UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                              ---------------------

                                   FORM 10-KSB AMENDMENT

|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

        FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                                       OR

|_|  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(D)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                             COMMISSION FILE NUMBER

                             ----------------------

                                AXM PHARMA, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                          NEVADA                            20-0745214
                 (STATE OR JURISDICTION OF               (I.R.S. EMPLOYER
              INCORPORATION OR ORGANIZATION)          IDENTIFICATION NUMBER)


                     US REPRESENTATIVE OFFICE
                17870 CASTLETON STREET, SUITE 255,
                    CITY OF INDUSTRY, CA 91728                     10591
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)           (ZIP CODE)

                                 (626) 964-2848
                                 (626) 964-3384
   (REGISTRANT'S TELEPHONE NUMBER AND FACSIMILE NUMBERS, INCLUDING AREA CODE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                         COMMON STOCK --$.001 PAR VALUE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                          COMMON STOCK--$.001 PAR VALUE
                         PREFERRED STOCK PURCHASE RIGHTS

                                   WEISHI WANG
                      PRESIDENT AND CHIEF EXECUTIVE OFFICER
                       17870 CASTLETON STREET, SUITE 255,
                           CITY OF INDUSTRY, CA 91748
                                 (626) 964-2848
            (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by  Section  13 or 15(d) of the  Securities  Act of 1934  during the
past 12 months and (2) has been subject to such filing  requirement for the past
90 days. Yes x  No

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant as of April 13, 2006: $9,529,740



<PAGE>

                                TABLE OF CONTENTS

                                                                        PAGE NO.

PART I

ITEM 1.           BUSINESS                                                  3
ITEM 2.           PROPERTIES                                               14
ITEM 3.           LEGAL PROCEEDINGS                                        14
ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS      15

PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
                    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
                    SECURITIES                                             16
ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS                    22
ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA              27
ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                    ACCOUNTING AND FINANCIAL
                  DISCLOSURE                                               27
ITEM 8A.          CONTROLS AND PROCEDURES                                  27
ITEM 8B.          OTHER INFORMATION                                        28

PART III
ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT       28
ITEM 10.          EXECUTIVE COMPENSATION                                   31
ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS               34
ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS           36
ITEM 13.          PRINCIPAL ACCOUNTING FEES AND SERVICES                   36

PART IV
ITEM 14.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES               36
                  SIGNATURES                                               38
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS               F-1
                  EXHIBITS INDEX                                           E-1







                                       2
<PAGE>
                                     PART I

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain  statements  made under the  captions  "Business"  (Item 1) and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" (Item 7), the notes to our audited financial statements (Item 8) and
elsewhere in this Annual Report on Form 10-K,  as well as  statements  made from
time to time by our representatives may constitute "forward-looking  statements"
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
These  forward-looking   statements  include,  without  limitation,   statements
regarding planned or expected manufacturing and sale of pharmaceutical  products
in  China  or  elsewhere,   scale  up  of  facility  under  United  States  Good
Manufacturing  Practices  (US GMP)  standards,  the  timing and amount of future
sales of  pharmaceutical  products,  the  potential  market size,  advantages or
therapeutic  uses of our  potential  products;  variation in actual  savings and
operating improvements resulting from restructurings; and the sufficiency of our
available  capital  resources to meet our funding needs. We do not undertake any
obligation to publicly update any forward-looking statement, whether as a result
of new information, future events, or otherwise, except as required by law. Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other  factors  which  may  cause  our  actual  results  or  achievements  to be
materially  different  from any future  results  or  achievements  expressed  or
implied by such  forward-looking  statements.  Such factors  include the factors
described under "Management's Discussion and Analysis of Financial Condition and
Results  of  Operations--Risk  Factors"  and  the  other  factors  discussed  in
connection with any forward-looking statements.

ITEM 1.  BUSINESS

OVERVIEW OF AXM PHARMA

     Introduction

         AXM Pharma, Inc., ("AXM",  "our", "us" or "we") is a pharmaceutical and
nutraceutical  company engaged in the production,  marketing and distribution of
over the  counter  and  prescription  pharmaceutical  products  in The  People's
Republic of China  ("China").  We have licenses to produce market and distribute
drug  products  in  various  dosages  and forms as well as herbal  remedies  and
vitamins and are currently  manufacturing  four drug products for sale in China.
We conduct our business in China through our wholly owned subsidiary, AXM Pharma
(Shenyang)  Inc.  ("AXM  Shenyang").  Further  information  can be  found on our
website:  www.axmpharma.com.  The contents of that website are not  incorporated
herein by reference thereto.

     History

          AXM was originally  founded as Wholesale on the Net, Inc in 1999, as a
Nevada  corporation.  In 2001,  we changed our named to Wickliffe  International
Corporation.  In  2003,  we  acquired  all of the  outstanding  shares  of Werke
Pharmaceuticals,  Inc ("Werke"),  a Chinese based pharmaceutical  company. Werke
owns all of the  outstanding  shares of AXM  Shenyang,  a "Wholly  Foreign Owned
Enterprise  (WFOE) under  Chinese law. In  connection  with the  acquisition  of
Werke,  we commenced  operations in our current line of business and changed our
name to Axiom  Pharmaceuticals  and,  later  in 2003,  to AXM  Pharma,  Inc.  We
conducted a series of private  financings in 2003, 2004 and 2005. Prior to March
2004,   our   common   stock  was  quoted   under  the  symbol   "WICK"  on  the
over-the-counter  Bulletin  Board. In March 2004, we were listed on the American
Stock  Exchange  under the ticker  symbol "AXJ .We continue to be listed on AMEX
under the ticker symbol "AXJ".

     Business Strategy

         Our core business  strategy is to manufacture  and distribute a diverse
group of over the  counter and  prescription  pharmaceutical  and  nutraceutical
products,  targeting  the  markets  of China,  Hong  Kong,  Taiwan,  Korea,  The
Philippines,  Indonesia,  Malaysia,  Singapore  and  Thailand.  Our growth  plan
includes  expanding  our existing  product line with new products  licensed from
North  America  and  Europe.  In  2004,  we  completed  the  construction  of  a
manufacturing plant in a special economic zone in Shenyang, China. The plant has
been certified as satisfying Chinese "Good  Manufacturing  Practices (GMP)", and
we intend to apply for  certification  of the plant  under US GMP as well.  This



                                       3
<PAGE>

designation would allow us to manufacture  pharmaceutical  products in China for
sale in the United States  market.  However,  we cannot  predict when if ever we
will obtain certification of the Shenyang plant under US GMP.

         Manufacturing Capabilities

         Our factory in Shenyang includes over 120,000 square feet of production
space capable of producing  50,000,000 tubes for ointments,  500,000,000 tablets
and 250,000,000  capsules annually.  In addition,  the plant contains laboratory
and  administration  facilities.  The  factory is located in a special  economic
zone, the High-Tech Industrial Development District,  established in 1988 by the
Chinese  government to  accelerate  the  development  and  industrialization  of
high-tech industries in the North-Eastern portion of China.

         Current Marketed Products

         AXM Shenyang  currently  holds 42 licenses to produce  over-the-counter
and prescription  pharmaceutical  products in China. To date, we have undertaken
commercial  sales of products  under four of these  licenses under approval from
the State Food and Drug  Administration of China ("SFDA").  Until the completion
of our plant and its  certification,  our products were produced by  third-party
manufacturers.  In the  second  quarter  of 2005,  we began to  manufacture  our
products in our new  factory.  Currently,  all of our  products are sold through
third-party distributors. Our current marketed products are:

         ASARONE:  Asarone  is a  tablet  form  of  medication  indicated  as an
anti-septic, anti-inflammatory, asthma reducing, including pediatric asthma, and
coughs prevention medicine. Additionally,  Asarone has been used to treat slight
and severe infantile pneumonia,  child pneumonia, adult bacterial pneumonia, and
chronic and acute bronchitis,  which are symptoms of SARS. Separately,  Asarone,
in the  form of an  injectable  solution,  has been  identified  as one of eight
experimental drugs recommended by the Chinese State Traditional Chinese Medicine
Administration for combating SARS.

         ELEGANCE:  Elegance is a menstrual relief pH balanced lotion formulated
with eight herbal extracts. The product is positioned as a therapeutic lotion to
relieve vaginal itch, vaginal irritation and vaginitis.

         LIVECOMF:  LiveComf  is a  compound  sulfur  cream  used  to  alleviate
dermatitis, seborrheica, scabies, acne and eczema.

         LIFEGATE:   LifeGate  is  an  anti-fatigue  capsule  categorized  as  a
functional food that is used for increased  energy and vitality.  The product is
sold   over-the-counter,   addressing  both  the  chronic  and  acute  treatment
requirements.

         Marketing, Sales and Distribution

         We currently  employ 90  individuals  involved in marketing  and sales.
Also,  we intend to  engage  additional  domestic  third-party  distributors  to
penetrate new markets.  We are  developing  educational  programs for hospitals,
doctors,  clinics and  distributors  with  respect to our product  lines.  These
educational  programs  are  intended  to  improve  sales  and  promotion  of our
products.  We are planning to advertise our products  through medical news paper
and magazine related media.

         As our resources permit,  we anticipate  expanding our current domestic
Chinese  distribution  beyond the cities in which we currently  sell through the
utilization of new distribution firms in regions currently not covered.  We have
developed new distribution and marketing relationships with the following firms:

     o   China Nat. Pharma. Group (Sinopharm)
     o   Jin Ming Shi Pharma
     o   DKSH (Taiwan) Limited
     o   KerryFlex Supply Chain Solutions Limited




                                       4
<PAGE>

     Recent Developments

         LIQUIDITY CRISIS. We are in urgent need of additional capital. Our cash
resources  have been  depleted.  We have not paid our  employees  in China since
January 2006. We are in default under the terms of certain  promissory  notes as
described  more fully below under "RISK FACTORS - WE ARE CURRENTLY IN DEFAULT ON
OUR OBLIGATIONS  UNDER OUR SERIES C CONVERTIBLE  PROMISSORY  NOTES." Our lack of
capital  has  severely  constrained  our  ability  to grow our  business.  These
conditions  raise  substantial  doubt  about our  ability to continue as a going
concern.  The  audit  report  prepared  by  our  independent  registered  public
accounting firm relating to our consolidated  financial  statements for the year
ended  December  31,  2005  includes an  explanatory  paragraph  expressing  the
substantial  doubt  about our ability to  continue  as a going  concern.  We are
currently  in  discussions  with  several  funding  sources  in China to  obtain
financing  to  support  operations  going  forward,  but to date  none of  these
discussions  have  resulted in additional  financing.  If we are unable to raise
additional  capital in the immediate  future, we may be forced to cease business
operations.

         DEFAULT  ON  SERIES  C  NOTES.  Under  the  terms  of  certain  Secured
Promissory  Notes issued on April 19, 2005, we are obligated to pay interest and
principal monthly in cash or shares.  However, we are obligated to make payments
in cash if our share  price  falls  below a  certain  price  calculated  under a
formula  specified  in the Notes.  We are  currently  in default in our  payment
obligations  because  we have not been able to pay the  required  principal  and
interest to the holders of the Notes.  We are in  negotiations  with the holders
with a view to restructuring the terms of the Notes.  However,  no agreement has
been reached and, if we fail to reach an  agreement,  it will be very  difficult
for us to raise any new funds from  other  sources  (see "RISK  FACTORS - WE ARE
CURRENTLY IN DEFAULT ON OUR OBLIGATIONS UNDER OUR SECURED PROMISSORY NOTES".)

         LOSS OF SUNKIST LICENSE. In 2004, we entered into a Trademark Licensing
Agreement with Sunkist Growers Inc. ("Sunkist") that granted us exclusive rights
to manufacture,  market and sell certain vitamin and vitamin  supplements  under
the Sunkist brand name and trademark  until  December 2005 in Hong Kong,  Taiwan
and Macau and until December 2008 in China. Sales under these licenses accounted
for  approximately 60% of our total sales in 2005. The agreement also granted us
a right of first  refusal for any  territory  in the rest of Asia where  Sunkist
does not currently license the product  categories covered by the agreement with
us. Under the terms of the agreement,  we were required to achieve certain sales
targets each year, for each category of product licensed under the agreement. In
order to support our Sunkist  license  agreement,  we entered into  distribution
agreements  with  Zuellig  Pharma Ltd. and Zuellig & Woo (Hong Kong) Co., Ltd in
March 2005 for  distribution  the Sunkist  brand  products in China,  Hong Kong,
Macau and Taiwan. In addition,  we entered into agreements with Kerryflex Supply
Chain  Solutions  Limited and executed a Memorandum of  Understanding  with DKSH
Taiwan  Limited,  to  distribute  the  Sunkist  brand  products in Hong Kong and
Taiwan.  In October 2005, we terminated the distribution  agreement with Zuellig
Pharma, Inc. and Zuellig & Woo (Hong Kong) Co., Ltd.

         We failed to achieve certain minimum sales targets during 2004 and 2005
for each category of product and failed to pay the minimum royalties  stipulated
under the license agreement.  As a result, Sunkist terminated our agreement with
them for sale of products in China on February  20, 2006.  The separate  license
agreement with Sunkist relating to rights to sell certain products in Hong Kong,
Macau and Taiwan expired on its stated termination date in December 2005 and has
not been renewed. Sunkist has notified us that we are in default with respect to
minimum royalties and has demanded payment of $368,000.  This amount in included
in our Statement of Financial Position under the caption "Current Liabilities."

         SEC  INVESTIGATION.  The SEC is currently  conducting an  investigation
into the  restatement  of our June 30, 2005  financial  statements.  Under prior
management,  we recorded  approximately  $2.8 million of revenues related to the
sale  of  Sunkist-branded  products  through  our  distributor,  Zuellig.  These
revenues  constituted  substantially  all of our revenues for the quarter  ended
June 30, 2005. In October 2005,  under current  management,  we determined  that
such  sales  were in  substance  consignment  arrangements  since we  could  not
determine  collectabilty  since  collections were not due until the distributors
shipped the products; therefore, we should not have recognized any revenues from
such sales.  We reported this matter to the SEC which then decided to conduct an
investigation  to  determine if we and others may have  violated the  reporting,
anti-fraud,  accounting and other provisions of the federal securities laws. The
investigation  is in a relatively early stage and we are not able to predict its
outcome.  We are fully cooperating with the SEC in this investigation (see "RISK
FACTORS  - WE ARE  CURRENTLY  THE  SUBJECT  OF AN  SEC  INVESTIGATION  INTO  OUR
RESTATEMENT OF OUR JUNE 30, 2005 FINANCIALS.")


                                       5
<PAGE>


CERTAIN CONSIDERATIONS RELATED TO CHINESE PHARMACEUTICAL COMPANIES

         Chinese Legal Status of AXM Shenyang

         AXM Shenyang, is classified as a Wholly Foreign Owned Enterprise (WFOE)
under  Chinese  Company  Law.  Wholly  Foreign  Owned  Enterprises  are  limited
liability  companies  established  under  Chinese  Company Law,  which are owned
exclusively  by one or more foreign  investors and thus offer  controls over the
company's management, technology, and finances that the typical foreign investor
requires. Advantages of qualifying as a WFOE include:

o    Ability to carry on  business in China  rather  than just a  representative
     office function;

o    Ability to issue invoices to customers in Renminbi  (Chinese  currency) and
     receive Renminbi revenues;

o    Ability to convert Renminbi profits to US dollars for remittance to foreign
     parent company outside China;

o    Ability to employ staff directly within China;

o    Protection of intellectual know-how and proprietary technology.

         Potential  disadvantages  of  operating  as a  WFOE  include  unlimited
liability for claims  arising from  operations in China,  and  potentially  less
favorable  treatment  from  governmental  agencies  in China and  other  Chinese
companies  than we would  receive if we operated  through a joint venture with a
Chinese Partner. We have not experienced any such disadvantages in operating our
business as a WFOE thus far.

         Government Regulation

         The  modernization  of regulations for the  pharmaceutical  industry is
relatively  new in China and the manner  and extent to which the  pharmaceutical
industry  is  regulated  will  continue  to  evolve.   We  are  subject  to  the
Pharmaceutical  Administrative  Law, which governs the  licensing,  manufacture,
marketing and distribution of pharmaceutical  products in China and sets penalty
provisions  for  violations of provisions of the  Pharmaceutical  Administrative
Law. In addition, as a WFOE, we are subject to the Foreign Company provisions of
the Company  Law of the China,  which  governs  the conduct of our wholly  owned
subsidiary,  AXM Shenyang and its officers and directors.  Changes in these laws
or new  interpretations  of existing laws may have a  significant  impact on our
methods and our costs of doing business.

         Additionally,  we will be subject to varying  degrees of regulation and
permitting by  governmental  agencies in China.  For example,  in 1999, the SFDA
established an administrative  system for the classification of prescription and
over-the-counter  drugs.  Since then, the SFDA has issued a series of guidelines
on  interpretation of the new  classification  system in such areas as labeling,
usage instructions and packaging of over-the-counter products.

         Recently,  the  SFDA  implemented  new  Good  Manufacturing   Practices
guidelines for licensing  pharmaceutical  products. Our new factory was required
to comply with these new  guidelines  to begin  production  at the  facility and
failure to satisfy these new guidelines would have a material adverse effect our
business. Our factory received Chinese Good Manufacturing  Practices approval in
January 2005.

         There  can  be  no  assurance  that  future  regulatory,  judicial  and
legislative  changes will not have a material  adverse  effect on our  business,
that  regulators or third parties will not raise material  issues with regard to
our business and operations or our compliance or non-compliance  with applicable
regulations or that any changes in applicable laws or regulations  will not have
a material adverse effect on our business.

         Chinese Registered Capital Requirements

         Pursuant to the Company Law of China, we are required to contribute and
maintain  a  certain  amount  of  "registered   capital"  in  our  wholly  owned


                                       6
<PAGE>

subsidiary,  AXM  Shenyang.  This  capital  may be in the  form of  tangible  or
intangible assets.  AXM Shenyang's current registered capital  requirement is US
$10,000,000.  We  are  currently  in  compliance  with  the  registered  capital
requirements of the Company Law.

         Chinese Environmental Laws

         We are  subject  to the  environmental  laws of  China  and  its  local
governments.  Our  operations  in China do not  involve  the use of  pollutants.
Therefore,  we do not incur significant  expense related to compliance with such
laws nor do we expect to be affected significantly by compliance with such laws.

LICENSING AND INTELLECTUAL PROPERTY

         The  State  Food and Drug  Administration  of the  government  of China
issues   licenses  and  permits  for   permission  to  market  and   manufacture
pharmaceutical products in China. Generally,  licenses and permits issued by the
SFDA are revocable at any time,  with or without cause.  We have been granted 42
product  licenses  and  permits,  of which  only  four  licenses  currently  are
commercialized.  We likely will undertake a selection process to decide which of
our remaining  licenses,  if any, will be commercialized,  and we will determine
the timeframe for such  commercialization.  None of our registered  products are
currently  patented nor do we have any patents  pending before the government of
China or any other government.

RESEARCH AND DEVELOPMENT

         We have minimal  research and development  activities.  Such activities
are focused on quality and laboratory testing of compounds  developed by others,
and administration of the testing process for such compounds.  We have developed
working relationships with Shenyang Medical University and the Liaoning Research
Institute for Traditional Chinese Medicine and Beijing Shiehe Medical University
to acquire new licenses according to market demand in the future.


COMPETITION

         We  compete  with   different   companies   in  different   therapeutic
categories. For example, with regard to Asarone Tablets, we compete with Liuzhou
Pharmaceutical Factory, located in Liuzhou City, Guang Xi Autonomous Region. AXM
and  Liuzhou  are the only two  companies  approved  by the SFDA to  manufacture
Asarone Tablets.  However because Liuzhou distributes its Asarone tablets mainly
in Southern China and AXM distributes its products mainly in Northern China, the
two companies do not directly  compete in their respective  markets.  We compete
with two companies for  distribution  of our product  Lifushu herbal  antiseptic
skin cream,  Zhejiang  Wenzhou  Pharmaceutical  Factory and Ying Kou Biochemical
Pharmaceutical  Factory.  However,  one of these competitors,  Zhejiang Wenzhou,
targets  its  product  to  public  bath  houses,  and  does not  compete  in the
pharmaceutical  distribution  segments  in which AXM sells  Weifukang.  Ying Kou
Biochemical   Pharmaceutical   Factory's   main  business   focus  is  its  bulk
bioprocessing  business.  Their herbal  antiseptic  product is a minor line. Our
largest  competitor for Cefaxlin  Capsules and  Norfloxacin  Capsules is Yanfeng
Pharmaceuticals,  also located in Shenyang.  Yanfeng Pharmaceutical Company is a
recently  privatized  State Owned  Enterprise  that  employs  approximately  400
persons.  Their sales territory  focus is in Shenyang city. We consider  Yanfeng
Pharmaceutical Company to be a major competitor.

EMPLOYEES

         At April 13, 2006, we had no employees in our  U.S.-based  headquarters
and 150 full-time  employees at our facilities located in China.  Certain of our
employees in China have instituted legal  proceedings in China related to unpaid
wages ( see  "RISK  FACTORS  - WE HAVE  NOT  MADE  PAYMENTS  TO  CERTAIN  OF OUR
EMPLOYEES  AND LENDERS,  AND CERTAIN  SERVICE  PROVIDERS  HAVE  ASSERTED  CLAIMS
AGAINST US".)

AVAILABLE INFORMATION


         We file annual,  quarterly and special  reports,  proxy  statements and
other information with the Securities and Exchange  Commission.  You may read or


                                       7
<PAGE>

obtain a copy of this annual  report or any other  information  we file with the
SEC at the SEC's Public  Reference Room at 450 Fifth Street,  N.W.,  Washington,
D.C.  20549.  You may obtain  information  regarding the operation of the Public
Reference  Room by calling the SEC at  1-800-SEC-0330.  Our SEC filings are also
available to the public from the SEC web site at www.sec.gov, which contains our
reports,  proxy  and  information  statements,  and  other  information  we file
electronically  with the SEC.  You can also obtain our  filings at our  website,
www.axmpharma.com.


         The Company also makes its periodic and current reports available, free
of charge, on its website, www.axmpharma.com,  as soon as reasonably practicable
after such material is electronically filed with the SEC. Information  available
on our  website  is not a part of, and should  not be  incorporated  into,  this
annual report on Form 10-K.

         Our Board of  Directors  has  adopted a Code of  Business  Conduct  and
Ethics which is posted on our website at www.axmpharma.com.

 RISK FACTORS

         The following risk factors should be read carefully in connection  with
evaluating our business and the forward-looking  statements that we make in this
Report and elsewhere  (including oral  statements) from time to time. Any of the
following risks could materially  adversely  affect our business,  our operating
results,  our financial  condition and the actual outcome of matters as to which
forward-looking statements are made in this Report.

         RISKS RELATED TO OUR FINANCIAL CONDITION

IF WE FAIL TO RAISE  ADDITIONAL  CAPITAL  IN THE  IMMEDIATE  FUTURE,  WE WILL BE
FORCED TO CEASE OPERATIONS

         We are in urgent need of additional  capital.  Our cash  resources have
been  depleted.  We have not paid our  employees in China since January 2006. We
are in default  under the terms of certain  promissory  notes as described  more
fully below under "RISK FACTORS - WE ARE CURRENTLY IN DEFAULT ON OUR OBLIGATIONS
UNDER OUR SERIES C CONVERTIBLE  PROMISSORY  NOTES." Our lack of adequate capital
has severely  constrained  our ability to grow our  business.  These  conditions
raise  substantial  doubt about our ability to continue as a going concern.  The
audit report  prepared by our  independent  registered  public  accounting  firm
relating to our  consolidated  financial  statements for the year ended December
31, 2005 includes an  explanatory  paragraph  expressing the  substantial  doubt
about  our  ability  to  continue  as a  going  concern.  We  are  currently  in
discussions with several funding sources in China to obtain financing to support
operations going forward; however, to date such discussions have not resulted in
any additional  financing.  At this time, we do not know if additional financing
will be available, nor can we predict the terms of any such financing. If we are
unable to raise  additional  funds in the immediate  future,  we may be forced t
cease business  operations.  If additional capital is raised through the sale of
equity or convertible  debt  securities,  the issuance of such securities  would
result in dilution to our existing stockholders. If additional capital is raised
through  incurrence of  indebtedness,  our interest expense will likely increase
and restrictive  covenants imposed by the lenders may impair our ability to grow
our business.

         Since  our  inception,   we  have  generated  significant  losses  from
operations  and we  anticipate  that we will  continue to  generate  significant
losses from operations for the foreseeable  future. As of December 31, 2005, our
accumulated deficit was approximately $30 million.  Our net loss was $11 million
and $14 million for the years ended  December  31, 2005 and 2004,  respectively.
Our cash outlays from  operations and capital  expenditures  were $9 million and
$10 million for 2005 and 2004, respectively.  Our stockholders' equity decreased
from $7 million as of December 31, 2004 to $4.1 million as of December 31, 2005.

