SECURITIES AND EXCHANGE COMMISSION

FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended: September 30, 2007
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from __________ to __________

Commission File Number: 000-30813

AlphaRx, Inc.

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


200-168 Konrad Crescent, Markham, Ontario, Canada L3R 9T9

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

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

Title of Each Class
      Name of Exchange on Which RegisteredCommon Stock ($0.0001 par value)
      None


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

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

Issuer's revenues for its most recent fiscal year ended September 30, 2007
were $ 170,441.

The aggregate market value of the issuer's common stock (the
only class of voting stock), held by non-affiliates was approximately
$17,671,813
based on the average closing bid and ask price for the common stock on December
14, 2007.

As of December 18, 2007 there were 86,203,964 shares outstanding of the
issuer's common stock.

1

---



AlphaRx, Inc.

FORM 10-KSB

For the Year Ended September 30, 2007

INDEX

|PART I     |                                                                                                                          |   
|---------- | ------------------------------------------------------------------------------------------------------------------------ | --
|Item 1.    | Description of
    Business                                                                                              | 3 
|Item 2.    | Description of
    Property                                                                                              | 19
|Item 3.    | Legal Proceedings                                                                                                        | 19
|Item 4.    | Submission of Matters
    to a Vote of Security Holders                                                                  | 20
|           |                                                                                                                          |   
|PART II    |                                                                                                                          |   
|Item 5.    | Market for Common
    Equity and Related Stockholder Matters                                                             | 20
|Item 6.    | Management Discussion
    and Analysis of Financial Condition                                                            | 22
|Item 7.    | Financial Statements
    for 2006 and 2005                                                                               | 31
|Item 8.    | Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure                             | 31
|Item 8A    | Controls and
    Procedures                                                                                              | 31
|Item 8B    | Other Information                                                                                                        | 32
|           |                                                                                                                          |   
|PART III   |                                                                                                                          |   
|Item 9.    | Directors, Executive
    Officers, Promoters and Control Persons; Compliance with
    Section 16(a) of the Exchange Act. | 32
|Item 10.   | Executive Compensation                                                                                                   | 34
|Item 11.   | Security Ownership of
    Certain Beneficial Owners and Management                                                       | 37
|Item 12.   | Certain Relationships
    and Related Party Transactions                                                                 | 37
|Item 13.   | Exhibits and Reports
    on Form 8-K                                                                                     | 38
|Item 14.   | Principal Accountants
    Fees and Services                                                                              | 39
|           |                                                                                                                          |   
|SIGNATURES | 40                                                                                                                      
|           |                                                                                                                          |   
|EXHIBITS   |                                                                                                                          | 42

2

---

PART I
Item 1. Description of Business
COMPANY BACKGROUND
In this annual report on Form 10-KSB, the "Company," "AlphaRx,"
"we," "us," and "our," refer collectively to AlphaRx, Inc., AlphaRx Canada
Limited, our wholly-owned subsidiary, 85% of AlphaRx International Holdings
Limited and 85% of Alpha Life Sciences 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.
Effective July 1, 2003 AlphaRx, Inc. acquired all of the
shares of AlphaRx Canada Limited for nominal value of $1. AlphaRx Canada Limited
was dormant until this time. AlphaRx Canada Limited was incorporated under the
laws of Ontario in order to streamline sales of the Companys products in the
Canadian market. Prior to this time AlphaRx Canada Limited had no material
assets or any liabilities and was wholly owned by the President & CEO of AlphaRx,
Inc.
Effective April 22, 2005 AlphaRx International Holdings
Limited (a British Virgin Island company and an 85% owned subsidiary of AlphaRx
Inc.) entered into a Joint Venture agreement with Basin Industrial Limited (a
British Virgin Islands Company and a wholly-owned subsidiary of Advance
Pharmaceutical Co. Ltd.). The Joint Venture, AlphaAP Inc., is involved in
manufacturing and marketing of certain of the Companys existing products.
The Company holds an indirect 42.5% interest in Alpha AP 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 from licensed product sales.
Effective June 22, 2006, New Super Limited, an independent
Hong Kong based corporation, subscribed for 1,500 shares of Common Stock of
AlphaRx International Holdings Ltd.("AIH"), previously a wholly-owned subsidiary
of the Company.
Effective June 30, 2006, AlphaRx International Holdings
Limited. ("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 involved in obtaining necessary regulatory approvals for the manufacture
and distribution of the Companys products in the Asian market and continues to
seek out partners and collaborative arrangements for the Company.
3
COMPANY OVERVIEW

