           |            
|NET INCREASE/(DECREASE) IN CASH                                     | (2,662,584) |             | 2,831,522
|                                                                    |             |             |           |            
|CASH, and cash equivalents, beginning of year                       |             | 2,856,042   |           | 24,520     
|                                                                    |             |             |           |            
|CASH, and cash equivalents, end of year                             | $           | 193,458     | $         | 2,856,042  
|SUPPLEMENTARY DISCLOSURE:                                           |             |             |           |            
|The statement of cash flows has been prepared
    using indirect    |             |             |           |            
|method as defined under Statement of
    Financial Accounting       |             |             |           |            
|Standard of No. 95.                                                 |             |             |           |            
|Income Tax Paid                                                     | $           | 0           | $         | 0          
|Interest Paid                                                       | $           | 0           | $         | 154,674    

F - 6

---



ALPHARX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND 2004, AS RESTATED

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.

Effective April 22, 2005 AlphaRx International Holdings Limited (a British
Virgin Island company and a wholly-owned subsidiary of AlphaRx Inc.) entered
into a Joint Venture agreement with Basin Industrial Limited (a British Virgin
Islands Company and a wholly-owned subsidiary of Advance Pharmaceutical Co.
Ltd.). The Joint Venture, AlphaAP Inc., will be involved in manufacturing and
marketing of certain of the Company's existing products and certain future
products in the far east. Alpha AP Inc. remains inactive as of September 30,
2005 and will commence activities once local health authorities grant approval
to commence over the counter sales of certain products.

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

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

NOTE 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 accounts receivable, accounts payable,
accrued liabilities, litigation liabilities and notes payable approximates their
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.

Property Plant and Equipment

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

F - 8

---



Furniture and
      Fixtures
      7 yearsMachinery and
      Equipment
      3 - 7 yearsLeasehold
      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.

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

F - 9

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customers during the year ended September 30, 2005, similar to 2004. The
majority of the Company's customers are blue chip, publicly traded companies.

Stock Based Compensation

The Company has adopted the fair value accounting for employee stock options
as per SFAS 123(R) using the modified retrospective application method,
effective April 1, 2005. The fair value of the stock options are amortized into
income over the vesting period of the options.

Recent Pronouncements

SFAS No. 151 - "Inventory Costs, an Amendment of ARB No. 43,
Chapter 4." SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4,
"Inventory Pricing," that inventories are presumed to be stated at cost;
however, it amends ARB No. 43 to clarify that abnormal amounts of idle
facilities, freight, handling costs and spoilage should be recognized as current
period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated
to inventories based on normal production capacity. The guidance in SAFS No. 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005.

SFAS 123 (Revised) - "Share Based Payment," which will
require the Company to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the awardthe requisite
service period. No compensation cost is recognized for equity instruments for
which employees do not render the requisite service. The grant-date fair value
of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25.
SFAS No. 123 (Revised) is effective for the first interim or annual reporting
period that begins after December 15, 2005. Early adoption for interim or annual
periods for which financial statements or interim reports have not been issued
is encouraged.

SFAS 152 - In December 2004, the FASB issued SFAS No. 152 "Accounting for
Real Estate TimeSharing Transactions - an amendment of FASB Statements No. 66
and 67" ("SFAS 152"). This statement amends FASB Statement No. 66 "Accounting
for Sales of Real Estate" to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position 04-2 "Accounting for Real Estate Time-Sharing
Transactions" ("SOP 04-2"). SFAS 152 also amends FASB Statement No. 67
"Accounting for Costs and Initial Rental Operations of Real Estate Projects" to
state that the guidance for incidental operations and costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions,
with the accounting for those operations and costs being subject to the guidance
in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning
after June 15, 2005.

SFAS 153 - In December 2004, the FASB issued SFAS No. 153
"Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" ("SFAS
153"). SFAS 153 replaces the exception from fair value measurement in APB
Opinion No. 29 for non-monetary exchanges of similar productive assets with a
general exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for all
interim periods beginning after June 15, 2005.

SFAS 154- In May 2005, the FASB issued SFAS 154 "Accounting
Changes and Error Corrections". The statement replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 requires companies to apply voluntary changes in

F -10

---



accounting principles retrospectively whenever practicable. SFAS 154 is
effective for accounting changes and correction of errors made in fiscal years
beginning after December 15, 2005.

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

|                                      |   | 2005   |   | 2004  
|------------------------------------- | - | ------ | - | ------
|                                      |   |        |   |       
|Accounts receivable                   | $ | 44,794 | $ | 51,576
|Less: Allowance for doubtful accounts |   | 2,911  |   | 1,646 
|                                      |   |        |   |       
|                                      | $ | 41,883 | $ | 49,930