         WE ARE  CURRENTLY  IN  DEFAULT  ON OUR  OBLIGATIONS  UNDER OUR SERIES C
CONVERTIBLE PROMISSORY NOTES.

On April 19, 2005, we entered into a private  financing with certain  accredited
investors and issues secured promissory notes with an aggregate principal amount
of  $3,425,000.  Under the terms of the Notes,  we are obligated to pay interest
and  principal  monthly in cash or shares.  However,  we are  obligated  to make
payments in cash if our share price falls below a certain price calculated under
a formula  specified  in the Notes.  We are  currently in default in our payment
obligations  because  we have not been  able to pay the  required  repayment  of


                                       8
<PAGE>

principal and interest to the holders of the Notes. We are in negotiations  with
the holders with a view to  restructuring  the terms of the Notes.  However,  no
agreement has been reached and, if we fail to reach an agreement, it will likely
be impossible  for us to raise any new funds.  Moreover,  one or more holders of
the Notes may bring legal claims seeking to enforce their rights against us.

         WE HAVE NOT MADE PAYMENTS TO CERTAIN OF OUR EMPLOYEES AND LENDERS,  AND
CERTAIN SERVICE PROVIDERS HAVE ASSERTED CLAIMS AGAINST US.

         Due to our limited available cash in the forth quarter,  we were unable
to allocate sufficient cash to our Chinese subsidiary,  AXM Shenyang,  for it to
pay its  approximately  150 employees.  As a result some of these employees have
resigned.  Further, we received notices from the Labor Arbitration  Committee in
China that 11 of our current and former employees have filed a labor arbitration
claim for unpaid salaries and un-reimbursed  expenses in the aggregate amount of
RMB429,958 ( $53,081).

         In addition,  AXM Shenyang  obtained  loans in the aggregate  amount of
8,290,302  RMB (US  $1,002,455)  between  October  22,  2004 and June 26,  2005,
through a series of short term  non-recourse  loans from ten individual  Chinese
lenders. AXM Shenyang is in default on the principal of these loans and interest
of  approximately  $494,000.  Although these loans are not secured by any of our
property or assets,  we could be subject to legal  action if these loans are not
repaid.  Currently, no lawsuits regarding these loans have been initiated and we
are not aware that any  lawsuits are being  contemplated  by any of the lenders.
However,  we can not assure you that the lenders  will not take legal  action in
the near term.

         We have also received  demand letters from Saatchi & Saatchi,  alleging
that we owe them approximately  RMB582,055.48  (U.S. $71,770) in connection with
advertising  services  allegedly  provided  to AXM  Shenyang  and  from  Sunkist
alleging that we owe them $368,000 for minimum royalty payments.

         We do not have the  ability to  satisfy  these  contingent  liabilities
should adverse judgments be entered against us. In addition,  these matters make
it more  difficult  for us to raise new  capital  and  divert  scarce  financial
resources and management time to defend against the various claims.

         WE ARE CURRENTLY IN LITIGATION WITH SEVERAL  SERVICE  PROVIDERS AND OUR
FORMER CHIEF EXECUTIVE OFFICER AND AN ADVERSE DETERMINATION IN THESE PROCEEDINGS
COULD FURTHER ADVERSELY AFFECT OUR LIQUIDITY.

         There is currently  pending in Los Angeles  superior  court,  a lawsuit
filed by Praxis  Advertising  and  Design,  Inc.  claiming  payment of an unpaid
package design fee of $119,800.  In addition, in November 2005, Don Bates, Inc.,
our former U.S. Good Manufacturing Practices consultant, instituted legal action
against  us  in  U.S.  District  Court,  District  of  Nevada,  claiming  unpaid
consultancy  fees. Don Bates,  Inc. has alleged that  $362,652.00,  plus accrued
interest,  is due to them. In November  2005, we became aware of a lawsuit filed
in the  District  Court  of  Clark  County,  Nevada  by  our  former  CEO  Peter
Cunningham,  whom we fired for cause on July 20, 2005. Mr. Cunningham's  counsel
claims  to have  properly  served  us with a summons  and  complaint  and took a
default  against us on  November 9, 2005.  Mr.  Cunningham's  complaint  alleges
unpaid  base  salary,  unpaid  commissions,  un-reimbursed  expenses  and unpaid
severance totaling approximately $180,000. We intend to contest these claims and
will consider appropriate cross-claims.  An adverse determination in one or more
of these proceedings would further impair our liquidity.

         WE  ARE  CURRENTLY  THE  SUBJECT  OF  AN  SEC  INVESTIGATION  INTO  OUR
RESTATEMENT OF OUR JUNE 30, 2005 FINANCIALS.

         The SEC is currently  conducting an investigation  into the restatement
of our June 30, 2005 financial statements.  Under prior management,  the Company
recorded  approximately  $2.8 of revenues related to the sale of Sunkist-branded
products  through  our   distributor,   Zuellig.   These  revenues   constituted
substantially  all of our  revenues  for the  quarter  ended June 30,  2005.  In
October 2005,  under current  management,  we determined that such sales were in
substance  consignment  arrangements since we could not determine  collectabilty
since  collections  were not due until the  distributors  shipped the  products;
therefore.  We should not have  recognized  any  revenues  from such  sales.  We
reported  this matter to the SEC which then decided to conduct an  investigation
to  determine  if we and others may have  violated  the  reporting,  anti-fraud,
accounting   and  other   provisions  of  the  federal   securities   laws.  The


                                       9
<PAGE>

investigation  is in a relatively early stage and we are not able to predict its
outcome. We are fully cooperating with the SEC in this investigation.

         The pendency of the SEC investigation has had a material adverse affect
upon our ability to raise new capital.  A number of  prospective  investors have
indicated  they are not  willing to proceed  with an  investment  in the Company
until the SEC investigation is resolved. Moreover, if the SEC determines to seek
sanctions against the Company following  completion of its  investigation,  such
sanctions could create further difficulties for our ability to raise capital and
continue in business.

         IF WE FAIL TO CONTINUE TO MEET ALL  APPLICABLE  AMERICAN STOCK EXCHANGE
REQUIREMENTS,  OUR COMMON STOCK COULD BE DELISTED,  WHICH WOULD ADVERSELY AFFECT
THE MARKET LIQUIDITY AND PRICE OF OUR COMMON STOCK .

         Our common stock is listed on the American  Stock Exchange  (AMEX).  In
order to maintain  that  listing,  we must satisfy  minimum  financial and other
requirements.  The AMEX has  notified us that we may not be in  compliance  with
their continued listing standards because our substantial  operating losses cast
doubt  upon  our  ability  to  continue  as a going  concern  and  three  of our
independent  directors  resigned in February,  including  the Chair of our Audit
Committee.  We have  responded to the AMEX with a plan to improve our  financial
condition and we have notified the AMEX that we have elected two new independent
directors,  one of whom qualifies as a financial  expert.  The AMEX is currently
considering our responses.  If they deem the responses inadequate,  or if we are
unable to execute our plan to improve our financial condition, then the AMEX may
commence  delisting  proceedings  against us. In this regard, it should be noted
that our plan depends upon  obtaining  funds from third parties and, to date, we
have not  closed  any  arrangements  with such  third  parties  to  provide  the
necessary  funding.  The AMEX has stated that we must  execute  upon our plan to
improve our financial condition by May 2, 2006.

         If we fail to continue to meet all applicable AMEX  requirements in the
future and AMEX  determines  to delist our common  stock,  the  delisting  could
adversely  affect the market  liquidity of our common stock and the market price
of our common stock could decrease.  Such delisting could also adversely  affect
our ability to obtain financing for the continuation of our operations and could
result in the loss of confidence by investors, suppliers and employees.

         OUR DISCLOSURE  CONTROLS AND  PROCEDURES  ARE NOT EFFECTIVE,  WHICH MAY
RESULT IN OUR FILING UNRELIABLE REPORTS WITH THE SEC.

         As a result of the restatement  discussed  above, we concluded that our
disclosure  controls  and  procedures  have not been  effective  to ensure  that
information required to be disclosed in reports that we file or submit under the
Securities Exchange Act of 1934 is processed, summarized and reported within the
time  periods  specified  by the SEC.  As a result,  our SEC  reports may not be
reliable.  This may impair our ability to raise new capital.  It may also expose
us to new liabilities if we file false or misleading reports. .

         WE HAVE OUTSTANDING WARRANTS THAT MAY ADVERSELY AFFECT US IN THE FUTURE
AND CAUSE DILUTION TO EXISTING SHAREHOLDERS.

         In connection  with the issuance of the Secured  Promissory  Notes,  we
issued  warrants to holders of the Notes to purchase our common stock at certain
prices as adjusted  pursuant to the terms of the  warrants.  The  warrants  were
issued in tranches with exercise periods  expiring on June 24, 2007,  August 21,
2008,  September 12, 2008, and December 31, 2008. There are currently  3,683,689
warrants outstanding,  which are exercisable at a price of $3.00 per share, with
the  exception  of those  warrants  which  expire  on June 24,  2007,  which are
exercisable  at a price of $5.50 per  share,  subject to  adjustment  in certain
circumstances.  Exercise of the warrants may cause  dilution in the interests of
other  shareholders  as a result of the  additional  common  stock that would be
issued  upon  exercise.  In  addition,  sales of the shares of our common  stock
issuable  upon  exercise of the warrants  could have a depressive  effect on the
price of our stock, particularly if there is not a coinciding increase in demand
by  purchasers of our common  stock.  Further,  the terms on which we may obtain
additional  financing  during the period any of the warrants remain  outstanding
may be adversely affected by the existence of these warrants as well.

         RISKS RELATED TO OUR BUSINESS OPERATIONS IN CHINA


                                       10
<PAGE>


         WE MAY NOT BE ABLE TO OBTAIN  REGULATORY  APPROVALS FOR OUR PRODUCTS OR
REIMBURSEMENT FROM THE SALE OF OUR PRODUCTS.

         The manufacture and sale of pharmaceutical  products in China is highly
regulated  by  a  number  of  state,  regional  and  local  authorities.   These
regulations   significantly  increase  the  difficulty  and  costs  involved  in
obtaining and maintaining  regulatory  approval and  reimbursement  listings for
marketing  new and  existing  products.  In  addition,  our  future  growth  and
profitability are, to a significant extent, dependent upon our ability to obtain
timely regulatory approvals and reimbursement from the relevant authorities.

         CHANGES IN THE LAWS AND  REGULATIONS IN CHINA MAY ADVERSELY  AFFECT OUR
ABILITY TO CONDUCT OUR BUSINESS.

         The  pharmaceutical  industry is relatively new in the emerging markets
of  China  that we are  targeting,  and the  manner  and  extent  to which it is
regulated in these geographical areas is evolving. As a Chinese corporation, AXM
Pharma is subject to the Company  Law of The Peoples  Republic of China and more
specifically to the Foreign Company provisions of the Company Law and the Law on
Foreign Capital Enterprises of the People's Republic of China. Additionally,  as
a pharmaceutical  company,  we are subject to the Pharmaceutical  Administrative
Law.  Changes in existing  laws or new  interpretations  of such laws may have a
significant impact on our methods and costs of doing business.  For example, new
legislative proposals for pharmaceutical product pricing,  reimbursement levels,
approval  criteria and  manufacturing  requirements may be proposed and adopted.
Such new  legislation  or regulatory  requirements  may have a material  adverse
effect on our  financial  condition,  results of  operations  or cash flows.  In
addition,  we will be subject to varying  degrees of regulation and licensing by
governmental  agencies  in China.  There  can be no  assurance  that the  future
regulatory,  judicial and legislative  changes will not have a material  adverse
effect on AXM Pharma,  that  regulators or third parties will not raise material
issues  with  regard to AXM  Pharma or our  compliance  or  non-compliance  with
applicable  laws or  regulations  or that  any  changes  in  applicable  laws or
regulations  will  not have a  material  adverse  effect  on AXM  Pharma  or our
operations.

         WE MAY EXPERIENCE  BARRIERS TO CONDUCTING  BUSINESS DUE TO GOVERNMENTAL
POLICY.

         The  SFDA set up a  classification  administrative  system  in 1999 for
prescription  and  over-the-counter  drugs.  Since  then,  the SFDA has issued a
series of guidelines for  interpretation  of the new  classification  system for
labeling,  usage instructions and packaging of  over-the-counter  products.  The
SFDA currently requires that  pharmaceutical  manufacturers  clearly label drugs
for  over-the-counter  sales  and  distinguish  them  from  those  to be sold in
hospitals as ethical drugs.  We have  instituted  this policy as required by the
SFDA. To date, we have never  experienced  any problems with compliance with the
regulations of the SFDA. We have never been  investigated  for  noncompliance by
this agency nor have we violated any regulations of the SFDA.

         OUR  BUSINESS  MAY  BE  ADVERSELY   AFFECTED  BY  GOVERNMENT  PLANS  TO
CONSOLIDATE STATE OWNED PHARMACEUTICAL COMPANIES IN CHINA.

         The Ministry of Commerce  announced  plans to consolidate  nearly 5,000
state owned pharmaceutical  companies into approximately 12 to 15 companies. The
Ministry  of Commerce  has stated  that it targets  the size of these  remaining
firms to be at least U.S. $ 10.0 billion  revenue per annum in the future (U.S.$
5.0 billion by the year 2010).  Their  primary  business will be to make generic
pharmaceutical  products  for  sale  to  state  owned  hospitals.   The  planned
consolidation  has already  commenced and is  anticipated  to continue until the
goals of the Ministry of Commerce have been realized. We are not aware, however,
at this time of how many  companies have been  consolidated  or when the planned
consolidation will be completed.  A recent example of the consolidation  amongst
state owned  pharmaceutical  companies is the  acquisition  by the  conglomerate
Huayuan Group of a 40% stake in Shanghai  Pharmaceutical Group. This new company
will be involved in manufacture,  distribution and research and development.  An
objective  of  the  consolidation  is  to  establish  a  manufacturing  standard
consistent  with U.S.  Good  Manufacturing  Practices.  It is  planned  that all
products  manufactured  in The  Peoples  Republic  of China will meet U.S.  Good
Manufacturing Practices standard in the future.


                                       11
<PAGE>

         CAPITAL  OUTFLOW  POLICIES  IN CHINA MAY  HAMPER  OUR  ABILITY TO REMIT
INCOME TO THE UNITED STATES.

         China has adopted  currency  and capital  transfer  regulations.  These
regulations  require that we comply with complex regulations for the movement of
capital.  In order to comply  with  these  regulations  we may have to revise or
change the  banking  structure  of our company or its  subsidiaries  Although we
believe that we are currently in compliance with these regulations, should these
regulations  or the  interpretation  of them by  courts or  regulatory  agencies
change we may not be able to remit all income  earned and  proceeds  received in
connection with our operations to the U.S.

         FLUCTUATION  OF THE  RENMINBI  COULD  MATERIALLY  AFFECT OUR  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

         The value of the  Renminbi  fluctuates  and is  subject  to  changes in
China's  political  and  economic  conditions.  Since 1994,  the  conversion  of
Renminbi into foreign currencies,  including US dollars, has been based on rates
set by the People's  Bank of China,  which are set daily based upon the previous
day's interbank  foreign exchange market rates and current exchange rates on the
world  financial  markets.  Since  1994,  the  official  exchange  rate  for the
conversion of Renminbi to US dollars has generally been stable.

         On July 21, 2005, the PRC allowed the RMB to fluctuate  within a narrow
range,  ending its decade-old fixed valuation peg to the US dollar.  The new RMB
rate  reflects an  approximately  2%  increase  in value  against the US dollar.
Historically,  the Chinese  government  has  benchmarked  the RMB exchange ratio
against  the US dollar,  thereby  mitigating  the  associated  foreign  currency
exchange rate fluctuation risk.

         WE MAY FACE OBSTACLES FROM THE POLITICAL SYSTEM IN CHINA.

         Foreign  companies  conducting  operations  in China  face  significant
political,  economic and legal risks.  The government of the Peoples Republic of
China has a history of intervening  in business  affairs in order to achieve its
political  objectives.  While current policies favor foreign  investment,  these
policies may change  without  warning.  Moreover,  corruption and a legal system
which is not fully developed pose significant risks for companies doing business
in China.

         WE MAY HAVE  DIFFICULTY  ESTABLISHING  ADEQUATE  MANAGEMENT,  LEGAL AND
FINANCIAL CONTROLS IN CHINA.

         China  historically  has been deficient in Western style management and
financial  reporting  concepts  and  practices,  as well as in  modern  banking,
computer  and other  control  systems.  We may have  difficulty  in  hiring  and
retaining a  sufficient  number of qualified  employees  to work in China.  As a
result  of  these  factors,   we  may  experience   difficulty  in  establishing
management,  legal  and  financial  controls,   collecting  financial  data  and
preparing  financial  statements,  books of account  and  corporate  records and
instituting business practices that meet Western standards.

         TRADE BARRIERS AND TAXES MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND
OPERATIONS.

         We may  experience  barriers to  conducting  business  and trade in our
targeted  emerging  markets in the form of delayed customs  clearances,  customs
duties and tariffs. In addition,  we may be subject to repatriation taxes levied
upon  the  exchange  of  income  from  local  currency  into  foreign  currency,
substantial  taxes  of  profits,  revenues,  assets  and  payroll,  as  well  as
value-added  tax. The markets in which we plan to operate may impose onerous and
unpredictable duties,  tariffs and taxes on our business and products, and there
can be no  assurance  that this will not have an adverse  effect on our finances
and operations.

         IT WILL BE  EXTREMELY  DIFFICULT  TO ACQUIRE  JURISDICTION  AND ENFORCE
LIABILITIES AGAINST OUR OFFICERS, DIRECTORS AND ASSETS BASED IN CHINA.

         Because several of our directors,  including Wei Shi Wang, the chairman
of our Board of  Directors,  are Chinese  citizens it may be  difficult,  if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit is


                                       12
<PAGE>

initiated  against AXM Pharma and/or its officers and directors by a shareholder
or group of shareholders in the U.S. Also,  although our executive  officers are
U.S. citizens,  because they may be residing in China at the time such a suit is
initiated,  achieving service of process against such persons would be extremely
difficult. Furthermore, because the majority of our assets are located in China,
it would also be extremely  difficult to access those assets to satisfy an award
entered against us in U.S. court.

         THERE CAN BE NO  GUARANTEE  THAT CHINA WILL COMPLY WITH THE  MEMBERSHIP
REQUIREMENTS OF THE WORLD TRADE ORGANIZATION.

         Due in part to the relaxation of trade barriers  following  World Trade
Organization accession in January 2002, we believe the Chinese market presents a
significant  opportunity for both domestic and foreign drug manufacturers.  With
the   Chinese   accession   to  the  World  Trade   Organization,   the  Chinese
pharmaceutical  industry  is gearing up to face the new  patent  regime  that is
required by World Trade  Organization  regulation.  The Chinese  government  has
begun to reduce its  average  tariff on  pharmaceuticals.  China has also agreed
that  foreign  companies  will be allowed  to import  most  products,  including
pharmaceuticals, into any part of China. Current trading rights and distribution
restrictions  are to be phased out over a three-year  period.  In the  sensitive
area of  intellectual  property  rights,  China  has  agreed  to  implement  the
trade-related intellectual property agreement of the Uruguay Round. There can be
no assurances  that China will implement any or all of the  requirements  of its
membership in the World Trade Organization in a timely manner, if at all.

         GENERAL BUSINESS RISKS

         WE MAY NOT BE ABLE TO ADEQUATELY  PROTECT AND MAINTAIN OUR INTELLECTUAL
PROPERTY.

         Our success  will depend in part on our ability to protect and maintain
intellectual property rights and licensing  arrangements for our products.  None
of our  products  are  patented.  As a result,  competitors  may be able to sell
products  that  are  substantially  the same as our  products.  We  depend  upon
licenses from third  parties for the rights to sell our  products.  No assurance
can be  given  that  licenses  or  rights  used  by us will  not be  challenged,
invalidated,  infringed or circumvented,  or that the rights granted  thereunder
will provide  competitive  advantages  to us. There can be no assurance  that we
will be able to  obtain a  license  to any  third-party  technology  that we may
require to conduct  our  business or that such  technology  can be licensed at a
reasonable  cost.  There is no certainty  that we will not be  challenged by our
partners for non-compliance with our licensing arrangements.  Furthermore, there
can be no  assurance  that we will be able to  remain  in  compliance  with  our
existing or future  licensing  arrangements.  Consequently,  there may be a risk
that licensing  arrangements  are withdrawn with no penalties to the licensor or
compensation to us.

         WE MAY HAVE  DIFFICULTY  COMPETING  WITH  LARGER  AND  BETTER  FINANCED
COMPANIES IN OUR SECTOR.

         The  prescription and  over-the-counter  drug markets in China are very
competitive  and  competition  may  increase.  Products  compete on the basis of
efficacy, safety, side effect profiles, price and brand differentiation. Some of
our  competitors may have greater  technical and financial  resources than we do
and may use these resources to pursue a competitive  position that threatens our
products.  Our  products  could be  rendered  obsolete  or  uneconomical  by the
development  of  new  pharmaceuticals  to  treat  conditions  addressed  by  our
products,  as  a  result  of  technological   advances  affecting  the  cost  of
production,  or as a result of marketing or pricing action by one or more of our
competitors.

         WE ARE DEPENDANT ON CERTAIN KEY EXISTING AND FUTURE PERSONNEL.

         Our  success  will  depend,  to a large  degree,  upon the  efforts and
abilities of our officers and key management  employees such as Zhenyu Kong, our
President of China Operations and Chief Operating Officer of AXM Shenyang;  and,
Wang Wei Shi,  Chief  Executive  Officer of AXM  Shenyang  and  Chairman  of AXM
Pharma.  The loss of the services of one or more of our key employees could have
a material  adverse effect on our operations.  We do not currently  maintain key
man life  insurance on any of our key  employees.  In addition,  as our business
plan is implemented,  we will need to recruit and retain  additional  management
and key employees in virtually all phases of our operations.  Key employees will
require  not only a strong  background  in the  pharmaceutical  industry,  but a


                                       13
<PAGE>

familiarity  with  language  and culture in the markets in which we compete.  We
cannot  assure  that we will be able to  successfully  attract  and  retain  key
personnel.

         WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS IN THE FUTURE.

         We face an inherent  business  risk of  exposure  to product  liability
claims in the event that the use of our  technologies  or products is alleged to
have   resulted  in  adverse  side   effects.   Side  effects  or  marketing  or
manufacturing problems pertaining to any of our products could result in product
liability claims or adverse publicity. These risks will exist for those products
in  clinical  development  and with  respect  to  those  products  that  receive
regulatory approval for commercial sale. Furthermorewe do not currently maintain
product liability insurance,  although we have not historically  experienced any
problems associated with claims by users of our products,

         THERE MAY NOT BE SUFFICIENT  LIQUIDITY IN THE MARKET FOR OUR SECURITIES
IN ORDER FOR INVESTORS TO SELL THEIR SECURITIES.

         There is currently  only a limited  public market for our common stock,
which is listed on the American  Stock  Exchange,  and there can be no assurance
that a trading  market  will  develop  further or be  maintained  in the future.
During  the  month  of March  2006,  our  common  stock  traded  an  average  of
approximately  134,957  shares per day.  As of April 13,  2006,  the closing bid
price of our common stock on the American Stock Exchange was $.43 per share.  As
of April 13, 2006, we had approximately 134 shareholders of record not including
shares held in street name.  In  addition,  during the past two years our common
stock  has had a  trading  range  with a low  price of $.30 per share and a high
price of $7 per share.

         THE FACT THAT OUR  DIRECTORS AND OFFICERS OWN  APPROXIMATELY  27.57% OF
OUR CAPITAL STOCK MAY DECREASE YOUR INFLUENCE ON SHAREHOLDER DECISIONS.

         Our executive  officers and directors,  in the aggregate,  beneficially
own  approximately  27.57% of our capital stock.  As a result,  our officers and
directors  will have the ability to influence our management and affairs and the
outcome of  matters  submitted  to  shareholders  for  approval,  including  the
election  and  removal of  directors,  amendments  to our bylaws and any merger,
consolidation or sale of all or substantially all of our assets.

ITEM 2.  PROPERTIES

         Our corporate and United States offices are located at 17870  Castleton
Street,  Suite 255,  City of Industry,  California  91748.  The current rent for
these  premises is $1,842 per month.  Our lease  expires on January 24, 2009. In
January  2006, we closed our office  located at 7251 West Lake Mead Blvd,  Suite
300, Las Vegas,  Nevada,  89128. The rent for the office in Las Vegas was $5,378
per month.

         Our  principal  administrative,  sales  and  marketing  facilities  are
located at No.  F.3004  Sankei  Torch  Bldg,  262A Shifu  Road,  Shenyang  City,
Liaoning  Province,  The People's  Republic of China. The current rent for these
facilities is US$2,917 per month and our lease expires in October 2007.

