---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended: September 30, 2010

[  ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934 for the transition period from
__________ to __________

Commission File Number: 000-30813

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

|Delaware                        | 98-0416123                          
|------------------------------- | ------------------------------------
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or organization)  |                                     

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

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

Securities registered pursuant to Section 12(b) of the Exchange
Act:

|Title of Each Class              | Name of Exchange on Which
      Registered
|-------------------------------- | ------------------------------------------
|Common Stock ($0.0001 par value) | None                                      

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.

YES [  ]   NO [X]

Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Act.

YES [  ]   NO [X]

Note  Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act
from their obligations under those Sections.

Persons who respond to the collection of information
contained in this form are not required to respond unless the form
displays a currently valid OMB control number.

---

SEC 1673 (03-10)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the issuer was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.

[X] Yes   [  ] No

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (Section 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files)

[X] Yes   [  ] No

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [
 ]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

|Large accelerated filer [  ]                                                   | Accelerated filer [  ]       
|------------------------------------------------------------------------------ | -----------------------------
|Non-accelerated filer [  ] (Do not check if a
      smaller reporting company) | Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the act).

[  ] Yes   [X] No

Issuer's revenues for its most recent fiscal year ended
September 30, 2010 were $ 326,345.

The aggregate market value of the issuers Common Stock (the
only class of voting stock), held by non-affiliates was approximately $4,065,135
based on the average closing bid and ask price for the Common Stock on September
30, 2010.

As of September 30, 2010 there were 94,635,047 shares
outstanding of the issuers Common Stock.

---

AlphaRx, Inc.

FORM 10-K

For the Year Ended September 30, 2010

INDEX

|PART I     |                                                                                                                    |   
|---------- | ------------------------------------------------------------------------------------------------------------------ | --
|           |                                                                                                                    |   
|Item 1.    | Business                                                                                                           | 3 
|Item 1A.   | Risk Factors                                                                                                       | 13
|Item 1B.   | Unresolved Staff
      Comments                                                                                    | 19
|Item 2.    | Properties                                                                                                         | 19
|Item 3.    | Legal Proceedings                                                                                                  | 19
|Item 4.    | (Removed and Reserved)                                                                                             | 19
|           |                                                                                                                    |   
|           |                                                                                                                    |   
|           |                                                                                                                    |   
|PART II    |                                                                                                                    |   
|           |                                                                                                                    |   
|Item 5.    | Market for Registrants Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity Securities | 20
|Item 6.    | Selected Financial Data                                                                                            | 21
|Item 7.    | Managements Discussion and Analysis of
      Financial Condition and Results of Operations                        | 21
|Item 7A.   | Quantitative and
      Qualitative Disclosures About Market Risk                                                   | 28
|Item 8.    | Financial Statements and Supplementary
      Data                                                                  | 28
|Item 9.    | Changes in and
      Disagreements With Accountants on Accounting and Financial Disclosure                         | 28
|Item 9A.   | Controls and Procedures                                                                                            | 28
|Item 9B.   | Other Information                                                                                                  | 30
|           |                                                                                                                    |   
|           |                                                                                                                    |   
|PART III   |                                                                                                                    |   
|           |                                                                                                                    |   
|Item 10.   | Directors, Executive Officers and
      Corporate Governance                                                       | 30
|Item 11.   | Executive Compensation                                                                                             | 32
|Item 12.   | Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters               | 34
|Item 13.   | Certain Relationships
      and Related Transactions, and Director Independence                                    | 34
|Item 14.   | Principal Accounting Fees and Services                                                                             | 35
|           |                                                                                                                    |   
|           |                                                                                                                    |   
|           |                                                                                                                    |   
|PART IV    |                                                                                                                    |   
|           |                                                                                                                    |   
|Item 15.   | Exhibits, Financial Statements Schedules                                                                           | 35
|SIGNATURES |                                                                                                                    | 36

---

PART I

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

The information in this report contains forward-looking
statements. All statements other than statements of historical fact made in this
report are forward looking. In particular, the statements herein regarding
industry prospects and future results of operations or financial position are
forward-looking statements. These forward-looking statements can be identified
by the use of words such as believes, estimates, could, possibly,
probably, anticipates, projects, expects, may, will, or should, or
other variations or similar words. No assurances can be given that the future
results anticipated by the forward-looking statements will be achieved.
Forward-looking statements reflect managements current expectations and are
inherently uncertain. Our actual results may differ significantly from
managements expectations.

Although these forward-looking statements reflect the good
faith judgment of our management, such statements can only be based upon facts
and factors currently known to us. Forward-looking statements are inherently
subject to risks and uncertainties, many of which are beyond our control. As a
result, our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those
set forth below under the caption Risk Factors. For these statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. You should not unduly rely
on these forward-looking statements, which speak only as of the date on which
they were made. They give our expectations regarding the future but are not
guarantees. We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by law.

ITEM 1. BUSINESS

Overview of AlphaRx

Introduction and History

In this annual report on Form 10-K, the "Company," "AlphaRx"
"we," "us," and "our," refer collectively to AlphaRx Inc., AlphaRx Canada
Limited, our wholly owned subsidiary and 80% of AlphaRx International Holdings
Limited.

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

AlphaRx is a specialty pharmaceutical company dedicated to
developing proven therapies by reformulating FDA approved and marketed drugs
which through the application of its proprietary site-specific nano drug
delivery technology, offers improved medical benefits and a potential for
significant commercial product development. Our core competence is in the
development of novel drug formulations for therapeutic molecules or compounds
that have exhibited poor gastro intestinal absorption due to poor solubility or
have yet be administrable to the human body with an acceptable delivery method.
Our nano drug delivery system is versatile and offers significant flexibility in
the development of suitable dosage formulations (i.e. oral, topical or
parenteral) to meet the requirements of specific drug molecules.

3

---

Since 2000, substantial efforts and resources have been devoted
to understanding our nano drug delivery technology and establishing a product
development pipeline that incorporated this technology with selected molecules.
Since 2008, AlphaRx has undergone many positive changes. New corporate
initiatives for China and a corresponding strategic growth plan, led by Ruby Hui, were implemented; our corporate strategy was
refocused on commercializing our nano drug delivery technology as quickly as
possible, building high-value partnerships and reprioritizing the product
pipeline. Spending was redirected and aggressive cost control initiatives were
implemented. We continue to investing in the further development of our nano
drug delivery technology and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating our
nano drug delivery system in exchange for milestone payments and royalties.
Further development, exploration and commercialization of the technology entail
risk and operational expenses. However, we have made significant progress on
refocusing our efforts on strategic development initiatives and cost control and
continue to aggressively seek to reduce non-strategic spending.

Although our product development program address various
pharmaceutical markets, including pain, inflammation, stroke and pneumonia, we
constantly evaluate and reassess our development program, resulting in new
product candidates and discontinuing or delaying lower priority development
program. This development optimization process is essential for assembling a
portfolio of short and long-term drug candidates, in order to build a stable and
sustainable revenue and profits for our Company.

Recent Developments

On April 9, 2010, we entered into a non-binding letter of
intent with Pacific Orient Capital Inc. (Pacific), a Capital Pool Company
listed on the TSX Venture Exchange, concerning the proposed acquisition of
AlphaRx Canada Limited ("ACL"), a wholly owned subsidiary of the Company. The
letter of intent was subsequently amended on June 9, 2010. The proposed
acquisition, if completed, will constitute Pacific's qualifying transaction
(Qualifying Transaction) pursuant to the policies of the TSX Venture Exchange
Inc. (the "Exchange").

The Qualifying Transaction is to be completed by (a) the
acquisition of ACL by way of share exchange through the issuance of one common
share of Pacific for every one common share of ACL at a deemed price of C$0.40
per share; and (b) the acquisition by Pacific of a licence from AIH to
commercialize the prescription drug Indaflex in Mexico and Asia for 8,250,000
common shares of Pacific at a deemed price of C$0.40 per share (the
"Transaction"). Pacific has advanced $25,000 to the Company on a non-refundable
basis. Completion of the proposed Qualifying Transaction is conditional on the
execution of a definitive agreement to be negotiated among the parties, the
satisfactory completion of due diligence, Exchange acceptance and the
satisfaction of the minimum listing requirements of the Exchange. On October 28,
2010, the Exchange conditionally accepted Pacifics proposed Qualifying
Transaction.

On June 28, 2010, we terminated our licensing agreement with
Cypress Biosciences (Cypress), our world-wide (except Mexico and Asia)
development partner for Indaflex. Despite the termination of Indaflex
development program with Cypress, we continue to develop Indaflex for the
Chinese market. We are currently working with our regulatory consultants,
pending availability of stability data, in preparation for submission of a
clinical trial application with the China State Food and Drug Association
(SFDA) in order to begin human trials in China. These preparations are
proceeding on schedule.

We established a feasibility and option agreement in October
2008 with Gaia BioPharma Limited (Gaia), a privately held early stage
biopharmaceutical company. We concluded formulation development on GAI-122
during August 2009. GAI-122 is an investigational, injectable nanoemulsion of a
Mitochondria-targeted neuroprotective agent formulated with our nanoemulsion
drug delivery technology. GAI-122 has been shown to provide significant
neuro-protection in multiple in vitro and in vivo animal studies, suggesting
that this injectable nanoemulsion formulation has the potential to treat
patients with acute ischemic stroke or to prevent postoperative delirium.
GAI-122 is proceeding to the clinical trial materials manufacturing stage and is
expected to enter clinical trials in 2011. GAI-122 is protected by 4 United
States patent applications and 2 Chinese patent applications.

We established a co-development agreement with Gaia in August
2010 for ARX8203, a prodrug of a well-known NSAID. Under the agreement, GAIA
owns the exclusive worldwide rights to the injectable formulation of ARX8203 and
the Company owns the exclusive worldwide rights to the oral formulation of
ARX8203.

4

---

Our other product candidates in development are in earlier or
preclinical research phases, and we continue to assess them for their
compatibility with our technology and market need. Our intent is to seek
partnerships with pharmaceutical and biotechnology companies for certain of these products. We plan
to expand our pipeline with product candidates that demonstrate significant
opportunities for growth.

Principal product and services and principal markets

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

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

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

The BCD drug delivery technology is designed to develop drugs
with major medical advantages, such as lower dosing, fewer side effects and
alternative dosage forms, as well as commercial advantages, such as extended
patent protection and broader use. We have a number of drugs under development,
certain of which have been successfully reformulated, utilizing our BCD
technology.

Products and product pipeline

The table below is a list of our products and candidates in the
product pipeline as well as their current stage of development. Although we
believe our development strategy of reformulating FDA approved drugs may have
less development risks as compared to new chemical entities development, there
can be no guarantee that any product candidates can be successfully developed
and as such, we constantly evaluate and prioritize our development programs. As
a result, new product candidates are constantly added and lower priority
development programs may be discontinued or delayed. We believe this product
development optimization process is essential for the development of a broad
portfolio of short to long-term drug candidates, which will position the company
for stable and sustainable growth. Stages of development include Animal Proof of
Concept (Animal POC), Investigational New Drug Toxicology Assessment (IND
Toxicology), Human Proof of Concept (Human POC), initial drug Formulation,
and Clinical Trial Phases (Phase 1, II and III as applicable).

|Product    | Initial Indication    | Stage of Development
|---------- | --------------------- | --------------------
|Indaflex* | Osteoarthritis        | Phase II            
|Zysolin   | Pneumonia (Gram neg.) | IND Toxicology      

|Zysolin | Biodefense          | Animal (POC)  
|-------- | ------------------- | --------------
|GAI-122  | Delirium            | IND Toxicology
|GAI-122  | Stroke              | IND Toxicology
|ARX-8028 | Post-operative Pain | Formulation   
|ARX-8028 | Gout                | Formulation   

5

---

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

**Animal Proof of concept (POC) activities include basic in
vitro and in vivo research attempting to adopt our Nano Delivery System (NDS) to
the respective drug while maintaining or improving efficacy and effectiveness of
the active ingredients. We anticipate that clinical trials, if they take place
at all, will initially be conducted outside the United States.

Indaflex is our only prescription drug at the clinical trial
stage. We completed a Phase I human trial for Indaflex in Canada during March
2005.

Together with our licensee Proprius Pharmaceuticals Inc.
("Proprius"), we completed Phase II clinical trials for Indaflex in March 2007.
The randomized double-blind placebo and vehicle controlled trial, which included
a six-week treatment period, was conducted on 233 patients with osteoarthritis
of the knee. While the trial did not meet its primary endpoints, subgroup
analyses of patients with moderate to severe pain and more impaired physical
function at baseline showed positive trends in patients treated with Indaflex as
compared to patients treated with either placebo or vehicle. Indaflex was
demonstrated to be safe and well tolerated. Because we did not meet the primary
endpoints, under the terms of the Licensing Agreement with Proprius we did not
receive any milestone payments for this trial. Proprius retained the rights to
clinical development and commercialization of Indaflex in April 2006 in exchange
for an initial license fee and future milestone and royalty payments. Future
milestone and royalty payments are based on successful completion of trials and
commercialization of Indaflex. Proprius is solely responsible for the global
commercialization (with the exception of Asia and Mexico) of Indaflex. Proprius
was acquired by Cypress Bioscience Inc. (Cypress), during March 2008.

On June 28, 2010, we terminated our licensing agreement with
Cypress, our world-wide (except Mexico and Asia) development partner for
Indaflex. Despite the termination of Indaflex development program with Cypress,
we continue to develop Indaflex for the Chinese market. We are currently working
with our regulatory consultants, pending availability of stability data, in
preparation for submission of a clinical trial application with the China State
Food and Drug Association (SFDA) in order to begin human trials in China.
These preparations are proceeding on schedule.

Indaflex is a topical NSAID formulation intended to be used in
the treatment of arthritis. Indaflexs active ingredient, Indomethacin, has a
long-standing and proven clinical treatment record. With our enhanced
proprietary drug delivery system, we believe its clinical effectiveness to be
significantly enhanced. Topical Indaflex delivery is intended to circumvent the
significant gastro intestinal side effects found with orally ingested NSAIDs.

Zysolin, a formulation of tobramycin in nanoparticles is
intended for Gram-negative pneumonia in intubated and mechanically ventilated
patients. Zysolin is entering IND (investigational new drug) toxicology
assessment. Also USAMRIID (You-SAM-rid), the U.S. military version of the CDC or
Centers for Disease control and Prevention have completed 2 studies with Zysolin
in treatment of plague and Tulareemia and more studies are forthcoming.

GAI-122 is an injectable nano-emulsion formula intended for
multiple indications including: an adjuvant treatment for hepatitis, the
prevention of post-operative delirium, treatment of stroke and as a
neuroprotectant. GAI-122 is entering an IND toxicology program to be completed
by early 2011 and a Phase I is planned for mid-2011.

ARX-8203 is a prodrug of a well-known non-steroidal
anti-inflammatory drug, designed to reduce the occurrence of side- effects
associated with the parent drug. ARX-8203 is pH neutral and has significantly
less GI toxicity than diclofenac in a 28 days GI animal study. ARX-8203
demonstrates excellent G.I. safety profile in acute GLP toxicity studies and can
be administrated orally or via intravenous infusion or IV bolus injection.

6

---

Bioadhesive Colloidal Dispersion (BCD)
systems

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

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

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

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

3. Expanding the Types of Drugs Capable of Oral
Delivery. Some drugs, including certain proteins (complex organic compounds
of high molecular weight containing numerous amino acids) and peptides (low
molecular weight compounds consisting of two or more amino acids), because of
their large molecular size and susceptibility to degradation in the GI tract,
must currently be administered by injection or by continuous infusion, which is
typically done in a hospital or other clinical setting. We believe our BCD
Systems may permit some of these drugs to be delivered orally and/or
transdermally without the necessity of visiting a hospital or clinic.

4. Proprietary Reformulation of Generic Products. We
believe our BCD Systems offer the potential to produce improved proprietary
formulations of off-patent drugs, differentiated from the existing generic
products by reduced dosing requirements, improved efficacy, decreased toxicity
or additional indications. The potential attraction here is the possibility to
re-patent existing drugs due to the adaptation of our delivery systems, which
may differentiate the new drug from the existing drug.