We are a pharmaceutical company, engaged in the research and
development of innovative therapeutic products using advanced drug delivery
technologies, which we believe, can be combined with a broad range of
therapeutic products to improve their effectiveness.
Our central strategy is to seek alliances with pharmaceutical
companies which will assist us in completing the reformulation and development
of the drugs and which will initiate clinical trials and commercialize the
products.
We have one product that has completed a Phase II Proof of
Concept clinical trial that has been licensed by one of our partners for
completion of late stage clinical trials and commercialization, and several
products in different stages of preclinical development.
With only limited financial resources available to us, and
with significant competition in the over the counter arthritis and muscle pain
relief category, we have decided not to continue pursuing direct sales and
marketing of Flexogan. We will focus our resources on development of products
and attempting to establish local and international licensing and distribution
arrangements and joint ventures for our existing over the counter products. As
we develop new products additional offerings will become available.
We intend to use our proprietary drug delivery technologies
in collaborative arrangements with pharmaceutical companies to formulate their
existing commercialized drugs as well as drugs under development by them. By
improving drug efficacy and reducing side effects, we believe our drug delivery
technologies will provide pharmaceutical companies with the opportunity to
enhance the commercial value of their existing products and new drug candidates.
We also intend to develop either independently or jointly certain off-patent and
over-the-counter ("OTC") products utilizing our proprietary drug delivery
technologies.
In August 2003, we licensed Indaflex, our lead pharmaceutical
product under development, to Industria Farmaceutica Andromaco, S.A. de C.V. ("Andromaco")
for commercialization in Mexico. Subject to the terms of the Agreement,
Andromaco has the exclusive and non-transferable manufacturing rights and
distribution rights in Mexico for Indaflex and we receive 15% royalties of the
gross revenue from product sales. Furthermore, Andromaco is responsible for
funding and completing any clinical and regulatory activities in support of
Indaflex registration in Mexico. The Agreement has an initial term of five (5)
years commencing on the effective date, and it shall automatically be renewed on
terms as provided in the Agreement and shall not be terminated without cause. In
June 2005, Andromaco launched Indaflex into the Mexican market.
We established AlphaRx International Holdings Limited ("AIH")
in 2005 in order to pursue sales activities in the Asia Pacific region with
experienced and established partners. AIH entered into a joint venture agreement
with Basin Industrial Limited (a Hong Kong based corporation  "Basin"), whereby
AIH and Basin will be equal holders of Alpha AP Inc., a company established in
order to manufacture and sell our existing and certain future products. AlphaRx,
through AIH, is to provide the products, manufacturing and distribution rights,
whereas Basin is to provide funding, day-to-day management, manufacturing and
marketing expertise. Recently, we have determined that the most effective way to
launch the Companys products in China is to establish our own manufacturing
plant locally via AIH. Accordingly, the Company has devised a strategic China
product launching plan with AIH whereby AIH will commission the registration of
Indaflex for the China and Hong Kong market, once approved by the local health
authority, AIH will start importing Indaflex from Andromaco, Mexico until such
time as its own manufacturing plant is established and able to produce Indaflex
locally.
4
We entered into a licensing and royalty agreement with
Proprius Pharmaceuticals, Inc. ("Proprius") during April, 2006. Under the
agreement Proprius has full development and commercialization rights to Indaflex,
topical NSAID (Non-Steroidal Anti-inflammatory Drug) currently undergoing Phase
II human trials. Under the agreement we could collect up to $116 million in
milestone license fees and royalties from product sales. To date we have
collected the initial milestone license fee of $1 million. We anticipate
additional payments in our new fiscal year.
We signed a Feasibility and Option agreement with a large
global specialty pharmaceutical company during November, 2006. Under the terms
of the Agreement, we will use our proprietary nanoparticle drug delivery
platforms to formulate three products to enhance their effectiveness in treating
pre-defined disease indications and of the three products, two are marketed
products. The licensee will have six months to evaluate the formulated products
and exercise its option right for a pre-negotiated License Agreement. We will
eligible to receive milestone and royalty payments from future product sales. We
have completed our contracted services related to this agreement as of September
30, 2007.
The Company has engaged a Canadian investment bank to act as
sponsor for the inter-listing of its shares on the TSX Venture Exchange. Upon
approval of its listing application by the TSX Venture Exchange, AlphaRxs
Common Stock will be dually listed on the TSX Venture Exchange in Canada as well
as over-the-counter in US. There is no assurance that our listing application
will ever be approved.
PRINCIPAL PRODUCT AND SERVICES AND PRINCIPAL MARKETS