         Our  factory  is  located at No. 2 Feiyun  Road,  Nunnan New  District,
Shenyang,  China. It is a 120,000 square foot facility comprised of a solid dose
facility, an ointment facility, and an administrative building.

ITEM  3. LEGAL PROCEEDINGS

            In February  2006, we became aware of a lawsuit filed in Los Angeles
superior court from the Praxi  Advertising and Design,  Inc. claiming payment of
an unpaid package design fee of $119,800.

         In November 2005, Don Bates,  Inc., our former U.S. Good  Manufacturing
Practices consultant, instituted legal action against us in U.S. District Court,
District of Nevada,  claiming  unpaid  consultancy  fees.  Don Bates,  Inc.  has
alleged that $362,652.00, plus accrued interest, is due to them. We believe that


                                       14
<PAGE>

this suit is  without  merit as,  among  other  things,  the fees  billed by the
plaintiff for services rendered to us were excessive.  We intend to contest this
claim and will consider appropriate cross-claims. There has been no discovery in
this matter and we cannot predict its outcome.

         In November  2005,  we became aware of a lawsuit  filed in the District
Court of Clark County, Nevada by our former CEO Peter Cunningham,  whom we fired
for cause on July 20, 2005.  Mr.  Cunningham's  counsel  claims to have properly
served us with a summons and complaint and took a default against us on November
9, 2005.  We are  disputing  the  validity  of the  service,  and have  retained
counsel.  We  anticipate  that the default will be set aside.  Mr.  Cunningham's
complaint alleges unpaid base salary, unpaid commissions, un-reimbursed expenses
and  unpaid  severance  totaling  approximately  $180,000.  The  complaint  also
requests  declaratory  relief to amend an  allegedly  incorrect  Form 8-K filing
which stated that Mr.  Cunningham  was fired for cause.  We intend to vigorously
defend  this  case  and  believe  hawse  have  meritorious  claims  against  Mr.
Cunningham  which  may be  asserted  in a  cross-complaint.  There  has  been no
discovery in this matter and we cannot predict its outcome.

         AXM Shenyang  obtained  loans in the aggregate  amount of 8,290,302 RMB
(US $1,002,455)  between October 22, 2004 and June 26, 2005, through a series of
short term non-recourse loans from ten individual Chinese lenders.  AXM Shenyang
is in default on the  principal  of these loans and  interest  of  approximately
$494,000. Although these loans are not secured by any of our property or assets,
we could be subject to legal action if these loans are not repaid. Currently, no
lawsuits regarding these loans have been initiated and we are not aware that any
lawsuits are being contemplated by any of the lenders.

         In July 2005,  we received a demand  letter from Saatchi & Saatchi,  an
advertising  firm,  that alleged that we owed them  approximately  RMB582,055.48
(U.S. $71,770) in connection with advertising services provided to AXM Shenyang.
We currently are  reviewing  their claim and intend to negotiate a settlement of
such claim. We do not anticipate that this matter will have a material impact on
our business or operations.

         The SEC is currently conducting an investigation to determine if we and
others  may have  violated  the  reporting,  anti-fraud,  accounting  and  other
provisions of the federal securities laws. This investigation  resulted from our
restatement of our financial  statements for the period ended June 30, 2005. The
investigation  is  currently at an early stage and we are not able to assess the
likelihood that the SEC will commence enforcement  proceedings against us or the
nature  and  potential  impact  of any  remedies  the  SEC  might  seek.  We are
cooperating fully with the SEC in this investigation.

ITEM 4.  SUBMISSION OF REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

         The  Company  did not  submit  any  matters  to a vote of the  security
holders during the fourth quarter of fiscal 2005.

















                                       15
<PAGE>


PART II

ITEM 5.  MARKET FOR REGISTRANT'S  COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

         The common stock is currently  listed on the  American  Stock  Exchange
under the symbol  "AXJ." Prior to March 14, 2003,  the date on which the reverse
acquisition  with Werke  Pharmaceuticals,  Inc.  occurred,  the common stock was
quoted under the symbol "WICK" on the over-the-counter Bulletin Board.

         The following  table sets forth the  quarterly  high and low bid prices
for the common  stock since the quarter  ended  March 31,  2004.  The prices set
forth below represent inter-dealer  quotations,  without retail markup, markdown
or commission and may not be reflective of actual transactions.

Fiscal 2004 and 2005                                             HIGH      LOW
                                                                 ----      ---
Quarter Ended March 31, 2004 .......................             7.30      3.80
Quarter Ended June 30, 2004 ........................             5.49      3.70
Quarter Ended September 30, 2004 ...................             4.35      2.05

Quarter Ended December 31, 2004 ....................             3.63      1.80
Quarter Ended March 31, 2005 .......................             3.15      2.21
Quarter Ended June 30, 2005 ........................             2.75      1.72
Quarter Ended September 30, 2005 ...................             2.35      1.23
Quarter Ended December 31, 2005 ....................             1.61      0.30


         Starting  on March 3, 2004,  our common  stock  listed on the  American
Stock Exchange, also called the AMEX, under the trading symbol "AXJ."

         At April 13,  2006,  the closing bid price of our common stock was $.43
per share and there were  approximately  134 record holders of our common stock.
This number  excludes  any  estimate  by AXM Pharma of the number of  beneficial
owners  of  shares  held in  street  name,  the  accuracy  of  which  cannot  be
guaranteed.

         We have not paid cash  dividends  on any class of common  equity  since
formation  and we do not  anticipate  paying any  dividends  on our  outstanding
common stock in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

         In March 2003,  we issued an aggregate of  11,420,000  shares of common
stock in exchange for all of the issued and  outstanding  capital stock of Werke
Pharmaceuticals,  Inc.  The shares  issued to the former  shareholders  of Werke
Pharmaceuticals,  Inc.  were issued to 25  accredited  investors  pursuant to an
exemption from  registration  under Section 4(2) of the Securities Act and to 33
non-U.S.  persons pursuant to an exemption from registration  under Regulation S
promulgated under the Securities Act.

         In April 2003, we issued  30,000  shares of restricted  common stock to
Rabelaisian Resources,  Plc. pursuant to a consulting agreement for business and
product development  services.  The shares were issued pursuant to the exemption
from  registration  provided by Section 4(2) of the Securities Act for issuances
not involving a public offering.  The shares were valued at $1.80 per share, the
market price for shares of our common  stock at the time of issuance.  The total
aggregate value of the consideration paid to Rabelasian Resources was $54,000.

         On April 30, 2003, we issued 150,000 shares of restricted  common stock
to Madden Consulting,  Inc. pursuant to a consulting  agreement for investor and
public  relations  services.  On  September  18, 2003,  we issued an  additional
400,000  shares  to  Madden  Consulting,  in  connection  with  renewal  of  its
consulting  agreement.  The shares were issued  pursuant to the  exemption  from
registration  provided by Section 4(2) of the  Securities  Act for issuances not
involving a public offering. The shares issued on April 30, 2003, were valued at


                                       16
<PAGE>

$1.80 per share and the shares  issued on  September  18,  2003,  were valued at
$5.00 per  share,  the  market  price  for  shares  of our  common  stock at the
respective  times of issuance.  The total aggregate  value of the  consideration
paid to Madden  Consulting  was $270,000 on April 30, 2003,  and  $2,000,000  on
September 18, 2003.

         In May,  2003, we issued  25,000  shares of restricted  common stock to
Robert Alexander pursuant to a consulting  agreement for services related to the
identification and evaluation of pharmaceutical companies, products and licenses
in Canada.  The shares were issued  pursuant to the exemption from  registration
provided by Section 4(2) of the  Securities  Act for  issuances  not involving a
public offering. The shares were valued at $1.50 per share, the market price for
shares of our common stock at the time of issuance. The total aggregate value of
the consideration paid to Robert Alexander was $37,500.

         On May 21, 2003, we issued 40,000 shares of restricted  common stock to
Amaroq Capital,  LLC pursuant to a consulting  agreement for services related to
business development and financial  consulting.  The shares were issued pursuant
to the exemption  from  registration  provided by Section 4(2) of the Securities
Act for  issuances not  involving a public  offering.  The shares were valued at
$1.75 per share,  the market price for shares of our common stock at the time of
issuance.  The total aggregate value of the consideration paid to Amaroq Capital
was $70,000.

         In May 2003,  we issued  15,000  shares of  restricted  common stock to
McCartney Multimedia,  Inc. in consideration for the creation of our website and
corporate   logo.  The  shares  were  issued  pursuant  to  the  exemption  from
registration  provided by Section 4(2) of the  Securities  Act for issuances not
involving a public  offering.  The shares  were  valued at $1.75 per share,  the
market price for shares of our common  stock at the time of issuance.  The total
aggregate value of the consideration paid to McCartney Multimedia was $26,250.

         In June 2003, we issued  80,000  shares of  restricted  common stock to
Woodbridge  Management,  Ltd.  pursuant to a consulting  agreement  for services
related to business development,  corporate strategy,  and assistance with joint
ventures,  mergers and  acquisitions.  The shares  were  issued  pursuant to the
exemption from  registration  provided by Section 4(2) of the Securities Act for
issuances not involving a public  offering.  The shares were valued at $4.45 per
share,  the market price for shares of our common stock at the time of issuance.
The total aggregate value of the consideration paid to Woodbridge Management was
$356,000.

         On August 21, 2003, and September 12, 2003, we issued  2,750,000 shares
of our  preferred  stock at a price per share of $2.00 and  2,750,000  warrants,
each of which  entitles the holder to purchase one share of our common stock for
a period of five years from the date of  issuance at a price of $3.00 per share,
to two accredited  investors pursuant to a private equity financing.  Each share
of preferred stock is convertible,  at the option of the holder,  into one share
of common stock, subject to adjustment for certain occurrences. We also issued a
five-year  warrant to purchase up to 275,000 units, with each Unit consisting of
one share of preferred  stock and one warrant at an exercise  price of $2.00 per
Unit, to TN Capital  Equities,  Ltd., our placement agent in connection with the
private equity financing.  The private equity financing described above was made
pursuant to the exemption from the registration provisions of the Securities Act
provided by Section  4(2) of the Act and Rule 506 of  Regulation  D  promulgated
thereunder.

         On August 31, 2003, we issued 41,667  shares to Peter  Cunningham,  our
President and Chief Executive  Officer,  pursuant to the terms of his employment
agreement  with us.  The shares  were  issued  pursuant  to the  exemption  from
registration  provided by Section 4(2) of the  Securities  Act for issuances not
involving a public  offering.  The shares  were  valued at $5.00 per share,  the
market price for shares of our common  stock at the time of issuance.  The total
aggregate value of the consideration paid to Peter W. Cunningham was $208,335.

         On September 18, 2003, we issued  100,000  shares to Lan Hao, our Chief
Financial  Officer,  pursuant to the terms of his employment  agreement with us.
The shares were issued pursuant to the exemption from  registration  provided by
Section  4(2) of the  Securities  Act  for  issuances  not  involving  a  public
offering. The shares were valued at $5.00 per share, the market price for shares
of our common stock at the time of issuance.  The total  aggregate  value of the
consideration paid to Lan S. Hao was $500,000.

         On December 31, 2003, we issued 860,000 shares of our preferred  stock,
at a price per share of $2.25 and  1,000,000  warrants.  Each share of preferred



                                       17
<PAGE>

stock is  convertible,  at the  option of the  holder,  into one share of common
stock, subject to adjustment for certain occurrences.  Each warrant entitles the
holder to purchase one share of our common stock for a period of five years from
the date of issuance at a price of $3.00 per share.  Holders of our warrants may
also  exercise  the  warrants   through  a  cashless   exercise   under  certain
circumstances.  In addition,  we issued to TN Capital  Equities,  our  placement
agent,  a five-year  warrant to purchase  up to 86,000  shares of our  preferred
stock for $2.25 per share and up to 100,000  warrants to purchase  shares of our
common stock upon exercise at $3.00 per share, on a pro-rata basis to the number
of shares of preferred stock purchased.  The private equity financing  described
above was made pursuant to the exemption from the registration provisions of the
Securities  Act provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder.

         On January  26,  2004,  the Board  authorized  the  issuance of 100,000
shares  of  restricted  common  shares  and  50,000  warrants  to Great  Eastern
Securities,  Inc. pursuant to an investment banking agreement. The shares are to
be released quarterly based upon a vesting schedule of 25,000 shares per quarter
during the term of the agreement.  Pursuant to an agreement that was executed on
December  18,  2003,  Great  Eastern will  provide  investor  relations  related
services and assist us with broker relations for our stock. The warrants are for
a term of five years and have an exercise  price  equal to $4.74 per share.  The
shares  were issued  pursuant to the  exemption  from  registration  provided by
Section  4(2) of the  Securities  Act  for  issuances  not  involving  a  public
offering. The shares were valued at $5.65 per share, the market price for shares
of our common stock at the time of issuance.  The total  aggregate  value of the
consideration paid to Great Eastern Securities,  Inc. was $639,828,  including a
$104,828 charge for the value of the warrants issued.

         On February 2, 2004 and April 20,  2004,  we issued  200,000  shares of
restricted common and 100,000 shares of restricted  common,  respectively to the
Aston  Organization  pursuant to a consulting  agreement and amendment  thereto.
20,000 shares were released  when the April 20, 2004  amendment was signed.  The
remaining  180,000  shares  are to be  released  monthly  based  upon a  vesting
schedule  of 15,000  shares  per month  during  the term of the  agreement.  The
services to be provided under the agreement are investor  relations.  The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving a public offering.  The shares
were  valued at $5.65 per share and $4.27 per  share,  respectively,  the market
price for shares of our common  stock at the time of  issuance.  Therefore,  the
total aggregate value of the  consideration  paid to the Aston  Organization was
$1,557,000.

         On May 7, 2004, we issued  120,000  shares of restricted  common stock,
and 200,000 warrants at $6.00 per warrant,  to XCL Partners,  Inc. 20,000 shares
were  released  when the  agreement  was signed on June 24, 2004.  The remaining
100,000  shares are to be  released  monthly  based upon a vesting  schedule  of
10,000 shares per month for ten months , beginning 30 days after  effective date
of the  agreement  The services to be provided  under the agreement are investor
relations.  20,000  warrants  shall  vest  immediately.  The  remaining  180,000
warrants  shall be  released  monthly  based on a  vesting  schedule  of  15,000
warrants  per month for eleven  months.  The shares were issued  pursuant to the
exemption from  registration  provided by Section 4(2) of the Securities Act for
issuances not involving a public  offering.  The shares were valued at $4.09 per
share,  the market price for shares of our common stock at the time of issuance.
Therefore,  the  total  aggregate  value  of the  consideration  paid to the XCL
Partners will be $ 490,800.

         On May 10, 2004, we issued  300,000 shares to Madden  Consulting,  Inc.
pursuant to a consulting  agreement for investor and public relations  services.
The shares were issued pursuant to the exemption from  registration  provided by
Section  4(2) of the  Securities  Act  for  issuances  not  involving  a  public
offering. The shares were valued at $3.92 per share, the market price for shares
of our common stock at the time of issuance.  The total  aggregate  value of the
consideration paid to Madden Consulting was $1,176,000.

         On June 24, 2004, we issued 30.425 shares of our preferred  stock, at a
price per share of $100,000 and 357,936 common stock purchase warrants,  each of
which  entitles the holder to purchase one share of our common stock,  $.001 par
value, for a period of three years from the date of issuance at a price equal to
$5.50 per share to accredited  investors pursuant to a private equity financing.
Each share of the preferred stock is convertible into a number of fully paid and
non-assessable shares of our common stock obtained by dividing the face value of
$100,000  per  share  by the  fixed  conversion  price of $4.25  per  share.  In
addition, we issued to HC Wainwright,  our placement agent, a three-year warrant
to  purchase  up to 3  shares  of our  Series  C  Preferred  Stock at a price of



                                       18
<PAGE>

$100,000 per share and up to 53,691  warrants on a pro-rata  basis to the number
of shares of Preferred  Stock  purchased  upon  exercise.  We also issued 53,691
warrants  to The Shemano  Group,  our  co-placement  agent.  The private  equity
financing   described  above  was  made  pursuant  to  the  exemption  from  the
registration  provisions  of the  Securities  Act for  issuances not involving a
public offering provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. The securities issued have not been registered under the
Act and may not be offered or sold in the United States absent  registration  or
an applicable exemption from registration requirements.

         On June 24,  2004,  we issued  100,000  warrants  to each of SF Capital
Partners Ltd., Gryphon Master Fund, L.P., Banyon Asia Limited and Banyon Mac 24,
Ltd. in consideration for services provided related to our recent private equity
financing. The private equity financing described above was made pursuant to the
exemption from the  registration  provisions of the Securities Act for issuances
not involving a public offering provided by Section 4(2) of the Act and Rule 506
of  Regulation D promulgated  thereunder.  The  securities  issued have not been
registered  under the Act and may not be offered  or sold in the  United  States
absent registration or an applicable exemption from registration requirements.

         On July 21, 2004, we issued 100,000  shares of restricted  common stock
to Chet Howard, our former Chief Financial Officer and Chief Accounting Officer.
The shares were issued pursuant to the exemption from  registration  provided by
Section  4(2) of the  Securities  Act  for  issuances  not  involving  a  public
offering.  The shares were valued  using the closing  stock price on the date of
issue,  pursuant to which the stock was valued at $3.83 at the time of issuance.
The total aggregate value of the consideration  paid to Mr. Howard was valued at
$383,000.

         On July 21, 2004, we issued 100,000  shares of restricted  common stock
to Harry Zhang, our Chief Accounting Officer of our wholly owned subsidiary. The
shares  were issued  pursuant to the  exemption  from  registration  provided by
Section  4(2) of the  Securities  Act  for  issuances  not  involving  a  public
offering.  The shares were valued  using the closing  stock price on the date of
issue,  pursuant  to  which  the  shares  were  valued  at  $3.83 at the time of
issuance.  The total aggregate value of the consideration  paid to Mr. Zhang was
valued at $383,000.

         On  August  27,  2004,  we  issued  35,000  stock  options  to  each to
Montgomery  Simus  and Mark  Bluer,  both of whom are  members  of our  Board of
Directors.  The  options  were  valued  using the Black  Scholes  value  method,
pursuant to which the options were valued at a total of $ 190,400 at the time of
issuance.

         On September  1, 2004,  we issued  stock  options,  for an aggregate of
100,000 shares to Dreamvest, LLC pursuant to a consulting agreement. The options
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving a public offering. The options
were valued using the intrinsic value method, pursuant to which the options were
valued at $2.69 at the time of issuance.

         On September  8, 2004,  we issued  stock  options,  for an aggregate of
57,500  stock  options  to  RCG  Capital  Markets  Group,  Inc.,  pursuant  to a
consulting agreement. A Termination Agreement, dated January 14, 2005 terminated
the  consulting  agreement  with RCG.  The options  were issued  pursuant to the
exemption from  registration  provided by Section 4(2) of the Securities Act for
issuances  not  involving a public  offering.  The options were valued using the
intrinsic  value  method,  pursuant to which the options were valued at $3.90 at
the time of issuance.

         On September 10, 2004,  we issued  83,334  shares of restricted  common
shares  to  Peter  Cunningham,  our  Chief  Executive  Officer  pursuant  to his
employment  agreement.  The shares were issued  pursuant to the  exemption  from
registration  provided by Section 4(2) of the  Securities  Act for issuances not
involving a public  offering.  The shares  were  valued at $3.83 per share,  the
market price for shares of our common stock at the time of issuance.  Therefore,
the total aggregate value of the consideration paid to Mr. Cunningham was valued
at $319,169.

         In October 2004, we engaged  Byrle Lerner,  a beneficial  owner of more
than five percent of our common stock (6.44%), to provide consulting services to
AXM Pharma.  Mr. Lerner will receive 60,000 restricted common shares and 100,000
options to purchase  our common stock at $2.15 per share for his  services.  The
current  agreement  with Mr.  Lerner is for one year and is terminable by either
Mr. Lerner or us upon thirty days written notice.





                                       19
<PAGE>


         In October 2004, we engaged  Aurelius  Consulting to provide  marketing
and investor relations services.  The initial term of the agreement is one year.
Aurelius is entitled to receive 12,500 shares of our restricted common stock per
quarter during the term of its agreement,  in consideration  for their services.
The initial 12,500 shares were paid on behalf of AXM Pharma by Byrle Lerner in a
private  transfer.  The shares were valued at $2.29 per share,  the market price
for shares of our common  stock at the time of  transfer.  Therefore,  the total
aggregate value of the transaction recognized by AXM Pharma was $28,625.

         In  October  2004,  we  agreed  to  issue  Mirador   Consulting  30,000
restricted common shares pursuant to a consulting  agreement with a 3 month term
that may be  renewed  upon the  written  consent  of both  Mirador  and us.  The
agreement is for  corporate  consulting  and investor  relations  services.  The
30,000  shares  were paid on behalf of AXM  Pharma by Byrle  Lerner in a private
transfer. The shares were valued at $2.15 per share, the market price for shares
of our common  stock at the time of  transfer.  Therefore,  the total  aggregate
value of the transaction recognized by AXM Pharma was $64,500.

         On January 19 and June 29, 2005,  we issued 50,017 and 28,583 shares of
common  stock as  dividends  to Series C  Preferred  shareholders  as payment of
interest totaling $141,048 and $40,016, respectively.

         On March 31, 2005 we issued 350,000  shares of restricted  common stock
to Madden Consulting as compensation for investor relations consulting services.
The stock was valued at $2.74 per share,  the closing stock price on the date of
issuance, the Company recognized $959,000.

         In March  2005,  we issued  94,117  shares of common  stock to  Iroquis
Capital for the conversion of 4 shares of Series C Preferred Stock.

         In March 2005, we issued  725,000  shares of common stock to SF Capital
for the conversion of 725,000 shares of Series A Preferred.

         In March 2005, we issued 30,000 shares of restrict stock to each of XCL
Partner Inc. and Ashton Organization pursuant to consulting services.  The total
value the consideration was $80,400 and $79,500, respectively.

         On April 1, 2005, we issued 40,000 shares of restricted common stock to
Newbridge Securities as compensation for investor relations consulting services.
The stock was valued at $2.75 per share,  the closing stock price on the date of
issuance;  the Company recognized  $110,000 in expenses for the issuance of this
stock.  On April 1, 2005 we issued 45,000 shares of stock to Zhu Ming and 10,000
shares of stock to Li Shuzhen, both at $2.75 per share and totaling $151,250 for
certain license rights.

         On April 19,  2005,  AXM Pharma,  Inc.  accepted  subscriptions  in the
amount of $3,425,000,  with 8 accredited  investors pursuant to a private equity
financing.  The  placement  was  co-managed  by H.C.  Wainwright  & Co, Inc. and
Chardan  Capital  Markets.  Net proceeds from the offering after estimated costs
and  expenses,  including  fees  of  the  placement  agent,  were  approximately
$2,767,500.  We issued 6.25 Units,  each consisting of one (1) $500,000  Secured
Promissory  Note and three  hundred  thousand  (300,000)  Common Stock  Purchase
Warrants (Series A Warrants) and three hundred thousand (300,000) special Common
Stock  Purchase  Warrants  (Series  B  Warrants).  For  each  $500,000  of Notes
purchased  pursuant to that certain Note and Warrant Purchase  Agreement entered
into on April 19,  2005  between  the  Company  and those  Purchasers  listed on
Exhibit A to the Agreement,  such Purchaser  shall receive a Series A Warrant to
purchase up to 300,000  shares of Common Stock at an exercise price of $2.90 per
share and a Series B Warrant to purchase up to 300,000 shares of Common Stock at
an exercise price per share of $3.50.  Each Purchaser  shall also be entitled to
receive a Series C Warrant to purchase a number of shares of Common  Stock equal
to one hundred  percent (100%) of the number of Conversion  Shares issuable upon
conversion of such  Purchaser's Note at an exercise price per share equal to the
Conversion  Price.  The Series A Warrants and the Series B Warrants shall expire
five (5) years following the Closing Date and the Series C Warrants shall expire
one  (1)  year  following  the  effective  date  of the  registration  statement
providing for the resale of the Conversion Shares and the Warrant Shares.




                                       20
<PAGE>


         Each Note is due on April 19, 2007 and is  convertible at the option of
the holder anytime in whole or in part at $2.10.  The notes bear interest at the
rate of nine  percent  (9%) per annum,  convertible  into shares of AXM's common
stock, par value $0.001 per share. The interest is payable monthly commencing on
the fifth (5th) month following the issuance date, in cash or in shares of AXM's
common stock.  Commencing  on the fifth (5th) month  following the issuance date
and  continuing  thereafter on the first (1st)  business day of each month until
the  maturity  date,  AXM shall pay the  principal  installment  amount equal to
one-twentieth  (1/20th) of the  original  principal  amount of the note plus any
accrued  but  unpaid  interest  to  the  holder;  provided,  however,  if on any
principal  payment date, the outstanding  principal  amount of the note plus any
accrued but unpaid interest is less than the principal  installment amount, then
AXM shall pay such lesser amount.  AXM may pay the Principal  Installment Amount
in cash or registered shares of common stock. If AXM elects to pay the principal
installment  amount  in  registered  shares  of  common  stock,  the  number  of
registered  shares of common stock to be issued to the holder shall be an amount
equal to the Principal  Installment Amount divided by eighty-five  percent (85%)
of the average of the VWAP for the five (5) trading days  immediately  preceding
the  principal  payment  date;  provided,  that, in no event shall the number of
registered  shares of common stock to be issued to the holder be greater than an
amount equal to the principal installment amount divided by eighty percent (80%)
of the VWAP on the date AXM  provides  the holder with notice as to how AXM will
pay the upcoming Principal  Installment  Amount,  which notice must be given ten
(10) business days prior to such payment.