Distribution Methods of The Products And Services

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

7

---

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

Competition

There are other companies that have oral drug delivery
technologies that compete with the BCD Systems. The competitors have oral tablet
products designed to release the incorporated drugs over time. Each of these
companies has a patented technology with attributes different from ours, and in
some cases with different sites of delivery to the GI tract. We believe that we
are the only drug delivery company that is currently using polymeric based
colloidal dispersion controlled release technologies to develop products for
oral and transdermal drug delivery for enhanced solubility and bioavailability
for drugs that are not readily water soluble. We believe that this combination
of oral and transdermal drug delivery technologies differentiates us from other
oral drug delivery companies and will enable us to attract pharmaceutical
companies to incorporate their proprietary drugs into the BCD Systems and also
to differentiate any OTC and/or off-patent drugs that utilize the BCD Systems
from those of other drug delivery companies.

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

Patents, Trademarks and Proprietary Rights

It is our policy to file patent applications in the United
States and certain foreign jurisdictions for any drug formulations and any drug
delivery methodologies that we consider commercially viable. We have four United
States patent pending applications as follows: Colloidal solid lipid vehicle
for pharmaceutical application and Hybrid Lipid-Polymer Nanoparticulate
Delivery Composition for the use of Zysolin to treat Tuberculosis and other
infectious diseases, Topical composition for acne treatment and Stabilization
of benzoyl peroxide in solution for the use of NuProm to treat acne. We have
also applied for patents in Mexico, Japan and China under the title Vehicle for
topical delivery of anti-inflammatory compounds for the use of Indaflex to
increase efficacy of non steroidal anti-inflammatory drugs which are still
pending.

We currently have three issued United States patents as
follows: Toothpaste comprisingbioadhesive submicron emulsion for
improved delivery of antibacterial and anticaries agents for the use of certain
oral care products that have never been developed. This patent was issued on
September 12, 2000 and will expire on June 17, 2019. Vehicle for topical
delivery of anti-inflammatory compounds for the use of Indaflex to increase
efficacy of non steroidal anti-inflammatory drugs. This patent was issued on
November 21, 2006 and will expire on September 29, 2021. Stabilization of
benzoyl peroxide in solution. This patent was issued on December 26, 2006 and
will expire on December 21, 2021.

8

---

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

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

Trademarks

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

Proprietary Information

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

Manufacturing, Marketing and Sales

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

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

9

---

We are not actively pursuing the direct sales and marketing of
our market ready products or potential products due primarily to our limited
amount of financial resources. We do retain marketing and sales agents from time
to time on an as needed basis on a commission or flat fee basis and other
incentives.

Government Regulation

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

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

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

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

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

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

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

10

---

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

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

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

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

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

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

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

11

---

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

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

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

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

Research and Development

We conduct our research and development activities in house and
through collaborative arrangements with universities, contract research
organizations and independent consultants. We are also dependent upon third
parties to conduct clinical studies, and to obtain FDA, Health Canada and other
regulatory approvals. We conduct all of our fundamental research and development
activities in Canada. We conduct animal testing, and other specialized research
and development activities in various countries via third parties depending
primarily on the most competitive pricing we can obtain.

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

Insurance

We maintained product liability insurance until September 30,
2008 in the amount of CAD $1,000,000. As we no longer directly sell, market, or
manufacture any products we determined that product liability insurance is no
longer necessary. We have never had any adverse legal or other consequences from
either Flexogan sales, nor from our Phase 1 and II clinical trials on Indaflex.
Our licensees do have product liability insurance based on their commercial
activities. Should we determine to commence direct sales or production of any of our products or
product candidates, product liability insurance will be obtained accordingly.
Any clinical trials require separate insurance coverage related specifically to
those trials. We could still be indirectly subject to product liability
claims.

12

---

We have property insurance coverage, materials in transit,
kidnap and ransom, and business interruption insurance coverage. Although we
deem the coverage amounts to be adequate to protect our interests, there is no
assurance that the insurance coverage would be adequate to protect us against
all potential liabilities. We do not carry directors and officers liability
insurance due to the prohibitive cost and limited coverage this insurance
offers.

Employees

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

Reports to Security Holders

As a result of its filing of Form 10-SB/A and listing on the
NASD OTC Bulletin Board, the Company has become subject to the reporting
obligations of the Securities Exchange Act of 1934, as amended (the Exchange
Act). These obligations include filing an annual report under cover of Form
10-K, with audited financial statements, unaudited quarterly reports on Form
10-Q and the requisite proxy statements with regard to annual shareholder
meetings. The public may read and copy any materials the Company files with the
Securities and Exchange Commission (the Commission) at the Commissions Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0030. The Commission maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission. Information about the Company is also available on its Web site
at www.AlphaRx.com. Information included on the Web site is not part of
this Form 10-K.

Website

Our website address is www.AlphaRx.com.

We intend to make available through our website, all of our
filings with the Commission and all amendments to these reports as soon as
reasonably practicable after filing, by providing a hyperlink to the EDGAR
website containing our reports.

Our Information

Our principal executive offices are currently located at 19/F,
Two International Finance Centre, 8 Finance Street, Central, Hong Kong and our
telephone number is (852) 2251-1927. We can be contacted by email at
info@AlphaRx.com.

ITEM 1A. RISK FACTORS

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

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

We have incurred annual operating losses since our inception.
As a result, at September 30, 2010 we had an accumulated deficit of
approximately $ 18,527,806. Our revenues for the years ended September 30, 2010
and September 30, 2009 were $326,345 and $377,480 respectively. Our revenues
have not been sufficient to sustain our operations. Revenues for 2010 consisted
of royalty revenues and consulting revenues and in 2009 revenues consisted of
royalty revenues and consulting revenues. In order to achieve profitability our revenue streams
will have to increase and there is no assurance that revenues can increase to
such a level. We may never be profitable.

13

---

We face intense competition in the pharmaceutical business,
and our failure to compete effectively would decrease our ability to generate
meaningful revenues from our products.

The pharmaceutical business is highly competitive and is
affected by new technologies, governmental regulations, health care legislation,
availability of financing, litigation and other factors. Many of our competitors
have longer operating histories and greater financial, research and development,
marketing and other resources than we do. We are subject to competition from
numerous other entities that currently operate or intend to operate in the
industry. These include companies that are engaged in the development of
colloidal drug delivery technologies and products as well as other manufacturers
that may decide to undertake in-house development of these products. Many of the
major pharmaceutical companies also have internal drug delivery programs that
may compete directly with our business.

Many of our competitors have more extensive experience than we
have in conducting preclinical studies and clinical trials, obtaining regulatory
approvals, and manufacturing and marketing pharmaceutical products. Many
competitors also have competing products that have already received regulatory
approval or are in late-stage development, and may have collaborative
arrangements in our target markets with leading companies and research
institutions.

Our competitors may develop or commercialize more effective,
safer or more affordable products, or obtain more effective patent protection,
than we are able to develop, commercialize or obtain. As a result, our
competitors may commercialize products more rapidly or effectively than we do,
which would adversely affect our competitive position, the likelihood that our
products will achieve market acceptance, and our ability to generate meaningful
revenues from our products.

Pre-clinical Research and Clinical Trials

In order to apply for a new medicine certificate, a
pharmaceutical company must conduct a series of pre-clinical research including
research on the synthesis technology, extraction methods, physical and chemical
nature and purity, pharmaceutical forms, selection of prescriptions,
manufacturing technologies, examination methods, quality indicators, stability,
pharmacology, toxicology and animal pharmacokinetics of pharmaceuticals. This
pre-clinical research should be conducted in compliance with the relevant
technological guidelines issued by the SFDA. In particular, the safety
evaluation research must be conducted in compliance with the Good Laboratory
Practice.

After completion of pre-clinical studies and obtaining the
relevant approval from the SFDA, clinical trials are conducted in compliance
with the Good Clinical Practice. Clinical trials to be conducted range from
Phase I to IV, although under certain circumstances, only Phase II and III or
only Phase III clinical trials are required.

- Phase I  preliminary trial of clinical pharmacology and human safety
  evaluation studies. The primary objective is to observe the pharmacokinetics
  and the tolerance level of the human body to the new medicine as a basis for
  ascertaining the appropriate methods of dosage.
- Phase II  preliminary exploration on the therapeutic efficacy. The
  purpose is to assess preliminarily the efficacy and safety of pharmaceutical
  products on patients within the target indication of the pharmaceutical
  products and to provide the basis for the design research and dosage tests for
  Phase III. The design and methodology of research in this phase generally
  adopts double-blind and random methods with limited sample sizes.
- Phase III  confirm the therapeutic efficacy. The objective is to further
  verify the efficacy and safety of pharmaceutical products on patients within
  the target indication of the pharmaceutical products, to evaluate the benefits
  and risks and finally to provide sufficient experimental proven evidence to
  support the registration application of the pharmaceutical products. In
  general, the trial should adopt double-blind, random methods with sufficient
  sample sizes.
- Phase IV  stage of application with research conducted by the applicants
  themselves after the launch of a new pharmaceutical. The objective is to observe the efficacy and
adverse reaction of pharmaceutical products under extensive use, to perform an
evaluation of the benefits and risks of the application among ordinary or
special group of patients, and to ascertain and improve the appropriate dosage
volume for application.

14

---

Our prior clinical trials evaluating Indaflex for
Osteoarthritis of the knee failed to meet all of their primary endpoints and
there can be no assurance this product will be approved for marketing.

In October 2007, our Phase 2 Canadian trials evaluating
Indaflex for Osteoarthritis of the knee failed to meet all of their primary
endpoints. However, additional analyses demonstrated that patients with moderate
to severe pain demonstrated improvements in pain outcomes compared to placebo-
and vehicle-treated patients. While these improvements involved only a small
subset of patients, the data were robust, showing clinically meaningful
improvements. Based on the guidance from Chinese regulatory consultants, we
expect to initiate a pivotal human trial for Indaflex in China in mid-2011. The
trial will be known as PAIN 3. There can be no assurance the results of the PAIN
3 trial will demonstrate the product candidate is sufficiently safe and
effective to obtain Chinese approval for marketing.

We will incur significant additional expenses and will not know
for at least one to two years whether the drug is safe and effective such that
it could be approved for marketing. Clinical development is a long, expensive
and uncertain process and is subject to delays. The positive or encouraging
results of prior clinical trial are not necessarily indicative of the results we
will obtain in later clinical trials. Accordingly, our PAIN 3 trial may not
demonstrate that Indaflex is effective for Osteoarthritis. In addition, data
obtained from pivotal clinical trials are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval.

We have limited in-house sales and marketing resources,
which we will require in order to successfully promote products through our own
sales force.

If Indaflex or another product we develop or acquire is
approved for marketing in the China, we may choose to promote the product with
our own sale force or through a contract sales organization. The success of our
own promotion efforts for Indaflex and any other product candidates that receive
regulatory approval that we choose to market or co-market, will require that we
substantially enhance our in-house marketing and sales force with technical
expertise, or make arrangements with third parties to perform these services for
us. The development of the infrastructure associated with these activities
involves substantial resources, and considerable attention of our management and
key personnel. To the extent that we enter into marketing and sales arrangements
with other companies, our revenues will depend on the efforts of others. These
efforts may not be successful. If we fail to fully develop marketing and sales
capabilities, or enter into arrangements with third parties, our revenues may
suffer.

We depend on our marketing partner for the successful
commercialization of Indaflex in Mexico.

We have licensed exclusive marketing right to Indaflex in
Mexico to Andromaco. Andromaco launched Indaflex in Mexico in June 2006. We
expect to expand the license with Andromaco to cover several more countries in
South America. If Andromaco fails to successfully commercialize Indaflex in
these countries them, our future revenues may be adversely affected.

The global economic downturn may adversely affect our
business.

The economic downturn that has affected the global economy over
the past several fiscal quarters may have a material adverse effect on our
liquidity and financial condition and our ability to raise additional funds,
whether pursuant to our existing or future financing arrangements. In addition,
if these developments negatively impact the ability of our collaborative
partners to develop, manufacture, promote or commercialize our products and
product candidates, our revenues may suffer and our business, financial
condition and results of operations could be materially and adversely affected.
Similarly, any negative impact of an economic downturn or recession on our
potential collaborative partners could adversely affect the terms on which
collaborative partnerships may be available to us, if at all.

15

---

If we are unable to obtain or maintain regulatory approval,
we will be limited in our ability to commercialize our products, and our
business will be harmed.

The regulatory process is expensive and time consuming. Even
after investing significant time and expenditures on clinical trials, we may not
obtain regulatory approval of our product candidates. Data obtained from
clinical trials are susceptible to varying interpretations, which could delay,
limit or prevent regulatory approval, and the regulatory agency may not agree
with our methods of clinical data analysis or our conclusions regarding safety
and/or efficacy. Significant clinical trial delays would impair our ability to
commercialize our products and could allow our competitors to bring products to
market before we do. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new application may cause delays or rejections. Even if we
receive regulatory approval, this approval may entail limitations on the
indicated uses for which we can market a product.

Further, with respect to our approved products, once regulatory
approval is obtained, a marketed product and its manufacturer are subject to
continual review. The discovery of previously unknown problems with a product or
manufacturer may result in restrictions on the product, manufacturer or
manufacturing facility, including withdrawal of the product from the market.
Manufacturers of approved products are also subject to ongoing regulation,
including compliance with regulations governing current Good Manufacturing
Practices (cGMP). Failure to comply with manufacturing regulations can result
in, among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to renew marketing applications and criminal
prosecution.

We depend on third parties to manufacture our products,
which could adversely affect our ability to deliver our products to market on a
timely or competitive basis.

We do not have, and we do not intend to establish in the
foreseeable future, internal commercial scale manufacturing capabilities.
Rather, we intend to use the facilities of third parties to manufacture products
for clinical trials and commercialization. Our dependence on third parties for
the manufacture of our products may adversely affect our ability to deliver such
products on a timely or competitive basis. The manufacturing processes of our
third party manufacturers may be found to violate the proprietary rights of
others. If we are unable to contract for a sufficient supply of required
products on acceptable terms, or if we encounter delays and difficulties in our
relationships with manufacturers, the market introduction and commercial sales
of our products will be delayed, and our future revenue will suffer.

Our disclosure controls & procedures and internal
control over financial reporting were ineffective

Section 404 of the Sarbanes-Oxley Act of 2002 requires
companies to conduct a comprehensive evaluation of their disclosure controls
& procedures and internal control over financial reporting. At the end of
each fiscal year, we must perform an evaluation of our disclosure controls &
procedures and internal control over financial reporting, include in our annual
report the results of the evaluation, and have our external auditors publicly
attest to such evaluation. If material weaknesses were found in our disclosure
controls & procedures and internal controls in the future, if we fail to
complete future evaluations on time, or if our external auditors cannot attest
to our future evaluations, we could fail to meet our regulatory reporting
requirements and be subject to regulatory scrutiny and a loss of public
confidence in our disclosure and internal controls, which could have an adverse
effect on our stock price.

In connection with managements assessment of the Companys
disclosure controls & procedures and internal control over financial
reporting, we identified the following material weakness in our disclosure
controls & procedures and internal control over financial reporting as of
September 30, 2010:

Segregation of Duties: We did not maintain adequate segregation
of duties related to job responsibilities for initiating, authorizing, and
recording of certain transactions. Due to this material weakness, there is a
risk that a material misstatement in the financial statements would not be
prevented or detected on a timely basis.

16

---

We are subject to currency fluctuations, which may affect
our results

The majority of our expenses and some of our debt are in
Canadian dollars, while our revenues are primarily U.S. dollars. We also incur
expenses in Hong Kong dollars related to our Far East subsidiaries. The
fluctuation of the Canadian dollar and Hong Kong dollar vis a vis the U.S.
dollar could materially impact our operating results and financial position.

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

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

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

At September 30, 2010, we had a working capital deficiency of
approximately $1,146,913 as compared to a working capital deficiency of $978,820
as at September 30, 2009. The independent auditors' report for the year ended
September 30, 2010 includes an explanatory paragraph stating that our recurring
losses from operations and working capital levels raise substantial doubt about
our ability to continue as a going concern.

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

We are subject to industry and government regulation

All of our products, clinical trials, and certain research and
development initiatives are regulated by Canadian health authorities, and if
applicable, the FDA in the United States, and similar governing bodies in
Mexico, China and elsewhere. Any changes in regulatory requirements, depth and
breadth of clinical trials, provisions, statutes, or regulations could adversely
impact the cost and duration of our research and development, product completion
and related operations.

Our competitors may include large pharmaceutical companies
with superior resources.

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

17

---

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

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

We also rely on trade secrets to protect our inventions. Our
policy is to include confidentiality and non-disclosure obligations in all
research contracts, joint development agreements and consulting relationships
that provide access to our trade secrets and other know-how. However, parties
with confidentiality obligations could breach their agreements causing us harm.
If a confidentiality or non-disclosure obligation were to be breached, we may
not have the financial resources necessary for a legal challenge. If licensees,
consultants or other third parties use technological information independently
developed by them or by others in the development of our products, disputes may
arise from the use of this information and as to the ownership rights to
products developed using this information. These disputes may not be resolved in
our favour.