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:

|                                            |   | 2005    |   | 2004   
|------------------------------------------- | - | ------- | - | -------
|                                            |   |         |   |        
|Raw materials                               | $ | -       | $ | 59,844 
|Finished goods                              |   | 81,166  |   | 120,428
|                                            |   |         |   |        
|                                            | $ | 81,166  | $ | 180,272
|                                            |   |         |   |        
|NOTE 5. PROPERTY,
    PLANT & EQUIPMENT     |   |         |   |        
|                                            |   | 2005    |   | 2004   
|                                            |   |         |   |        
|Leasehold Improvements                      | $ | 21,553  | $ | 19,948 
|Furniture & Fixtures                        |   | 31,590  |   | 25,089 
|Machinery & Equipment                       |   | 335,264 |   | 293,475
|                                            |   |         |   |        
|COST                                        |   | 388,407 |   | 338,512
|                                            |   |         |   |        
|Less: Accumulated depreciation/amortization |   |         |   |        
|                                            |   |         |   |        
|Leasehold Improvements                      |   | 7,598   |   | 3,573  
|Furniture & Fixtures                        |   | 13,003  |   | 8,679  
|Machinery & Equipment                       |   | 134,831 |   | 84,727 
|                                            |   |         |   |        
|                                            |   | 155,432 |   | 96,979 
|                                            |   |         |   |        
|NET                                         | $ | 232,975 | $ | 241,533

F -11

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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:

|                       |   | 2005    |   | 2004   
|---------------------- | - | ------- | - | -------
|                       |   |         |   |        
|                       |   |         |   |        
|Trade Accounts Payable | $ | 275,363 | $ | 177,962
|Accrued Liabilities    |   | 109,112 |   | 101,109
|                       |   |         |   |        
|                       | $ | 384,475 | $ | 279,071

NOTE 8. NOTES PAYABLE

All notes payable outstanding as at September 30, 2004 were either converted
into common stock plus warrants to purchase common stock, or repaid during the
year. Of the notes payable, $520,347 were converted into common stock plus
warrants to purchase common stock, and the remaining notes were repaid in cash.
Issuance costs served to increase Shareholders' Equity by a net amount of
$511,508.

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, during 2004, interest expense of
$1,161,000 was recognized and additional paid in capital was 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

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

Year
      Amount2006
      $72,5352007
      $71,2212008
      $56,741


F -12

---



2009
      $17,1182010
      $ 1,890TOTAL
      $219,505


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 up to 250,000,000 shares of common
stock. As of September 30, 2005, there remains issued and outstanding 57,508,112
shares of common stock which has a stated par value of $0.0001 per share.

During 2005, convertible notes totalling $520,347 were converted into
5,203,470 shares of common stock at $0.10 per share and 10,406,940 warrants to
purchase shares of common stock at an exercise price of $0.30 per share. These
warrants expire between September 1, 2007 and October 13, 2007.

During 2004, 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:

|                              |   | 2005      |   | 2004     
|----------------------------- | - | --------- | - | ---------
|                              |   |           |   |          
|Deferred tax assets:          |   |           |   |          
|                              |   |           |   |          
|Operating loss carry forwards | $ | 2,872,665 | $ | 1,927,500
|Valuation
    allowance       |   | 2,872,665 |   | 1,927,500
|                              |   |           |   |          
|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.
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

F -13

---

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:

|                                                    | Numberof  | Weighted
|--------------------------------------------------- | --------- | --------
|                                                    | Shares    | Average 
|                                                    |           | Exercise
|                                                    |           | Price   
|Options exercisable at September
    30, 2003, 2004 | 1,150,000 | $0.10   
|and 2005                                            |           |         

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:

|                                                     | Numberof | 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                                            | 75,000   | $0.63   
|Outstanding as of September 30, 2004 and 2005        | 570,000  | $0.63   
|Options exercisable at September 30, 2005            | 570,000  | $0.63   

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

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

|                                                 | Numberof   | Weighted
|------------------------------------------------ | ---------- | --------
|                                                 | Shares     | Average 
|                                                 |            | Exercise
|                                                 |            | Price   
|Outstanding at July
    24, 2004 (plan adoption) | 0          |         
|Granted during fiscal
    2004                   | 0          |         
|Granted during fiscal
    2005                   | 20,710,000 | $0.16   
|Exercised/Cancelled                              | 0          |         
|Outstanding as of
    September 30, 2005         | 20,710,000 | $0.16   
|Options exercisable at
    September 30, 2005    | 600,000    | $0.39   

F -14

---



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

|Grant   | Quantity   | Option | Expiry  | Fair Value | Risk  | Expected | Expected   | Expected
|------- | ---------- | ------ | ------- | ---------- | ----- | -------- | ---------- | --------
|Date    | Granted    | Price  |         |            | Free  | Life     | Volatility | Dividend
|        |            |        |         |            | Rate  |          |            |         
|Nov 15, | 13,220,000 | $0.15  | Nov 15, | $1,448,922 | 2.32% | 10       | 185%       | NIL     
|2004    |            | to     | 2014    |            |       | years    |            |         
|        |            | $0.50  |         |            |       |          |            |         
|Jan 10, | 7,000,000  | $0.15  | Feb 8,  | $1,045,056 | 2.02% | 10       | 177%       | NIL     
|2005    |            |        | 2015    |            |       | years    |            |         
|Feb 8,  | 390,000    | $0.15  | Feb 8,  | $53,894    | 1.93% | 10       | 156%       | NIL     
|2005    |            |        | 2015    |            |       | years    |            |         
|May 25, | 100,000    | $0.13  | May 25, | $7,627     | 2.00% | 10       | 70%        | NIL     
|2005    |            |        | 2015    |            |       | years    |            |         
|        | 20,710,000 |        |         | $2,555,499 |       |          |            |         

Of these options, 600,000 which were granted to consultants vest immediately,
and the remaining 20,110,000 were granted to employees including directors and
vest on the first anniversary of the grant date.