         The parties to the Note and Purchase Agreement, along with AXM's wholly
owned  subsidiary  AXM Pharma  (Shenyang)  Inc.,  also  entered  into a Security
Agreement dated April 19, 2005.  Pursuant to the Security  Agreement,  Investors
are  granted a  security  interest  in the real  property  at which  AXM  Pharma
(Shenyang)  Inc.'s  factory is located and all  equipment and inventory of every
kind and  nature  located  on the real  property,  as well as all  proceeds  and
products  of such real  property,  except  for any  accounts  receivables.  This
security is senior to all other creditors except for the existing line of credit
with Shanghai Pudong Development Bank. Additionally, AXM also granted a security
interest  in  100%  of  the  shares  of  its  wholly  owned  subsidiary,   Werke
Pharmaceuticals, Inc., which owns AXM Shenyang.

         In  addition  to  its  fees  and  expenses,  the  placement  agent  and
co-placement  agent,  or its assigns,  will receive  commissions and warrants as
follows, but each agent shall only receive such commissions and warrants for the
investors  participating  in the offering  through  each agent's own efforts.  A
selling commissions in an amount equal to 10% of the gross subscription proceeds
shall be awarded,  as well as one (1) 5-year  Warrant to purchase  shares of the
Company's  Common  Stock at $2.90 per share  for each 10 shares  underlying  the
Notes and Warrants issued by the Company in connection with the offering.

          On April 22 and April 26, 2005,  we issued  totaling  78,329 shares of
common stock to SRG Capital for the conversion of fractional  shares of Series C
Preferred.

         On June 14, 2005,  we issued  11,700  shares of common stock to Gryphon
Master Fund for the conversion of 11,700 shares of Series A Preferred Stock.

         On July 1 and August 10, 2005,  we issued  totaling  111,800  shares of
Common Stock to National  Financial Service in connection with the conversion of
111,800 shares of its Series A Preferred Stock.

         On August 8, 2005, we completed a sale of shares of Common Stock by the
exercise  of the  Company's  warrant  for gross  proceeds  of  $2,127,436.  This
financing  was  made  pursuant  to a  Special  Warrant  Offer  extended  to  the
purchasers  listed in the Note and Warrant Purchase  Agreement dated as of April
19, 2005.

         On August 31, 2005, we issued 150,000 shares to Madden Consulting, Inc.
pursuant to a  consulting  agreement.  The  services  to be  provided  under the
consulting  agreement  were investor and public  relations,  which was valued at
$252,000.

         On September 9, 2005, we issued  50,000 shares to Ashok Patel  pursuant
to a  consulting  agreement.  The services to be provided  under the  consulting
agreement were advisory of strategic  licensing and marketing,  which was valued
as $77,000.




                                       21
<PAGE>

<TABLE>

             On September  19, 2005,  we issued  245,645  shares of Common Stock
(valued at $334,077) to  convertible  debenture  holders in payment of principal
and interest due under the  debentures.  Of this  amount,  $171,250  represented
principal payments and the balance interest expense.

Equity Compensation Plan Information

------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category                               (A)                          (B)                          (C)
                                Number of securities to be   Weighted average exercise    Number of securities
                                issued upon exercise of      price of outstanding         remaining available for
                                outstanding options,         options, warrants and        future issuance under
                                warrants and rights          rights                       equity compensation plans
                                                                                          (excluding securities
                                                                                          reflected in column (a)
<S>                                                                            <C>        <C>

------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation plans       2,477,500                    $4.58                        522,500
approved by security holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity  compensation plans not  1,493,334                    $4.05                        0
approved by security holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total                           2,477,500                    $4.58                        522,500
------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>


We did not issue any  options  in 2005  under our 2005  equity  incentive  plan,
approved by our shareholders in March 2005.

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

GENERAL

         AXM Pharma, Inc. is a pharmaceutical and nutraceutical  company engaged
in  the  production,   marketing  and  distribution  of  over  the  counter  and
prescription  pharmaceutical  products  in China.  We have  licenses to produce,
market and  distribute  drug products in various  dosages and forms,  as well as
herbal remedies and vitamins. Currently, subject to having sufficient resources,
we plan to develop sales of Chinese products such as Asarone, Lifegate, LiveComf
and  Elegance  though our  operations  in  Shenyang.  Products  sold through AXM
Shenyang will be sold primarily to the mainland  Chinese market,  which includes
hospital and retail sales. We plan to continue to deemphasize  hospital sales in
favor of retail sales through pharmacies, which generally provide better margins
than hospital sales.

LIQUIDITY AND CAPITAL RESOURCES

         We are in urgent need of additional  capital.  Our cash  resources have
been  depleted.  We have not paid our  employees in China since January 2006. We
are in default  under the terms of certain  promissory  notes as described  more
fully below under "RISK FACTORS - WE ARE CURRENTLY IN DEFAULT ON OUR OBLIGATIONS
UNDER OUR CONVERTIBLE  PROMISSORY  NOTES." These  conditions  raise  substantial
doubt  about our  ability  to  continue  as a going  concern.  The audit  report
prepared by our independent  registered  public  accounting firm relating to our
consolidated  financial statements for the year ended December 31, 2005 includes
an explanatory  paragraph  expressing the substantial doubt about our ability to
continue as a going  concern.  We are  currently  in  discussions  with  several
funding  sourcess  in China to obtain  financing  to  support  operations  going
forward;  however,  to date these discussions have not resulted in our obtaining
any additional  financing.  At this time, we do not know if additional financing
will be available,  nor can we predict the terms of any additional financing. If
we do not raise additional  capital in the immediate future, we may be forced to
cease operations.  If additional capital is raised through the sale of equity or
convertible  debt  securities,  the issuance of such securities  would result in
dilution to our existing  stockholders.  If additional capital is raised through
incurrence  of  indebtedness,  our  interest  expense  will likely  increase and
restrictive  covenants imposed by the lenders may impair our ability to grow our
business.




                                       22
<PAGE>


         Since  our  inception,   we  have  generated  significant  losses  from
operations  and we  anticipate  that we will  continue to  generate  significant
losses from operations for the foreseeable  future. As of December 31, 2005, our
accumulated deficit was approximately $30 million.  Our net loss was $11 million
and $14 million for the years ended  December  31, 2005 and 2004,  respectively.
Our cash outlays from operations and capital  expenditures were $9.1 million for
2005. Our stockholders' equity decreased from $7 million as of December 31, 2004
to $4 million as of December 31, 2005.

         Under the terms of certain Secured Promissory Notes issued on April 19,
2005, we are obligated to pay interest and principal  monthly in cash or shares.
However,  we are  obligated  to make  payments  in cash if our share price falls
below a certain price calculated under a formula  specified in the Notes. We are
currently in default in our payment obligations because we have not been able to
pay the  required  repayment  of  principal  and  interest to the holders of the
Notes. We are in negotiations  with the holders with a view to restructuring the
terms of the Notes.  However,  no agreement  has been reached and, if we fail to
reach an agreement,  it will likely be impossible  for us to raise any new funds
(see "RISK  FACTORS - WE ARE CURRENTLY IN DEFAULT ON OUR  OBLIGATIONS  UNDER OUR
SECURED PROMISSORY NOTES".)

         Cash Sources and Uses

         Total  assets  increased  from  $12,340,946  at  December  31,  2004 to
$13,729,011 at December 31, 2005. The increase is primarily  attributable to the
receipt of  $4,941,192  and  $2,654,467  in net proceeds  from the  placement of
securities  and  short-term  bank  loans  offset  by losses  incurred  in normal
operations.

         Our total outstanding  current  liabilities  increased to $9,639,604 at
December 31, 2005, as compared to approximately $5,346,696 at December 31, 2004.
The increase in current  liabilities was the result of an increase in short-term
loans and accrued interest and principle on the secured promissory notes.

         From  December  31,  2004,  to  December  31,  2005,  our cash and cash
equivalents decreased by approximately $1,163,062. We received net proceeds from
the  sale of the  secured  promissory  notes  of  $3,034,000.  We also  received
$1,907,193 form the exercise of warrants to acquire common stock.  These amounts
were offset by general,  administrative  and selling  expenses of  approximately
$7,621,405.  The sales,  general and  administrative  expenditures were incurred
primarily in connection  with  offerings of securities,  marketing  expenses and
legal,  accounting and consulting fees. We incurred approximately $2 million and
$5.6 million of non-cash  general,  administrative  and selling expenses in 2005
and 2004,  respectively.  The non-cash  expense is incurred  for services  (e.g.
financial  consulting  and  investor  relations  services)  for which we pay our
vendor in shares of our common stock.

         Capital  used to date in  activities  associated  with the building and
certification of the new facilities in Shenyang is approximately US$7.4 million.
To fulfill our planned sales expansion,  implement the required systems and fund
our working  capital needs,  we will need to raise  approximately  $6 million in
additional funds during 2006. We are currently  seeking to raise this additional
capital through either sales of our equity securities or debt financing, secured
by our factory and  equipment  in Shenyang,  but there cannot be any  guarantees
that we will be able to raise this additional  capital on acceptable terms or at
all. We are not  currently in a position to generate cash inflows by calling for
the exercise of any of our outstanding warrants because the trading price of our
stock is below $2.1 per share. If we are not able to raise  additional  capital,
we will be forced to cease operations.

         Financing Activities

         On August 8, 2005, we completed the sale of 1,488,100  shares of Common
Stock for gross  proceeds  of  $2,127,436  (net  proceeds of  $1,907,193).  This
financing  was  made  pursuant  to a  Special  Warrant  Offer  extended  to  the
purchasers  listed in the Note and Warrant Purchase  Agreement dated as of April
19, 2005. Eight out of the nine original purchasers  participated in the Special
Warrant Offer.

         On April 19, 2005 we  completed a private  financing  with 9 accredited
investors. We executed notes totaling $3,425,000. Net proceeds from the issuance
of the notes after offering costs were approximately $3,034,000.  The notes were
issued as a portion of 6.25 Units,  each consisting of one (1) $500,000  Secured




                                       23
<PAGE>

Promissory Note; three hundred thousand (300,000) Common Stock Purchase Warrants
(Series A Warrants);  and three hundred thousand  (300,000) special Common Stock
Purchase  Warrants  (Series B Warrants).  The Notes bear  interest at 9% and are
repayable in equal installments during the period September 2005-April 2007 (see
description above under RECENT SALES OF UNREGISTERED SECURITIES.)

RESULTS OF OPERATIONS

         Year Ended December 31, 2005 Compared to Year Ended December 31, 2004.

         Revenue - During the fiscal year ended  December 31, 2005, we generated
$2,021,728  from product  sales  compared to revenues from product sales for the
fiscal year ended  December 31, 2004, of  $2,115,751.  Approximately  60% or our
2005 revenues were derived from the sale of Sunkist labeled products. Due to the
termination of our license  arrangements with Sunkist, we will have only minimal
sales in 2006 derived from the Sunkist-labeled products. The balance of our 2005
sales and all of our 2004 sales  were  derived  from  products  produced  by our
Shenyang  operations.  The decline in sales of Shenyang  produced  products from
2005 to 2004 is  principally  a result of lack of adequate  capital has severely
constrained our ability to market and promote our products.

           During  the  second   quarter   of  2005,   we  entered   into  three
international  markets for our Sunkist-labeled  products:  Hong Kong; Taiwan and
the PRC.  Although  we  received  purchase  orders  for  certain  products  from
distributors in these  territories,  we concluded that,  under our  distribution
agreements,  several of the elements necessary to the recognition of the revenue
related to these  purchase  orders were not in place as of  September  30, 2005.
Therefore,  we restated our financial  statements for the quarter ended June 30,
2005.  In  addition,  we  concluded  that  the  business  arrangements  with our
distributors  for  the  Sunkist-labeled  products  were  not  satisfactory.   We
therefore  entered new  distribution  agreements  with  Kerryflex  Supply  Chain
Solutions Limited and a Memorandum of Understanding  with DKSH Taiwan Limited in
Hong Kong and Taiwan in the forth  quarter  of 2005.  We  recognized  revenue of
Sunkist  labeled  products  of $1.2  million in 2005  taking  into  account  the
restatement.

         Our  license  agreements  with  Sunkist in Hong Kong,  Macau and Taiwan
expired at  December  31,  2005,  and our license  for China was  terminated  in
February  20,  2006.  As  a  result,  we  no  longer  have  any  right  to  sell
Sunkist-labeled products.

         Future  revenues will be derived from the sale of products  produced at
our Shenyang facility. To date, our ability to conduct manufacturing  operations
at Shenyang and sales  activity in China has been  severely  constrained  by our
lack of funds. If we are unable to raise  substantial  additional  funds, we may
not have the ability to generate  significant sales from our Shenyang operation.
In such event,  we may  consider  licensing  arrangements  or other  strategies.
However,  we have no such  arrangements  in place and no assurance  can be given
that satisfactory arrangements can be obtained.

         Gross Profit - Gross profit on product  sales for the fiscal year ended
December 31, 2005, was $772,368 compared to $1,065,468 for the fiscal year ended
December 31, 2004.  The decrease was the result of lower  margins on the Sunkist
labeled products.

         Sales, General and Administrative Expenses - We incurred Sales, General
and Administrative  expenses of $ 9,629,424,  for fiscal year ended December 31,
2005,  compared to  $15,055,322  for the fiscal year ended  December 31, 2004, a
decrease  of  $5,425,898.  The  decrease in  expenses  is  primarily  due to the
decrease in consulting fees and personnel  costs. We incurred  approximately  $2
million in 2005 in non-cash SG&A expenses in recognition of stock,  warrants and
options issued to cover  administrative  services  provided by  consultants  and
approximately $7.6 million of cash expenditures, a decrease of $1.8 million from
the same period last year.

         Inventory written-off - We delivered Sunkist brand products of Chewchew
Bear  multi-vitamins  to  distributors,  of which,  $313,000 of such product was
labeled to be sold in China.  However,  we had not obtained the necessary import
license for this  product from the Chinese  government  as of December 31, 2005.
The inventories  remain in the distributor's  warehouse in Hong Kong. We can not
predict  when we will obtain the  necessary  license to remove this product from




                                       24
<PAGE>

the distributor's warehouse.  Accordingly, we have written off the value of this
product from our inventory.  During 2005, we outsourced and manufactured Sunkist
brand products of Leafs vitamin supplement strips in China. The raw material had
quality  problems,  resulting  in a write-off  of  $219,000.  As a result of the
above, we took an inventory write-off of approximately $532,000 during 2005

         Non-Cash Consulting Expenses - During the year ended December 31, 2005,
our Board of  Directors  authorized  the  issuance  of shares of our  restricted
common stock,  warrants and stock options to various consultants in lieu of cash
payments.  Based upon the common stock  trading  price at the times of issuance,
and FASB  rules,  we were  required  to incur  non-cash  consulting  expenses of
approximately  $2 million for the issuance of these shares during the year ended
December 31, 2005.

Net Loss - As a result of the above,  we recorded a net loss from operations for
the fiscal year ended December 31, 2005, of  $11,088,281  compared to a net loss
of $13,989,854  for the fiscal year ended December 31, 2004. The decrease is the
result of the  aforementioned  decrease in Selling,  General and  Administrative
expenses.  The net loss per share for the year ended December 31, 2005 was $0.54
per share  calculated on weighted  average  shares  outstanding  of  20,433,762,
compared to a net loss per share for the year ended  December  31, 2004 of $0.87
calculated  on weighted  average  shares  outstanding  of  16,066,789.  Net loss
applicable to common  shareholders  of  $11,516,339  and 16,412,313 for 2005 and
2004,  respectively  resulted in a net loss applicable to common shareholders of
$0.56 and $1.02, respectively.

CRITICAL ACCOUNTING POLICIES

         We believe the following critical  accounting  policies,  among others,
affect our more  significant  judgments and estimates used in the preparation of
our financial statements:

         Revenue Recognition- Product sales revenue is recognized when the goods
are  shipped,  title and risk of loss passes and  collectability  is  reasonably
assured. In situations where a distributor's sales reporting to us is inadequate
or untimely,  we have to judge whether all of the elements  required for revenue
recognition  have been  met,  including  assurance  of  collectability.  In such
instances,  we may  conclude  that revenue  recognition  of such sales should be
delayed  until  payments are received  from the  distributor.  Any provision for
discounts  and  estimated  returns are  accounted  for in the period the related
sales are recorded.

         Allowance for Doubtful  Accounts - We maintain  allowances for doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments. The allowance for doubtful accounts is based on specific
identification  of customer  accounts and our best estimate of the likelihood of
potential loss, taking into account such factors as the financial  condition and
payment  history of major  customers.  We  evaluate  the  collectability  of our
receivables at least quarterly. If the financial condition of our customers were
to  deteriorate,  resulting in an impairment of their ability to make  payments,
additional  allowances may be required.  The  differences  could be material and
could significantly impact cash flows from operating activities.

         Sales  Allowances  - A portion of our  business is to sell  products to
distributors who resell the products to the end customers. In certain instances,
these  distributors  obtain  discounts based on the  contractual  terms of these
arrangements.  Sales discounts are usually based upon the volume of purchases or
by  reference  to a specific  price in the related  distribution  agreement.  We
recognize  the  amount of these  discounts  at the time the sale is  recognized.
Additionally,  sales returns allowances are estimated based on historical return
data,  and  recorded  at the time of sale.  If the  quality or  efficacy  of our
products  deteriorates or market conditions  otherwise change,  actual discounts
and  returns  could  be  significantly  higher  than  estimated,   resulting  in
potentially material differences in cash flows from operating activities.

         Inventory - We write down our inventory for estimated  obsolescence  or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated  market value based upon assumptions  about future demand,  future
pricing and market  conditions.  If actual  future  demands,  future  pricing or
market  conditions  are less  favorable  than  those  projected  by  management,
additional  inventory  write-downs may be required and the differences  could be
material.  Such differences might significantly impact cash flows from operating
activities.

         Accounting for  Stock-Based  Compensation - We account for  stock-based
compensation for employees and non-employee members of our board of directors in
accordance with Accounting Principles Board, or APB, Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB Opinion No. 25,  compensation  expense



                                       25
<PAGE>

is based on the  intrinsic  value on the  measurement  date,  calculated  as the
difference  between the fair value of our common stock and the relevant exercise
price. We account for stock-based  compensation for  non-employees,  who are not
members  of our  board  of  directors,  at  fair  value  using  a  Black-Scholes
option-pricing  model  in  accordance  with  the  provisions  of SFAS  No.  123,
"Accounting  for  Stock-Based  Compensation"  and  other  applicable  accounting
principles.  There  were  2,140,000  stock  options  granted  to  employees  and
directors in 2004. There were not any options granted to employees in 2005.

         Had  compensation  expense been determined  based on the estimated fair
value at the measurement  dates of awards under those plans  consistent with the
method prescribed by SFAS No. 123, our December 31, 2005 and 2004 net loss would
have been  changed to the pro forma  amounts  indicated  below.  No options were
granted in 2005.

         In December 2002, the Financial  Accounting  Standards Board issued its
Statement No. 148,  "Accounting for  Stock-Based  Compensation -- Transition and
Disclosure--an  amendment of Financial  Accounting Standards Board Statement No.
123." This Statement amends Statement of Financial Accounting Standards No. 123,
to provide  alternative  methods of  transition  for an entity that  voluntarily
changes to the fair value based method of accounting  for  stock-based  employee
compensation. It also amends the disclosure provisions of Statement of Financial
Accounting  Standards No. 123 to require prominent  disclosure about the effects
on reported net income of an entity's  accounting  policy decisions with respect
to stock-based  employee  compensation.  The  transition  and annual  disclosure
provisions of Statement of Financial  Accounting Standards No. 148 are effective
for fiscal  years ending after  December  15, 2002,  and the interim  disclosure
provisions were effective for the first interim period  beginning after December
15,  2002.  We did not  voluntarily  change to the fair  value  based  method of
accounting for stock-based  employee  compensation,  therefore,  the adoption of
Statement  of  Financial  Accounting  Standards  No. 148 did not have a material
impact on our operations and/or financial position.

         Convertible  Preferred Stock - Convertible Preferred Sock issued by AXM
Pharma is initially offset by a discount representing the relative fair value of
the beneficial  conversion feature and warrants.  This beneficial conversion for
the  preferred  stock is  recorded as a dividend  over the period the  preferred
stock is  convertible  and  accelerated  pro-rata  as the  preferred  stock  are
converted. The beneficial conversion feature allocated to warrants is recognized
over the life of the warrants and  accelerated  as warrants are  exercised.  The
fair value of the warrants and  beneficial  conversion  discount are  calculated
based  on  available  market  data  using  appropriate   valuation  models.  The
beneficial conversion feature is limited to the total proceeds received.

         Convertible  Debentures  -  Convertible  debentures  that we issued are
initially  offset by a  discount  representing  the  relative  fair value of the
warrants  issued with the  debentures.  This  discount is  amortized as interest
expense  over  the term of the  debentures,  along  with  the fees and  expenses
relating to the issuance of these  debentures.  The fair value of the debentures
and the warrants are calculated based on available market data using appropriate
valuation models.

         Valuation of  Intangibles  - From time to time,  we acquire  intangible
assets that are beneficial to our product development processes. We periodically
evaluate the carrying value of intangibles,  including the related  amortization
periods.  In evaluating  acquired  intangible assets, we determine whether there
has been  impairment by comparing the anticipated  undiscounted  cash flows from
the  operation  and eventual  disposition  of the product line with its carrying
value.  If the  undiscounted  cash flows are less than the carrying  value,  the
amount of the  impairment,  if any, will be determined by comparing the carrying
value of each  intangible  asset with its fair  value.  Fair value is  generally
based on either a  discounted  cash flows  analysis or market  analysis.  Future
operating  income  is  based  on  various   assumptions,   including  regulatory
approvals, patents being granted, and the type and nature of competing products.
If  regulatory  approvals  or  patents  are not  obtained  or are  substantially
delayed, or other competing technologies are developed and obtain general market
acceptance or market  conditions  otherwise  change,  our intangibles may have a
substantially reduced value, which could be material.

         Deferred Taxes - We record a valuation allowance to reduce the deferred
tax assets to the amount that is more likely  than not to be  realized.  We have
considered  estimated future taxable income and ongoing tax planning  strategies
in  assessing  the amount  needed for the  valuation  allowance.  Based on these
estimates,  all of our deferred tax assets have been reserved. If actual results
differ  favorably  from those  estimates  used, we may be able to realize all or
part of our net deferred tax assets.  Such realization  could positively  impact




                                       26
<PAGE>

our operating results and cash flows from operating activities.

         Value Added Tax - Value added tax payable is reported as a  significant
liability. The accounting policies adopted by management include full disclosure
of the value added tax  liability  calculated at 17% of the  difference  between
ex-factory  price and the cost of raw materials,  less the cost of the fees paid
to the third-party original equipment manufacturing company.

         Litigation  - We  account  for  litigation  losses in  accordance  with
Statement  of  Financial  Accounting  Standards  (SFAS) No. 5,  "Accounting  for
Contingencies."  Under SFAS No. 5, loss contingency  provisions are recorded for
probable losses at management's best estimate of a loss, or when a best estimate
cannot be made, a minimum loss contingency  amount is recorded.  These estimates
are often initially  developed  substantially  earlier than the ultimate loss is
known,  and the  estimates  are refined each  accounting  period,  as additional
information is known.  Accordingly,  we are often initially  unable to develop a
best estimate of loss;  therefore,  the minimum amount,  which could be zero, is
recorded.  As  information  becomes  known,  either the  minimum  loss amount is
increased  or a  best  estimate  can  be  made,  resulting  in  additional  loss
provisions.  Occasionally,  a best estimate  amount is changed to a lower amount
when events result in an expectation of a more favorable outcome than previously
expected.  Due to the nature of current  litigation  matters,  the factors  that
could lead to changes in loss  reserves  might  change  quickly and the range of
actual losses could be significant, which could materially impact our results of
operations and cash flows from operating activities.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial  statements and financial  statement  schedules  begin on
page F-1 of this report.

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

         None.

ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION AND DISCLOSURE CONTROLS AND PROCEDURES

         We have evaluated the  effectiveness of the design and operation of our
"disclosure  controls and  procedures," as such term is defined in Rules 13a-15e
promulgated under the Exchange Act as of this report. Based upon the evaluation,
the Chief Executive  Officer and Chief Financial Officer have concluded that our
disclosure  controls  and  procedures  were not  effective  as of the end of the
period covered by this report to provide  reasonable  assurance that information
required  to be  disclosed  by the  Company in reports  that it files or submits
under the Exchange Act is recorded, processed,  summarized and report within the
time periods specified in SEC rules and forms.

         In  this  regard,  our  current  management  noted  in  particular  our
restatement  necessitated  by an improper  recognition of revenues in the second
quarter of 2005. In order to address this matter, we have undertaken a number of
steps to improve our  disclosure  process.  We have changed our Chief  Financial
Officer  and the  composition  of our  Audit  Committee.  We have  appointed  an
experienced  and independent  individual who qualifies as a financial  expert to
serve as Chair of the  Audit  Committee.  We have  implemented  a more  rigorous
disclosure process. Nonetheless, in light of our limited financial resources and
the  concomitant  limitations  on our  financial  reporting  infrastructure,  we
believe it is premature to conclude that our disclosure  controls and procedures
are effective.

CHANGES IN INTERNAL CONTROLS

         There  has  been no  change  in our  internal  control  over  financial
reporting (as such term is defined in Rules  13a-15(f)  and 15d-15(f)  under the
Exchange  Act) during the quarter  ended  December 31, 2005 that has  materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.




                                       27
<PAGE>


         Our  management,  including  our  chief  executive  officer  and  chief
financial officer,  does not expect that our disclosure  controls and procedures
or internal  controls over  financial  reporting will prevent all errors and all
fraud. A control system, no matter how well conceived and operated,  can provide
only reasonable,  not absolute,  assurance that the objectives of the system are
met and cannot detect all deviations. Because of the inherent limitations in all
control systems,  no evaluation of controls can provide absolute  assurance that
all control  issues and  instances of fraud or  deviations,  if any,  within the
company have been detected.  Projections of any evaluation of  effectiveness  to
future  periods  are  subject to the risk that  controls  may become  inadequate
because of  changes in  conditions,  or that the degree of  compliance  with the
policies or procedures may deteriorate.

ITEM 8B.   OTHER INFORMATION

         None.

PART III.

ITEM 9.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


 The  following  table  and text set  forth  the  names  and ages of all
directors  and  executive  officers  of AXM  Pharma  as of April  28,  2006.  On
September  25,  2005,  we  elected  Baozhong  Zhang  to  serve  on the  Board of
Directors.  On October 13, 2005, Chet Howard resigned as Chief Executive Officer
and Chief Financial  Officer of the Company.  On that same day, Wang Wei Shi was
elected by the Board of  Directors  to serve as the  Company's  Chief  Executive
Officer  and  elected  Harry  Zhang to serve as the  Company's  Chief  Financial
Officer.  On March 8, 2006, we elected Elliot M. Maza and Wenzhou Zhang to serve
as  directors  on the Board of  Directors.  Elliot  M.  Maza also  serves as the
Chairman of the Audit Committee.

         The Board of  Directors  is  comprised  of only one  class.  All of the
directors  will serve until the next annual  meeting of  shareholders,  which is
anticipated  to be held in May of 2006,  and until their  successors are elected
and qualified, or until their earlier death, retirement, resignation or removal.
There are no family  relationships among directors and executive officers.  Also
provided  herein  are brief  descriptions  of the  business  experience  of each
director and executive  officer  during the past five years and an indication of
directorships  held by each director in other companies subject to the reporting
requirements under the Federal securities laws.

NAME                       AGE          POSITION
Wang Wei Shi               48           Chairman
Harry Zhang                42           Acting Chief Financial Officer
Elliot M. Maza             50           Director
Baozhong  Zhang            61           Director
Wenzhou Zhang              63           Director
Zhenyu Kong                61           President of China Operations & Chief
                                        Operating Officer of AXM Sheyang

          MS. WANG WEI SHI,  CHAIRMAN.  Ms.  Wang became  Chairman of AXM Pharma
when we acquired Werke Pharmaceuticals, Inc. in March 2003 and has been Chairman
of AXM Shenyang and Vice-Chairman of Werke Pharmaceuticals,  Inc. since December
2000.  From 1999 until December 2000, Ms. Wang was Chairman and General  Manager
of Shenyang Tianwei Pharmaceutical Factory, Ltd., a predecessor to AXM Shenyang.
Since May 1996, she has also been Chairman of Liaoning  Shenda Import and Export
Company, a Chinese  import/export  company. From 1984 through 1988, Ms. Wang was
the Manager of the Finance  Department of the Shenyang  Five Mineral  Import and
Export  Company,  a Chinese  import/export  company.  Ms. Wang attended  Beijing
University and Shenyang University and studied financial management,  accounting
and economics.

         HARRY ZHANG, CHIEF FINANCIAL OFFICER.  Mr. Zhang became Chief Financial
Officer on October 13, 2005. Mr. Zhang has been the Chief Accounting Officer for
the our subsidiary,  AXM Pharma Shenyang, Inc. since 2004. For the 4 years prior
thereto he was  employed by the  international  accounting  firm of Deloitte and
Touche LLP, initially as a senior auditor in its New York office for 2 years and
then as audit manager for its Beijing office for an additional two years.


                                       28
<PAGE>



         ELLIOT M. MAZA, DIRECTOR.  Mr. Maza became a director on March 8, 2006.
Mr.  Maza  also   currently  is  the  Chief   Financial   Officer  of  Emisphere
Technologies,  Inc.  (NASDAQ:  EMIS), a  biopharmaceutical  company.  During his
career,  Mr. Maza has held  distinguished  positions in the areas of finance and
law.  While  at  Emisphere,  he  has  successfully  restructured  the  company's
indebtedness, helped the company raise capital and implemented Section 404 under
the  Sarbases-Oxley  Act. Since December 2004, he has also served as a member of
the  Board  of  Directors  and  chairman  of the  audit  committee  of  Tapestry
Pharmaceuticals Inc. (NASDAQ: TPPH).  Previously,  he was a Partner at Ernst and
Young LLP and a Vice  President at Goldman Sachs,  JP. Morgan  Securities and BT
Securities  Corporation.  Mr. Maza  previously  practiced  law at  Sullivan  and
Cromwell LLP. He received his J.D.  degree from the  University of  Pennsylvania
Law School in 1985 and his C.P.A. from the State of New Jersey in 1981.

         BAOZHONG ZHANG,  DIRECTOR.  Mr. Zhang was elected to serve on the Board
of Directors on September 25, 2005. Mr. Zhang has extensive international pharma
experience,  having spent 36 years in the pharma sector, including 15 years as a
vice general manager and general manager of Northeastern  Pharmaceutical  Group,
and 21 years as technician,  engineer,  vice general manager and general manager
with the Sixth Pharmaceutical Factory in Northeast China.

         WENZHOU ZHANG,  DIRECTOR. Mr. Zhang became a director on March 8, 2006.
Mr. Zhang has 38 years of  pharmaceutical  industry  experience  and  management
experience in China.  For the past 10 years, he has served as a Vice Official to
the State  Food and Drug  Administration  and the State Drug  Administration  in
China.  Previous to that time,  Mr. Zhang  served as the  Secretary of Chongqing
Municipality,  the  Chairman of the  Chongqing  Economic  Reform  Committee,  an
official of Chongqing Drug Administration, and as a General Manager of Chongqing
Pharmaceutical Factory.

         ZHENYU KONG,  PRESIDENT OF CHINA OPERATIONS AND CHIEF OPERATING OFFICER
OF AXM SHENYANG. Mr. Kong spent nearly 25 years at China National Pharmaceutical
Group, China's leading  pharmaceutical  company,  where he was Chairman of China
National Pharmaceutical Group United Engineering.  China National Pharmaceutical
Group Corp., also known as,  SINOPHARM,  is actively engaged in the research and
development,  capital  investment,  manufacture and trade of pharmaceuticals and
medical instruments. SINOPHARM has achieved an annual sales volume of 10 billion
RMB (over 1.2 billion U.S.  Dollars) and a total import and export volume of 200
million U.S. Dollars. Prior to becoming Chairman of SINOPHARM,  Mr. Kong was the
Director  of  the  Planning  and   Development   Department  of  China  National
Pharmaceutical  Group Corporation.  From 1998 to 1999, Mr. Kong was the director
of the  International  Department  of China  National.  Mr. Kong has  tremendous
expertise  in  planning  and  developing   extensive   product   portfolios  and
commendable strength in research,  production,  sales and distribution,  as well
as,  international  trade.  Mr. Kong has held various  leadership  roles in many
industry  associations,  which  solidified  his  significant  place  in  China's
pharmaceutical  industry.  He pioneered  the  organization  of national drug and
pharmaceutical  ingredients exhibitions,  national medical equipment exhibitions
and other exhibitions in China and abroad. Mr. Kong has played a key role in the
shaping of industry structure, improving market regulation, maintaining disaster
reserves, overseeing pharmaceutical supplies, encouraging international economic
and technological cooperation,  as well as, foreign investment and technological
exchanges.  Mr. Kong attended Beijing Chemical Engineering  University from 1963
to 1968.

AUDIT COMMITTEE FINANCIAL EXPERT AND IDENTIFY AUDIT COMMITTEE:

     The Audit Committee focuses its efforts on assisting our Board of Directors
to fulfill its oversight responsibilities with respect to AXM Pharma's:

o        Quarterly and annual  consolidated  financial  statements and financial
         information filed with the Securities and Exchange Commission;

o        System of internal controls;

o        Financial accounting principles and policies;



                                       29
<PAGE>


o        Internal and external audit processes; and

o        Regulatory compliance programs.

         The current  Audit  Committee  members are Mr. Maza  (Chair),  Baozhong
Zhang and Wenzhou Zhang.  The committee  meets  periodically  with management to
consider the adequacy of AXM Pharma's internal controls and financial  reporting
process. It also discusses these matters with AXM Pharma's  independent auditors
and with appropriate  financial  personnel employed by AXM Pharma. The committee
reviews our financial  statements  and discusses  them with  management  and our
independent  auditors  before  those  financial  statements  are filed  with the
Securities and Exchange Commission. The committee met 6 times in 2005 and 2006.

         The  committee  has the  sole  authority  to  retain  and  dismiss  our
independent auditors and periodically reviews their performance and independence
from management.  The independent  auditors have unrestricted  access and report
directly to the committee.

AUDIT COMMITTEE FINANCIAL EXPERT.

         The Board has determined  that the Chairman of the committee,  Mr. Maza
is an "audit committee  financial expert" as that term is defined in Item 401(e)
of Regulation S-B and  "independent"  for purposes of currently adopted American
Stock  Exchange  listing  standards  and  Section  10A(m)(3)  of the  Securities
Exchange Act of 1934.  Mr Maza is also  currently on the Board of Directors  and
serves as chairman of the audit committee of Tapestry  Pharmaceuticals  Inc. Our
Board of Directors has determined that such simultaneous service does not impair
the ability of Mr. Maza to  effectively  serve as the  Chairman of AXM  Pharma's
Audit Committee.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Section 16(a) of the Exchange Act requires our officers,  directors and
persons who own more than 10% of any class of our  securities  registered  under
Section  12(g) of the Exchange  Act to file reports of ownership  and changes in
ownership with the SEC.  Officers,  directors and greater than 10%  stockholders
are required by SEC  regulation  to furnish us with copies of all Section  16(a)
forms they file.

         We believe that there was compliance with all other filing requirements
of Section  16(a)  applicable to our  officers,  directors and 10%  stockholders
during fiscal 2005.

CODE OF ETHICS

         The Company has always encouraged its employees, including officers and
directors to conduct business in an honest and ethical manner. Additionally,  it
has  always  been our  policy to comply  with all  applicable  laws and  provide
accurate and timely  disclosure.  In February  2005,  our Board adopted a formal
written code of ethics for all of our employees.

         Our codes of ethics are designed to deter wrongdoing and promote honest
and ethical conduct and compliance with applicable laws and  regulations.  These
codes also  incorporate  our  expectations  of our executives  that enable us to
provide  accurate and timely  disclosure in our filings with the  Securities and
Exchange  Commission  and other public  communications.  Our codes of ethics are


                                       30
<PAGE>



<TABLE>

<CAPTION>


posted  on  our  website,   http://www.axmpharma.com.   Any  future  changes  or
amendments  to our code of ethics,  and any  waiver of our codes of ethics  will
also be posted on our website when applicable.

         You may  obtain a copy of any of our  codes of  ethics  at no cost,  by
written request to: AXM Pharma, Inc., 17870 Castleton Street, Suite 255, City of
Industry, California; or, oral request at: (626) 964-2848.


ITEM 10.    EXECUTIVE COMPENSATION


                           SUMMARY COMPENSATION TABLE


                                 Annual Compensation                Long Term Compensation
                         --------------------------------    ------------------------------------
<S>                                                                            <C>    <C>           <C>
                                                                       Awards       Payouts


      Name                                         Other                    Securities                All
      And                                          Annual    Restricted     Underlying               Other
   Principal                                       Compen-     Stock          Options/    LTIP      Compen-
    Position                                       sation     Award(s)         SARs      Payouts    sation
                   Year   Salary($)   Bonus($)      ($)          $              (#)         $          $
      (a)          (b)      (c)         (d)         (e)         (f)             (g)        (h)       (i)
--------------------------------------------------------------------------------------------------------------

Wang Wei Shi
President, CEO     2005   $240,000        0           0           0             0           0          0
                   2004    240,000        0           0           0         300,000(1)      0          0
Chairman of
the Board          2003    240,000        0           0           0             0           0          0


Harry Zhang        2005    120,000        0           0           0             0           0          0
CFO,
Chief              2004     80,000        0           0        383,000          0           0          0
Accounting         2003       0           0           0           0             0           0          0
Officer


Peter W.           2005     70,000        0           0           0             0           0          0
Cunningham         2004    240,000        0           0        208,335      40,000(2)       0          0
Former             2003     50,000        0           0        208,335          0           0          0
President and
CEO


Chet Howard        2005    100,000     60,000         0           0             0           0          0
Former CFO         2004    120,000        0           0        383,000          0           0          0
                   2003       0           0           0           0             0           0          0

</TABLE>


(1) The purchase  price of the shares of the Common Stock  covered by the Option
is $4.14 per share.
(2) The purchase  price of the shares of the Common Stock  covered by the Option
is $4.14 per share.



                                       31
<PAGE>


                         OPTION/SAR IN LAST FISCAL YEAR

OPTION/SAR GRANTS

         None of our executive  officers were granted options or SARs during the
last fiscal year.

AGGREGATED OPTION/SAR EXERCISED AND FISCAL YEAR-END OPTION/SAR VALUE TABLE

           None of our executive  officers  exercised options or SARs during the
last fiscal year.

LONG TERM INCENTIVE PLANS

         None of our executive  officers were granted Long Term Incentive awards
in the last fiscal year.

BOARD OF DIRECTORS

         Our directors who are  employees do not receive any  compensation  from
AXM Pharma for  services  rendered as  directors.  The Board has  created  three
classes  of  fees  for  outside   directors:   (1)  outside  directors  who  are
"independent,"  as defined in the Exchange Act will be paid $4,500.00 per month;
(2) outside  directors  who are not  "independent"  will receive  $3,000.00  per
month;  and, (3) the Vice  Chairman  will receive a flat fee of  $18,000.00  per
month, inclusive of committee fees and the Chairwoman will receive a flat fee of
$20,000.00  per month.  All board  members of U.S.  citizenship  are entitled to
participate in AXM Pharma's health  insurance  plan.  Since August 24, 2004, our
Board of Directors issued 2,030,000 stock options exercisable at $4.14 per share
to members of our Board of Directors and employees and an additional  40,000 and
70,000 stock options exercisable at $5.70 and 2.72 per share, respectively.  The
foregoing   options  were  granted  under  the  Company's   2004  Incentive  and
NonStatutory Stock Option Plan.

EMPLOYMENT AGREEMENTS

         Mr.  Cunningham  was originally  hired to serve as our Chief  Operating
Officer,  but in September 2003, Mr. Cunningham was promoted to the positions of
President and Chief Executive Officer.  When Mr. Cunningham was promoted,  other
than the change in his  responsibilities,  the terms of his employment agreement
remained the same. On January 31, 2005, Chet Howard  replaced Mr.  Cunningham as
Chief Executive Officer. Mr. Cunningham became President of International Sales.
Although other terms of his employment agreement had not yet been finalized, the
Board approved certain aspects of Mr. Cunningham's  compensation,  including Mr.
Cunningham's  compensation of $10,000 per month for a one-year contract with AXM
for this position.  The Board also approved a three-month  severance package for
Mr.  Cunningham  in the  event  that he was  terminated  other  than for  cause.
Additionally,  Mr.  Cunningham  was to  receive  3% of net  sales  based  upon a
projected  budget  that  had  been  prepared  and  approved  by the  Board.  Mr.
Cunningham  also had the  opportunity  to receive 5% of net sales if he retained
any sales over the stated budget. Mr. Cunningham's  employment  agreement was to
be amended to reflect his position  change,  but a new employment  agreement was
never reached because Mr. Cunningham was terminated for cause on July 20, 2005.

         On  January  31,  2005,  Chet  Howard  was  appointed  by the  Board of
Directors to replace Peter  Cunningham as Chief  Executive  Officer.  Mr. Howard
became our Chief Executive  Officer on February 1, 2005, and continued to act as
our Chief Financial Officer until October 13, 2005 when he voluntarily  resigned
from the position.  Pursuant to the terms of his agreement with AXM Pharma,  Mr.
Howard was paid a Base Salary of $240,000 per year, distributed in equal monthly
installments. Mr. Howard also received a $60,000 signing bonus. In addition, Mr.
Howard was entitled to receive  250,000  incentive  employee  stock  options per
year, vesting quarterly.  During the term of his employment under the Agreement,
at the Board's  discretion,  Mr. Howard was also eligible to  participate in all
bonus and  incentive  plans.  Mr.  Howard was  eligible  to  participate  in all
employee  benefit  plans to the  extent  maintained  by the  Company,  including
(without limitation) any life, disability,  health, accident and other insurance
programs, paid vacations, and similar plans or programs, subject in each case to
the generally applicable terms and conditions of the plan or program in question
and to the  determinations of any committee  administering such plan or program.
Mr.  Howard's  salary,  bonus  and  incentives  were  reviewed  by our  Board of
Directors  and  compensation  committee  with the goal of bringing his salary in
line with  industry  standards.  Mr.  Howard's  employment  agreement  was for a


                                       32
<PAGE>

two-year term. Mr. Howard voluntarily terminated his employment agreement.  Upon
his voluntary termination we accrued salary, vested deferred compensation (other
than pension  plan or profit  sharing  plan  benefits,  which were to be paid in
accordance with the applicable  plan), and accrued vacation pay, all to the date
of termination,  but no severance compensation.  Mr. Howard's agreement requires
that he keep  confidential any proprietary  information  acquired while employed
and upon  termination of his employment.  He was also prohibited from soliciting
any employees of AXM Pharma for a period of six months following his termination
for any reason.

         The Company entered into an employment agreement with Mr. Kong on March
31,  2005;  Mr.  Kong  began  his  employment  on May 1,  2005.  The term of the
Agreement  is for one (1)  year  beginning  on the  Effective  Date,  but may be
extended  by the mutual  agreement  of the parties  and,  unless  terminated  in
writing at least thirty (30) days prior to the  expiration  of the initial term,
shall  automatically  renew  for  an  additional  one-year  term  on  the  first
anniversary  of the Effective  Date and on each  successive  anniversary  of the
Effective Date unless  terminated in writing  similarly to the procedure  stated
above.  Mr. Kong's Base Salary will be US $20,000.00 per month. The Company will
contribute  $17,500 per month and AXM Shenyang  shall  contribute  the remaining
$2,500  per month less any  deductions  for taxes.  Mr.  Kong will also  receive
200,000 incentive employee stock options per year,  vesting quarterly.  Mr. Kong
is  eligible  to  participate  in all  employee  benefit  plans  to  the  extent
maintained  by the  Company  for its  China-based  employees.  Mr.  Kong  may be
terminated for cause,  upon which he will receive all accrued salary,  incentive
compensation  to the extent earned,  vested deferred  compensation,  and accrued
vacation  pay,  all to the  date of  termination.  Additionally,  his  incentive
compensation and bonuses, to the extent earned, shall be paid within thirty (30)
days of the date of the termination.  If Mr. Kong's employment is terminated for
any reason,  he will retain all of his rights to benefits that have vested,  but
his  rights  to  participate  in those  plans  will  cease  upon his  employment
termination  unless the  termination is a Termination  Other Than for Cause,  in
which case his rights of  participation  will continue for a period of three (3)
months following the termination of his employment.  If Mr. Kong's employment is
terminated in a Termination Other Than for Cause or by Company due to Mr. Kong's
disability,  he will be paid as  severance  pay his Base  Salary  for the period
commencing on the date that his  employment is terminated and ending on the date
which  is one (1)  month  thereafter.  Due to Mr.  Kong's  employment  with  the
Company,  he will have  access to the  Company's  Confidential  Information.  In
consideration for that access,  Mr. Kong agrees that for a period of twelve (12)
months after  termination of his employment,  he will not use such  Confidential
Information  to compete  with the business of the  Company.  In addition,  for a
period of twelve (12) months after  termination of his  employment,  he will not
induce or attempt to induce any  employee of the Company to  discontinue  his or
her  employment  with the Company  for the  purpose of becoming  employed by any
competitor  of  Company,  nor  will he  initiate  discussions,  negotiations  or
contacts  with persons  known by him to be a customer or supplier of the Company
at the time his employment  with the Company is  terminated,  for the purpose of
competing with the Company.  Notwithstanding  anything to the contrary contained
in the  Agreement,  the previously  stated  Non-Compete  provisions  will not be
applicable in the event of any Termination  Other Than for Cause with respect to
Mr. Kong's employment.

         The Company  currently has no employment  agreements in effect with Ms.
Wang Wei-Shi or Mr. Harry Zhang.

STOCK OPTION PLANS

         On February  1, 2005 our Board of  Directors  approved  the 2005 Equity
Incentive Plan, which will replace the 2004 Plan. Our shareholders  approved the
2005 Plan at our Special Meeting on March 10, 2005. The 2005 Plan is intended to
further our growth and financial success by providing  additional  incentives to
our directors,  executives and selected  employees and  consultants so that such
participants may acquire or increase their proprietary  interest in the Company.
Stock options  available under the 2005 Plan include  "Incentive Stock Options",
as  defined  in Code  section  422 and any  regulations  promulgated  under that
Section, and "Nonstatutory Options" at the discretion of the Board of Directors.
Additionally,  Stock  Appreciation  Rights,  Restricted Stock,  Restricted Stock
Unit, Performance Awards, Dividend Equivalents,  or Other Stock-Based Awards may
be granted under the Equity Plan.  Shares  available under the 2005 Plan include


                                       33

<PAGE>

<TABLE>


5,000,000 shares of our common stock,  plus all Shares  remaining  available for
issuance  under the 2004 Plan on the  effective  date of the Equity Plan.  As of
April 13, 2006, no stock options have been granted pursuant to the 2005 Plan.



ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND  MANAGEMENT AND
            RELATED STOCKHOLDER MATTERS

         As used in this section,  the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the  Securities  Exchange Act of 1934,
as amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared  investment  power (including the
power to dispose of or direct the  disposition  of) with respect to the security
through any contract,  arrangement,  understanding,  relationship  or otherwise,
subject to community property laws where applicable.

         As of April 13,  2006,  we had a total of  22,162,185  shares of common
stock and 826,500 (presently convertible into approximately  1,922,093 shares of
common stock) shares of preferred  stock issued and  outstanding,  which are the
only issued and outstanding  voting equity  securities of AXM Pharma.  Shares of
Preferred Stock vote on as converted basis with the common stock. At the date of
this Prospectus,  each share of Preferred Stock is convertible into one share of
common stock.

         The following table sets forth, as of April 13, 2006: (a) the names and
addresses of each beneficial  owner of more than five percent (5%) of our common
stock and Preferred  Stock (taken together as one class) known to us, the number
of shares of common stock and Preferred  Stock  beneficially  owned by each such
person,  and the percent of our common stock and Preferred  Stock so owned;  and
(b) the names and addresses of each director and executive  officer,  the number
of shares our common  stock and  Preferred  Stock  beneficially  owned,  and the
percentage  of our  common  stock and  Preferred  Stock so  owned,  by each such
person,  and by all of our  directors and  executive  officers as a group.  Each
person has sole voting and  investment  power with  respect to the shares of our
common stock and  Preferred  Stock,  except as otherwise  indicated.  Beneficial
ownership  consists  of a direct  interest  in the  shares of  common  stock and
Preferred Stock, except as otherwise indicated.