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

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

Our business exposes us to the risk of product liability claims
that are a part of human testing, manufacturing and sale of pharmaceutical
products. The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims even if our products are
not actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to cause, adverse side effects or potentially dangerous
drug interactions that we may not learn about or understand fully until the drug
is actually manufactured and sold. Product liability claims can be expensive to
defend and may result in large judgments against us. Even if a product liability
claim is not successful, the adverse publicity, time, and expense involved in
defending such a claim may interfere with our business. We may not have
sufficient resources to defend against or satisfy these claims. Even though our
licensees are required to have product liability insurance we may still be
subject to product liability claims.

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

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

The market price of our Common Stock is volatile.

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

18

---

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

Our Common Stock is traded on the OTC Bulletin Board. As a
result, the holders of our Common Stock may find it more difficult to obtain
accurate quotations concerning the market value of the stock. Stockholders also
may experience greater difficulties in attempting to sell the stock than if it
was listed on a stock exchange or quoted on the Nasdaq National Market or the
Nasdaq Small-Cap Market. Because AlphaRx Common Stock is not traded on a stock
exchange or on Nasdaq, and the market price of the Common Stock is less than
$5.00 per share, the Common Stock is classified as a "penny stock." Rule 15g-9
of the Securities Exchange Act of 1934 imposes additional sales practice
requirements on broker-dealers that recommend the purchase or sale of penny
stocks to persons other than those who qualify as an "established customer" or
an "accredited investor." This includes the requirement that a broker-dealer
must make a determination that investments in penny stocks are suitable for the
customer and must make special disclosures to the customer concerning the risks
of penny stocks. Application of the penny stock rules to our Common Stock could
adversely affect the market liquidity of the shares, which in turn may affect
the ability of holders of our Common Stock to resell the stock.

We have a significant number of options and warrants
outstanding that could be exercised in the future. Subsequent resales of these
and other shares could cause the Companys stock price to decline. This could
also make it more difficult to raise funds at acceptable levels, via future
securities offerings.

Lack of Independent Directors

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

Ownership of our Common Stock by Current Officers and
Directors

The present officers and directors own approximately 28.41% of
the outstanding shares of Common Stock, and are therefore no longer in a
position to elect all of our Directors and otherwise control the Company. Any
single shareholder or the management group as a whole can no longer control the
Company. Stockholders have no cumulative voting rights. (See Security Ownership
of Certain Beneficial Owners and Management)

ITEM 1B. UNRESOLVED STAFF COMMENTS

NONE.

ITEM 2. PROPERTIES

We lease approximately 2,930 square feet in Markham, Ontario,
on a month-to-month basis. Present leasing costs are approximately $3,800 a
month. We believe that our existing properties are sufficient for our
administrative, research and development needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings against the Company to the best
of the Companys knowledge as of the date hereof and to the Companys knowledge,
no action, suit or proceeding has been threatened against the Company.

ITEM 4. (REMOVED AND RESERVED)

19

---

PART II

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

MARKET INFORMATION

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

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

|                                                | High $ | Low $
|----------------------------------------------- | ------ | -----
|Fourth Quarter (Ended
      September 30, 2010) | 0.06   | 0.04 
|Third Quarter (Ended June 30, 2010)             | 0.10   | 0.03 
|Second Quarter (Ended
      March 31, 2010)     | 0.13   | 0.08 
|First Quarter (Ended December 31,
      2009)   | 0.16   | 0.07 
|Fourth Quarter (Ended
      September 30, 2009) | 0.19   | 0.10 
|Third Quarter (Ended June 30, 2009)             | 0.12   | 0.03 
|Second Quarter (Ended
      March 31, 2009)     | 0.04   | 0.02 
|First Quarter (Ended December 31,
      2008)   | 0.06   | 0.02 

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

Records of our stock transfer agent indicate that as of
September 30, 2010 there were approximately 72 record holders of our Common
Stock. This does not include an indeterminate number of stockholders who may
hold their shares in "street name" or in nominee form.

DIVIDENDS

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

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

STOCK OPTION PLANS

At the Annual General Meeting of stockholders held on November
26, 2008 a majority of stockholders approved a new stock option plan - the 2008
Stock Incentive Plan. This plan is generally more restrictive than the preceding
plans were. Major amendments to the existing plans reflected in the 2008 Stock
Incentive Plan include: (i) combining the 2004 and 2006 Plans for ease of
administration; (ii) providing a cap for the number of options to be issued at
22,000,000; (iii) providing guidelines for exercise prices such that the
exercise price of any newly granted option is never less than the market value
or in the case of a 10%+ holder, never less than 110% of the market value on the
date of grant; (iv) providing for a maximum term of 5 years for any option
granted; (v) provide for a vesting schedule whereby vesting must occur over at
least 18 months with no more than 1/6th of the options granted vesting in
any 3 month period; (vi) providing for the maximum number of options to be
granted to any one individual in any 12 month period to be no more than 5% of
the issued and outstanding common stock, and (vii) providing for a maximum
number of options to be granted to any Investor Relations party to be no more
than 2% of the issued and outstanding common stock. Finally, in accordance with
the existing Plan we can grant no more than 4,310,000 options regardless of how
many options may be exercised or expire.

20

---

No options were granted nor were any exercised during the year
ended September 30, 2010. There remain 14,260,000 options to purchase shares of
Common Stock as of September 30, 2010.

During fiscal 2008 employees, officers and consultants
exercised a total of 3,430,000 options at an average exercise price of
approximately $0.08 per share and resulting in $274,750 in cash proceeds to the
Company. Of these options 700,000 were from the 2000 Plan and had a weighted
remaining contractual life of 2.5 years when exercised and 2,730,000 were from
the 2004 Plan and had a weighted remaining contractual life of 7.8 years when
exercised. Immediately thereafter the remaining options in the 2000 Plan and
2003 Plan were cancelled, with the agreement of the option holders. In addition,
and pursuant to an application for listing on the Toronto Venture Exchange, the
Company cancelled a total of 7,660,000 options with the agreement of the option
holders during fiscal 2008. Also during fiscal 2008, with the agreement of the
option holders, the option expiry date for all remaining 2004 Plan options was
accelerated to June 30, 2012. All options now expire on or before June 30,
2012.

RECENT SALES OF UNREGISTERED SECURITIES

During fiscal 2010, 2,263,855 shares of common stock with a
value of $113,192.75, based upon the quoted trading price of $0.05 per share,
were issued to Michael Lee (President & CEO) in lieu of salary. There
remains 94,635,047 common stock issued and outstanding as of September 30, 2010

ITEM 6. SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATONS

The following discussion should be read in conjunction with the
information contained in the consolidated financial statements of the Company
and the notes thereto appearing elsewhere herein and in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in (1) the Company's Annual Report on Form 10-K for the
year ended September 30, 2010. Readers should carefully review the risk factors
disclosed in this Form 10-K and other documents filed by the Company with the
SEC.

As used in this report, the terms "Company," "AlphaRx" "we,"
"us," and "our," refer collectively to AlphaRx Inc., AlphaRx Canada Limited, our
wholly owned subsidiary and 80% of AlphaRx International Holdings Limited.

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within
the meaning of the federal securities laws. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "the Company believes," "management believes" and similar
language. The forward-looking statements are based on the current expectations
of the Company and are subject to certain risks, uncertainties and assumptions,
including those set forth in the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this report.
Actual results may differ materially from results anticipated in these
forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update
them. Investors are also advised to refer to the information in our previous
filings with the Securities and Exchange Commission (SEC), especially on Forms
10-K, 10-Q and 8-K, in which we discuss in more detail various important factors
that could cause actual results to differ from expected or historic results. It
is not possible to foresee or identify all such factors. As such,
investors should not consider any list of such factors to be an exhaustive
statement of all risks and uncertainties or potentially inaccurate assumptions.

21

---

General

AlphaRx is a drug delivery company specializing in the
development of innovative therapeutic products for the pharmaceutical and
consumer health care market. Our core competence is in the development of novel
drug formulations for therapeutic molecules or compounds that have exhibited
poor gastro intestinal absorption due to poor solubility or have yet be
administrable to the human body with an acceptable delivery method. Our drug
delivery system is versatile and offers significant flexibility in the
development of suitable dosage formulations. Our delivery systems can be adopted
to administer drugs orally, topically, or parenterally in order to meet the
requirements of specific drug molecules.

Please refer to the table under Product Pipeline, Item 1 for
the current status of our product research and development activities.

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

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

If we cannot complete our research and development initiatives
on a timely basis consequences to our operations could be significant to the
point where the initiative would be delayed or even abandoned. We would also
face the risk of competitors developing the same or similar products and being
first to market. Finally, our failure to develop products on a timely basis
could substantially impair our ability to generate revenues and materially harm
our financial position.

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

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

Recent Developments

On April 9, 2010, we entered into a non-binding letter of
intent with Pacific Orient Capital Inc. (Pacific), a Capital Pool Company
listed on the TSX Venture Exchange, concerning the proposed acquisition of
AlphaRx Canada Limited ("ACL"), a wholly owned subsidiary of the Company. The
letter of intent was subsequently amended on June 9, 2010. The proposed
acquisition, if completed, will constitute Pacific's qualifying transaction
(Qualifying Transaction) pursuant to the policies of the TSX Venture Exchange
Inc. (the "Exchange").

The Qualifying Transaction is to be completed by (a) the
acquisition of ACL by way of share exchange through the issuance of one common
share of Pacific for every one common share of ACL at a deemed price of C$0.40
per share; and (b) the acquisition by Pacific of a licence from AIH to
commercialize the prescription drug Indaflex in Mexico and Asia for 8,250,000 common shares of Pacific at a deemed price of C$0.40
per share (the "Transaction"). Pacific has advanced $25,000 to the Company on a
non-refundable basis. Completion of the proposed Qualifying Transaction is
conditional on the execution of a definitive agreement to be negotiated among
the parties, the satisfactory completion of due diligence, Exchange acceptance
and the satisfaction of the minimum listing requirements of the Exchange. On
October 28, 2010, the Exchange conditionally accepted Pacifics proposed
Qualifying Transaction.

22

---

On June 28, 2010, we terminated our licensing agreement with
Cypress Biosciences (Cypress), our world-wide (except Mexico and Asia)
development partner for Indaflex. Despite the termination of Indaflex
development program with Cypress, we continue to develop Indaflex for the
Chinese market. We are currently working with our regulatory consultants,
pending availability of stability data, in preparation for submission of a
clinical trial application with the China State Food and Drug Association
(SFDA) in order to begin human trials in China. These preparations are
proceeding on schedule.

We established a feasibility and option agreement in October
2008 with Gaia BioPharma Limited, a privately held early stage biopharmaceutical
company. We concluded formulation development on GAI-122 during August 2009.
GAI-122 is an investigational, injectable nanoemulsion of a
Mitochondria-targeted neuroprotective agent formulated with our nanoemulsion
drug delivery technology. GAI-122 has been shown to provide significant
neuro-protection in multiple in vitro and in vivo animal studies, suggesting
that this injectable nanoemulsion formulation has the potential to treat
patients with acute ischemic stroke or to prevent postoperative delirium.
GAI-122 is proceeding to the clinical trial materials manufacturing stage and is
expected to enter clinical trials in 2011. GAI-122 is protected by 4 United
States patent applications and 2 Chinese patent applications.

We established a co-development agreement with Gaia in August
2010 for ARX8203, a prodrug of a well-known NSAID. Under the agreement, GAIA
owns the exclusive worldwide rights to the injectable formulation of ARX8203 and
the Company owns the exclusive worldwide rights to the oral formulation of
ARX8203.

Our other product candidates in development are in earlier or
preclinical research phases, and we continue to assess them for their
compatibility with our technology and market need. Our intent is to seek
partnerships with pharmaceutical and biotechnology companies for certain of
these products. We plan to expand our pipeline with product candidates that
demonstrate significant opportunities for growth.

The Companys Drug Pipeline

Management believes that it has achieved significant milestones
in the development of a number of drug candidates. We now have high efficacy
lead drug candidates against three commercially important diseases, namely, (1)
Stroke (GAI-122), (2) Nosocomial pneumonia (Zysolin) and (3) Pain and
Inflammation (ARX8203).

The Company has not yet finished performing detailed safety
profile studies to be included in a Tox Package for submission to the FDA for
any of our drug candidates. Our studies regarding safety of the various drug
candidates to date have been preliminary and of a limited nature.

Managements beliefs are based on results of pre-clinical cell
culture studies and in vivo animal studies using mice and rats. It should be
noted that all of our studies to date were preliminary. Thus, the evidence we
have developed is indicative and not considered confirmative.

Requirement for Additional Capital

We estimate that we will need approximately an additional $10M
to $15M over the next 18 months for further development of our drug pipeline.
These additional funds, if raised, will enable us to perform IND enabling
Toxicology Package Studies and additional efficacy studies necessary to prepare
the full dataset required for filing Investigational New Drug Application
(IND) with the US FDA on our drug candidates and to conduct clinical trials
thereafter.

The Company has limited experience with pharmaceutical drug
development. Thus, our budget estimates are not based on experience, but rather
based on advice given by our associates and consultants. As such these budget
estimates may not be accurate. In addition, the actual work to be performed is not
known at this time, other than a broad outline, as is normal with any scientific
work. As further work is performed, additional work may become necessary or
change in plans or workload may occur. Such changes may have an adverse impact
on our estimated budget. Such changes may also have an adverse impact on our
projected timeline of drug development.

23

---

Management intends to use capital and debt financing, as
required, to fund the Companys operations. There can be no assurance that the
Company will be able to obtain the additional capital resources necessary to
fund its anticipated obligations for the next twelve months.

The Company is considered to be a development stage company and
will continue in the development stage until it generates substantial revenues
from the sales of its products or services.

Research and Development Costs

The Company does not maintain separate accounting line items
for each project in development. The Company maintains aggregate expense records
for all research and development conducted. Because at this time all of the
Companys projects share a common core material, the Company allocates expenses
across all projects at each period-end for purposes of providing accounting
basis for each project. Project costs are allocated based upon labor hours
performed for each project.

The Company has signed several cooperative research and
development agreements with different agencies and institutions.

The Company expects to enter into additional cooperative
agreements with other governmental and non-governmental, academic, or
commercial, agencies, institutions, and companies. There can be no assurance
that a final agreement may be achieved and that the Company will execute any of
these agreements. However, should any of these agreements materialize, the
Company will implement a system to track these costs by project and account for
these projects as customer-sponsored activities and show these project costs
separately.

Overview of Results of Operations

The following tables summarize the results of operations for
the years ended September 30, 2010 and 2009 and the quarterly results of
operations for the past two years:

|Year Ended September 30 |  | 2010     |   |  | 2009     |  
|----------------------- |  | -------- | - |  | -------- | -
|                        |  | **$**    |   |  | **$**    |  
|Net Sales               |  | 326,345  |   |  | 377,480  |  
|Net Loss                |  | (465,981 | ) |  | (441,876 | )
|Net Loss Per Share      |  | (0.01    | ) |  | (0.01    | )

|Three                                 |  | Sep 30   |   |  | June 30  |   |  | Mar 31  |  |  | Dec 31   |   |  | Sep 30   |   |  | June 30  |   |  | Mar 31  |   |  | Dec 31  |  
|------------------------------------- |  | -------- | - |  | -------- | - |  | ------- |  |  | -------- | - |  | -------- | - |  | -------- | - |  | ------- | - |  | ------- | -
|Months                                |  | 2010     |   |  | 2010     |   |  | 2010    |  |  | 2009     |   |  | 2009     |   |  | 2009     |   |  | 2009    |   |  | 2008    |  
|Ended                                 |  | **$**    |   |  | **$**    |   |  | **$**   |  |  | **$**    |   |  | **$**    |   |  | **$**    |   |  | **$**   |   |  | **$**   |  
|Net Sales                             |  | 180,432  |   |  | 45,623   |   |  | 48,720  |  |  | 51,570   |   |  | 88,815   |   |  | 20,982   |   |  | 164,109 |   |  | 103,574 |  
|Net Income (Loss)                     |  | (242,109 | ) |  | (157,366 | ) |  | 206,078 |  |  | (122,518 | ) |  | (208,562 | ) |  | (235,695 | ) |  | (23,420 | ) |  | (21,039 | )
|Net (Income) Loss per Share
      (1) |  | (0.01    | ) |  | (0.01    | ) |  | 0.00    |  |  | (0.00    | ) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01   | ) |  | (0.01   | )

NOTE(1)Net Loss per share on a quarterly basis
does not equal net Loss per share for the annual periods due to rounding.