Drug delivery companies apply proprietary technologies to
create new pharmaceutical products utilizing drugs developed by others. These
products are generally novel, cost-effective dosage forms that may provide any
of several benefits, including better control of drug concentration in the
blood, improved safety and efficacy, and ease of use and improved patient
compliance. We believe drug delivery technologies can provide pharmaceutical
companies with a means of developing new products as well as extending existing
patents.
The increasing need to deliver medication to patients
efficiently and with fewer side effects has accelerated the development of new
drug delivery systems. Today, medication can be delivered to a patient through
many different means of delivery, including transdermal (through the skin),
injection, implant and oral methods. These delivery methods, however, continue
to have certain limitations. Transdermal patches are often inconvenient to apply
can be irritating to the skin and the rate of release can be difficult to
control. Injections are uncomfortable for most patients. Implants generally are
administered in a hospital or physician's office and frequently are not suitable
for home use. Oral administration remains the preferred method of administering
medication. Conventional oral drug administration, however, also has limitations
in that capsules and tablets have limited effectiveness in providing controlled
drug delivery, resulting frequently in drug release that is too rapid (causing
incomplete absorption of the drug), irritation to the gastrointestinal (GI)
tract and other side effects. In addition capsules and tablets cannot provide
localized therapy. Insoluble or poorly soluble drugs are a major problem for the
pharmaceutical industry, with over one-third of the drugs listed in the United
States' Pharmacopoeia being insoluble or poorly soluble in water. Further, most
approaches used to overcome insolubility result in clinical problems ranging
from poor and erratic bioavailability to serious side effects.
We are engaged in developing novel formulations of existing
drugs that are insoluble or poorly soluble in water, utilizing our proprietary
Bioadhesive Colloidal Dispersion (BCD) (henceforth, "BCD") drug delivery
systems. Our strategy is to develop patentable improved formulations of such
drugs that are soluble in human medicines. Our BCD drug delivery technology
includes two different approaches to improve the effectiveness of
insoluble drugs and provide new methods of delivery, namely, (i) CLD (Colloidal
Lipid Dispersion System), (ii) SECRET (Self Emulsifying Controlled Release
Tablet System) and SLN (Solid Lipid Nanoparticles) delivery system.5The BCD drug delivery technology is designed to develop drugs
with major medical advantages, such as lower dosing, fewer side effects and
alternative dosage forms, as well as commercial advantages, such as extended
patent protection and broader use. We have a number of drugs under development,
certain of which have been successfully reformulated, utilizing our BCD
technology.

PRODUCTS AND PRODUCT PIPLELINE

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

|Brand Name                         | Application            | Delivery Route | Stage                  
|---------------------------------- | ---------------------- | -------------- | -----------------------
|Pharmaceuticals                   
|2.5% Indaflex                     | Osteoarthritis         | Topical        | Phase II*              
|Vansolin NDS                       | Nosocomial Pneumonia   | I.V.           | Preclinical underway** 
|Zysolin NDS                        | Pneumonia              | I.V.           | Preclinical underway** 
|Ocusolin NDS                       | Ocular Infection       | Topical        | Preclinical underway** 
|Streptomycin NDS                   | Tuberculosis           | I.V.           | Preclinical underway **
|Binoxan                            | Ocular Inflammation    | Topical        | Preclinical underway** 
|ARX828                             | Systemic Inflammation  | Oral           | Preclinical underway** 
|ARX838                             | Neuro-inflammation     | Oral           | Preclinical underway** 
|Consumer Health (over-the-counter)
|Flexogan                          | Analgesic              | Topical        | Market ready*          
|CoQ10ER                            | Nutritional Supplement | Oral           | Market ready*          

*

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

**

Preclinical
activities include basic in vitro and in vivo research attempting to adopt our
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 in
Canada, at test sites which are pre-approved by both Health Canada and FDA.

Indaflex is our only prescription drug at the clinical trial
stage. 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. Under the terms of the Licensing Agreement with
Proprius we may 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.

6

---



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.

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

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

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

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

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

ARX828 and ARX838 are early stage drug candidates targeting
inflammatory diseases. ARX828 and ARX838 are orally bioavailable, small
molecules with potent anti- inflammatory and immuno-modulation activity.