-----------------------------------------------------------------------------------------------------------
                                                                                           PERCENTAGE
             NAME AND ADDRESS               AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP     OF VOTING OF
                                                                                         SECURITIES (1)
-----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>       <C>

Ms. Wang Wei Shi
46 Wen An Road                                            6,047,000(2)                       27.29%
Building 4, 5th Floor
Shenyang, Liaoning,
The Peoples Republic Of China 110003

-----------------------------------------------------------------------------------------------------------
Harry Zhang
STE 2109  Beijing Exchange BLDG NO 128                       100,000                         0.45%
Jianguo RD, Beijing, 100022 P. R China

-----------------------------------------------------------------------------------------------------------
Elliot M. Maza
114 Chestnut Street                                             0                              0%
Englewood, NJ 07631

-----------------------------------------------------------------------------------------------------------
Chaoying(Charles) Li
14/F, Buiding A, Huixium Plaza, No                           210,000                         0.95%
Beishuan Zhong Road, Chaoyang



                                       34
<PAGE>


District
Beijing 100101, P.R. China

-----------------------------------------------------------------------------------------------------------
Baozhong  Zhang
100-7 East Binke Road                                           0                              0%
Shenke District
Shenyang Liaoning, F4 110015

-----------------------------------------------------------------------------------------------------------
Wenzhou Zhang
No.2 Feiyun Road Hunnan New District                            0                              0%

-----------------------------------------------------------------------------------------------------------
Zhenyu Kong
Room 2109                                                   50,000(3)                        0.23%
The Exchange Beijing, No.118 Jianguo Road,
Chaoyang District
Beijing 100022, China

-----------------------------------------------------------------------------------------------------------
Peter W. Cunningham
755 Promontory Point Drive West                            555,001(4)                         2.5%
Newport Beach, California 92660

-----------------------------------------------------------------------------------------------------------
Mr. Chet Howard
11792 Lily Rubin Ave.                                      200,000(5)                         0.9%
Las Vegas, NV 89138

-----------------------------------------------------------------------------------------------------------
Gryphon Master Fund, L.P.
500 Crescent Court                                          1,838,200                        8.29%
Suite 270
Dallas, Texas  75201

-----------------------------------------------------------------------------------------------------------
Byrle Lerner
2904 Via Campesina                                        1,165,300(6)                       5.26%
Palo Verdes Estates, CA 90274

-----------------------------------------------------------------------------------------------------------
All directors and officers as a group (10
persons)                                                    7,162,001                        32.32%

-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) All  Percentages  have been  rounded up to the nearest one  hundredth of one
percent.

(2) Includes  3,137,000  shares owned by Ms. Wang  directly,  including  300,000
stock options and 2,910,000 shares owned by members of her immediate family.

(3)  Includes  50,000  incentive  stock  options Mr. Kong is entitled to receive
through  his  employment  agreement  with AXM  Pharma.  Mr.  Kong is entitled to
receive an additional  150,000  incentive stock options during the year pursuant
to his  employment  agreement,  which  provides  that he is  entitled to receive
200,000  incentive stock options per year,  vesting  quarterly  beginning in May
2005.

(4) Includes 125,001 shares owned by Mr.  Cunningham  directly and 30,000 shares
owned by Rabelaisian  Resources,  Plc., a company owned by Mr. Cunningham.  Also
includes  41,667  shares Mr.  Cunningham  was  entitled  to receive  through his
employment  agreement with AXM Pharma as Chief Executive Officer. Mr. Cunningham
ceased being our Chief Executive  Officer on January 31, 2005 and his employment


                                       35
<PAGE>

agreement was amended  accordingly.  Also includes 400,000 stock options granted
to Mr.  Cunningham on April 29, 2004,  under the 2004 Qualified and Nonstatutory
Stock Option Plan

(5) Includes  100,000 stock  options,  at an exercise  price of $3.83 per share,
granted  to Mr.  Howard  on  April  29,  2004,  under  the  2004  Qualified  and
Nonstatutory Stock Option Plan.

(6) Includes 60,000 shares of restricted stock Mr. Lerner is entitled to receive
under his consulting agreement, dated October 25, 2004.

CHANGES IN CONTROL

         As of the date of this  filing,  there are no  arrangements,  which may
result in a change in control of AXM Pharma, Inc.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         We are party to a consulting  agreement with TriPoint Capital Advisors,
LLC, a company in which Mark Elenowitz,  a director and significant  shareholder
of AXM  Pharma,  indirectly  owns a 40%  interest.  Pursuant to the terms of the
consulting agreement,  we are required to pay TriPoint a monthly fee of $17,500.
The current  agreement  between  Tripoint  Capital Advisors and AXM Pharma has a
one-year term and is terminable by either party,  with or without cause, upon 30
days written notice.  Additionally,  on May 1, 2002,  pursuant to the terms of a
previous consulting agreement with TriPoint,  Werke  Pharmaceuticals,  Inc., our
wholly owned  subsidiary  issued  TriPoint  500,000  shares of its common stock,
which  shares  were  exchanged  pursuant  to the  terms  of our  share  exchange
agreement with the  shareholders of Werke  Pharmaceuticals,  Inc. into shares of
AXM  Pharma  common  stock.  On April  29,  2004,  the  Board  authorized  Peter
Cunningham to sign a new  agreement  with  Tripoint  Capital  Advisors for their
consulting  services.  In addition,  we are party to a consulting agreement with
Investor  Communications  Company,  LLC , a  company  in  which  Mark  Elenowitz
directly benefits from 20% of the stock compensation  received from the Company.
Pursuant to the terms of the consulting agreement,  Werke Pharmaceuticals,  Inc.
is required to pay Investor Communications Company, LLC a monthly fee of $14,000
and issued to Investor  Communications Company, LLC 120,000 shares of its common
stock which were  subsequently  converted into shares of AXM Pharma common stock
as a result of the Share Exchange.

         In October 2004, we engaged  Byrle Lerner,  a beneficial  owner of more
than five percent of our common stock (5.55%), to provide consulting services to
AXM Pharma.  Mr.  Lerner  received  60,000  shares of our  restricted  stock and
100,000  options  to  purchase  our  common  stock at $2.15  per  share  for his
services.  The agreement  with Mr. Lerner was for one year and was terminable by
either Mr. Lerner or us upon thirty days written notice.

         In November 2004, Byrle Lerner paid 12,500 shares of restricted  common
stock to Aurelius  Consulting and 30,000 shares to Mirador  Consulting on behalf
of AXM Pharma pursuant to consulting agreements with those entities.

On December  31,  2005,  AXM Pharma,  Inc.  received  advances of  approximately
$237,000 from Wei Shi Wang,  Chief Executive  Officer and Chairman of the Board.
The amounts are unsecured and due upon demand.


ITEM 13.    PRINCIPAL ACCOUNTING FEES AND SERVICES

         Information  required by this item is  incorporated by reference to the
Proxy  Statement to be distributed in connection with our next annual meeting of
stockholders.



                                       36
<PAGE>

PART IV

ITEM 14.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a) (1) Financial Statements
         A list of the  financial  statements  filed  as a part  of this  report
         appears on page F-1.
         (2) Financial Statement Schedules
         Schedules  have been omitted  because the  information  required is not
         applicable or is shown in the Financial Statements or the corresponding
         Notes to the Consolidated Financial Statements.

         (3) Exhibits
         A list of the exhibits  filed as a part of this report appears on pages
         E-1 and E-2, which follow immediately after the financial statements.

     (b) See Exhibits listed under the heading "Exhibit Index" set forth on page
         E-1.
     (c) Schedules  have been omitted  because the  information  required is not
         applicable or is shown in the Financial Statements or the corresponding
         Notes to the Consolidated Financial Statements











                                       37
<PAGE>





                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant has duly caused this Annual Report on Form 10-KSB/A to be signed
on its behalf by the undersigned, hereunto duly authorized.

                                                    AXM PHARMA, INC.

                                                    By: /s/ Weishi Wang
                                                    -------------------
                                                         Weishi Wang
                                                         Chief Executive Officer









                                       38
<PAGE>



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant has duly caused this Annual Report on Form 10-KSB/A to be signed
on its behalf by the undersigned hereunto duly authorized.




Name and Signature                    Title                          Date
-------------------------             ------------------------       -----------

/s/  Wang Wei Shi                     Chief Executive Officer        May 1, 2006
-------------------------
Wang Wei Shi

/s/  Harry Zhang                      Chief Financial Officer        May 1, 2006
-------------------------
Harry Zhang

/s/  Wenzhou Zhang                    Director                       May 1, 2006
-------------------------
Wenzhou Zhang

/s/  Chaoying Li                      Director                       May 1, 2006
-------------------------
Chaoying Li

/s/  Zhang Baozhong                   Director                       May 1, 2006
-------------------------
Zhang Baozhong

/s/  Elliot Maza                      Director                       May 1, 2006
-------------------------
Elliot Maza












                                       39
<PAGE>



<TABLE>

<CAPTION>




AXM Pharma, Inc.

CONSOLIDATED FINANCIAL STATEMENTS

Index

AXM Pharma, Inc.
<S>                                                                             <C>            <C>
                                                                                               Page
Report of Independent Registered Public Accounting Firm .....................................   F-2
Consolidated Balance Sheet as of December 31, 2005 ..........................................   F-3
Consolidated Statements of Operations for the years ended December 31, 2005 and 2004 ........   F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 ........   F-5
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2005 and 2004   F-6
Notes to the Consolidated Financial Statements ..............................................   F-7


</TABLE>













                                       F-1


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
 AXM Pharma, Inc.
 City of Industry, California

We have audited the accompanying  consolidated balance sheet of AXM Pharma, Inc.
as of December 31, 2005 and the related statements of operations,  stockholders'
equity,  and cash flows for each of the two years then  ended.  These  financial
statements are the responsibility of AXM Pharma's management. Our responsibility
is to express an opinion on these 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 financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the 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 financial  statements  referred to above present fairly, in
all material respects, the financial position of AXM Pharma, Inc. as of December
31,  2005 and the results of its  operations  and its cash flows for each of the
two years  then  ended,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that AXM Pharma,  Inc. will continue as a going concern.  As discussed in Note 1
to the  consolidated  financial  statements,  AXM Pharma has incurred  losses of
$11,008,281  and  $13,989,854  for the years ended  December  31, 2005 and 2004,
respectively.  AXM Pharma will require additional working capital to develop its
business  until AXM Pharma  either (1) achieves a level of revenues  adequate to
generate  sufficient  cash  flows from  operations;  or (2)  obtains  additional
financing  necessary  to  support  its  working  capital   requirements.   These
conditions raise  substantial  doubt about AXM Pharma's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 1. The  accompanying  financial  statements do not include any  adjustments
that might result from the outcome of these uncertainties.


/s/  Lopez, Blevins, Bork & Associates, LLP
-------------------------------------------
Lopez, Blevins, Bork & Associates, LLP
Houston, Texas


April 7, 2006
















                                       F-2

<PAGE>


<TABLE>

<CAPTION>


                                AXM PHARMA, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2005

                                     ASSETS

<S>                                                                           <C>

Current assets
  Cash                                                                        $     92,619
  Accounts receivable, net of allowance of $0                                    1,071,008
  Inventories                                                                    2,287,487
  Prepaid expenses and other                                                       609,207
                                                                              ------------
    Total current assets                                                         4,060,321

Property and equipment, net                                                      7,558,010
Licenses                                                                         1,601,138
Deferred financing costs                                                           509,542
                                                                              ------------

    TOTAL ASSETS                                                              $ 13,729,011
                                                                              ============

                              LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
  Convertible secured debentures                                              $  1,057,184
  Accounts payable and accrued expenses                                          4,622,171
  Short-term loans                                                               3,960,249
                                                                              ------------
   Total current liabilities                                                     9,639,604
                                                                              ------------

Commitments and Contingencies

STOCKHOLDERS' EQUITY:
  Series A, Preferred stock, $.001 par value, 10,000,000 shares authorized,
    826,500 shares issued and outstanding                                              826
  Series B, Preferred stock, $.001 par value, 2,000,000 shares authorized,
   no shares issued and outstanding                                                   --
  Series C, Preferred stock, $.001 par value, 100 shares authorized,
   17 shares issued and outstanding                                                   --
  Common stock, $.001 par value, 50,000,000 shares authorized,
    21,609,630 shares issued and outstanding                                        21,610
  Additional paid-in capital                                                    34,423,190
  Accumulated deficit                                                          (30,356,219)
                                                                              ------------
    Total stockholders' equity                                                   4,089,407
                                                                              ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $ 13,729,011
                                                                              ============
</TABLE>


See  accompanying  summary of  accounting  policies  and notes to the  financial
statements

                                       F-3


<PAGE>



                                AXM PHARMA, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004


                                                          December 31,
                                                     2005            2004
                                                 ------------    ------------

Revenues                                         $  2,021,728    $  2,115,751

Cost of revenues                                    1,249,360       1,050,283
                                                 ------------    ------------

Gross profit                                          772,368       1,065,468
                                                 ------------    ------------

Selling, general and administrative                 9,629,424      15,055,322
                                                 ------------    ------------

Operating Loss                                     (8,857,056)    (13,989,854)

Interest expense                                    2,231,225            --
                                                 ------------    ------------

Net Loss                                         $(11,088,281)   $(13,989,854)
                                                 ============    ============

Net loss applicable to common shareholders:
    Net loss                                     $(11,088,281)   $(13,989,854)
    Beneficial conversion of preferred stock             --        (1,413,374)
    Deemed dividend from beneficial conversion
      feature of warrants                            (428,058)     (1,009,085)
                                                 ------------    ------------
Net loss applicable to common shareholders       $(11,516,339)   $(16,412,313)
                                                 ============    ============

Net loss per share:
                                                 $      (0.56)   $      (1.02)
    Basic and diluted                            ============    ============

Weighted averaged shares outstanding:
    Basic and diluted                              20,433,762      16,066,789
                                                 ============    ============


See  accompanying  summary of  accounting  policies  and notes to the  financial
statements



                                       F-4


<PAGE>


<TABLE>

<CAPTION>

                                AXM PHARMA, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 2005 AND 2004


                                 Common Stock               Preferred Stock
                                 ------------               ---------------            Additional
                                                                                         Paid-In      Accumulated
                          Shares           Amount          Shares         Amount         Capital        Deficit          Total
                       ------------    ------------    ------------    ------------    ------------    ------------    ------------
<S>                                                                           <C>        <C>           <C>             <C>

Balance,
  December 31, 2003      13,728,347    $     13,728       2,750,000           2,750      12,844,354      (5,278,084)      7,582,748
Issuance of
preferred
 stock and                4,508,633
warrants,                      --              --           860,030             860       4,507,773            --
  net of expenses
Issuance of common
  stock for
warrants,
  net of expense          1,070,016           1,070            --              --         3,271,155            --         3,272,225
Issuance of common
  stock and
  warrants for
  services                1,161,001           1,161            --              --         5,619,337            --         5,620,498
Beneficial
conversion
  feature embedded
in
  preferred stock
and
  warrants                     --              --              --              --         2,422,459            --         2,422,459
Deemed dividend on
preferred stock                --              --              --              --        (1,413,374)           --        (1,413,374)


Deemed dividends
  on warrants                  --              --              --              --        (1,009,085)           --        (1,009,085)
Conversions of
  preferred stock         2,076,175           2,077      (1,935,006)           (142)           --              --

Net Loss                       --              --              --              --              --       (13,989,854)    (13,989,854)
                       ------------    ------------    ------------    ------------    ------------    ------------    ------------

Balance,
  December 31, 2004      18,035,539          18,036       1,675,024           1,675      26,242,477     (19,267,938)      6,994,250
Issuance of common
 stock for dividend          78,600              79            --              --           180,985            --           181,064
Issuance of common
stock and warrants
for assets                   55,000              55            --              --           933,434            --           933,489
Issuance of common
 stock and warrants
 for services               685,800             685            --              --         1,789,952            --         1,790,637
Issuance of
common
stock in
connection with
exercise of warrants      1,488,100           1,488            --              --         1,908,681            --         1,910,169
Debt discount of
  convertible
debentures                     --              --              --              --         3,034,000            --         3,034,000
Issuance of common
 stock for repayment
of
  principal and
interests                   245,645             246            --              --           333,833            --           334,079
Deemed dividends
  on warrants                                                                              (428,058)                       (428,058)
Beneficial
conversion
  feature embedded
in warrants                    --              --              --              --           428,058            --           428,058
Issuance of common
stock for
conversion of
  preferred stock         1,020,946           1,021        (848,507)           (849)           (172)           --              --
Net Loss                       --              --              --              --              --       (11,088,281)    (11,088,281)
                       ------------    ------------    ------------    ------------    ------------    ------------    ------------

Balance,
  December 31, 2005      21,609,630    $     21,610         826,517    $        826    $ 34,423,190    $(30,356,219)   $  4,089,407
                       ============    ============    ============    ============    ============    ============    ============
</TABLE>

See  accompanying  summary of  accounting  policies  and notes to the  financial
statements


                                       F-5

<PAGE>


<TABLE>

<CAPTION>


                                AXM PHARMA, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004

                                                              2005            2004
                                                          ------------    ------------
<S>                                                       <C>             <C>

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                $(11,088,281)   $(13,989,854)
    Adjustments to reconcile net loss to cash used in
      operating activities:
        Common stock issued for services, and dividends      1,971,701       5,620,498
        Non-cash interest expenses                           1,535,510
        Bad debt                                                  --           810,793
        Inventory write-off                                    532,105       1,714,200
        Depreciation and amortization                           56,309          32,167
    Changes in assets and liabilities:

      Accounts receivable                                   (1,040,258)      1,773,436
      Prepaid expenses                                        (164,105)      1,023,578
      Inventories                                             (817,462)     (1,472,576)
      Accounts payable and accrued expenses                    402,612       3,817,849

      Value added tax payable                                     --        (2,914,811)
                                                          ------------    ------------

CASH FLOWS USED IN OPERATING ACTIVITIES                     (8,611,869)     (3,584,720)
                                                          ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                        (453,943)     (6,892,907)
                                                          ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from short-term loans                             2,958,581       1,001,668
  Proceeds from sale of preferred stock                           --         4,508,633
  Proceeds from exercise of warrants                         1,910,169       3,272,225
  Proceeds from notes payable                                3,034,000            --
                                                          ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES                         7,902,750       8,782,526
                                                          ------------    ------------

NET DECREASE IN CASH                                        (1,163,062)     (1,695,101)

Cash, beginning of period                                    1,255,681       2,950,782
                                                          ------------    ------------

Cash, end of period                                       $     92,619    $  1,255,681
                                                          ============    ============

SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid                                           $    111,629    $       --

SUPPLEMENTAL NON-CASH TRANSACTIONS:
  Common stock and warrants for assets                    $    933,489    $       --
  Common stock for principal and interest                 $    334,079    $       --

</TABLE>


See  accompanying  summary of  accounting  policies  and notes to the  financial
statements

                                       F-6

<PAGE>

                                AXM PHARMA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF OUR BUSINESS AND LIQUIDITY

         NATURE OF OUR BUSINESS.  AXM Pharma, Inc., ("AXM", "our", "us" or "we")
is a  pharmaceutical  and  nutraceutical  company  engaged  in  the  production,
marketing and distribution of over the counter and  prescription  pharmaceutical
products  in The  People's  Republic  of China  ("China").  We have  licenses to
produce market and distribute drug products in various dosages and forms as well
as herbal  remedies  and  vitamins  and are  currently  manufacturing  four drug
products for sale in China.  We conduct our business in China through our wholly
owned subsidiary, AXM Pharma (Shenyang) Inc. ("AXM Shenyang").

         Our core business  strategy is to manufacture  and distribute a diverse
group of over the counter and prescription  pharmaceutical  products,  targeting
the markets of China,  Hong Kong,  Taiwan,  Korea, The  Philippines,  Indonesia,
Malaysia,  Singapore  and  Thailand.  Our growth  plan  includes  expanding  our
existing product line with new products  licensed from North America and Europe.
In 2004, we completed the  construction  of a  manufacturing  plant in a special
economic  zone in Shenyang,  China.  The plant has been  certified as satisfying
Chinese  "Good  Manufacturing  Practices  (GMP)",  and we  intend  to apply  for
certification of the plant under US GMP as well. This designation would allow us
to  manufacture  pharmaceutical  products in China for sale in the United States
market.

         Our factory in Shenyang includes over 120,000 square feet of production
space capable of producing  50,000,000 tubes for ointments,  500,000,000 tablets
and 250,000,000  capsules annually.  In addition,  the plant contains laboratory
and  administration  facilities.  The  factory is located in a special  economic
zone, the High-Tech Industrial Development District,  established in 1988 by the
Chinese  government to  accelerate  the  development  and  industrialization  of
high-tech  industries  in  the  North-Eastern  portion  of  China.  The  factory
satisfies  Chinese  GMP and we intend to apply  for  certification  of the plant
under US GMP as well. AXM Shenyang employs 150 people.

         We currently  employ 90  individuals  involved in marketing  and sales.
Also,  we intend to  engage  additional  domestic  third-party  distributors  to
penetrate new markets.  We are  developing  educational  programs for hospitals,
doctors,  clinics and  distributors  with  respect to our product  lines.  These
educational  programs  are  intended  to  improve  sales  and  promotion  of our
products.

         As our resources permit,  we anticipate  expanding our current domestic
Chinese  distribution  beyond the cities in which we currently  sell through the
utilization of new distribution firms in regions currently not covered.  We have
developed new distribution and marketing relationships with the following firms:

     o   China Nat. Pharma. Group (Sinopharm)
     o   Jin Ming Shi Pharma
     o   DKSH (Taiwan) Limited
     o   KerryFlex Suplly Chain Solutions Limited

         LIQUIDITY.  We are in  urgent  need of  additional  capital.  Our  cash
resources  have been  depleted.  We have not paid our  employees  in China since
January 2006. We are in default under the terms of certain  promissory  notes as
described  more fully below under "RISK FACTORS - WE ARE CURRENTLY IN DEFAULT ON
OUR  OBLIGATIONS  UNDER  OUR  SERIES  C  CONVERTIBLE   PROMISSORY  NOTE."  These
conditions  raise  substantial  doubt  about our  ability to continue as a going
concern.  The  audit  report  prepared  by  our  independent  registered  public
accounting firm relating to our consolidated  financial  statements for the year
ended  December  31,  2005  includes an  explanatory  paragraph  expressing  the
substantial  doubt  about our ability to  continue  as a going  concern.  We are
currently  in  discussions  with several  banks in China to obtain  financing to
support  operations  going  forward,  but we can offer no assurance that we will
obtain additional financing. If additional capital is raised through the sale of
equity or convertible  debt  securities,  the issuance of such securities  would
result in  dilution  to our  existing  stockholders.  We cannot  assure you that
financing will be available on favorable terms or at all.


                                       F-7

<PAGE>

         Since  our  inception,   we  have  generated  significant  losses  from
operations  and we  anticipate  that we will  continue to  generate  significant
losses from operations for the foreseeable  future. As of December 31, 2005, our
accumulated deficit was approximately $30 million.  Our net loss was $11 million
and $14 million for the years ended  December  31, 2005 and 2004,  respectively.
Our cash outlays from  operations and capital  expenditures  were $8 million for
2005. Our stockholders' equity decreased from $7 million as of December 31, 2004
to approximately $4 million as of December 31, 2005.

         Under the terms of certain Secured Promissory Notes issued on April 19,
2005, we are obligated to pay interest and principal  monthly in cash or shares.
However,  we are  obligated  to make  payments  in cash if our share price falls
below a certain price calculated under a formula  specified in the Notes. We are
currently in default in our payment obligations because we have not been able to
pay the  required  repayment  of  principal  and  interest to the holders of the
Notes. We are in negotiations  with the holders with a view to restructuring the
terms of the Notes.  However,  no agreement  has been reached and, if we fail to
reach an agreement,  it will likely be impossible  for us to raise any new funds
(see "RISK  FACTORS - WE ARE CURRENTLY IN DEFAULT ON OUR  OBLIGATIONS  UNDER OUR
SECURED PROMISSORY NOTES".)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets  and  liabilities  at the date of the  balance  sheet.  Actual
results could differ from those estimates.

         PRINCIPLES OF  CONSOLIDATION.  The  consolidated  financial  statements
include the accounts of one subsidiary. All inter-company transactions have been
eliminated in consolidation.

         CASH AND CASH  EQUIVALENTS.  Cash  equivalents  include  highly liquid,
temporary cash  investments  having  original  maturity dates of three months or
less. For reporting  purposes,  cash equivalents are stated at cost plus accrued
interest, which approximates fair value.

         INVENTORIES.  Inventories  are  valued at the lower of cost or  market.
Cost is  determined  by using  the  average  cost  method.  Inventories  consist
primarily of raw materials and packaging for our pharmaceutical products.

         EQUIPMENT AND LONG-LIVED  ASSETS.  Property and equipment are stated at
cost  less  accumulated  depreciation.   Major  renewals  and  improvements  are
capitalized; minor replacements,  maintenance and repairs are charged to current
operations.  Depreciation is computed by applying the straight-line  method over
the estimated  useful lives of machinery  and equipment  (three to seven years).
The majority of our  long-lived  assets are located in The People's  Republic of
China.  We perform  reviews for the  impairment  of long-lived  assets  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.