24

---

RESULTS OF OPERATIONS

Year ended September 30, 2010 as compared to year ended
September 30, 2009

Revenues

Revenues totaled $326,345 for the year ended September 30, 2010
as compared to $377,480 generated for the year ended September 30, 2009, a
decrease of $51,135 or about 13.55%. Royalties from Indaflex sales in Mexico
increased to $242,309 from $137,223 generated for the same period a year ago
based on increased sales of Indaflex and an increase in the minimum royalty
payment compared to previous year. We also generated $84,036 in consulting
revenues related to product research on behalf of one of our customers during
the year ended September 30, 2010 as compared to $240,257 generated for the year
ended September 30, 2009, a decrease of $156,221 or about 65%. We anticipate
generating both royalty revenues and consulting revenues in the new fiscal year.

General and Administrative Expenses

General and administrative expenses were $795,416 for the year
ended September 30, 2010 as compared to $499,339 incurred for the same period a
year ago, an increase of $296,077 or about 59%.

Stock based compensation was $262,090 for the year ended
September 30, 2010 as compared to $73,725 in 2009, a decrease of $188,365 or
about 255%. There are no further amounts remaining to be amortized related to
warrants or options as at September 30, 2009. We anticipate issuance of
additional options and warrants in the future, which may result in stock based
compensation expense and warrant amortization expense.

General and administrative salary and consulting fees totalled
$174,073 for the year ended September 30, 2010 as compared to $175,871 incurred
for the same period a year ago, a decrease of $1,798 or about 1.02%. Head count
in the general and administrative category with 2 full time and 1 part time
staff.

We incurred $6,777 in investor relations expenses for the year
ended September 30, 2010 as compared to $35,787 incurred in the same period a
year ago, a decrease of $29,010 or about 81.1%.

We realized a foreign exchange loss of $27,408 for the year
ended September 30, 2010 as compared to a foreign exchange gain of $49,189
generated during the same period a year ago, a decrease of $21,781 between
years.

We incurred travel expenses of $67,037 for the year ended
September 30, 2010 as compared to $63,733 incurred during the same period a year
ago, an increase of $3,304 or about 5%. Increased travel particularly to China
because of the expansion to china market.

Research and Development Expenses

Research and development expenses include costs for scientific
personnel, supplies, equipment, outsourced clinical and other research
activities, consultants, and other costs directly related to research and
development of new and existing products. We are incurring research and
development expenses in Canada via our wholly owned subsidiary AlphaRx Canada
Ltd. and to a lesser degree in China.

We incurred $151,165 in research and development expenses
during the year ended September 30, 2010 as compared to $204,731 incurred in the
same period a year ago, a decrease of $53,566 or about 26%.

Research and development staff costs and external consulting
services totalled $86,822 for the year ended September 30, 2010 as compared to
$139,379, a decrease of $52,557 or about 37.7%. Salary reductions and reduced
external consulting services served to reduce this expense when compared to
prior year.

Finally equipment leasing for research and development
activities totalled $2,194 during the year ended September 30, 2010 as compared
to $11,151, a reduction of $8,957 or about 80%. All equipment leases have come
to the end of their lease term during the year ended September 30, 2010.

25

---

During 2009 we focused our research and development efforts on
Vancomycin, Idebenone, Mebicar, and Iodoantipyrine. Activities primarily related
to formulations, and analytical development and testing.

During 2008 we incurred research and development expenses
related to completing animal testing with Zysolin, as well as continued
research and development with Vancomycin, Tobramycin, Gentamycin and
Doxycycline.

We anticipate continued spending on research and development in
the future. The degree and pace of expenditures will depend primarily on
financial resources available to us.

Depreciation Expense

Depreciation expense totalled $39,503 for the year ended
September 30, 2010 as compared to $61,288 incurred for the same period a year
ago, a decrease of $21,785 or about 35.6%. On December 1, 2009 we spent $5,700
(10% of its original cost) for the purchase of an off-lease equipment from
leaser used in research & development. Fully depreciated assets no longer
attracting depreciation expense more than offset the additional depreciation
expense stemming from capital asset purchases made in 2009.

Interest Expense

We incurred $92,062 in net interest expense during 2010 as a
result of our borrowings and the issuance of promissory notes yielding interest
ranging from 10% - 12% per annum. This compares to $54,154 incurred during 2009
an increase of $37,908 or about 70%. We will continue to seek funding in the
form of Promissory Notes, which will result in ongoing interest expense until
more permanent equity or other forms of funding are sourced.

Loss from Continuing Operations and Net Loss

As a result of the above revenues and expenses, we incurred a
loss from continuing operations of $($751,801) for the year ended September 30,
2010 as compared to $(442,032) incurred for the same period a year ago, an
increase of $309,769 or about 70%. Revenues decreased by $51,135 and expenses
increased by $258,634 in the year ended September 30, 2010 as compared to the
previous year.

Cumulative Translation Adjustment and Comprehensive Loss

The cumulative translation adjustment (CTA) stems from
unrealized foreign exchange gains and losses resulting from translation of
foreign currency subsidiaries into U.S. dollars. Although the CTA is reflected
in the statement of operations, it is reflected after the net loss and flows
into stockholders equity/ (deficiency) directly. The CTA was a $33 gain for the
year ended September 30, 2010 as compared to a gain of $4,373 for the year ended
September 30, 2009. Netting the CTA against the Net Loss for the year results in
comprehensive loss of $(728,038) for the year ended September 30, 2010 as
compared to a comprehensive loss of $(437,503) incurred for the year ended
September 30, 2009.

Liquidity And Capital Resources

At September 30, 2010, we had a working capital deficiency of
approximately $1,146,910 as compared to a working capital deficiency of $978,820
as at September 30, 2009. We have licensing arrangements with Andromaco which
provides our royalty of our products. We also generate certain consulting
revenues from time to time in conjunction with our research and development. We
continue to seek out licensing and royalty arrangements and distribution
arrangements with established and experienced partners in order to expand our
revenue base.

Immediate capital needs are sourced via directors loans and
other private sources. Since inception, we have financed operations primarily
from the issuance of Common Stock. We expect to continue Common Stock issuances
and issuance of promissory notes to fund our ongoing activities.

26

---

We currently do not have sufficient resources to complete the
commercialization of all of our proposed products or to carry out our entire
business strategy. Therefore, we will need to raise additional capital to fund
our operations sometime in the future. We cannot be certain that any financing
will be available when needed. Any additional equity financings will be dilutive
to our existing stockholders, and debt financing, if available, may involve
restrictive covenants on our business and also the issuance of warrants or
conversion features which may further dilute our existing stockholders.

We expect to continue to spend capital on:

|1. | research and development programs;                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                   
|2. | preclinical studies and clinical trials;                                                                          
|   |                                                                                                                   
|3. | regulatory processes; and                                                                                         
|   |                                                                                                                   
|4. | sales and marketing activities related to establishing collaborative,
      licensing and distribution agreements.

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

|1. | the progress, timing and scope of our research and development
      programs;                                                                          
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                         
|2. | the progress, timing and scope of our preclinical studies and clinical
      trials;                                                                    
|   |                                                                                                                                                         
|3. | the time and cost necessary to obtain regulatory approvals;                                                                                             
|   |                                                                                                                                                         
|4. | the time and cost necessary to establish licensing and similar
      marketing arrangements in order to generate royalty and license fee
      revenues;
|   |                                                                                                                                                         
|5. | the time and cost necessary to respond to technological and market
      developments; and                                                              
|   |                                                                                                                                                         
|6. | new collaborative, licensing and other commercial relationships that
      we may establish.                                                            

The inability to raise capital would have a material adverse
effect on the Company.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are
material and which, in our opinion, could become material in the future.

Contractual Obligations and Commitments

Excluding accounts payable and accrued liabilities, the Company
is committed to the following contractual obligations and commitments.

|                            |   | 2010    |  |   | 2011   |  |   | 2012  |  |  | 2013 |  |  | 2014 | 
|--------------------------- | - | ------- |  | - | ------ |  | - | ----- |  |  | ---- |  |  | ---- | 
|Operating Lease Obligations | $ | 6,431   |  | $ | 14,313 |  | $ | 9,962 |  |  | -    |  |  | -    | 
|Notes Payable (1)           |   | 790,671 |  |   | -      |  |   | -     |  |  | -    |  |  | -    | 
|Total                       | $ | 797,102 |  | $ | 14,313 |  | $ | 9,962 |  |  | -    |  |  | -    | 

(1) These notes are unsecured and include accrued interest
accruing at rates ranging from 8% -12% per annum.

Certain Factors that may Affect Future Results

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

27

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK

Not required for smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements for the fiscal year ending September
30, 2010 and 2009, required by Item 7 are set forth on pages F-1 through
F-21.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

On December 16, 2010, Schwartz Levitsky Feldman LLP ("SLF")
resigned as the independent accountant of AlphaRx, Inc. (the "Company"). The
Board of Directors acting in the capacity of an audit committee approved the
dismissal of SLF.

SLF's reports on the Company's financial statements for the
years ended September 30, 2009 and 2008 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles except that the reports for both years
indicated that the Company is under development, has suffered significant
operating losses, and is dependent upon its stockholders to provide sufficient
working capital to meet its obligations and sustain its operations. Accordingly,
such reports indicated that there was substantial doubt as to the Company's
ability to continue as a going concern and that the financial statements did not
include any adjustments that might result from the outcome of this uncertainty.

During the years ended September 30, 2009 and 2008 and through
December 16, 2010, there were no disagreements with SLF on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
SLF, would have caused it to make reference thereto in connection with its
reports on the financial statements for such years. During the years ended
September 30, 2009 and 2008 and through December 16, 2010, there were no matters
that were either the subject of a disagreement as defined in Item 304(a)(l)(iv)
of Regulation S-K or a reportable event as described in Item 304(a)(l)(v) of
Regulation S-K.

The Company provided SLF with a copy of the foregoing
disclosures and requested SLF to furnish the Company with a letter addressed to
the Securities and Exchange Commission stating whether or not SLF agrees with
the disclosures.

On December 17, 2010, the Company's Board of Directors acting
in the capacity of an audit committee engaged Albert Wong & Co. ("AWC") as
the Company's new independent accountant to act as the principal accountant to
audit the Company's financial statements. During the Company's fiscal years
ended September 30, 2009 and 2008 and through November 15, 2010, neither the
Company, nor anyone acting on its behalf, consulted with AWC regarding the
application of accounting principles to a specific completed or proposed
transaction or the type of audit opinion that might be rendered on the Company's
financial statements, and no written report or oral advice was provided that AWC
concluded was an important factor considered by the Company in reaching a
decision as to any such accounting, auditing or financial reporting issue.

ITEM 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
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 that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were ineffective as of the
end of the period covered by this report to provide reasonable assurance that
material information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.

28

---

Management is aware that there is a lack of segregation of
certain duties at the Company due to the small number of employees with
responsibility for general administrative and financial matters. This
constitutes a deficiency in financial reporting. However, at this time,
management has decided that considering the employees involved and the control
procedures in place, the risks associated with such lack of segregation of
duties are insignificant and the potential benefits of adding additional
employees to clearly segregate duties do not justify the additional expenses
associated with such increases. Management will periodically reevaluate this
situation. If the volume of business increases and sufficient capital is
secured, it is the Companys intention to further increase staffing to mitigate
the current lack of segregation of duties within the general, administrative and
financial functions.

Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f), and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of, our principal executive officer and
principal financial officer and effected by our Board, management, and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the consolidated financial statements
in accordance with U.S. generally accepted accounting principles.

Our internal control over financial reporting is supported by
policies and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect our transactions and
dispositions of our assets; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of the consolidated financial
statements in accordance with U.S. generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the
consolidated financial statements.

Managements Report on Internal Control over Financial
Reporting

Management assessed our internal control over financial
reporting as of September 30, 2010, the end of our fiscal year. Management based
its assessment on criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Managements assessment included an evaluation of the design
of our internal control over financial reporting and testing of the operational
effectiveness of those controls.

Based on this assessment, management has concluded that as of
September 30, 2010, our internal control over financial reporting was
ineffective to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.

This annual report does not include an attestation report of
our registered public accounting firm regarding internal control over financial
reporting. Our report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only Managements report in this Form 10-K.

Management is aware that we have a lack of segregation of
certain duties due to the small number of employees with responsibility for
general administrative and financial matters. This constitutes a deficiency in
financial controls. However, at this time, management has decided that
considering the employees involved and the control procedures in place, the
risks associated with such lack of segregation of duties are insignificant and
the potential benefits of adding additional employees to clearly segregate
duties do not justify the expenses associated with such increases. Management
will periodically reevaluate this situation. If the volume of business increases
and sufficient capital is secured, it is our intention to further increase
staffing to mitigate the current lack of segregation of duties within the
general, administrative and financial functions.

A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected. Such limitations
include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures, such as
simple errors or mistakes or intentional circumvention of the established
process.

29

---

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2010, there were no
changes in our internal controls over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that was conducted during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE

The following table sets forth the names and ages of our
current directors and executive officers, their principal offices and positions
and the date each such person became a director or executive officer. Executive
officers are elected annually by our Board of Directors. Each executive officer
holds his office until he resigns, is removed by the Board or his successor is
elected and qualified. Directors are elected annually by our stockholders at the
annual meeting. Each director holds his office until his successor is elected
and qualified or his earlier resignation or removal.

The following persons are the directors and executive officers
of our company:

|Name                | Age | Position            | Term           
|------------------- | --- | ------------------- | ---------------
|                    |     |                     |                
|Michael M. Lee      | 47  | Chairman of the     | since 8/8/1997 
|                    |     | Board of Directors  |                
|                    |     | Chief Executive     |                
|                    |     | Officer, Chief      |                
|                    |     | Financial Officer   |                
|                    |     |                     |                
|Joseph Schwarz,     | 56  | Chief Scientist     |                
|Ph.D                |     |                     |                
|                    |     |                     |                
|Michael Weisspapir, | 54  | Chief Medical       |                
|MD, Ph.D            |     | Officer             |                
|                    |     |                     |                
|Sandro Persia       | 40  | Secretary/Treasurer |                
|                    |     |                     |                
|Dr. David Milroy    | 59  | Director            | since 4/15/2003
|                    |     |                     |                
|Dr. Ford Moore      | 59  | Director            | Since 4/15/2003

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

Joseph Schwarz, Ph.D.: Dr. Schwarz is our chief scientist. Dr.
Schwarz has extensive experience in the research and development of controlled
release drug delivery systems, his areas of expertise cover controlled delivery
of drugs, colloidal and microcorpusculate drug delivery systems, submicron
emulsions (SME), transdermal delivery (topical and systemic). Dr. Schwarz has
published more than 40 articles in various scientific journals and has written
over 20 patents and patent applications. Dr. Schwarz was the senior scientist at
Pharmos Ltd., a publicly traded U.S. pharmaceuticals company from 1991 to 1995.
From 1995 to 1997 he was the senior scientist in the research and development
department of TEVA Pharmaceuticals Ltd. From 1997 to 1998, Dr. Schwarz was the
senior scientist of D-PHARM, a pharmaceuticals concern located in Israel. From
1998 to 1999 Dr. Schwarz served as a part time consultant to the Company and has
been with the company since that time.

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

30

---

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

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

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

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

Compensation of Directors

Our directors did not receive any compensation for the year
ended September 30, 2010 or 2009. Directors are reimbursed for direct
out-of-pocket expenses for attendance at meetings of the Board of Directors and
for expenses incurred for and on behalf of the Company.

Board of Directors Committees

We were not able to attract an independent director with
financial experience to sit on our board. Based on the size of the organization
 six full time employees, and 2 part time consultants, effective controls over
financial reporting and internal financial controls can still be effectively
maintained without an audit committee. The board of directors has not yet
established a compensation committee.

Audit Committee

Although its By-laws provide for the appointment of one, the
Company is not yet required to have an Audit Committee as a result of the fact
that our common stock is not considered a listed security as defined in Rule
10A-3 of the Exchange Act. There are currently no audit committee members that
meet the criteria of Financial Expert, however the company is actively working
to appoint a Financial Expert in the current year.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

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

Based solely upon our review of the copies of such forms that
we received during the fiscal year ended September 30, 2010, we believe that
each person who at any time during the fiscal year was a director, officer, or
beneficial owner of more than ten percent of our Common Stock complied with all
Section 16(a) filing requirements during such fiscal year.