Flexogan is a series of topical arthritis and muscle pain
relief creams. Flexogan has a unique delivery formulation that increases the
speed, volume, and sustained duration of drug penetration through the skin in
animal studies.

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

BIOADHESIVE COLLOIDAL DISPERSION (BCD) SYSTEMS

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

7

---

The BCD Systems are designed to provide orally and
transdermally administered, conveniently dosed, cost-effective drug therapy in a
continuous, controlled delivery over a multihour period. We believe our BCD
Systems may provide one or more of the following therapeutic advantages over
conventional methods of drug administration:
1. Enhanced Safety and Efficacy. We believe our BCD
Systems may improve the ratio of therapeutic effect to toxicity by decreasing
the initial peak concentrations of a drug, associated with toxicity, while
maintaining levels of the drug at therapeutic, subtoxic concentrations for an
extended period of time. Many drugs demonstrate optimal efficacy when
concentrations are maintained at therapeutic levels over an extended period of
time. When a drug is administered intermittently, the therapeutic concentration
is often exceeded for some period of time, and then rapidly drops below
effective levels. Excessively high concentrations are a major cause of side
effects, while subtherapeutic concentrations are ineffective.
2. Greater Patient and Caregiver Convenience. We
believe our BCD Systems may permit once-daily dosing for certain drugs that are
currently required to be administered several times daily, thereby promoting
compliance with dosing regimens. Patient 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 repatent 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.

8

---

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 systems for enhanced solubility and
bioavailability for drugs that are not readily water soluble. We believe that
this combination of oral and transdermal drug delivery technologies
differentiates us from other oral drug delivery companies and will enable us to
attract pharmaceutical companies to incorporate their proprietary drugs into the
BCD Systems and also to differentiate any OTC and/or off-patent drugs that
utilize the BCD Systems from those of other drug delivery companies.
Competition in the areas of pharmaceutical products and drug
delivery systems is intense and this is expected to continue in the future.
Competing technologies may prove superior, either generally or in particular
market segments, in terms of factors such as cost, consumer satisfaction or drug
delivery profile. Our principal competitors in the business of developing and
applying drug delivery systems have substantially greater financial,
technological, marketing, personnel and research and development resources than
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 which utilize the BCD Systems. There can be no assurance that
developments by others will not render any potential products utilizing the BCD
Systems non-competitive or obsolete. In addition, our competitive success will
depend heavily on entering into collaborative relationships on reasonable
commercial terms, commercial development of products incorporating the BCD
Systems, regulatory approvals, protection of intellectual property and market
acceptance of such products.

9
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 Rifamsolin, Zysolin, Vansolin & Ocusolin to
treat Tuberculosis and other infectious diseases, "Topical composition for acne
treatment" and "Stabilization of benzoyl peroxide in solution" for the use of
NuProm to treat acne. We have also applied for patents in Mexico, Japan and
China under the title "Vehicle for topical delivery of anti-inflammatory
compounds" for the use of Indaflex to increase efficacy of non steroidal
anti-inflammatory drugs which are still pending.
We currently have two 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.
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 which
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", "PhytoScience", "NuProm", and "LipoLette". We
have registered the following trademarks in the United States: "Flexogan", "Indaflex",
"LipoBloc", "NuProm", "Oralife". We have also registered "Flexogan" in the
Peoples Republic of China. In connection with our Internet web site, we have
registered with Network Solutions, Inc., the internet domain name "AlphaRx.com"
for our corporate website.

10

Proprietary Information

Much of our technology is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect the
rights to our proprietary technology, our policy requires all employees and
consultants to execute confidentiality agreements that prohibit the disclosure
of confidential information to anyone outside 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.

We rely on Canadian Custom Packaging Inc., Patheon Inc. and
Andromaco to manufacture our products on a when needed basis. There are no
outstanding manufacturing orders or any conditional obligations outstanding to
any of these parties.

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.

11

---



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

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

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

12

---



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 vivo
products 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.

13

---



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

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

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

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

RESEARCH AND DEVELOPMENT

We conduct our research and development activities in house
and through collaborative arrangements with universities, contract research
organizations and independent consultants. We are also dependent upon third
parties to conduct clinical studies, and to obtain FDA, Health Canada and other
regulatory approvals. Until recently all of our research and development
activities took place at our main offices in Canada. We have commenced research
and development of our oncology initiatives in China via our 85% owned
subsidiary AlphaRx International Holdings Limited.