The Company has adopted the fair value accounting for employee stock options
as per SFAS 123(R) using the modified retrospective application method,
effective April 1, 2005. Resultingly, the Company recorded $2,009,920 in stock
based compensation expense related to employee options during the year using the
Black-Scholes option pricing model. The Company also recorded $62,300 in
administrative expenses related to the options granted to consultants using the
Black-Scholes option pricing model. See also subsequent event note below.

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

|                                 | As reported using | Pro Forma per
|-------------------------------- | ----------------- | -------------
|                                 | SFAS 123(R)       | APB 25       
|                                 |                   |              
|Stock Based compensation         | $ 2,072,220       | $ 62,300     
|                                 |                   |              
|Net Loss (pre-tax/after tax)     | $(4,852,124)      | $(2,842,204) 
|                                 |                   |              
|Basic and Diluted Loss per share | $(0.08)           | $(0.05)      

NOTE 14. WARRANTS

The Company has the following warrants outstanding to purchase common stock
at September 30, 2004 and 2005:

F -15

---



|                                                                    | 2005       | 2004      
|------------------------------------------------------------------- | ---------- | ----------
|                                                                    |            |           
|Warrants issued in
    conjunction with financing costs whereby     |            |           
|one warrant entitles
    the holder to purchase one share of        |            |           
|common stock at an
    exercise price of $1.10, expiring            |            |           
|December 19, 2005.                                                  | 670,275    | 670,275   
|                                                                    |            |           
|Warrants issued in
    conjunction with financing costs whereby     |            |           
|one warrant entitles
    the holder to purchase one share of        |            |           
|common stock at an
    exercise price of $0.65 expiring June 17,    |            |           
|2006.                                                               | 75,524     | 75,524    
|                                                                    |            |           
|Warrants issued in
    return for financial advisory services       |            |           
|whereby one warrant
    entitles the holder to purchase one share   |            |           
|of common stock at an
    exercise price of $0.05, expiring         |            |           
|September 1, 2007.                                                  | 3,000,000  | 3,000,000 
|                                                                    |            |           
|Warrants issued in
    conjunction with financing costs whereby     |            |           
|one warrant entitles
    the holder to purchase one share of        |            |           
|common stock at an
    exercise price of $0.15, expiring            |            |           
|September 1, 2007.                                                  | 2,994,642  | 2,994,642 
|                                                                    |            |           
|Warrants issued in
    conjunction with financing costs whereby     |            |           
|one warrant entitles
    the holder to purchase one share of        |            |           
|common stock at an
    exercise price of $0.30, expiring            |            |           
|September 1, 2007                                                   | 2,287,669  | 2,287,669 
|                                                                    |            |           
|Warrants issued in
    conjunction with conversion of promissory    |            |           
|notes and in
    conjunction with the private placement completed   |            |           
|during July and
    September, 2004. One warrant entitles the       |            |           
|holder to purchase one
    share of common stock at an exercise     |            |           
|price of $0.30,
    expiring September 1, 2007.                     | 39,931,492 | 34,728,712
|                                                                    |            |           
|Warrants issued in
    conjunction with the conversion of           |            |           
|promissory notes and
    in conjunction with the private            |            |           
|placement completed
    during July and September, 2004. One        |            |           
|warrant entitles the
    holder to purchase on share of common      |            |           
|stock at an exercise
    price of $0.30, expiring October 13, 2007. | 5,204,160  | -         
|                                                                    |            |           
|Warrant issued in
    conjunction with financing costs whereby      |            |           
|one warrant entitles
    the holder to purchase one share of        |            |           
|common stock at an
    exercise price of $0.05, expiring January    |            |           
|1, 2005.                                                            | -          | 250,000   
|                                                                    |            |           
|                                                                    | 54,163,762 | 44,006,822

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.

F -16

---



NOTE 16. RECLASSIFICATIONS

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

NOTE 17. SUBSEQUENT EVENTS

On October 17, 2005 the Company granted 3,290,000 options
under the Plan to employees including directors and officers. The exercise price
of these options is $0.075 and all options vest on the first anniversary date of
the grant.

On December 2, 2005 the Company extended the expiry date of
$1.10 warrants. There were 670,275 warrants exercisable at $1.10 per share,
expiring December 19, 2005. The expiry period was extended to December 19, 2007.

NOTE 18. RESTATEMENT OF 2004 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 during fiscal 2004 did not
include 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 for the year ended
September 30, 2004 was as follows:

|Net Loss as previously reported: | $(1,772,840)
|-------------------------------- | ------------
|                                 |             
|Interest expense per EITF 98-5   | (1,161,000) 
|and EITF 00-27:                  |             
|                                 |             
|Net Loss, as restated:           | $(2,933,840)

F -17

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