31

---

CODE OF ETHICS

We have not adopted a formal code of ethics at this time, as
our focus has been on our product development and enhancement. We do follow what
are considered proper business ethics and labour law in Canada ensures that our
employees are treated with a minimum standard of care and consideration.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation

The table below summarizes the compensation received by the
Company's Chief Executive Officer for the fiscal years ended September 30, 2010,
2009 and 2008 and each other executive officer of the Company who received
compensation in excess of $40,000 for services rendered during any of those
years ("named executive officers").

|                        |      |            |           | LONG TERM   
|----------------------- | ---- | ---------- | --------- | ------------
|                        |      |            |           | COMPENSATION
|                        |      |            |           | SECURITIES  
|NAME AND                |      |            |           | UNDERLYING  
|PRINCIPAL POSITION      | YEAR | SALARY ($) | BONUS ($) | OPTION (#)  
|Michael M. Lee          | 2010 | 120,000    | 0         | 0           
|President & C.E.O.      | 2009 | 50,504     | 0         | 0           
|                        | 2008 | 21,209     | 0         | 0           
|Joseph Schwarz          | 2010 | 37,415     | 0         | 0           
|Chief Scientist         | 2009 | 43,198     | 0         | 0           
|                        | 2008 | 89,614     | 0         | 0           
|Michael Weisspapir      | 2010 | 37,415     | 0         | 0           
|Chief Medical Scientist | 2009 | 43,198     | 0         | 0           
|                        | 2008 | 82,023     | 0         | 0           

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

The following table sets forth certain information regarding
exercises of stock options during the fiscal year ended September 30, 2010 by
the named executive officers. Value of unexercised options is considered to be
the difference between exercise price and market price of $0.06 per share on
September 30, 2010. No options were exercised by the named executive officers
during fiscal 2010.

|                   |                    |                    |                         | Value of Unexercised
|------------------ | ------------------ | ------------------ | ----------------------- | --------------------
|                   |                    |                    | Number of Exercisable   | In-The-Money Options
|                   |                    |                    | Options at Fiscal Year- | at                  
|                   |                    |                    | End (#)                 | Fiscal Year-End ($) 
|                   | Shares acquired on | Value Realized (1) | Exercisable/            | Exercisable/        
|Name               | exercise (#)       | ($)                | Unexercisable           | Unexercisable       
|Michael M. Lee     | -                  | -                  | 7,000,000/0             | 0/0                 
|Joseph Schwarz     | -                  | -                  | 3,000,000/0             | 0/0                 
|Michael Weisspapir | -                  | -                  | 3,000,000/0             | 0/0                 

1. The value realized is the difference between Fair Market
Value of the underlying stock at the time of exercise and the exercise price.

32

---

2000 and 2003 Stock Option Plans - cancelled

After the exercising of options to purchase 700,000 shares of
Common Stock on December 27, 2007 at an exercise price of $0.10, the 2000 Stock
Option Plan was cancelled with the agreement of the option holders. Similarly
the 2003 Stock Option Plan was cancelled in December 2007 with the agreement of
the option holders. A total of 1,020,000 options to purchase Common Stock were
cancelled under these plans.

2004 and 2006 Stock Option Plans - combined into the 2008
Stock Option Plan

The 2004 and 2006 Plans are administered by the board of
directors, which determines which directors, officers, employees, consultants,
scientific advisors and independent contractors of the Company are to be granted
options, the number of shares subject to the options granted, the exercise price
of the options, and certain terms and conditions of the options. The board of
directors may delegate administration of the 2004 and 2006 Plans, including the
power to grant options to persons who are not officers or directors of the
Corporation, to a Stock Option Committee, composed of members of the board of
directors. The board of directors, in its sole discretion, may amend, modify or
terminate the 2004 and 2006 Plans at any time without restriction. However, no
amendment may, without stockholder approval, increase the total number of shares
of stock, which may be issued under the 2004 and 2006 Plans (other than
increases to reflect stock dividends, stock splits or other relevant
capitalization changes). There were 26,000,000 authorized shares of our Common
Stock that are not issued or outstanding, reserved for implementation of the
2004 and 2006 Plans.

Options to purchase 2,730,000 shares of Common Stock were
exercised on December 27, 2007 at an exercise price of $0.075. Immediately
thereafter 6,640,000 options to purchase shares of Common Stock were cancelled
with the agreement of the option holders.

2008 Stock Option Plan

At the Annual General Meeting of Stockholders held November 26,
2008 a majority of stockholders approved the amendment of our Stock Option
Plans. The key changes reflected in the 2008 Plan: (i) combine the 2004 and 2006
Plans (the only remaining plans) into one plan for ease of administration; (ii)
provide for a cap for the number of options allowed to be issued at 22,000,000;
(iii) provide guidelines for exercise prices such that the exercise price of any
newly granted option is never less than market value or in the case of any 10%
holder, never less than 110% of market value on the day of grant; (iv) provide
for a maximum term of 5 years for any option granted; (v) provide for a vesting
schedule whereby vesting must occur over at least 18 months with no more than
1/6th of the options granted vesting in any 3 month period; (vi)
provide for a maximum number of options to be granted to any one individual in
any 12 month period to be no more than 5% of the issued and outstanding common
stock; and (vii) provide for a maximum number of options to be granted to any
Investor Relations party to be no more than 2% of the issued and outstanding
common stock.

These changes provide for more restrictions as to the issuance
of stock options than exist under the present 2004 and 2006 Plans. Secondly the
combination of the two existing plans will result in less administration effort
and fewer administrative costs. The above summary of the 2008 Plan is qualified
in all respects by reference to the full text of the 2008 Plan, which was filed
together with our Proxy Statement on or about October 1, 2008.

33

---

Equity Compensation Plan Information

|                       |                                    |                                | Number of securities remaining    
|---------------------- | ---------------------------------- | ------------------------------ | ----------------------------------
|                       |                                    |                                | available                         
|                       | Number of Securities to be issued  | Weighted- Average Exercise     | for future issuance under equity  
|                       | upon exercise of                   | Price of                       | compensation plans                
|                       | outstanding options, warrants, and | outstanding options, warrants, | (excluding securities reflected in
|                       | rights                             | and rights                     | the first two columns             
|Equity                 |                                    |                                |                                   
|Compensation           |                                    |                                |                                   
|Plans                  |                                    |                                |                                   
|Approved by            |                                    |                                |                                   
|Security
      Holders | 14,260,000                         | $0.155                         | 4,310,000 *                       
|                       |                                    |                                |                                   
|Equity                 |                                    |                                |                                   
|Compensation           |                                    |                                |                                   
|Plans                  |                                    |                                |                                   
|Not Approved           |                                    |                                |                                   
|by Security            |                                    |                                |                                   
|Holders                | None                               | None                           | None                              
|                       |                                    |                                |                                   
|Total**                | 14,260,000                         | $0.155                         | 4,310,000                         

* This amount represents options made available to management,
employees and consultants as approved by stockholders at the Annual General
Meeting held November 26, 2008. None of these options have been granted to date.

** The total number of shares of Common Stock that may be
issued equals 18,570,000, which is less than the 22,000,000 maximum number that
may be issued in accordance with the 2008 Plan. Once options have been exercised
the maximum allowed to be issued is reduced accordingly. (22,000,000 less
3,430,000 exercised during fiscal 2008 = 18,570,000)

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information with respect to
ownership of the Companys securities by its officers and directors and by any
person (including any group) who is the beneficial owner of more than 5% of
the Companys Common Stock. The total number of shares authorized is 250,000,000
shares of Common Stock, each of which has a par value of $0.0001. As of
September 30, 2010 there were 94,635,047 shares of Common Stock issued and
outstanding.

|Name and Address                                        | Amount and Nature of | Percent of
|------------------------------------------------------- | -------------------- | ----------
|Of Owner                                                | Beneficial Owner     | Class     
|Michael Lee (1)                                         | 19,089,689 shares    | 20.17%    
|Joseph Schwarz (2)                                      | 602,500 shares       | 0.64%     
|Ford Moore (3)                                          | 4,158,179 shares     | 4.39%     
|Michael Weisspapir (2)                                  | 457,500 shares       | 0.48%     
|David Milroy (3)                                        | 2,556,933 shares     | 2.70%     
|Sandro
      Persia (2)                                 | 18,000 shares        | 0.02%     
|All directors and officers as a group (7
      persons) | 26,882,801 shares    | 28.41%    

(1)Director and Officer; (2)Officer;
(3)Director

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Mr. Lee, CEO and director loaned us $2,430 during the year
ended September 30, 2010. Interest accrued on all loans outstanding to Mr. Lee
totalled $12,198 as of September 30, 2010. The Company also repaid $2,000 in
principal to extinguish one of the Promissory Notes owing to Mr. Lee during
fiscal 2010.

Except as disclosed above, during the past two years, there
have been no other material transactions, series of similar transactions or
currently proposed transactions, to which the Company was or is to be a party,
and in which any director or executive officer, or any security holder who is
known to the Company to own of record or beneficially more than five percent of the Company's Common Stock, or any member of the
immediate family of any of the foregoing persons, had a material interest.

34

---

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees:For the year ended September 30, 2010 we
incurred $22,600 in external audit fees, and quarterly reviews in connection
with statutory and regulatory filings to our principal accountants as compared
to approximately $24,775 for the year ended September 30, 2009.

Audit-Related Fees:For the years ended September 30,
2010 and 2009 we incurred no fees for assurance and related services by the
principal accountant.

Tax Fees: For the year ended September 30, 2010 and
September 30, 2009 we incurred NIL tax fees with our principal accountants.

All Other Fees:For the year ended September 30, 2010 we
incurred NIL in other fees with our principal accountants related to our
application to the Toronto Stock Exchange  Venture market (for the year ended
September 30, 2009 we incurred $1,613).

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

PART IV

ITEM 15. EXHIBITS

Exhibits required to be attached by Item 601 of Regulation S-B
are listed in the Index to Exhibits beginning after Item 14 of this Form 10-K,
which is incorporated herein by reference.

35

---

SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

DATED: December 31, 2010

ALPHARx, INC.

By: /s/ Michael M. LeeMichael M. Lee, President
and Chief Executive Officer

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

DATED: December 31, 2010

ALPHARx, INC.

Directors:

/s/ Michael M. LeeMichael M. Lee, Director and
Chairman of the Board

/s/ David MilroyDavid Milroy, Director

/s/ Ford MooreFord Moore, Director

36

---

INDEX TO EXHIBITS

|EXHIBIT | DESCRIPTION                                                                                                                                                                          
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NO.     |                                                                                                                                                                                      
|3(i)(a) | Certificate of Incorporation
      dated August 8, 1997 (incorporated by reference to the Form 10-KSB filed
      on June 16, 2000).                                                 
|3(i)(b) | Amendment to Certificate of Incorporation dated
      January 26, 2000 (incorporated by reference to the Form 10- KSB filed on
      June 16, 2000).                                 
|3(i)(c) | Amended and Restated
      Certificate of Incorporation dated July 20, 2000 (incorporated by
      reference to the Form 10-KSB filed on December 31, 2001).                         
|3(ii)   | Bylaws dated August 11, 1997
      (incorporated by reference to the Form 10-KSB filed on June 16, 2000).                                                                            
|10.1    | 2000 Stock Option Plan adopted
      June 20, 2000 (incorporated by reference to the Form 10-KSB filed on
      December 31, 2001).                                                  
|10.2    | Manufacturing and Distribution License
      Agreement with Industria Farmaceutica Andromaco, S.A. de C.V.
      (incorporated by reference to the Form 10KSB filed on July 8, 2005).
|10.3    | 2004 Stock Option Plan adopted
      March 29, 2005 (incorporated by reference to the 10KSB filed on December
      29, 2005)                                                        
|10.4    | 2006 Stock Option Plan adopted March 29, 2006
      (incorporated by reference to the 10KSB filed on December 21, 2006)                                                              
|10.5    | 2008 Stock Option Plan adopted
      November 26, 2008 (incorporated by reference to the 10K filed on December
      22, 2008)                                                       
|31.1    | Certification of C.E.O. Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                             
|31.2    | Certification of Interim
      C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                     
|32.1    | Certification of Michael Lee pursuant to
      Section 1350 of Chapter 63 of Title 18 United States Code.                                                                            
|32.2    | Certification of Michael
      Lee pursuant to Section 1350 of Chapter 63 of Title 18 United States Code.                                                                            

37

---

ALPHARx, INC. CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009

TABLE OF CONTENTS

|CONSOLIDATED FINANCIAL STATEMENTS FOR 2010 AND 2009                                  | PAGE (S)
|------------------------------------------------------------------------------------ | --------
|                                                                                     |         
|REPORTS OF INDEPENDENT REGISTERED
      PUBLIC ACCOUNTING FIRMS                      | F-2     
|CONSOLIDATED BALANCE SHEETS FOR 2010 AND 2009                                        | F-4     
|CONSOLIDATED STATEMENTS OF OPERATIONS AND
      COMPREHENSIVE LOSS FOR 2010 AND 2009 | F-5     
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
      FOR 2010 AND 2009          | F-6     
|CONSOLIDATED STATEMENTS OF CASH
      FLOWS FOR 2010 AND 2009                        | F-7     
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                           | F-8-22  

F - 1

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of
AlphaRx, Inc. (incorporated in the State of Delaware) as at September 30, 2009
and the related consolidated statements of operations and comprehensive loss,
cash flows and stockholders deficiency for the year then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
AlphaRx, Inc. as at September 30, 2009 and the results of its operations and its
cash flows for the year then ended in accordance with generally accepted
accounting principles in the United States of America.

The company is not required to have nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
companys internal controls over financial reporting. Accordingly, we express no
such opinion.

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

|                         | SCHWARTZ LEVITSKY FELDMAN LLP
|------------------------ | -------------------------------
|Toronto, Ontario, Canada | Chartered Accountants          
|November 11, 2009        | Licensed Public Accountants    

F  2

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of
AlphaRx, Inc. (incorporated in the State of Delaware) as at September 30, 2010
and the related consolidated statements of operations and comprehensive loss,
cash flows and stockholders deficiency for the year then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
AlphaRx, Inc. as at September 30, 2010 and the results of its operations and its
cash flows for the years then ended in accordance with generally accepted
accounting principles in the United States of America.

The company is not required to have nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
companys internal controls over financial reporting. Accordingly, we express no
such opinion.