14

---



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.

PRODUCT LIABILITY AND OTHER INSURANCE

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

Although we currently maintain product liability insurance of
approximately CAD $1,000,000 through third party insurers that provides coverage
for product liability claims, there can be no assurance that:

- 

- we will be able to secure increased coverage
  as the commercialization of the BCD Systems proceeds; or

- any insurance will provide adequate
  protection against potential liabilities.

We have 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.

Since we have stopped direct sales of any of our products, we
have reduced our product liability coverage to CAD $1 million from CAD $3
million effective September 30, 2007. 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. Proprius Pharmaceuticals Inc. our Indaflex licensee
is responsible for future insurance coverage on any Indaflex trials that may be
conducted.

EMPLOYEES

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

RISK FACTORS

We provide the following cautionary discussion of risks,
uncertainties and possible inaccurate assumptions relevant to our business and
our products. These are factors that we think could cause our actual results to
differ materially from expected results. Other factors besides those listed here
could 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, 2007 we had an accumulated deficit of
approximately $ 16,284,473. Our revenues for the years ended September 30, 2007
and September 30, 2006 were $170,441 and $1,024,774 respectively. Our revenues
have not been sufficient to sustain our
operations. Revenue for 2007 consisted of royalty revenues and consulting
revenue, and in 2006 consisted royalty revenues from sales of Indaflex in Mexico
and license fees derived from a licensing agreement with Proprius Pharmaceutical
Inc. 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.

15

---

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, 2007, we had a working capital deficiency of
approximately $559,439 as compared to a working capital deficiency of $176,129
as at September 30, 2006. The independent auditors' report for the year ended
September 30, 2007 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.
16
We face significant competition in the over-the-counter
health care market.

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

We filed applications for U.S. patents relating to
proprietary drug delivery technologies and formulations that we have invented in
the course of our research. To date, one U.S. patent has been issued and other
applications are pending. We have also made patent application filings in
selected foreign countries. We face the risk that any of our pending
applications will not issue as patents. In addition, our patents may be found to
be invalid or unenforceable. Our business also is subject to the risk that our
issued patents will not provide us with significant competitive advantages if,
for example, a competitor were to independently develop or obtain similar or
superior technologies. To the extent we are unable to protect our patents and
patent applications, our investment in those technologies may not yield the
benefits that we expect.
17
We also rely on trade secrets to protect our inventions. Our
policy is to include confidentiality obligations in all research contracts,
joint development agreements and consulting relationships that provide access to
our trade secrets and other know-how. However, parties with confidentiality
obligations could breach their agreements causing us harm. If a secrecy
obligation were to be breached, we may not have the financial resources
necessary for a legal challenge. If licensees, consultants or other third
parties use technological information independently developed by them or by
others in the development of our products, disputes may arise from the use of
this information and as to the ownership rights to products developed using this
information. These disputes may not be resolved in our favour.
We are not aware of infringing on any third partys patents,
nor are we aware of any third party infringing on any of our patents or patent
applications.
Our technology, 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. We
currently maintain CAD$1,000,000 in product liability insurance coverage.
However, these amounts may not be sufficient to protect us against losses or may
be unavailable in the future on acceptable terms, if at all.
We may be unable to retain key employees or recruit
additional qualified personnel.

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

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

18

---

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, who are also principal
stockholders and directors, could establish policies and enter into transactions
without independent review and approval thereof. This could present the
potential for a conflict of interest between the Company and its stockholders
generally and the controlling officers, stockholders or directors.
Ownership of our Common Stock by Current Officers and
Directors

The present officers and directors own approximately 20.55%
of the outstanding shares of Common Stock, and are therefore no longer in a
position to elect all of our Directors and otherwise control the Company. Any
single shareholder or the management group as a whole can no longer control the
Company. Shareholders have no cumulative voting rights. (See Security Ownership
of Certain Beneficial Owners and Management)
Item 2. Description of Property

We lease approximately 2,930 square feet in Markham, Ontario,
under a lease, which expires on November 30, 2008 for approximately $2,600 a
month. We believe that our existing properties are sufficient for our
administrative, research and development needs for the foreseeable future. We
are searching for an office (less than 500 square feet) in China to administer
research and development initiatives based in China. To date we have not located
an acceptable space.
Item 3. Legal Proceedings

Farhad Walji filed suit against AlphaRx, Inc. and AlphaRx
Canada Limited in the Supreme Court of British Columbia on August 23, 2002.
Farhad Walji filed a claim asking for $20,000 plus interest for allegedly
providing $20,000 pursuant to a subscription agreement to purchase shares of
AlphaRxs Common Stock and damages resulting from lost opportunity. As of May
2006 the courts have formally dismissed the case and we no longer have any
liability relating to this or any other legal action.
19Item 4. Submission of Matters to a Vote of Security HoldersDuring the quarter ended September 30, 2007 no matters were
submitted to a vote of security holders.