         LICENSES.   Licenses  consist  of  permits  to  produce  pharmaceutical
products which were acquired in a business combination. The licenses were valued
at their historical cost. The cost of the licenses is not amortized because they
have an  indefinite  life.  The licenses are  reviewed for  impairment  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The permits are in the Peoples Republic of China.

         VALUE  ADDED TAX  PAYABLE.  We are subject to a value added tax rate of
17% on product sales by The Peoples  Republic of China.  Value added tax payable
is  computed  net of value  added  tax paid on  purchases  for all  sales in The
Peoples Republic of China.




                                       F-8

<PAGE>

         REVENUE RECOGNITION.  We recognize product sales revenue when the goods
are  shipped,  title and risk of loss passes and  collectability  is  reasonably
assured. In situations where a distributor's sales reporting to us is inadequate
or untimely,  we have to judge whether all of the elements  required for revenue
recognition  have been  met,  including  assurance  of  collectability.  In such
instances,  we may  conclude  that revenue  recognition  of such sales should be
delayed  until  payments are received  from the  distributor.  Any provision for
discounts  and  estimated  returns are  accounted  for in the period the related
sales are recorded.

         INCOME TAXES.  Income taxes are computed  using the asset and liability
method.  Under the asset and liability  method,  deferred  income tax assets and
liabilities  are  determined  based on the  differences  between  the  financial
reporting  and tax bases of assets and  liabilities  and are measured  using the
currently enacted tax rates and laws. A valuation  allowance is provided for the
amount of  deferred  tax  assets  that,  based on  available  evidence,  are not
expected to be realized.

         FOREIGN  CURRENCY  TRANSLATION.  Transactions  and balances  originally
denominated  in  U.S.   dollars  are  presented  at  their   original   amounts.
Transactions and balances in other currencies are converted into U.S. dollars in
accordance  with  Statement of  Financial  Accounting  Standards  (SFAS) No. 52,
"Foreign  Currency  Translation,"  and are included in determining net income or
loss.

         For  foreign  operations  with the  local  currency  as the  functional
currency,  assets and liabilities are translated from the local  currencies into
U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues
and expenses are translated at weighted average exchange rates for the period to
approximate  translation  at the exchange  rates  prevailing  at the dates those
elements are  recognized in the financial  statements.  Translation  adjustments
resulting  from  the  process  of  translating  the  local  currency   financial
statements into U.S. dollars are included in determining comprehensive loss.

         The reporting currency is the U.S. dollar.  The functional  currency of
our  subsidiary,  AXM  Shenyang,  is the  Renminbi  ("RMB")  which is the  local
currency in China.  The financial  statements of our  subsidiary  are translated
into U.S.  dollars using  period-end  exchange rates for assets and liabilities,
and average rates of exchange for the period for revenues,  costs, and expenses.
Net gains and losses resulting from foreign  exchange  transactions are included
in the consolidated statements of operations.

         STOCK-BASED  COMPENSATION.  We account for stock-based compensation for
employees and non-employee  members of our board of directors in accordance with
Accounting  Principles  Board,  or APB,  Opinion No. 25,  "Accounting  for Stock
Issued to Employees." Under APB Opinion No. 25, compensation expense is based on
the  intrinsic  value on the  measurement  date,  calculated  as the  difference
between the fair value of our common stock and the relevant  exercise  price. We
account for stock-based  compensation for non-employees,  who are not members of
our board of directors, at fair value using a Black-Scholes option-pricing model
in accordance  with the provisions of SFAS No. 123,  "Accounting for Stock-Based
Compensation"   and  other  applicable   accounting   principles.   We  recorded
stock-based  compensation expense of approximately $5,600,000 during 2004. There
were 2,140,000 stock options  granted to employees and directors in 2004.  There
were not any options granted to employees in 2005.

Had  compensation  expense been determined  based on the estimated fair value at
the  measurement  dates of awards under those plans  consistent  with the method
prescribed  by SFAS No. 123,  our December 31, 2005 and 2004 net loss would have
been changed to the pro forma amounts  indicated  below. No options were granted
in 2005.









                                       F-9

<PAGE>


<TABLE>

                                                                  December 31, 2005     December 31, 2004
                                                                --------------------------------------------
<S>                                                             <C>                    <C>

     Net loss applicable to common shareholders:
       As reported                                              $       (11,516,339)   $       (16,412,313)
       Stock based compensation under fair value method                           -             (5,629,853)
                                                                --------------------------------------------
       Pro forma                                                $      (11,516,339)    $       (22,042,166)
                                                                ============================================

     Net loss applicable to common shareholders per share
      basic and diluted:
         As reported                                             $           (0.56)    $           (1.02)
         Stock based compensation under fair value method                        -                 (0.35)
                                                                --------------------------------------------
         Pro forma                                                            (0.56)   $           (1.37)
                                                                ============================================

</TABLE>

         The fair value of each option grant was  estimated on the date of grant
using the  Black-Scholes  option  pricing model with the following  assumptions:
risk free rate of 2.0%;  volatility  of 79% for 2004  with no  assumed  dividend
yield;  and expected lives of two to five years. No stock options were issued to
employees in 2005.

         FAIR VALUE OF FINANCIAL  INSTRUMENTS.  Financial  instruments  that are
subject to fair disclosure  requirements are carried in the financial statements
at amounts that  approximate  fair value and include cash and cash  equivalents,
accounts  receivable and accounts payable.  Fair values are based on assumptions
concerning  the amount and timing of  estimated  future  cash flows and  assumed
discount rates reflecting varying degrees of perceived risk.

         BASIC  AND  DILUTED  NET LOSS PER  SHARE.  Basic  net loss per share is
computed using the weighted average number of common shares  outstanding  during
the period.  Diluted net loss per share is computed  using the weighted  average
number of common and, if dilutive,  potential common shares  outstanding  during
the period.  Potential  common shares consist of the  incremental  common shares
issuable  upon the exercise of stock  options and  warrants  (using the treasury
stock  method).  For  2005 and  2004,  there  were no  potential  common  shares
outstanding  that were  related to shares  issuable  upon the  exercise of stock
options or warrants.

         IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

         In November 2004,  the FASB issued SFAS No. 151,  Inventory  Costs,  an
amendment  of ARB No. 43.  This  statement  clarifies  the  accounting  for idle
capacity expense,  freight, handling costs, and wasted material and is effective
for the third  quarter of 2005. We believe the adoption of this  statement  will
not have a material effect on our results of operations, cash flows or financial
position.

         In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment.
This statement  establishes  standards for the accounting  for  transactions  in
which an entity  exchanges its equity  instruments  for goods and  services.  It
focuses  primarily on accounting  for  transactions  in which an entity  obtains
employee services in share-based payment transactions  (employee stock options).
The statement requires the measurement of the cost of employee services received
in exchange for an award of equity  instruments (such as employee stock options)
at fair value on the grant date.  That cost will be  recognized  over the period
during  which an employee is  required to provide  services in exchange  for the
award (the requisite  service  period).  The effective date of this statement is
the first quarter of 2006.  We are still  considering  transition  methods under
this standard.

         In  December  2004,  the  FASB  issued  SFAS  No.  153,   Exchanges  of
Non-monetary  Assets, an amendment of APB 29. This statement  clarifies that all
non-monetary  transactions that have commercial  substance should be recorded at
fair value and is effective for the first quarter of 2005.  The adoption of this
statement  did not have a material  effect on its  results of  operations,  cash
flows or financial position.




                                      F-10
<PAGE>

3.  INVENTORY WRITE-OFF

         We delivered Sunkist brand products of Chewchew Bear  multi-vitamins to
distributors,  of which,  $313,000  of such  product  was  labeled to be sold in
China.  However,  we had not  obtained  the  necessary  import  license for this
product from the Chinese  government  as of December 31, 2005.  The  inventories
remain in the  distributor's  warehouse in Hong Kong. We can not predict when we
will obtain the necessary  license to remove this product from the distributor's
warehouse.  Accordingly,  we have written off the value of this product from our
inventory.

         During 2005, we outsourced and  manufactured  Sunkist brand products of
Leafs vitamin supplement strips in China. The raw material had quality problems,
resulting in a write-off of $219,000.

         As  a  result  of  the  above,  we  took  an  inventory   write-off  of
approximately $532,000 during 2005.

4.  ACCOUNTS RECEIVABLE

         Our trade  accounts  receivable are shown net of allowance for doubtful
accounts of $0.

         AXM Pharma  maintains  allowances  for doubtful  accounts for estimated
losses  resulting from the inability of its customer to make required  payments.
If the  financial  condition  of AXM  Pharma's  customer  were  to  deteriorate,
resulting  in an  impairment  of  their  ability  to make  payments,  additional
allowances may be required.

5. PROPERTY AND EQUIPMENT

Components  of  property,  plant,  and  equipment,  at December  31, 2005 are as
follows:

    Land                                              $         932,286
    Vehicles                                                     70,630
    Equipment                                                   622,858
    Construction in progress                                  6,011,317
                                                      -----------------
                                                              7,637,091
    Less: accumulated depreciation                              (79,081)
                                                      -----------------
                                                      $       7,558,010
                                                      =================

Depreciation expense totaled $56,309 and $22,772 in 2005 and 2004, respectively,
and was included in selling general and administrative expenses.

AXM Pharma expects to reclassify  construction  in progress in the first half of
2006.

6. SHORT-TERM LOANS

         We  have  loans  outstanding  with an  aggregate  principal  amount  of
$3,960,249 at December 31, 2005. Our wholly owned subsidiary secured these loans
from the Shenyang Branch of Shanghai Pudong Development Bank in the amount of 20
million RMB (US$2,416,422) with a one-year term and 5 million  (US$609,756) with
a term of six months on January 14 and August 18, 2005, respectively.  The loans
have an annual interest rate of 6.417%,  interest is due quarterly and principal
is due upon maturity. The loans are secured by our properties through a Mortgage
Agreement  between AXM  (Shenyang)  and the  Development  Bank, and the land-use
right of the state-owned land. Both notes mature after December 31, 2005 and are
currently in default.

         Between October 22, 2004 and July 5, 2005, we secured  additional loans
through a series of short  term,  non-recourse  loans  from  individual  Chinese
lenders.  Most of the loans have an interest rate of 24% annually and a maturity
of 180 days from inception. We used the proceeds of the loans to finance certain


                                      F-11

<PAGE>

costs  associated  with  construction  of our  factory  in  Shenyang,  China and
operations in China. At December 31, 2005, we had outstanding non-recourse loans
due of $934,071 all of which are in default and accruing interest at 40%.

7. CONVERTIBLE DEBENTURES

         On April 20, 2005 we  completed a private  financing  with 9 accredited
investors. We executed notes totaling $3,425,000.  Each Note is due on April 19,
2007 and is  convertible at the option of the holder anytime in whole or in part
at $2.10.  Net proceeds from the issuance of the notes after offering costs were
approximately $3,034,000. The notes were issued as a portion of 6.25 Units, each
consisting  of one  (1)  $500,000  Secured  Promissory  Note  (the  "Convertible
Debentures");  three hundred thousand  (300,000) Common Stock Purchase  Warrants
(Series A Warrants);  and three hundred thousand  (300,000) special Common Stock
Purchase Warrants (Series B Warrants).  The Convertible Debentures bear interest
at 9% and are  repayable  in equal  installments  during  the  period  September
2005-April  2007.  The Series A Warrants  were issued with an exercise  price of
$2.90 per share and the Series B Warrants were issued with an exercise price per
share of $3.50.  Each  Purchaser  also received a Series C Warrant to purchase a
number of shares of Common  Stock  equal to one  hundred  percent  (100%) of the
number  of  Conversion  Shares  issuable  upon  conversion  of such  Purchaser's
Convertible  Debentures at an exercise  price per share equal to the  Conversion
Price.  The Series A Warrants  and the Series B Warrants  expire  five (5) years
following  the  Closing  Date and the  Series  C  Warrants  expire  one (1) year
following the effective  date of the  registration  statement  providing for the
resale of the  Conversion  Shares  and the  Warrant  Shares.  The value of these
warrants  and the fees paid were  recorded  as a  discount  to the notes and are
being amortized over the term of the notes using the effective interest method.
  See Note 2 above  regarding the accounting for these  securities.  At December
31, 2005, the  outstanding  balance is $1,057,184  which is net of $2,196,567 in
unamortized discounts.

8. STOCKHOLDERS' EQUITY

         COMMON STOCK. We periodically issue common stock for services rendered.
Common stock issued is valued at fair market  value,  which is the quoted market
price.  During the years ended December 31, 2005 and 2004, we issued 685,800 and
1,161,001  shares of common stock and warrants for services valued at $1,790,637
and $5,620,498, respectively.

         On January 19 and June 29, 2005,  we issued 50,017 and 28,583 shares of
common  stock as  dividends  to Series C  Preferred  shareholders  as payment of
interest totaling $141,048 and $40,016, respectively.

         On March 31, 2005 we issued 350,000  shares of restricted  common stock
to Madden Consulting as compensation for investor relations consulting services.
The stock was valued at $2.74 per share,  the closing stock price on the date of
issuance. We recognized $959,000 in expenses for the issuance of this stock.

         In March  2005,  we issued  94,117  shares of common  stock to  Iroquis
Capital for the conversion of 4 shares of Series C Preferred Stock.

         In March 2005, we issued  725,000  shares of common stock to SF Capital
for the conversion of 725,000 shares of Series A Preferred.

         In March,  2005, we issued  30,000 shares of restrict  stock to each of
XCL Partner Inc. and Ashton Organization  pursuant to consulting  services.  The
total value the consideration was $80,400 and $79,500, respectively.

         In March 2005, we issued  10,000 shares of restricted  common stock for
consulting services. The stock was valued at $26,800.

         On April 1, 2005, we issued 40,000 shares of restricted common stock to
Newbridge Securities as compensation for investor relations consulting services.
The stock was valued at $2.75 per share,  the closing stock price on the date of
issuance;  the Company recognized  $110,000 in expenses for the issuance of this
stock.

                                      F-12
<PAGE>

         On April 22 and April 26, 2005,  we issued  totaling  78,329  shares of
common stock to SRG Capital for the conversion of fractional  shares of Series C
Preferred.

         On June 14, 2005,  we issued  11,700  shares of common stock to Gryphon
Master Fund for the conversion of 11,700 shares of Series A Preferred  Stock. On
April 22 and April 26, 2005,  we also issued  totaling  78,329  shares of common
stock to SRG  Capital  for the  conversion  of  fractional  shares  of  Series C
Preferred.

          On July 1 and August 10, 2005, we issued  totaling  111,800  shares of
Common Stock to National  Financial Service in connection with the conversion of
111,800 shares of its Series A Preferred Stock.

         On August 8, 2005,  we completed a sale of  1,488,100  shares of Common
Stock  for  the  exercise  of  the  Company's  warrant  for  gross  proceeds  of
$2,127,436. This financing was made pursuant to a Special Warrant Offer extended
to the purchasers listed in the Note and Warrant Purchase  Agreement dated as of
April 19, 2005.

         On August 31, 2005, we issued 150,000 shares to Madden Consulting, Inc.
pursuant to a  consulting  agreement.  The  services  to be  provided  under the
consulting  agreement  were investor and public  relations,  which was valued at
$252,000.

         On September 9, 2005, we issued  50,000 shares to Ashok Patel  pursuant
to a  consulting  agreement.  The services to be provided  under the  consulting
agreement were advisory of strategic  licensing and marketing,  which was valued
as $77,000.

         On September 19, 2005, we issued 245,645 shares of Common Stock (valued
at  $334,077)  to  convertible  debenture  holders in payment of  principal  and
interest  due  under  the  debentures.  Of  this  amount,  $171,250  represented
principal payments and the balance interest expense.

         On September 8, 2005,  we issued  60,000 shares of Common Stock (valued
at $88,200) for services.

On January 26, 2004,  the Board  authorized  the  issuance of 100,000  shares of
restricted common shares and 50,000 warrants to Great Eastern  Securities,  Inc.
pursuant  to an  investment  banking  agreement.  The shares are to be  released
quarterly based upon a vesting  schedule of 25,000 shares per quarter during the
term of the  agreement.  Pursuant to an agreement  that was executed on December
18, 2003,  Great Eastern will provide  investor  relations  related services and
assist AXM Pharma with broker  relations  for our stock.  The warrants are for a
term of five years and have an  exercise  price  equal to $4.74 per  share.  The
shares were valued at $5.35 per share, the market price for shares of our common
stock at the time of  issuance.  Therefore,  the  total  aggregate  value of the
consideration  paid to Great Eastern  Securities,  Inc. was $639,828 including a
$104,828 charge computed using the black-scholes option pricing model.

         On February 2, 2004 and April 20,  2004,  we issued  200,000  shares of
restricted common and 100,000 shares of restricted  common,  respectively to the
Aston  Organization  pursuant to a consulting  agreement and amendment  thereto.
20,000 shares were released  when the April 20, 2004  amendment was signed.  The
remaining  180,000  shares  are to be  released  monthly  based  upon a  vesting
schedule of 15,000 shares per month during the term of the agreement. The shares
were  valued at $5.65 per share and $4.27 per  share,  respectively,  the market
price for shares of our common  stock at the time of  issuance.  Therefore,  the
total aggregate value of the  consideration  paid to the Aston  Organization was
$1,557,000.  At December 31,  2004,  270,000  common  shares had been issued for
consideration  of $1,387,500.  The remaining 30,000 common shares were issued in
January and February 2005.

         On May 7, 2004, we issued  120,000  shares of restricted  common stock,
and 200,000 warrants at $6.00 per warrant,  to XCL Partners,  Inc. 20,000 shares
were  released  when the  agreement  was signed on June 24, 2004.  The remaining
100,000  shares are to be  released  monthly  based upon a vesting  schedule  of
10,000 shares per month for ten months , beginning 30 days after  effective date
of the  agreement  The services to be provided  under the agreement are investor
relations.  20,000  warrants  shall  vest  immediately.  The  remaining  180,000


                                      F-13
<PAGE>

warrants  shall be  released  monthly  based on a  vesting  schedule  of  15,000
warrants per month for eleven (11)  months.  The shares were valued at $4.09 per
share,  the market price for shares of our common stock at the time of issuance.
Therefore,  the total aggregate value of the consideration  paid to XCL Partners
was $957,815 including a $467,015 charge computed using the black-scholes option
pricing  model.  At December 31, 2004,  80,000 common shares had been issued for
consideration of $640,100, including $312,900 for the value of the warrants. The
remaining  40,000  common  shares and 66,000  warrants  were  issued in January,
February, March and April 2005.

         On May 10, 2004, we issued  300,000 shares to Madden  Consulting,  Inc.
pursuant to a  consulting  agreement.  The  services  to be  provided  under the
consulting agreement were investor and public relations.  The shares were valued
at $3.92 per share,  the market price for shares of our common stock at the time
of issuance.  Therefore,  the total aggregate value of the consideration paid to
Madden Consulting was $1,176,000.

         On June 24,  2004,  we issued  100,000  warrants  to each of SF Capital
Partners Ltd., Gryphon Master Fund, L.P., Banyon Asia Limited and Banyon Mac 24,
Ltd. in consideration for services provided related to our recent private equity
financing.

         On July 21, 2004, we issued 100,000 shares of restricted common to Chet
Howard,  our Chief Financial  Officer and Chief Accounting  Officer.  The shares
were  valued  using the closing  stock  price on the date of issue,  pursuant to
which the stock was  valued  at $3.83 at the time of  issuance.  Therefore,  the
total  aggregate  value of the  consideration  paid to Mr.  Howard was valued at
$383,000.

         On July 21, 2004,  we issued  100,000  shares of  restricted  common to
Harry Zhang, our Chief Accounting  Officer of our wholly owned  subsidiary.  The
shares were valued using the closing stock price on the date of issue,  pursuant
to which the shares were valued at $3.83 at the time of issuance. Therefore, the
total  aggregate  value of the  consideration  paid to Mr.  Zhang was  valued at
$383,000.

         On September  1, 2004,  we issued  stock  options,  for an aggregate of
100,000  options to  Dreamvest,  LLC  pursuant to a  consulting  agreement.  The
options  have an  exercise  price of $2.69 and were valued  using  black-scholes
option pricing model for a charge of approximately $173,000.

         On September 10, 2004,  we issued  83,334  shares of restricted  common
shares  to  Peter  Cunningham,  our  Chief  Executive  Officer  pursuant  to his
employment  agreement.  The shares  were  valued at $3.83 per share,  the market
price for shares of our common  stock at the time of  issuance.  Therefore,  the
total aggregate value of the consideration  paid to Mr. Cunningham was valued at
$319,169.

         In October 2004, we engaged  Byrle Lerner,  a beneficial  owner of more
than five percent of our common stock (6.44%), to provide consulting services to
AXM Pharma.  Mr. Lerner will receive 60,000 restricted common shares and 100,000
options to purchase  our common stock at $2.15 per share for his  services.  The
current  agreement  with Mr.  Lerner is for one year and is terminable by either
Mr. Lerner or us upon thirty days written notice.

         In October 2004, we engaged  Aurelius  Consulting to provide  marketing
and investor relations services.  The initial term of the agreement is one year.
Aurelius is entitled to receive 12,500 shares of our restricted common stock per
quarter during the term of its agreement,  in consideration  for their services.
The initial 12,500 shares were paid on behalf of AXM Pharma by Byrle Lerner in a
private  transfer.  The shares were valued at $2.29 per share,  the market price
for shares of our common  stock at the time of  transfer.  Therefore,  the total
aggregate value of the transaction recognized by AXM Pharma was $28,625.

         In  October  2004,  we  agreed  to  issue  Mirador   Consulting  30,000
restricted common shares pursuant to a consulting  agreement with a 3 month term
that may be  renewed  upon the  written  consent  of both  Mirador  and us.  The
agreement is for  corporate  consulting  and investor  relations  services.  The
30,000  shares  were paid on behalf of AXM  Pharma by Byrle  Lerner in a private
transfer. The shares were valued at $2.15 per share, the market price for shares
of our common  stock at the time of  transfer.  Therefore,  the total  aggregate
value of the transaction recognized by AXM Pharma was $64,500.

                                      F-14
<PAGE>

<TABLE>

CONVERTIBLE  PREFERRED STOCK. AXM Pharma is authorized to issue up to 12,000,100
shares in  aggregate of preferred  stock,  and has to date  designated 3 series,
which are summarized below:

                                                                           Annual
                Total Series         Stated Value                       Dividends per          Conversion
                 Authorized                              Voting             Share              Rate
              ------------------    ---------------    ------------    ----------------    ------------------
<S>                                                                            <C>          <C>

Series A             10,000,000             $ 2.00             Yes                 n/a               1 for 1
Series B              2,000,000               2.25             Yes                 n/a               1 for 1
Series C                    100            425,000             Yes                  6%         705,882 for 1
</TABLE>


         Dividends are payable  semi-annually  in January and June for Series C.
Accrued but unpaid dividends do not pay interest.

         The holder of each share of the Series A, B and C Preferred Stock shall
be entitled to the number of votes equal to the number of shares of Common Stock
into  which  such  share of Series A  Preferred  Stock  could be  converted  for
purposes of determining  the shares  entitled to vote at any regular,  annual or
special meeting of shareholders of AXM Pharma,  and shall have voting rights and
powers equal to the voting rights and powers of the Common Stock.

         On June 24,  2004,  we issued  30.425  shares of our Series C preferred
stock,  at a price per share of  $100,000  and  357,936  common  stock  purchase
warrants,  each of which entitles the holder to purchase one share of our common
stock, $.001 par value, for a period of three years from the date of issuance at
a price equal to $5.50 per share to accredited  investors  pursuant to a private
equity financing. Each share of the preferred stock is convertible into a number
of fully paid and non-assessable shares of our common stock obtained by dividing
the face value of $100,000 per share by the fixed  conversion price of $4.25 per
share.  In  addition,  we  issued  to HC  Wainwright,  our  placement  agent,  a
three-year warrant to purchase up to 3 shares of our Series C Preferred Stock at
a price of $100,000 per share and up to 35,793  (53,691)  warrants on a pro-rata
basis to the number of shares of Preferred  Stock  purchased upon  exercise.  We
also issued 53,691 warrants to The Shemano Group, our co-placement  agent. Total
proceeds were approximately $2,770,000, net of expenses.

         In connection  with the  transaction,  we recorded a deemed dividend of
$1,413,374  for the  beneficial  conversion  feature  embedded in the  preferred
stock.

         In connection  with the  transaction,  we recorded a deemed dividend of
$2,933,137 for the beneficial conversion feature embedded in the preferred stock
and a deemed dividend of $130,362 for the beneficial conversion feature embedded
in the  warrants  in 2003.  We recorded a deemed  dividend  of $850,609  for the
beneficial conversion feature embedded in the warrants in 2004.