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

|                  | ALBERT WONG & CO            
|----------------- | ----------------------------
|Hong Kong, China  | Certified Public Accountants
|December 31, 2010 |                             

F - 3

---

ALPHARx, INC.CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30, 2010 AND, 2009(All amounts in US Dollars)

|                                                                         |   | 2010        |   |   | 2009        |  
|------------------------------------------------------------------------ | - | ----------- | - | - | ----------- | -
|CURRENT ASSETS                                                           |   |             |   |   |             |  
|Cash and Cash Equivalents                                                | $ | 16,264      |   | $ | 14,006      |  
|Accounts Receivable
      (Note 3)                                       |   | 147,839     |   |   | 42,330      |  
|TOTAL CURRENT ASSETS                                                     |   | 164,103     |   |   | 56,336      |  
|                                                                         |   |             |   |   |             |  
|PROPERTY, PLANT and EQUIPMENT, net (Note 4)                              |   | 43,078      |   |   | 78,237      |  
|                                                                         |   |             |   |   |             |  
|TOTAL ASSETS                                                             |   | 207,181     |   |   | 134,573     |  
|                                                                         |   |             |   |   |             |  
|CURRENT LIABILITIES                                                      |   |             |   |   |             |  
|Accounts Payable and
      Accrued Liabilities (Note 5)                  |   | 520,342     |   |   | 414,872     |  
|Notes Payable (Note 6)                                                   |   | 790,671     |   |   | 585,284     |  
|Deferred Revenue                                                         |   | 0           |   |   | 35,000      |  
|TOTAL CURRENT LIABILITIES                                                |   | 1,311,013   |   |   | 1,035,156   |  
|                                                                         |   |             |   |   |             |  
|Going Concern (Note 1)                                                   |   |             |   |   |             |  
|Commitments (Note 8)                                                     |   |             |   |   |             |  
|Related Party Transactions (Note 13)                                     |   |             |   |   |             |  
|                                                                         |   |             |   |   |             |  
|STOCKHOLDERS DEFICIENCY                                                 |   |             |   |   |             |  
|Common Stock: $ 0.0001 par value,                                        |   |             |   |   |             |  
|Authorized: 250,000,000 shares; Issued and
      outstanding             |   |             |   |   |             |  
|September 30, 2010: 94,635,047 and
      2009: 92,375,732(Notes 9,11,12) |   | 9,464       |   |   | 9,238       |  
|Additional paid-in capital                                               |   | 17,500,855  |   |   | 17,052,076  |  
|Deficit                                                                  |   | (18,789,891 | ) |   | (18,061,820 | )
|Accumulated Other Comprehensive Loss                                     |   | (2,284      | ) |   | (2,317      | )
|Non-controlling
      Interest (Note 7)                                  |   | 178,024     |   |   | 102,240     |  
|                                                                         |   |             |   |   |             |  
|TOTAL DEFICIENCY                                                         |   | (1,103,832  | ) |   | (900,583    | )
|                                                                         |   |             |   |   |             |  
|TOTAL LIABILITIES AND DEFICIENCY                                         | $ | 207,181     |   | $ | 134,573     |  

|Signed: Michael Lee | Signed: Dr. Ford Moore
|------------------- | ----------------------
|Director            | Director              

The accompanying notes are an integral part of these
consolidated financial statements

F - 4

---

ALPHARx, INC.CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSSFOR THE YEARS ENDED SEPTEMBER 30,
2010 AND 2009 (All amounts in US Dollars)

|                                                                    |   | 2010       |   |   | 2009       |  
|------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|License Fees and Royalties                                          | $ | 242,309    |   | $ | 137,223    |  
|Consulting Revenues                                                 |   | 84,036     |   |   | 240,257    |  
|TOTAL REVENUES                                                      |   | 326,345    |   |   | 377,480    |  
|General and Administrative Expenses                                 |   | 795,416    |   |   | 499,339    |  
|Research and Development Expenses                                   |   | 151,165    |   |   | 204,731    |  
|Depreciation                                                        |   | 39,503     |   |   | 61,288     |  
|LOSS FROM OPERATIONS                                                |   | (659,739   | ) |   | (387,878   | )
|OTHER EXPENSES                                                      |   |            |   |   |            |  
|Interest Expense, net                                               |   | (92,062    | ) |   | (54,154    | )
|LOSS BEFORE INCOME TAXES                                            |   | (751,801   | ) |   | (442,032   | )
|Income Tax (Note 10)                                                |   | -          |   |   | -          |  
|LOSS FROM CONTINUING OPERATIONS                                     |   | (751,801   | ) |   | (442,032   | )
|Gain from Operations of Discontinued
      Component                |   | -          |   |   | -          |  
|NET LOSS BEFORE NON-CONTROLLING INTEREST                            |   | (751,801   | ) |   | (442,032   | )
|Non-Controlling Interest in Loss of
      consolidated subsidiaries |   | (23,730    | ) |   | (156       | )
|NET LOSS                                                            | $ | (728,071   | ) | $ | (441,876   | )
|Translation Adjustment                                              |   | (33        | ) |   | (4,373     | )
|COMPREHENSIVE LOSS                                                  |   | (728,038   | ) |   | (437,503   | )
|Per Share Data                                                      |   |            |   |   |            |  
|Net Loss per Share, basic and diluted                               | $ | (0.01      | ) | $ | (0.01      | )
|Weighted Average Number of Common
      Shares Outstanding          |   | 92,375,732 |   |   | 92,371,192 |  

The accompanying notes are an integral part of these
consolidated financial statements

F - 5

---

ALPHARx, INC.CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS DEFICIENCY FOR THE YEARS ENDED SEPTEMBER 30, 2010
AND 2009(All amounts in US Dollars)

|                    |  | Common Stock |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|------------------- |  | ------------ |  | - | ------ |  | ----- | -------------- |  | - | ----------- | - |  | --------------- | - | - | ------------- | - | - | -----------
|                    |  |              |  |   |        |  |       |                |  |   | Accumulated |   |  |                 |   |   | Total         |   |   |            
|                    |  |              |  |   |        |  |       | Additional     |  |   | Other Com-  |   |  |                 |   |   | AlphaRx Inc.  |   |   | Non-       
|                    |  | Number of    |  |   |        |  |       | Paid in        |  |   | prehensive  |   |  |                 |   |   | Stockholders |   |   | controlling
|                    |  | Shares       |  |   | Amount |  |       | Capital        |  |   | Loss        |   |  | Deficiency      |   |   | Deficiency    |   |   | Interest   
|Balance as of       |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|September           |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|30, 2009            |  | 92,371,192   |  | $ | 9,238  |  | **$** | **17,052,076** |  |   | (2,317      | ) |  | **(18,061,820** | ) |   | (1,002,823    | ) |   | 102,240    
|Warrants            |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|issued for          |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|services            |  |              |  |   |        |  |       | 262,090        |  |   |             |   |  |                 |   |   | 262,090       |   |   |            
|Debt                |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|Conversion          |  |              |  |   |        |  |       | 73,723         |  |   |             |   |  |                 |   |   | 73,723        |   |   |            
|Addl pickup        |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|of Equity by        |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|NCI                 |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   | 99,514     
|Stock issued        |  | 2,263,855    |  |   | 226    |  |       | 112,966        |  |   |             |   |  |                 |   |   |               |   |   |            
|for Service         |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   | 113,192       |   |   |            
|Foreign             |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|Currency            |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|Translation         |  |              |  |   |        |  |       |                |  |   | 33          |   |  |                 |   |   | 33            |   |   |            
|                    |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|Non-                |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|controlling         |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|interest            |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   | (23,730    
|                    |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|Net Loss
      2010 |  |              |  |   |        |  |       |                |  |   |             |   |  | (728,071        | ) |   | (728,071      | ) |   |            
|Balance as of       |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|September           |  |              |  |   |        |  |       |                |  |   |             |   |  |                 |   |   |               |   |   |            
|30, 2010            |  | 94,635,047   |  | $ | 9,464  |  | **$** | **17,500,855** |  | $ | (2,284      | ) |  | **(18,789,891** | ) | $ | (1,281,856    | ) | $ | 178,024    

The accompanying notes are an integral part of these
consolidated financial statements

F - 6

---

ALPHARx, INC.CONSOLIDATED STATEMENTS OF CASH
FLOWSFOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009(All
amounts in US Dollars)

|                                                                                  |   | 2010     |   |   | 2009     |  
|--------------------------------------------------------------------------------- | - | -------- | - | - | -------- | -
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |   |          |   |   |          |  
|Net Loss                                                                          | $ | (728,071 | ) | $ | (441,876 | )
|Adjustments to reconcile net loss to
      net cash used in operating activities: |   |          |   |   |          |  
|Depreciation and amortization                                                     |   | 39,503   |   |   | 61,288   |  
|Stock based
      compensation                                                    |   | 262,090  |   |   | 73,725   |  
|Changes in assets and liabilities:                                                |   |          |   |   |          |  
|Decrease/(Increase) in
      Accounts Receivable                                  |   | (105,509 | ) |   | (33,901  | )
|Accrued Interest on Notes Payable                                                 |   | -        |   |   | 46,131   |  
|Increase/(Decrease) in
      Accounts Payable and Accrued Liabilities             |   | 105,473  |   |   | 98,566   |  
|Increase in Deferred Revenue                                                      |   | (35,000  | ) |   | 35,000   |  
|Non Controlling Interest                                                          |   | 75,781   |   |   | (156     | )
|NET CASH USED IN OPERATING ACTIVITIES                                             |   | (385,733 | ) |   | (161,223 | )
|                                                                                  |   |          |   |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |   |          |   |   |          |  
|Purchase of Machinery and Equipment                                               |   | (4,344   | ) |   | -        |  
|                                                                                  |   |          |   |   |          |  
|NET CASH USED IN INVESTING
      ACTIVITIES                                       |   | (4,344   | ) |   | -        |  
|                                                                                  |   |          |   |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |   |          |   |   |          |  
|Issuance of Common Stock                                                          |   | 186,916  |   |   | -        |  
|Issuance of Notes Payable, net of repayments                                      |   | 205,387  |   |   | 138,717  |  
|                                                                                  |   |          |   |   |          |  
|NET CASH PROVIDED BY FINANCING
      ACTIVITIES                                   |   | 392,303  |   |   | 138,717  |  
|                                                                                  |   |          |   |   |          |  
|Effect of exchange rate changes on
      cash and cash equivalents                |   | 32       |   |   | 11,889   |  
|NET DECREASE IN CASH                                                              |   | 2,258    |   |   | (10,617  | )
|CASH and cash equivalents, beginning
      of year                                |   | 14,006   |   |   | 24,623   |  
|                                                                                  |   |          |   |   |          |  
|CASH and cash equivalents, end of
      year                                      | $ | 16,264   |   | $ | 14,006   |  
|                                                                                  |   |          |   |   |          |  
|SUPPLEMENTARY DISCLOSURE:                                                         |   |          |   |   |          |  
|                                                                                  |   |          |   |   |          |  
|Income Tax Paid                                                                   | $ | -        |   | $ | -        |  
|Interest Paid                                                                     | $ | 2,119    |   | $ | 6,227    |  

The accompanying notes are an integral part of these
consolidated financial statements

F - 7

---

ALPHARX INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSSEPTEMBER 30, 2010 AND 2009 (All amounts in US
Dollars)

NOTE 1. NATURE OF BUSINESS AND GOING CONCERN

ALPHARX, INC. (the Company) was incorporated under the laws
of the State of Delaware on August 8, 1997. AlphaRx Inc. is an emerging
pharmaceutical company specializing in the formulation of therapeutic products
using proprietary drug delivery technologies.

Effective June 30, 2006, AlphaRx International Holdings Limited
(a British Virgin Island company and an 80% owned subsidiary of AlphaRx Inc.)
(AIH) acquired 100% of Alpha Life Sciences Ltd. (ALS) for a nominal amount
and the assumption of approximately $63,000 of related party liabilities. ALS is
primarily involved in research and development of drugs in the Asian market.

Effective June 22, 2006, New Super Limited, an independent Hong
Kong based corporation, subscribed for 1,500 shares of Common Stock of AIH,
previously a wholly-owned subsidiary of the Company.

The consolidated financial statements reflect the activities of
the Company, 100% of AlphaRx Canada Limited and 85% of AIH and ALS (AIHs
wholly-owned subsidiary) accounted for on a self-sustained basis. All material
inter-company accounts and transactions have been eliminated. Where the Company
owns less than 100% of a consolidated entity the net assets belonging to the
minority owners are accounted for as a non-controlling interest.

The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, they do not include any adjustments relating to the realization of
the carrying value of assets or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. Factors relating to going concern issues include working capital
deficiency, operating losses, stockholders deficit, and continued reliance on
external funding sources. Continuance of the Company as a going concern is
dependent on its future profitability and on the on-going support of its
stockholders, affiliates and creditors. In order to mitigate the going concern
issues, the Company is constantly pursuing new business arrangements and
striving to achieve profitability, and seeking capital funding on an ongoing
basis via the issuance of Promissory Notes, and private placements. The Company
has contracted with several parties for research and development consulting
services that could also result in future license fees and royalties. The
Company has one licensee that provides an ongoing royalty stream for its
Indaflex product. The Company is constantly seeking out collaborative
arrangements with third parties in anticipation of license fees, royalties,
milestone payments and consulting services.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

F - 8

---

Cash and Cash Equivalents

Cash includes cash on hand, and amounts on deposit with banks.
Cash equivalents include any other highly liquid cash investments purchased with
maturity of three months or less which are readily convertible to cash. The
carrying amount approximates fair value because of the immediate liquidity or
short maturity of these instruments. As at September 30, 2010 and 2009 the
Company had only cash on deposit and petty cash on hand.

Accounts Receivable

The Company segregates trade receivables resulting from
revenues generated from non-trade or other receivables. An allowance for bad
debts is estimated for each type of receivable on a periodic basis based on
experience with the respective parties.

Financial Instruments

a) Fair Value

Fair value estimates of financial instruments are made at a
specific point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective in nature,
involving uncertainties and matters of judgement, they cannot be determined with
complete accuracy. Changes in assumptions can significantly affect estimated
fair values. The carrying values of cash, accounts receivable, notes payable,
accounts payable, and accrued liabilities approximate their fair values because
of the short-term nature of these instruments.

b) Interest rate, currency and credit risk

The Company is not subject to significant credit and interest
risks arising from these financial instruments. The Company may be subject to
significant currency risk as some of the external promissory notes are
denominated in Canadian dollars or Hong Kong dollars.

Long-Term Financial Instruments

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

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

Foreign Currency Translation

The Company maintains the books and records of AlphaRx Canada
Ltd. in Canadian dollars, and the books and records of Alpha Life Sciences Ltd.
and AlphaRx International Holdings Ltd. in Hong Kong dollars, their respective
functional currencies. The records of these companies are converted to US
dollars, the reporting currency. The translation method used is the current rate
method. Under the current rate method all assets and liabilities are translated
at the current rate, stockholders equity accounts are translated at historical
rates and revenues and expenses are translated at average rates for the year.
Cumulative net translation adjustments related to equity accounts are included
as a separate component of stockholders deficiency.

F - 9

---

Earnings or Loss Per Share

Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the year. Diluted earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding plus Common
Stock equivalents (if dilutive) related to stock options and warrants for each
year.

Income Taxes

The Company recognizes deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statement or tax returns. Deferred income taxes are provided using the
liability method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax and
financial statement bases of assets and liabilities.

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

Property Plant and Equipment

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

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

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

Research and Development

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

Revenue Recognition

Revenues related to license fees and royalties are recognized
when persuasive evidence of an arrangement exists, the fee is fixed or
determinable, and collectability is probable. Should there be any future
obligations or deliverables related to the license fees, revenue is deferred and
recognized only when those obligations and or deliverables have been satisfied.
Any advance payments or deposits received in relation to license fees and other
fees are deferred until those obligations or deliverables have been satisfied.
Royalty payments are not received in advance but rather, are paid to the Company
based on previous period sales by licensees. Royalty revenue is accrued in the
period earned based on estimates or actual licensed sales during the period in
question.

F - 10

---

Consulting revenues are recognized as the services are rendered
to the customer, and invoiced on a periodic basis or upon completion of the
consulting services depending on contract terms and conditions.

Sales represent the invoiced value of goods supplied to
customers. Revenues are recognized upon the passage of title to the customers,
provided that the collection of the proceeds from sales is reasonably assured. A
reserve for returns is considered periodically based on actual or anticipated
returns from customers. The Company no longer sells any products directly to
end-users.

Use of Estimates

The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
certain reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates in amounts than may be material
to the consolidated financial statements. Management believes that these
estimates and assumptions used are reasonable. These estimates are reviewed
periodically and as adjustments become necessary, they are reported in earnings
in the period in which they become known. Estimates were used in determining the
amounts of accrued liabilities, useful lives of property plant and equipment,
stock based compensation, and valuation allowances.

Long-Lived Assets

The Company reviews long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During the year management
determined that an impairment test was necessary and used its best estimate of
the undiscounted cash flows to evaluate the carrying amount and have determined
that no impairment has occurred.

Concentrations of Credit Risks and Revenues

The Companys receivables are unsecured and are generally due
in 30 Days. Reserves for uncollectible receivables are determined by the Company
periodically based on best estimates available and historical data, as well as
the economic and financial status of its debtors. Investment in marketable
securities carry normal market risk of fluctuation in the price of securities
traded on recognized stock exchanges as well as liquidity and foreign exchange
risks.

Currently, the Company does not have a diverse customer base.
The Company relies on one licensee for all of its royalty revenues and has
another licensee attempting to commercialize one of its product candidates.
Should these licensees discontinue sales of our products, or should
commercialization efforts of our product candidates be curtailed, our revenues
could be adversely impacted.

Investment in Joint Venture

The Company holds an indirect 42.5% interest in AlphaAP Inc.
(AAP), a joint venture established between the Company (via its AIH
subsidiary) and Basin Industrial Limited (an independent third party). As the
Company contributes no funds, and does not provide management or direction to
the joint venture, the Companys interest in the joint venture is not
consolidated into the financial statements. AIH will receive a 5% royalty on all
revenues generated by AAP. This joint venture is currently inactive.

F -11

---

Stock Based Compensation

The Company recognizes compensation cost for third party and
employee services rendered in exchange for an equity instrument award based on
the fair value of the award on the date of grant. The Company uses the
Black-Sholes option-pricing model in determining the fair value of options and
warrants. In determining the expected volatility, the Company bases this
assumption on the historical volatilities of the Companys common stock over the
expected life of the stock acquisition rights.