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters

MARKET INFORMATION

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

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

High $
      Low $Fourth Quarter
      (Ended September 30, 2007)
      0.10
      0.05Third Quarter
      (Ended June 30, 2007)
      0.12
      0.04Second Quarter
      (Ended March 31, 2007)
      0.15
      0.08First Quarter
      (Ended December 31, 2006)
      0.10
      0.07Fourth Quarter
      (Ended September 30, 2006)
      0.12
      0.08Third Quarter
      (Ended June 30, 2006)
      0.25
      0.08Second Quarter
      (Ended March 31, 2006)
      0.24
      0.07First Quarter
      (Ended December 31, 2005)
      0.10
      0.06


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

Records of our stock transfer agent indicate that as of
December 9, 2007 there were approximately 77 record holders of our Common Stock.
This does not include an indeterminate number of shareholders 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 future investments in business. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon our results of operations, financial conditions, contractual
restrictions, and other factors deemed relevant by the Board of Directors. We
are under no contractual restrictions in declaring or paying dividends to our
common shareholders.

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

20

---



STOCK OPTION PLANS

Under the 2000 Stock Option Plan we issued 1,150,000 options
to purchase shares of Common Stock with an exercise price of $0.10 per share.
These options expire in June 2010.

Under the 2003 Stock Option Plan we issued 570,000 options to
purchase shares of Common Stock with exercise prices ranging from $0.50 - $0.69
per share. These options expire from February to May, 2008.

Under the 2004 Stock Option Plan approved by our stockholders
in July 2004, 24,000,000 shares of Common Stock were made available as options.
Under the 2004 Option Plan we issued the following options on November 15, 2004:
options to purchase up to 12,720,000 shares of Common Stock with an exercise
price of $0.15 per share; options to purchase up to 250,000 shares of Common
Stock with an exercise price of $0.40 per share; options to purchase up to
110,000 shares of Common Stock with an exercise price of $0.45 per share; and
options to purchase up to 140,000 shares of Common Stock with an exercise price
of $0.50 per share. A total of 13,220,000 options were issued, all of which
expire on November 15, 2014. These options were issued to management, directors
and consultants and vest 100% on November 15, 2005 as to 12,720,000 options and
November 15, 2004 as to the remaining 500,000 options, which were allocated to
our consultants. On January 10, 2005 we issued 7,000,000 options under this plan
with an exercise price of $0.16 per share. These options were issued to
management and vest 100% on January 10, 2006.

On February 8, 2005 we issued options to purchase up to
390,000 shares of Common Stock to employees and consultants of the Company.
These options have an exercise price of $0.15, vest 100% on February 8, 2006,
and expire on February 8, 2015.

On May 25, 2005 we issued options to purchase up to 100,000
shares of Common Stock to a consultant of the Company. These options have an
exercise price of $0.13, vest 100% on May 25, 2005 and expire on May 25, 2010.

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

We adopted a new option plan  the 2006 Option Plan at our
Annual General Meeting held March 29, 2006. Under this plan we can issue up to
5,000,000 shares of Common Stock to employees, including directors and external
consultants. On January 3, 2007 we issued options to purchase up to 90,000
shares of Common Stock to consultants of the Company. These options have an
exercise price of $0.10, vest 100% on November 10, 2007 and expire on January 3,
2012. There are 4,910,000 options remaining available for issuance under the
2006 Plan.

RECENT SALES OF UNREGISTERED SECURITIES

On November 14, 2007 we issued 5,000,000 units consisting of
5,000,000 shares of unregistered Common Stock and warrants to purchase 5,000,000
shares of unregistered Common Stock at an exercise price of $0.10. We received
gross proceeds of $500,000 before anticipated commission of 5% or $25,000.

21

---



On November 20, 2006 we issued 300,000 shares of restricted
stock to a consultant in lieu of $30,000 cash payment for services rendered.