9. STOCK OPTION PLANS

         In April of 2004,  our  Shareholders  approved the "2004  Qualified and
Non-statutory  Stock  Option  Plan." The Board of Directors  reserved  3,000,000
shares  of our  common  stock  to be  issued  in the  form of  incentive  and/or
non-qualified stock options for employees,  directors and consultants to AXM. On
April 29, 2004, our shareholders approved and ratified the issuance of 2,140,000
options to employees,  directors and consultants. On February 1, 2005, our Board
of Directors  approved the 2005 Equity  Incentive  Plan,  which will replace the
2004 Plan.  Our  shareholders  approved the 2005 Plan at our Special  Meeting on
March 10, 2005. Shares available under the 2005 Plan include 5,000,000 shares of
our common stock,  plus all shares  remaining  available for issuance  under the
2004 Plan.




                                      F-15


<PAGE>

         Stock option activity during the periods indicated is as follows:

                                                                    Weighted
                                                     Number of      Average
                                                      Shares      Exercise Price
                                                    ------------- ------------
         Outstanding, December 31, 2003                       --   $       --

             Granted                                   2,140,000         4.08
             Exercised                                        --           --
             Forfeited                                        --           --
             Expired                                          --           --
                                                    ------------- ------------
         Outstanding, December 31, 2004                       --           --
             Granted                                          --           --
             Exercised                                        --           --
             Forfeited                                        --           --
             Expired                                          --           --
                                                    ------------- ------------
         Outstanding, December 31, 2005                2,140,000  $      4.08
                                                    ============= ============
         Exercisable, December 31, 2005                2,140,000  $      4.08
                                                    ============= ============

         At December 31, 2005, the range of exercise prices and weighted average
remaining   contractual  life  of  outstanding   options  was  $2.72  to  $4.14,
respectively.  The weighted  average grant date fair value of the options issued
in 2004 amounted to $2.66. No stock options were issued in 2005 to employees.

10.  INCOME TAXES

         Our subsidiary, AXM (Shenyang) is incorporated in The People's Republic
of China  (PRC),  which is governed by the Income Tax Law of the PRC  concerning
Foreign Investment  Enterprises and Foreign Enterprises and various local income
tax laws (the "Income Tax Laws").  Under the Income Tax Laws, foreign investment
enterprises  ("FIE") generally are subject to an income tax at an effective rate
of 33% (30% state income taxes plus 3% local income taxes) on income as reported
in their statutory financial statements after appropriate tax adjustments unless
the  enterprise is located in specially  designated  regions or cities for which
more favorable  effective rates apply. Upon approval by the PRC tax authorities,
FIEs  scheduled  to  operate  for a period  of 10 years or more and  engaged  in
manufacturing  and  production  may be exempt from  income  taxes for two years,
commencing with their first profitable year of operations, and thereafter with a
50%  exemption  for the next three years.  As of December  31, 2005,  we had not
attained profitable operations for tax purposes.

         For the years ended  December 31, 2005 and 2004, we incurred net losses
and,  therefore,  had no tax liability.  The net deferred tax asset generated by
the loss  carry-forward  has been fully  reserved.  The cumulative net operating
loss  carry-forward is approximately  $18,000,000 at December 31, 2005, and will
expire in the years 2007 through 2025.

         Deferred income taxes consist of the following at December 31, 2005:

    Long-term:
      Net operating loss                                  $    6,000,000
      Valuation allowance                                     (6,000,000)
                                                          --------------
                                                          $            -
                                                          ==============







                                      F-16
<PAGE>

11. VALUE ADDED TAX PAYABLE

         We are  subject to Chinese  value added tax at a rate of 17% on product
sales.  Value added tax payable on sales is computed net of value added tax paid
on purchases for all domestic sales.

12. DISTRIBUTION OF PROFITS

         As  stipulated  by the  relevant  laws and  regulations  applicable  to
China's foreign investment  enterprises,  we are required to make appropriations
from net income as determined under accounting  principles generally accepted in
the PRC  ("PRC  GAAP") to  non-distributable  reserves  which  include a general
reserve,  an  enterprises  expansion  reserve  and  employee  welfare  and bonus
reserves.

         The general  reserve is used to offset future  extraordinary  losses as
defined under PRC GAAP. We may, upon a resolution passed by the owners,  convert
the general reserve into capital. The employee welfare and bonus reserve is used
for the collective welfare of our employees. The enterprise expansion reserve is
used for the expansion of AXM Pharma and can be converted to capital  subject to
approval by the relevant authorities. We did not record any reserves in 2005 and
2004. We incurred losses under accounting  principles  generally  accepted under
the PRC.  Therefore,  we were not  required  to record  such  reserves.  No such
adjustments are required under accounting  principles  generally accepted in the
United States of America in 2005 and 2004.

13. EMPLOYEE RETIREMENT BENEFITS AND POST RETIREMENT BENEFITS

         Our employees in the PRC are entitled to retirement benefits calculated
with reference to their basic salaries on retirement and their length of service
in accordance  with a government  managed  benefits  plan. The PRC government is
responsible  for the  benefit  liability  to  these  retired  employees.  We are
required to make  contributions to the state retirement plan based on 19% of the
employees'  monthly  basic  salaries.  We do not have any other post  retirement
benefit plans and does not provide any post-employment benefits.

14. COMMITMENTS AND CONTINGENCIES

COMMITMENTS:  Operating  Leases.  Our corporate  and United  States  offices are
located at 17870  Castleton  Street,  Suite 255,  City of  Industry,  California
91748.  The  current  rent for  these  premises  is $1,842  per month  with a 5%
increase  each year.  Our lease expires on January 24, 2009. In January 2006, we
closed our office  located  at 7251 West Lake Mead Blvd,  Suite 300,  Las Vegas,
Nevada, 89128. The rent for the office in Las Vegas was $5,378 per month.

         Our  principal  administrative,  sales  and  marketing  facilities  are
located at No.  F.3004  Sankei  Torch  Bldg,  262A Shifu  Road,  Shenyang  City,
Liaoning  Province,  The Peoples  Republic of China.  The current rent for these
facilities is US$2,917 per month and our lease expires in October 2007.

         Future minimum lease payments under non-cancelable leases with terms in
excess of one year are as follows:

Twelve Months Ending December 31,
               2006                                               $ 59,866
               2007                                                 52,286
               2008                                                 24,275
               2009                                                  2,034
               2010 and thereafter                                       -
                                                             --------------
                Total                                             $138,461
                                                             ==============
CONTINGENCIES.  In  February  2006,  we became  aware of a lawsuit  filed in Los
Angeles  superior court from the Praxi  Advertising  and Design,  Inc.  claiming
payment of an unpaid package design fee of $119,800.


                                      F-17
<PAGE>


         In November 2005, Don Bates,  Inc., our former U.S. Good  Manufacturing
Practices consultant, instituted legal action against us in U.S. District Court,
District of Nevada,  claiming  unpaid  consultancy  fees.  Don Bates,  Inc.  has
alleged that $362,652.00, plus accrued interest, is due to them. We believe that
this suit is  without  merit as,  among  other  things,  the fees  billed by the
plaintiff for services rendered to us were excessive.  We intend to contest this
claim and will consider appropriate cross-claims.
 There has been no discovery in this matter and we cannot predict its outcome.

         In November  2005,  we became aware of a lawsuit  filed in the District
Court of Clark County, Nevada by our former CEO Peter Cunningham,  whom we fired
for cause on July 20, 2005.  Mr.  Cunningham's  counsel  claims to have properly
served us with a summons and complaint and took a default against us on November
9, 2005.  We are  disputing  the  validity  of the  service,  and have  retained
counsel.  We  anticipate  that the default will be set aside.  Mr.  Cunningham's
complaint alleges unpaid base salary, unpaid commissions, un-reimbursed expenses
and  unpaid  severance  totaling  approximately  $180,000.  The  complaint  also
requests  declaratory  relief to amend an  allegedly  incorrect  Form 8-K filing
which stated that Mr.  Cunningham  was fired for cause.  We intend to vigorously
defend  this  case  and  believe  hawse  have  meritorious  claims  against  Mr.
Cunningham  which  may be  asserted  in a  cross-complaint.  There  has  been no
discovery in this matter and we cannot predict its outcome.

         AXM Shenyang  obtained  loans in the aggregate  amount of 8,290,302 RMB
(US $1,002,455)  between October 22, 2004 and June 26, 2005, through a series of
short term non-recourse loans from ten individual Chinese lenders.  AXM Shenyang
is in default on the  principal  of these loans and  interest  of  approximately
$494,000. Although these loans are not secured by any of our property or assets,
we could be subject to legal action if these loans are not repaid. Currently, no
lawsuits regarding these loans have been initiated and we are not aware that any
lawsuits are being contemplated by any of the lenders.

         In July 2005,  we received a demand  letter from Saatchi & Saatchi,  an
advertising firm, that alleged that we owed them approximately  RMB582,055 (U.S.
$71,770) in connection with advertising  services  provided to AXM Shenyang.  We
currently are reviewing their claim and intend to negotiate a settlement of such
claim.  We do not anticipate that this matter will have a material impact on our
business or operations.

         The SEC is currently conducting an investigation to determine if we and
others  may have  violated  the  reporting,  anti-fraud,  accounting  and  other
provisions of the federal securities laws. This investigation  resulted from our
restatement of our financial  statements for the period ended June 30, 2005. The
investigation  is  currently at an early stage and we are not able to assess the
likelihood that the SEC will commence enforcement  proceedings against us or the
nature  and  potential  impact  of any  remedies  the  SEC  might  seek.  We are
cooperating fully with the SEC in this investigation.

         AXM Pharma  received  notices from the Labor  Arbitration  Committee in
China that 11 of our current and former employees have filed a labor arbitration
claim for unpaid salaries and un-reimbursed  expenses in the aggregate amount of
RMB429,958 ( $53,081).

         AXM  Pharma,  Inc. is involved  in  lawsuits,  claims and  proceedings,
including  those  identified  above,  which  arise  in the  ordinary  course  of
business.  In accordance with SFAS No. 5,  "Accounting for  Contingencies,"  AXM
makes a provision for a liability  when it is both probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. AXM Pharma
believes it has adequate  provisions  for any such matters.  AXM Pharma  reviews
these  provisions at least quarterly and adjusts these provisions to reflect the
impacts of  negotiations,  settlements,  rulings,  advice of legal counsel,  and
other  information  and events  pertaining to a particular  case.  Litigation is
inherently  unpredictable.  However,  AXM  Pharma  believes  that  it has  valid
defenses with respect to legal matters pending against it.  Nevertheless,  it is
possible that cash flows or results of operations  could be materially  affected
in any particular  period by the unfavorable  resolution of one or more of these
contingencies.

         We intend to  vigorously  defend  these and other  lawsuits  and claims
against us. However, we cannot predict the outcome of these lawsuits, as well as
other legal  proceedings  and claims with  certainty.  An adverse  resolution of
pending  litigation  could  have a  material  adverse  effect  on our  business,
financial  condition and results of  operations.  AXM Pharma is subject to legal
proceedings  and  claims  that arise in the  ordinary  course of  business.  AXM
Pharma's  management  does not expect  that the  results  in any of these  legal
proceedings  will have adverse  affect on the Company's  financial  condition or
results of operations.



                                      F-18


<PAGE>

15. RELATED PARTY TRANSACTIONS

         At  December  31,  2005,   AXM  Pharma,   Inc.   received  advances  of
approximately  $237,000 from Wei Shi Wang, Chief Executive  Officer and Chairman
of the Board.  The amounts are included in accrued expense and are unsecured and
due upon demand.












                                      F-19



<PAGE>


<TABLE>

<CAPTION>


     EXHIBIT NUMBER      DESCRIPTION
     --------------      -----------
<S>                                                                            <C>

          4.13^          Securities Purchase Agreement dated as of June 24, 2004

          4.14^          Registration Rights Agreement dated as of June 24, 2004

          4.15^          Form of Common Stock Purchase Warrant issued June 24, 2004

          4.16^          Designation of Rights and Preferences of Series C Preferred Stock dated as of June 24,
                         2004

          4.16#          Loan Agreement between AXM Pharma(Shenyang), Inc. and Shenyang Branch of Shanghai Pudong
                         Development Bank

          4.17#          Mortgage Agreement between AXM Pharma (Shenyang) Inc.and Shenyang Branch of Shanghai
                         Pudong Development Bank

         4.18##          Form of Note and Warrant Purchase Agreement, dated April 19, 2005, by and between the
                         Company and each of the Purchasers thereto

         4.19##          Form of Registration Rights Agreement,  dated April 19,
                         2005,  by and  between  the  Company  and  each  of the
                         Purchasers thereto.


         4.20##          Form of Convertible Promissory Note dated April 19, 2005

         4.21##          Form of Series A Warrant

         4.22##          Form of Series B Warrant

         4.22##          Form of Series C Warrant

         4.23##          Form of Security Agreement, dated April 19, 2005, by and between the Company and each of
                         the Secured parties thereto

                         Form of Mortgage Agreement, dated April 19, 2005, by and between the Company and each of
         4.23##          the Mortgagees thereto

         4.24###         Form of Series D Warrant

         4.25####         2005 Equity Incentive Plan

         10.4****         Agreement on Agency for Sale (Distribution) between Shenyang Taiwei Pharmaceutical
                          Factory and Liaoning Weikang Medicine Co., Ltd.

         10.5****         Consulting Agreement with Tripoint Capital Advisors, LLC

         10.6****         Consulting Agreement with Amaroq Capital, LLC


                                       E-1




<PAGE>

        10.7****         Consulting Services Agreement with Woodbridge Management, Ltd.
        10.8****         Consulting Agreement with Madden Consulting, Inc.

        10.9****         Investment Banking Agreement with Great Eastern Securities, Inc.

        10.10****        Investor Relations Agreement with the Aston Organization

        10.11+++ (2)     Incentive and Nonstatutory Stock Option Plan

        10.12++++        Consulting Agreement with Byrle Lerner

        10.13++++        Consulting Agreement with Aurelius Consulting

        10.14++++        Consulting Agreement with Mirador Consulting, Inc

        10.15++++        Consulting Agreement with Dreamvest, llc

        10.16++++        Consulting Agreement with RCG

        10.17++++        Termination Agreement with RCG

        10.18(2)(3)      Chet Howard's Employment Agreement

        10.19(2)(4)      Peter Cunningham's Employment Agreement

        10.20(2)(3)      Zhenyu Kong's Employment Agreement

        10.21(5)         Transition Agreement

        14.1++           Code of Ethics for Board of Directors

        14.2++           Code of Ethics for Executive Officers

        14.3+            Code of Ethics For Employees

        16.1^^           Letter from Malone & Bailey,  PLLC regarding  change in
                         certifying accountant, dated September 2, 2004.

        21.1++           Subsidiaries of the Company

        31.1+            Certification of Chief Executive Officer and Principal Accounting Officer pursuant to
                         Rule 13a-14(a)

        32.1+            Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18
                         U.S.C. 1350

        99.1****         Form of lock-up agreement by officers, directors and 5% or greater shareholders

</TABLE>


                                       E-2



<PAGE>

         **** Incorporated  herein by reference to Exhibits 10.1 to 10.10 of the
         Company's Registration Statement on Form SB-2 Dated March 4, 2004.

         +++Incorporated  herein by reference to Exhibit  10.11 of the Company's
         Annual Report on Form 10-KSB/A dated April 6, 2004.

         ++++Incorporated  herein by reference to Exhibit  10.12 to 10.17 of the
         Company's Annual Report on Form 10-KSB/A dated April 15, 2005.

         + Filed herewith

         ++  Incorporated  herein by reference to Exhibit 14.1, 14.2 and 21.1 of
         the Company's Annual Report on Form 10-KSB dated March 29, 2004

         (2) Exhibit  represents a management  contract or compensatory  plan or
         arrangement.

         (3) Incorporate  herein by reference to Exhibit 10.1,  10.2,  10.3, and
         10.4 of the Company's Current Report on Form 8-K/A dated April 4, 2005.

         (4)   Incorporated   herein  by   reference  to  Exhibit  10.1  of  the
         Post-Effective  Amendment No. 6 to the Company's Registration Statement
         on Form SB-2 Dated May 17, 2004

         (5) Incorporated  herein by reference to Exhibits 10.1 of the Company's
         Current Report on Form 8-K Dated September 25, 2005

         ^  Incorporated  herein by  reference  to Exhibits  10.1 to 10.4 of the
         Company's Current Report on Form 8-K Dated June 24, 2004

         ^^ Incorporated by reference to Exhibit 16.1 to the Company's amendment
         to Current Report on Form 8-K/A filed on September 2, 2004

         #  Incorporated  herein by  reference  to Exhibits  10.1 to 10.2 of the
         Company's Current Report on Form 8-K Dated January 24, 2005

         ##  Incorporated  herein by reference  to Exhibits  10.1 to 10.8 of the
         Company's Current Report on Form 8-K Dated April 20, 2005

         ### Incorporated  herein by reference to Exhibits 10.1 of the Company's
         Current Report on Form 8-K Dated August 9, 2005

         ####Incorporated  herein by reference to Exhibit 99.1 of the  Company's
         Current Report on Form 8-K dated March 10, 2005.


(c)               Reports on Form 8-K.

1.   On  January  21,  2005,  we filed a report on Form 8-K  regarding  received
     collateral a short-term loan.
2.   On February 1, 2005, we filed a report on Form 8-K regarding  promoted Chet
     Howard to Chief Executive Officer.
3.   On  March  10,  2005,  we file a  report  on Form  8-K  regarding  Board of
     Directors approved the 2005 Equity Incentive Plan.



                                       E-3




<PAGE>

4.   On April 20,  2005,  we filed a report  on Form 8-K  regarding  results  of
     operations and financial condition.
5.   On January 24, 2005, we filed a report on Form 8-K/A regarding  creation of
     a direct financial obligation
6.   On April 20, 2005,  we filed a report on Form 8-K  disclosing an additional
     private financing we completed.
7.   On  April  20,  2005,  we filed a report  on Form  8-K  regarding  accepted
     subscription  with 8  accredited  investors  pursuant  to a private  equity
     financing.  8. On May 16, 2005, we filed a report on Form 8-K our financial
     results for the first quarter of fiscal 2005.
9.   On June 15, 2005, we filed a Form 8-K disclosing a private financing with 9
     accredited investors.
10.  On July 21, 2005, we filed a Form 8-K  disclosing a termination of employee
     agreement with Peter Cunningham.
11.  On August 9, 2005,  we filed a Form 8-K  regarding  completed  a  financing
     through a Special Warrant Offer.
12.  On August  10,  2005,  we filed a Form 8-K  regarding  received  additional
     commitments pursuant to the private financing.
13.  On August 15, 2005,  we filed a Form 8-K regarding  held a conference  call
     discussing our fiscal 2005, second quarter results and current events.
14.  On  September  25,  2005,  we  filed a Form  8-K  regarding  its  principal
     shareholder  entered into a Transition  Agreement with its former financial
     consultants, investor relations firm and legal counsel, as well as 2 former
     directors and certain other related parties.
15.  On  October  13,  2005,  we filed a Form 8-K  disclosing  Mr.  Chet  Howard
     resigned  as Chief  Executive  Officer and Chief  Financial  Officer of the
     Company.
16.  On October 28, 2005, we filed a Form 8-K disclosing the  restatement of the
     second quarter revenue of 2005.
17.  On November 22, 2005, we filed a Form 8-K disclosing estimated revenues and
     net loss for its third quarter of fiscal 2005.
18.  On October 31, 2005, we filed a Form 8-K regarding default of the principal
     and interest  payments due to the 9 holders of its April,  2005 Convertible
     Debentures.















                                       E-4


<PAGE>

                                                                    Exhibit 31.1
                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Weishi Wang, certify that:

1. I have reviewed this annual report on Form 10-KSB of AXM Pharma, 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  presents 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. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining  disclosure controls and procedures (as defined
in Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal  control  over
financial  reporting (as defined in Exchange Act Rules  13a-15(f) and 15d-15(f))
for the small business issuer and have:

     a.   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision, to ensure that material information relating to the small
          business  issuer,  including its  consolidated  subsidiaries,  is made
          known to us by others within those entities,  particularly  during the
          period in which this report is being prepared;


     b.   Omitted.

         c.  Evaluated  the   effectiveness  of  the  small  business   issuer's
         disclosure  controls and  procedures  and  presented in this report our
         conclusions  about the  effectiveness  of the  disclosure  controls and
         procedures, as of the end of the period covered by this report based on
         such evaluation; and

         d. Disclosed in this report any change in the small  business  issuer's
         internal  control over  financial  reporting  that occurred  during the
         small business  issuer's most recent fiscal quarter (the small business
         issuer's  fourth fiscal  quarter in the case of an annual  report) that
         has materially affected,  or is reasonably likely to materially affect,
         the small business issuer's internal control over financial  reporting;
         and

5. The small business issuer's other certifying officer(s) and I have disclosed,
based  on  our  most  recent  evaluation  of  internal  control  over  financial
reporting,  to the small business  issuer's  auditors and the audit committee of
the small  business  issuer's  board of  directors  (or persons  performing  the
equivalent functions):

     a.   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the small  business  issuer's
          ability   to  record,   process,   summarize   and  report   financial
          information; and

     b.   Any fraud, whether or not material,  that involves management or other
          employees who have a significant  role in the small business  issuer's
          internal control over financial reporting.








Date:  May 1, 2006

/s/  Weishi Wang
-----------------------
Weishi Wang,
Chief Executive Officer



<PAGE>


                                                                    Exhibit 31.2


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER


I, Harry Zhang, certify that:

1. I have reviewed this annual report on Form 10-KSB of AXM Pharma, 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  presents 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. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining  disclosure controls and procedures (as defined
in Exchange  Act Rules  13a-15(e)  and  15d-15(e))  and  internal  control  over
financial  reporting (as defined in Exchange Act Rules  13a-15(f) and 15d-15(f))
for the small business issuer and have:

     a.   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision, to ensure that material information relating to the small
          business  issuer,  including its  consolidated  subsidiaries,  is made
          known to us by others within those entities,  particularly  during the
          period in which this report is being prepared;

     b.   Omitted.

     c.   Evaluated the effectiveness of the small business issuer's  disclosure
          controls and procedures  and presented in this report our  conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the  end of the  period  covered  by  this  report  based  on  such
          evaluation; and

     d.   Disclosed  in this  report any change in the small  business  issuer's
          internal  control over financial  reporting  that occurred  during the
          small business issuer's most recent fiscal quarter (the small business
          issuer's  fourth fiscal  quarter in the case of an annual report) that
          has materially affected, or is reasonably likely to materially affect,
          the small business issuer's internal control over financial reporting;
          and

5. The small business issuer's other certifying officer(s) and I have disclosed,
based  on  our  most  recent  evaluation  of  internal  control  over  financial
reporting,  to the small business  issuer's  auditors and the audit committee of
the small  business  issuer's  board of  directors  (or persons  performing  the
equivalent functions):

     a.   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the small  business  issuer's
          ability   to  record,   process,   summarize   and  report   financial
          information; and

     b.   Any fraud, whether or not material,  that involves management or other
          employees who have a significant  role in the small business  issuer's
          internal control over financial reporting.





Date: May 1, 2006

/s/  Harry Zhang
------------------------------
Harry Zhang,
Acting Chief Financial Officer







<PAGE>




                                                                    Exhibit 32.1

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


         In  connection  with  the  Annual  Report  of  AXM  Pharma,  Inc.  (the
"Company") on Form 10-KSB for the period ending December 31, 2005, as filed with
the Securities  and Exchange  Commission on the date hereof (the  "Report'),  I,
Weishi Wang,  Chief Executive  Officer of the Company,  certify,  pursuant to 18
U.S.C.  Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley
Act of 2002, that:

     (1)The  Report fully  complies  with the  requirements  of Section 13(a) or
     15(d) of the Securities Exchange Act of 1934; and

     (2)The information contained in the Report fairly presents, in all material
     respects,  the financial condition and results of operations of the Company
     at the dates and for the periods indicated.



/s/  Weishi Wang
-----------------------
Weishi Wang,
Chief Executive Officer


Dated: May 1, 2006








<PAGE>



                                                                    Exhibit 32.2

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


         In  connection  with  the  Annual  Report  of  AXM  Pharma,  Inc.  (the
"Company") on Form 10-KSB for the period ending December 31, 2005, as filed with
the Securities  and Exchange  Commission on the date hereof (the  "Report'),  I,
Harry Zhang,  Chief Financial  Officer of the Company,  certify,  pursuant to 18
U.S.C.  Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley
Act of 2002, that:

     (1)The  Report fully  complies  with the  requirements  of Section 13(a) or
     15(d) of the Securities Exchange Act of 1934; and

     (2)The information contained in the Report fairly presents, in all material
     respects,  the financial condition and results of operations of the Company
     at the dates and for the periods indicated.



/s/  Harry Zhang
------------------------------
Harry Zhang,
Acting Chief Financial Officer

Dated: May 1, 2006