Comprehensive Income

Comprehensive income is net income plus certain items that are
recorded directly to stockholders equity, bypassing net income. With the
exception of foreign exchange gains and losses, the Company has no other
components in its comprehensive income (loss) accounts.

Recent Pronouncements

FASB ASC TOPIC 805  Business Combinations. The
objective of this topic is to enhance the information that an entity provides in
its financial reports about a business combination and its effects. The Topic
mandates: (i) how the acquirer recognizes and measures the assets acquired,
liabilities assumed and any non-controlling interest in the acquiree; (ii) what
information to disclose in its financial reports and; (iii) recognition and
measurement criteria for goodwill acquired. This Topic is effective for any
acquisitions made on or after December 15, 2008. The adoption of this Topic did
not have a material impact on the Companys financial statements and
disclosures.

FASB ASC TOPIC 810  Noncontrolling Interests. The
objective of this Topic is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require: (i) the ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity, but separate
from the parent's equity; (ii) the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income;
(iii) changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently;
(iv) when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value. The
gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any noncontrolling equity investment rather than the carrying amount of
that retained investment and; (v) entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the non-controlling owners. This Topic is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The adoption of this Topic is
not expected to have a material impact on the Companys financial statements and
disclosures.

FASB ASC TOPIC 815  Derivatives and Hedging. The use
and complexity of derivative instruments and hedging activities have increased
significantly over the past several years. This Topic requires enhanced
disclosures about an entity's derivative and hedging activities and thereby
improves the transparency of financial reporting. This Topic is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The adoption of this Topic
is not expected to have a material impact on the Companys financial statements
and disclosures.

F -12

---

FASB ASC TOPIC 944 – “Financial Services – Insurance.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises. That diversity results in inconsistencies in the
recognition and measurement of claim liabilities because of differing views about when a loss has been incurred. This Topic requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial obligation. This Topic is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except
for some disclosures about the insurance enterprise's risk-management activities. The adoption of this Topic is not expected to have a material impact on the Company’s financial statements and disclosures.

FASB ASC TOPIC 855 - “Subsequent Events.” In May 2009, the FASB issued Topic 855, which establish general standards of accounting and disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, this Topic sets forth : (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date. This Topic should be applied to the accounting and disclosure of subsequent events. This Topic does not apply to subsequent events or transactions that are within
the scope of other applicable accounting standards that provide different guidance on the accounting treatment for subsequent events or transactions. This Topic was effective for interim and annual periods ending after June 15, 2009, which was
September 30, 2009 for the Company. The adoption of this Topic did not have a material impact on the Company’s financial statements and disclosures.

FASB ASC TOPIC 105 - “The FASB Accounting Standard Codification and the Hierarchy of Generally Accepted Accounting Principles.”In June 2009, the FASB issued Topic 105, which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Topic,
the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification will become non-authoritative. This Topic identifies the sources of accounting
principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP and arranged these sources of GAAP in a hierarchy for users to apply
accordingly. This Topic is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this topic did not have a material impact on the Company’s disclosure of the financial
statements.

FASB ASC TOPIC 320 - “Recognition and Presentation of Other-Than-Temporary Impairments.”In April 2009, the FASB issued Topic 320 amends the other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This Topic does not amend existing recognition and measurement guidance related
to other-than-temporary impairments of equity securities. The Topic is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods
ending before March 15, 2009, is not permitted. This Topic does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this Topic requires comparative disclosures only
for periods ending after initial adoption. The adoption of this Topic did not have a material impact on the Company’s financial statements and disclosures.

F -13

---

FASB ASC TOPIC 860 - “Accounting for Transfer of Financial Assets and Extinguishment of Liabilities.” In June 2009, the FASB issued additional guidance under Topic 860 which improves the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets. This additional guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a
transferors beneficial interest) and liabilities incurred as a result of a
transfer of financial assets accounted for as a sale. Enhanced disclosures are
required to provide financial statement users with greater transparency about
transfers of financial assets and a transferors continuing involvement with
transferred financial assets. This additional guidance must be applied as of the
beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. This additional guidance must be applied to transfers
occurring on or after the effective date. The adoption of this Topic is not
expected to have a material impact on the Companys financial statements and
disclosures.

FASB ASC TOPIC 810 - Consolidation of Variables
Interest and Special Purpose Entities. In June 2009, the FASB issued Topic 810,
which requires an enterprise to perform an analysis to determine whether the
enterprises variable interest or interests give it a controlling financial
interest in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as the enterprise that has both of the
following characteristics: (i) The power to direct the activities of a variable
interest entity that most significantly impact the entitys economic performance
and (ii) The obligation to absorb losses of the entity that could potentially be
significant to the variable interest entity or the right to receive benefits
from the entity that could potentially be significant to the variable interest
entity. Additionally, an enterprise is required to assess whether it has an
implicit financial responsibility to ensure that a variable interest entity
operates as designed when determining whether it has the power to direct the
activities of the variable interest entity that most significantly impact the
entitys economic performance. This Topic requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity
and eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity, which was based on
determining which enterprise absorbs the majority of the entitys expected
losses, receives a majority of the entitys expected residual returns, or both.
This Topic is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited. The adoption of this
Topic is not expected to have a material impact on the Companys financial
statements and disclosures.

FASB ASC TOPIC 820 - Fair Value measurement and
Disclosures, an Accounting Standard Update. In September 2009, the FASB issued
this Update to amendments to Subtopic 82010, Fair Value Measurements and
Disclosures. Overall, for the fair value measurement of investments in
certain entities that calculates net asset value per share (or its equivalent).
The amendments in this Update permit, as a practical expedient, a reporting
entity to measure the fair value of an investment that is within the scope of
the amendments in this Update on the basis of the net asset value per share of
the investment (or its equivalent) if the net asset value of the investment (or
its equivalent) is calculated in a manner consistent with the measurement
principles of Topic 946 as of the reporting entitys measurement date, including
measurement of all or substantially all of the underlying investments of the
investee in accordance with Topic 820. The amendments in this Update also
require disclosures by major category of investment about the attributes of
investments within the scope of the amendments in this Update, such as the
nature of any restrictions on the investors ability to redeem its investments
at the measurement date, any unfunded commitment, and the investment strategies
of the investees. The major category of investment is required to be determined
on the basis of the nature and risks of the investment in a manner consistent
with the guidance for major security types in GAAP on investments in debt and
equity securities in paragraph 320-10-50-lB. The disclosures are required for
all investments within the scope of the amendments in this Update regardless of
whether the fair value of the investment is measured using the practical
expedient. The amendments in this Update apply to all reporting entities that
hold an investment that is required or permitted to be measured or disclosed at
fair value on a recurring or non recurring basis and, as of the reporting
entitys measurement date, if the investment meets certain criteria The
amendments in this Update are effective for the interim and annual periods
ending after December 15, 2009. Early application is permitted in financial
statements for earlier interim and annual periods that have not been issued. The
adoption of this Update is not expected to have a material impact on the
Companys financial statements and disclosures.

F -14

---

FASB ASC TOPIC 740 - Income Taxes, an Accounting
Standard Update. In September 2009, the FASB issued this Update to address the
need for additional implementation guidance on accounting for uncertainty in
income taxes. For entities that are currently applying the standards for
accounting for uncertainty in income taxes, the guidance and disclosure
amendments are effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of this Update did not
have a material impact on the Companys financial statements and
disclosures.

Recent Issued Standards

FASB ASC Update No. 2009-05 - In August 2009, the FASB
issued ASC Update No. 2009-05, Fair Value Measurements and Disclosures (Topic
820): Measuring Liabilities at Fair Value (ASC Update No. 2009-05). This
update amends ASC 820, Fair Value Measurements and Disclosures and provides
further guidance on measuring the fair value of a liability. The guidance
establishes the types of valuation techniques to be used to value a liability
when a quoted market price in an active market for the identical liability is
not available, such as the use of an identical or similar liability when traded
as an asset. The guidance also further clarifies that a quoted price in an
active market for the identical liability at the measurement date and the quoted
price for the identical liability when traded as an asset in an active market
when no adjustments to the quoted price of the asset are required are both Level
1 fair value measurements. If adjustments are required to be applied to the
quoted price, it results in a level 2 or 3 fair value measurement. The guidance
provided in the update is effective for the first reporting period (including
interim periods) beginning after issuance. The Company does not expect that the
implementation of ASC Update No. 2009-05 will have a material effect on its
financial position or results of operations.

FASB ASC Update No. 2009-12 - In September 2009, the
FASB issued ASC Update No. 2009-12, Fair Value Measurements and Disclosures
(Topic 820): Investments in Certain Entities that Calculate Net Asset Value per
Share (or Its Equivalent) (ASC Update No. 2009-12). This update sets forth
guidance on using the net asset value per share provided by an investee to
estimate the fair value of an alternative investment. Specifically, the update
permits a reporting entity to measure the fair value of this type of investment
on the basis of the net asset value per share of the investment (or its
equivalent) if all or substantially all of the underlying investments used in
the calculation of the net asset value is consistent with ASC 820. The update
also requires additional disclosures by each major category of investment,
including, but not limited to, fair value of underlying investments in the major
category, significant investment strategies, redemption restrictions, and
unfunded commitments related to investments in the major category. The
amendments in this update are effective for interim and annual periods ending
after December 15, 2009 with early application permitted. The Company does not
expect that the implementation of ASC Update No. 2009-12 will have a material
effect on its financial position or results of operations.

In March 2010, the FASB issued new accounting guidance on
embedded credit derivatives. This new accounting guidance clarifies the scope
exception for embedded credit derivatives and defines which embedded credit
derivatives should be evaluated for bifurcation and separate accounting. The
Company does not expect that the implementation of this new accounting guidance
will have a material effect on its financial position or results of operations.

FASB ASC Update No. 2010-22 -The FASB has issued FASB
Accounting Standards Update (ASU) No. 2010-22, Accounting for Various Topics.
ASU 2010-22 amends various SEC paragraphs in the FASB Accounting Standards
CodificationTM (Codification) based on external comments received and the
issuance of Staff Accounting Bulletin (SAB) No. 112 , which amends or rescinds
portions of certain SAB topics. Specifically, SAB 112 was issued to bring
existing SEC guidance into conformity with: Codification Topic 805, Business
Combinations (originally issued as FASB Statement No. 141 (Revised December
2007), Business Combinations); and Codification Topic 810, Consolidation
(originally issued as FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements).

FASB ASC Update No. 2010-29 -The FASB has issued ASU
2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro
Forma Information for Business Combinations. This amendment affects any public
entity as defined by Topic 805, Business Combinations, that enters into business
combinations that are material on an individual or aggregate basis. The
comparative financial statements should present and disclose revenue and
earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments also expand
the supplemental pro forma disclosures to include a description of the nature
and amount of material, nonrecurring pro forma adjustments directly attributable
to the business combination included in the reported pro forma revenue and
earnings. The amendments are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The adoption of the
ASU 2010-29 will not have material impact to the financial statements of the
Company.

F -15

---

NOTE 3. ACCOUNTS RECEIVABLE

|                          |   | 2010    |  |   | 2009   | 
|------------------------- | - | ------- |  | - | ------ | 
|Trade Accounts Receivable | $ | 142,611 |  | $ | 40,350 | 
|Other Accounts Receivable |   | 5,228   |  |   | 1,980  | 
|                          | $ | 147,839 |  | $ | 42,330 | 

The Company carries accounts receivable at the amounts it deems
to be collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on managements best estimates.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that becomes uncollectible could differ from those
estimated. No reserve for bad debts was established as at September 30, 2010 and
2009 as all amounts were deemed collectible.

NOTE 4. PROPERTY, PLANT & EQUIPMENT

|                                                  |   | 2010    |  |   | 2009    | 
|------------------------------------------------- | - | ------- |  | - | ------- | 
|Leasehold Improvements                            | $ | -       |  | $ | -       | 
|Furniture and Fixtures                            |   | 10,870  |  |   | 16,140  | 
|Machinery and Equipment                           |   | 181,060 |  |   | 198,988 | 
|COST                                              |   | 191,930 |  |   | 215,128 | 
|Less: Accumulated
      depreciation/amortization |   |         |  |   |         | 
|Leasehold Improvements                            |   | -       |  |   | -       | 
|Furniture and Fixtures                            |   | 10,093  |  |   | 12,837  | 
|Machinery and Equipment                           |   | 138,759 |  |   | 124,054 | 
|                                                  |   | 148,852 |  |   | 136,891 | 
|NET                                               | $ | 43,078  |  | $ | 78,237  | 

NOTE 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the
following:

|                                                      |   | 2010    |  |   | 2009    | 
|----------------------------------------------------- | - | ------- |  | - | ------- | 
|Accounts Payable                                      | $ | 474,236 |  | $ | 303,010 | 
|Accrued Liabilities for services rendered but         |   |         |  |   |         | 
|not invoiced as of September 30,
      2010 and 2009: |   |         |  |   |         | 
|Professional services (legal, audit, financial)       |   | 46,106  |  |   | 20,795  | 
|Management Salary                                     |   | -       |  |   | 68,225  | 
|Other                                                 |   | -       |  |   | 22,842  | 
|                                                      | $ | 520,342 |  | $ | 414,872 | 

NOTE 6. NOTES PAYABLE

The Company and its subsidiaries issued $191,749 and $120,533
in promissory notes, net of repayments during the year ended September 30, 2010
and 2009 respectively. The newly issued and existing promissory notes bear
interest at rates of 8% - 12% per annum and are repayable on or before the first
anniversary date of issuance.

Included in Promissory Notes payable are $43,246 in Notes
Payable including accrued interest of $12,198 to Michael Lee  CEO at September
30, 2010. (As at September 30, 2009 Notes Payable plus accrued interest of
$12,400 owing to Mr. Lee totalled $54,400). See also Related Party Transactions
Note 14.

|September 30,                                  |   | 2010    |  |   | 2009    |  |  | 2008    | 
|---------------------------------------------- | - | ------- |  | - | ------- |  |  | ------- | 
|Promissory Notes Issued and
      outstanding, | $ | 663,765 |  | $ | 520,551 |  |  | 385,063 | 
|net of repayments and conversions:             |   |         |  |   |         |  |  |         | 
|Interest accrued                               |   | 126,906 |  |   | 64,733  |  |  | 18,602  | 
|Promissory Notes Payable                       | $ | 790,671 |  | $ | 585,284 |  |  | 403,665 | 

NOTE 7. NON-CONTROLLING INTEREST

On June 22, 2006, AlphaRx International Holdings Ltd. (AIH),
previously a wholly-owned subsidiary of the Company issued 1,500 shares of its
Common Stock to New Super Limited (NSL), an independent Hong Kong based
corporation, at a price of approximately $HK 6,667 per share or $HK 10 million
in cash. (US $1,288,826). As a result AIHs issued and outstanding shares were
increased to 10,000 and the Companys interest in AIH was reduced to 85%. With
the consolidation of only 85% of AIH, a non-controlling interest was
established, representing amounts owing to the minority shareholder. The capital
infusion into AIH is accounted for as additional paid in capital on the
consolidated financial statements of the Company.

F -16

---

NOTE 8. COMMITMENTS

The Company leases scientific research and development
equipment, its main premises on a month-to-month basis and an automobile all on
an operating lease basis. The aggregate minimum annual and total payments due
under these operating leases are as follows:

|As of September 30, |   | 2010   |  |   | 2009   |  |  | 2008   | 
|------------------- | - | ------ |  | - | ------ |  |  | ------ | 
|2009                |   | -      |  | $ | -      |  |  | 24,232 | 
|2010                | $ | 6,431  |  |   | 23,923 |  |  | 2,062  | 
|2011                |   | 14,313 |  |   | 10,911 |  |  | -      | 
|2012                |   | 10,361 |  |   | 8,066  |  |  | -      | 
|TOTAL               | $ | 31,105 |  | $ | 42,900 |  |  | 26,294 | 

NOTE 9. COMMON STOCK

The Company is authorized to issue up to 250,000,000 shares of
Common Stock. As of September 30, 2010, there were 94,635,047 shares of Common
Stock issued and outstanding, with a stated par value of $0.0001 per share.

On September 30, 2010, the Company issued 2,263,855 shares of
Common Stock to President & CEO, Mr. Michael Lee as compensation for the
2010 fiscal. During the year ended September 30, 2009 the Company did not issue
any shares of Common Stock.