We did not issue any unregistered securities during the year
ended September 30, 2006

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

The following discussion and analysis should be read in
conjunction with the Financial Statements and Notes included in Item 8 of this
report. Except for the historical information contained herein the foregoing
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those projected
in the forward-looking statements discussed herein.

General

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

During 2003 we initiated commercialization of our products
commencing with sales of Flexogan in the Canadian market. It became evident
during 2005 that we required more substantial financial resources to pursue
Flexogan marketing strategy. We determined that completion of Phase II Indaflex
clinical trials was the most appropriate course of action with the resources
remaining. Should we be successful in raising additional funding we will
continue to pursue completion of Phase II Indaflex clinical trials as our
primary objective.

We signed a licensing agreement with Andromaco in August 2003
for the commercialization of our lead pharmaceutical products "Indaflex" in
Mexico. Mexican health authorities gave approval to Andromaco to start sales of
Indaflex in Mexico. We collected our first royalties from Indaflex sales in the
year ended September 30, 2005 and continue to collect royalties.

We established a wholly owned subsidiary  AlphaRx
International Holdings Limited ("AIH") in April, 2005 and entered into a Joint
Venture Agreement with Basin Industrial Limited (a wholly-owned subsidiary of
Advance Pharmaceutical Co. Ltd.). The joint venture  AlphaAP Inc., will be
involved in the manufacture and marketing of certain existing and future
products in the Far East. AlphaAP remains inactive until local health
authorities in Hong Kong and China grant approval to commence over the counter
sales of certain products.

We signed a license agreement with Proprius Pharmaceutical
Inc. ("Proprius") during April 2006, whereby Proprius completed Phase II
clinical trials

On May 1, 2006 we announced that AIH has entered into an
agreement with China Lianyungang City Golden Enterprises Limited ("China Party")
to establish a Joint Venture in mainland China. The Joint Venture intends to
establish a manufacturing facility in Lianyungang City, Jiangsu Province and a
distribution network in order to manufacture and market pharmaceutical products
licensed by AIH. In addition AIH will help to develop branded generic products
in lieu of capital payment into the Joint Venture. China Party has agreed to
inject working capital of RMB 250 million (approximately $31 million) into the
Joint Venture in the form of equity. AIH will own 30% of the Joint Venture
Common Stock and China Company will own 70%. AIH is also to receive a 5% royalty
on all AIH licensed product sales generated by the Joint Venture.

22

---



In June 2006 AIH issued 1,500 shares of its Common Stock to
New Super Limited ("NSL") in accordance with an agreement concluded during April
2006. The shares were issued for total cash consideration of $HK 10 million
(about $1,288,826). There are presently 10,000 shares of Common Stock issued and
outstanding, of which we own 85%. In accordance with SAB No. 51, we have
accounted for the issuance of our subsidiarys stock as a capital transaction.
Considering that AIH is essentially a non-operating entity, and that the capital
infusion was meant for commencement of business development in Asia region, gain
recognition was not appropriate.

Effective June 30, 2006, AlphaRx International Holdings
Limited. ("AIH") acquired 100% of AlphaRx Life Sciences Ltd. ("ALS") for a
nominal amount and the assumption of approximately $63,000 of related party
liabilities. ALS is involved in obtaining necessary regulatory approvals for the
manufacture and distribution of the Companys products in the Asian market.

During November 2006 we signed feasibility and option
agreement with a large U.S. based pharmaceutical company. Under the agreement we
will use our proprietary nanoparticle drug delivery platforms to formulate three
products to enhance their effectiveness. Two products are currently marketed
products. Should our delivery platform be adopted we will be eligible to receive
milestone payments and royalty payments based on future product sales utilizing
our delivery technology. We generated $76,000 in consulting revenues in relation
to the reformulations during fiscal 2007.

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.

23

---



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

RESULTS OF OPERATIONS

Year ended September 30, 2007 as compared to year ended
September 30, 2006

Consulting Revenue

We completed our provision of services during fiscal 2007 in
conjunction with a feasibility and option agreement for three of our formulas
with a pharmaceutical company, generating $76,000 in consulting revenue, with no
comparable revenues generated for the same period a year ago.