Net Loss per share of Common Stock is not based on diluted
shares since the effect would be anti-dilutive. The Company has warrants
outstanding to purchase 6,740,150 shares of Common Stock and options outstanding
to purchase 14,260,000 shares of Common Stock as at September 30, 2010. On a
fully diluted basis there would be 115,635,197 shares of Common Stock issued and
outstanding if all warrants and all options were to be exercised. Refer to Notes
12 and 13 respectively for more details on options and warrants. (As at
September 30, 2009 there would have been 114,631,192 shares outstanding on a
diluted basis if all outstanding warrants and options were exercised).

F -17

---

NOTE 10. INCOME TAXES

The regional sources of tax losses for the years ended
September 30, 2010 and 2009 were as follows:

|                      |   | 2010     |   |   | 2009     |  
|--------------------- | - | -------- | - | - | -------- | -
|North America         | $ | (532,047 | ) | $ | (305,980 | )
|Outside North America |   | (27,267  | ) |   | (78,953  | )
|                      | $ | (559,314 | ) | $ | (384,933 | )

Tax losses by year of origin and year of expiry are as
follows:

|Year of                 |   |            |  |  | Year of |  |   |           |  |  | Year of |  |       | Outside        |  |  | Year of | 
|----------------------- | - | ---------- |  |  | ------- |  | - | --------- |  |  | ------- |  | ----- | -------------- |  |  | ------- | 
|Origin                  |   | United     |  |  | Expiry  |  |   | Canada    |  |  | Expiry  |  |       | North          |  |  | Expiry  | 
|                        |   | States     |  |  |         |  |   |           |  |  |         |  |       | **America**    |  |  |         | 
|                        |   |            |  |  |         |  |   |           |  |  |         |  |       |                |  |  |         | 
|1998                    | $ | 212,899    |  |  | 2018    |  |   |           |  |  |         |  |       |                |  |  |         | 
|1999                    |   | 795,878    |  |  | 2019    |  |   |           |  |  |         |  |       |                |  |  |         | 
|2000                    |   | 6,179      |  |  | 2020    |  |   |           |  |  |         |  |       |                |  |  |         | 
|2001                    |   | 292,351    |  |  | 2021    |  |   |           |  |  |         |  |       |                |  |  |         | 
|2002                    |   | 1,017,792  |  |  | 2022    |  |   |           |  |  |         |  |       |                |  |  |         | 
|2003                    |   | 1,189,476  |  |  | 2023    |  |   |           |  |  |         |  |       |                |  |  |         | 
|2004                    |   | 790,108    |  |  | 2024    |  |   |           |  |  |         |  |       |                |  |  |         | 
|2005                    |   | 2,166,634  |  |  | 2025    |  |   | 732,448   |  |  | 2015    |  |       |                |  |  |         | 
|2006                    |   | 1,764,202  |  |  | 2026    |  |   | 682,619   |  |  | 2016    |  |       | 205,123        |  |  | 2013    | 
|2007                    |   | 1,530,976  |  |  | 2027    |  |   |           |  |  |         |  |       | 293,528        |  |  | 2014    | 
|2008                    |   | 1,266,180  |  |  | 2028    |  |   |           |  |  |         |  |       | 99,852         |  |  | 2015    | 
|2009                    |   | 208,940    |  |  | 2029    |  |   | 97,040    |  |  |         |  |       | 78,953         |  |  | 2016    | 
|2010                    |   | 477,350    |  |  | 2030    |  |   | 54,697    |  |  | 2020    |  |       | 27,267         |  |  | 2017    | 
|                        |   |            |  |  |         |  |   |           |  |  |         |  |       |                |  |  |         | 
|TOTAL                   | $ | 11,718,965 |  |  |         |  | $ | 1,566,804 |  |  |         |  | $     | 704,723        |  |  |         | 
|                        |   |            |  |  |         |  |   |           |  |  |         |  |       |                |  |  |         | 
|CONSOLIDATED TAX LOSSES |   |            |  |  |         |  |   |           |  |  |         |  | **$** | **13,990,492** |  |  |         | 

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

|                              |   | 2010       |   |   | 2009       |  
|----------------------------- | - | ---------- | - | - | ---------- | -
|Deferred tax assets:          |   |            |   |   |            |  
|North America                 | $ | 5,124,138  |   | $ | 4,400,034  |  
|Outside North America         |   | 105,708    |   |   | 101,618    |  
|Sub-total                     |   | 5,229,846  |   |   | 4,501,652  |  
|Less Valuation allowance      |   | (5,229,846 | ) |   | (4,501,652 | )
|Net deferred tax
      assets |   | -          |   |   | -          |  

The valuation allowance as of September 30, 2010 and 2009
totalled $5,229,846 and $4,501,652 respectively which consisted primarily of
established reserves for deferred tax assets on non-capital operating loss carry
forwards for our entities in United States and our foreign entities. The tax
rates being used to determine deferred tax assets are estimated at 34.5% for
North America and 15% for outside North America.

F -18

---

The consolidated effective tax (benefit) rate as a percentage
of income (loss) before income taxes is as follows:

|                              |  | 2010  |   |  | 2009  |  
|----------------------------- |  | ----- | - |  | ----- | -
|Combined Statutory Rates      |  | 31.3% |   |  | 31.3% |  
|Non-deductible expenses       |  | (9    | ) |  | (9    | )
|Change in valuation allowance |  | (22.3 | ) |  | (22.3 | )
|Effective tax rate            |  | 0%    |   |  | 0%    |  

As of September 30, 2010 and 2009 the Company had no
unrecognized tax benefits and as such required no adjustments to the financial
statements. The Company records any interest and penalties related to tax
matters within general and administrative expenses on the accompanying
consolidated statements of operations and comprehensive loss. These amounts are
not material to the consolidated financial statements for the periods presented.
The Companys US and Canadian tax returns are subject to examination by
respective tax authorities. Generally tax years 2007  2010 remain open to
examination by those respective tax authorities. (IRS in the United States and
Canada Customs and Revenue Agency in Canada).

NOTE 11. STOCK OPTION PLANS

No options were granted nor were any exercised during the year
ended September 30, 2010. There remains 14,260,000 options to purchase shares of
Common Stock as of September 30, 2010.

During fiscal 2009 employees, officers and consultants
exercised a total of 3,430,000 options at an average exercise price of
approximately $0.08 per share and resulting in $274,750 in cash proceeds to the
Company. Of these options 700,000 were from the 2000 Plan and had a weighted
remaining contractual life of 2.5 years when exercised and 2,730,000 were from
the 2004 Plan and had a weighted remaining contractual life of 7.8 years when
exercised. Immediately thereafter the remaining options in the 2000 Plan and
2003 Plan were cancelled, with the agreement of the option holders. In addition,
and pursuant to an application for listing on the Toronto Venture Exchange, the
Company cancelled a total of 7,660,000 options with the agreement of the option
holders during fiscal 2008.

Proceeds received by the Company from exercises of stock
options are credited to Common Stock and additional paid-in capital. Additional
information with respect to the plans stock option activity is seen in the
table below. The weighted average exercise price and remaining contractual life
for all options seen at the bottom of the table was calculated by multiplying
the number of options by the exercise prices or remaining lives and dividing the
result by the total number of options. During fiscal 2008, with the agreement of
the option holders, the option expiry date for all remaining 2004 Plan options was accelerated to June 30, 2012. All options now
expire on or before June 30, 2012. The table below reflects remaining
contractual life of the options as of September 30, 2010.

At the Companys Annual General Meeting held November 26, 2008
a majority of stockholders approved amendments to the existing Stock Incentive
Plans including, among others: (i) combining the 2004 and 2006 Plans into one
2008 Stock Incentive Plan for ease of administration; (ii) providing a cap for
the number of options to be issued at 22,000,000; (iii) providing guidelines for
exercise prices such that the exercise price of any newly granted option is
never less than the market value or in the case of a 10%+ holder, never less
than 110% of the market value on the date of grant; (iv) providing for a maximum
term of 5 years for any option granted; (v) provide for a vesting schedule
whereby vesting must occur over at least 18 months with no more than
1/6th of the options granted vesting in any 3 month period; (vi)
providing for the maximum number of options to be granted to any one individual
in any 12 month period to be no more than 5% of the issued and outstanding
common stock, and (vii) providing for a maximum number of options to be granted
to any Investor Relations party to be no more than 2% of the issued and
outstanding common stock.

F -19

---

As a result of the new terms governing the Companys Stock
Incentive Plan, the maximum number of options that can still be issued totals
4,310,000 regardless of how many are exercised or expire.

|                                      |  | Number         |   |  |            |  |  |             |  |  | Share    |  |  |           |  |  |              | 
|------------------------------------- |  | -------------- | - |  | ---------- |  |  | ----------- |  |  | -------- |  |  | --------- |  |  | ------------ | 
|2008 Stock                            |  | Granted,       |   |  |            |  |  |             |  |  | Price on |  |  |           |  |  | Remaining    | 
|Incentive Plan                        |  | (exercised),   |   |  |            |  |  | Exercise    |  |  | Date of  |  |  | Expiry    |  |  | Contractual  | 
|                                      |  | (cancelled) or |   |  | Date       |  |  | Price $     |  |  | Grant $  |  |  | Date      |  |  | Life (Years) | 
|                                      |  | (expired)      |   |  |            |  |  |             |  |  |          |  |  |           |  |  |              | 
|                                      |  | 12,720,000     |   |  | 15/11/2004 |  |  | 0.15        |  |  | 0.11     |  |  | 6/30/2012 |  |  | 1.75         | 
|                                      |  | 500,000        |   |  | 15/11/2004 |  |  | 0.40  0.50 |  |  | 0.11     |  |  | 6/30/2012 |  |  | 1.75         | 
|                                      |  | 7,000,000      |   |  | 10/1/2005  |  |  | 0.16        |  |  | 0.14     |  |  | 6/30/2012 |  |  | 1.75         | 
|                                      |  | 390,000        |   |  | 8/2/2005   |  |  | 0.15        |  |  | 0.14     |  |  | 6/30/2012 |  |  | 1.75         | 
|                                      |  | 100,000        |   |  | 5/25/2005  |  |  | 0.13        |  |  | 0.13     |  |  | 6/30/2012 |  |  | 1.75         | 
|                                      |  | 3,290,000      |   |  | 10/17/2005 |  |  | 0.075       |  |  | 0.08     |  |  | 6/30/2012 |  |  | 1.75         | 
|Total Grant                           |  | 24,000,000     |   |  |            |  |  |             |  |  |          |  |  |           |  |  |              | 
|Exercised                             |  | (2,730,000     | ) |  | 12/27/2007 |  |  | 0.075       |  |  | -        |  |  | -         |  |  | -            | 
|Cancelled                             |  | (6,640,000     | ) |  | 12/28/2007 |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Expired                               |  | (460,000       | ) |  | 2/10/2008  |  |  | -           |  |  | -        |  |  | -         |  |  | -            | 
|Remaining                             |  | 14,170,000     |   |  |            |  |  |             |  |  |          |  |  |           |  |  |              | 
|Granted                               |  | 90,000         |   |  | 1/3/2007   |  |  | 0.10        |  |  | 0.10     |  |  | 1/3/2012  |  |  | 1.26         | 
|Total                                 |  | 14,260,000     |   |  |            |  |  |             |  |  |          |  |  |           |  |  |              | 
|Weighted Average of Options Remaining |  |                |   |  |            |  |  | 0.15        |  |  |          |  |  |           |  |  | 1.73         | 

NOTE 12. WARRANTS

On April 12, 2010, the Company issued 3,740,150 warrants to
purchase 3,740,150 shares of Common Stock at $0.085 per share expiring on April
11, 2015. The warrants were issued in exchange for financial advisory services
to be provided from the period from April 11, 2010 until Sep 30, 2010. The total
fair value of the warrants has been estimated to be $262,090 using Black-Scholes
option pricing model based on the following assumptions: dividend yield of 0%,
expected volatility of 103,86%, risk-free interest rate of 3%, and an expected
life of 5 years. The company recorded $262,090 in stock based compensation for
the year ended September 30, 2010 (2009- $73,725). No income tax benefit has
been realized as a result of warrant amortization expenses during 2010 and 2009.
Stock based compensation is included in general and administrative expenses seen
on the consolidated statement of operations and comprehensive loss.

As at September 30, 2010 there were 6,740,150 warrants issued
and outstanding. Additional details regarding warrant activity and warrants
outstanding as of September 30, 2010 and 2009 are seen in the table below.

F -20

---



|Outstanding                                                                                 | Weighted | Weighted    
|------------------------------------------------------------------------------------------- | -------- | ------------
|as at                                                                                       | Average  | Average     
|September                                                                                   | Exercise | Contractual 
|30, 2008                                                                                    | Price    | Life (Years)
|7,260,000                                                                                   | $ 0.1    | 0.75        
|Activity during fiscal 2009 and 2010                                                        |          |             
|(2,260,000) Expired during fiscal 2009                                                      |         
|3,000,000 Granted in exchange for advisory
      services April 1, 2009 @ $0.03 per share  
|8,000,000 Balance September 30,
      2009                                                  |         
|(5,000,000) Expired during fiscal 2010                                                      |         
|3,740,150 Granted in exchange for advisory
      services April 12, 2010 @ $0.085 per share |         
|6,740,150 Balance September 30,
      2010                                                  |         

|               |            |          | Share  |           |                 |                    
|-------------- | ---------- | -------- | ------ | --------- | --------------- | -------------------
|Outstanding    |            |          | Price  |           |                 |                    
|as at          |            |          | on     |           | Remaining       |                    
|September      |            | Exercise | Grant  | Expiry    | **Contractual** |                    
|30,
      2010 | Issue Date | Price $  | Date $ | Date      | Life (Years)    | Reason for Issuance
|3,000,000      | 4/1/2009   | 0.03     | 0.03   | 3/31/2014 | 3.50            | Issued in exchange 
|               |            |          |        |           |                 | for financial      
|               |            |          |        |           |                 | advisory services. 
|3,740,150      | 4/12/2010  | 0.085    | 0.09   | 4/11/2015 | 4.53            | Issued in exchange 
|               |            |          |        |           |                 | for financial      
|               |            |          |        |           |                 | advisory services. 
|               |            |          |        |           |                 |                    
|               |            | Weighted |        |           | Weighted        |                    
|               |            | Average  |        |           | Average         |                    
|               |            | Exercise |        |           | Contractual     |                    
|Total          |            | Price    |        |           | Life (Years)    |                    
|6,740,150      |            | 0.06     |        |           | 4.015           |                    

NOTE 13. RELATED PARTY TRANSACTIONS

The Company sourced some of its funding during the year from
one director. Mr. Lee, CEO and director loaned the Company $2,430 during the
year ended September 30, 2010. Interest accrued on all loans outstanding to Mr.
Lee (the only loans remaining from directors) totalled $12,198 as of September
30, 2010. The Company also repaid $2,000 in principal to extinguish one of the
Promissory Notes owing to Mr. Lee during fiscal 2010. The total loan amounts
including accrued interest owing to Mr. Lee as of September 30, 2010 was
$55,444. (September 30, 2009 - $49,813)

F -21

---

NOTE 14. SEGMENTED INFORMATION

The Company operates in one business segment, namely human
therapeutics. Results of operations are reported on a consolidated basis for
segment reporting purposes. Consolidated disclosures about revenue streams and
long-lived assets by geographic area are seen below.

Revenues

The Company derived revenues from royalties and from consulting
services for the year ended September 30, 2010 and 2009.

|                                |   | Years ended September
      30, | 
|------------------------------- | - | ------------------------------- | 
|Revenue Stream                  |   | 2010                            | 
|Third Party Royalties (Mexico)  |   | 242,309                         | 
|Consulting Fees (North America) |   | 84,036                          | 
|Total Revenues                  | $ | 326,345                         | 
|                                |   |                                 | 
|Long Lived Assets               |   |                                 | 
|                                |   |                                 | 
|                                |   | Years ended September
      30, | 
|Long Lived Assets               |   | 2010                            | 
|North America                   | $ | 43,079                          | 
|Asia                            |   | -                               | 
|Total Long Lived Assets         | $ | 43,079                          | 

NOTE 15. RECLASSIFICATIONS

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

NOTE 16. SUBSEQUENT EVENTS

Management has reviewed subsequent events through the date of
filing the Annual Report on Form 10-K that includes these consolidated financial
statements with the US Securities and Exchange Commission. There were no
material subsequent events since December 29, 2010 (audit completion date) that
would require recognition or note disclosure in these financial statements.

F -22

---