License Fees and Royalties

License fees and royalties totalled $81,602 for the year
ended September 30, 2007  derived from sales of Indaflex via Farmaceutica
Andromaco, S.A. de C.V. ("Andromaco") in Mexico. This compares to $24,774
derived for the year ended September 30, 2006. We also generated initial
milestone license payments during 2006 in the amount of $1,000,000 from Proprius
Pharmaceuticals, Inc. with no comparable milestones earned in the fiscal year
ended September 30, 2007. We continue to work with Proprius Pharmaceutical Inc.
in determining the nature and extent of the next clinical trials to initiate in
relation to Indaflex .

Royalties from Joint Venture

We generated $12,839 in royalties from our joint venture
Alpha AP Inc. during the year ended September 2007 with no comparable royalties
generated for the same period a year ago.

General and Administrative Expenses

General and administrative expenses were $1,023,684 for the
year ended September 30, 2007 as compared to $1,944,910 incurred for the same
period a year ago, a decrease of $921,226 or about 47%. Stock based compensation
expense totalled $15,752 for the year ended September 30, 2007 as compared to
$717,117 for the year ended September 30, 2006, a decrease of $701,365 or about
98%. The majority of options issued by the Company were fully vested during 2006
(22,430,000), and only 3,290,000 options vested in October 2007 (the majority of
the stock compensation expense for these options was therefore also incurred in
fiscal 2006 causing the reduction in this expense year over year).

Warrant amortization was $318,718 for the year ended
September 30, 2007 as compared to $251,720 in 2006, an increase of $66,998 or
about 27%. There remains about $66,000 in warrant amortization to be expensed in
fiscal 2008 and no further stock based compensation expense related to options
outstanding as at September 30, 2007. We anticipate issuance of additional
options and warrants in the future, which will continue to result in stock based
compensation expense and may result in warrant amortization expense.

We incurred about $14,000 in expenses related to discontinued
operations during 2007 as compared to about $197,000 in the year ended September
30, 2006, a decrease of about $183,000. Expenses related to discontinued
operations (sales of Flexogan in Canada) will be nominal in the future.

24

---



We incurred about $141,000 in administrative expenses during
the year, in relation to AlphaRx International Holdings Limited and AlphaRx Life
Sciences Ltd., our 85% owned subsidiaries operating out of China as compared to
about $194,000 incurred during 2006, a decrease of about $53,000. We incurred
$214,905 in administrative consulting and salaries during 2007 as compared to
$265,286 incurred in the same period a year ago, a decrease of $50,381 or about
19%.

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 both in China via our 85% owned subsidiary AlphaRx Life
Sciences Ltd. and in Canada via our wholly owned subsidiary AlphaRx Canada Ltd.

During 2007 we incurred research and development expenses
related to various initiatives including clinical animal trials with Vansolin
and Zysolin used for serious infections such as lung inflammation and
nosocomial pneumonia, Dicloflex, an eye-drop formula used to treat ocular
inflammation and pain, and ARX828, an orally-administered, potent and selective
inhibitor of iNOS (Inducible Nitric Oxide Synthase).

We incurred a total of $727,046 in research and development
during 2007 as compared to $1,417,700 incurred during the year ago period, a
decrease of about $690,654 or about 49%. During 2006 we incurred about $994,000
related to Indaflex clinical trials with no comparable expense during 2007.
Effective April 2006 all costs related to Indaflex clinical trials and
commercialization are being borne by Proprius Pharmaceuticals, Inc. in return
for full commercialization and sub-licensing rights in the U.S and other
regions.

Offsetting the decrease in research and development related
to Indaflex, we incurred about $205,000 in research and development in China
during 2007 as compared to $9,995 during 2006, an increase of about $194,970. We
are utilizing more competitive resources in Asia in the drug research fields as
compared to North American costs and will continue to pursue cost effective
development of our drug candidates and commercial potential in China and other
regions.

We incurred $166,591 in research and development consulting
fees in North America for the year ended September 30, 2007 as compared to about
$77,355 during 2006 for non-Indaflex initiatives, an increase of $89,236 or
about 115%.

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.

Sales and Marketing Expenses

Sales and marketing expenses totalled $3,750 for the year
ended September 30, 2007 as compared to $94,140 incurred during the same period
a year ago, a decrease of $90,390 or about 96%. We are focusing our resources on
research and development of drug candidates and are not actively marketing any
of our products or potential products. We have sales arrangements in place for
the payment of commissions but only in the event of receipt of milestone
payments from our license arrangements.

Sales commissions will continue in future, based on
collection of license fee milestones. We also expect to continue business
development expenditures, and sales consulting based on opportunities available
to us. We no longer intend to incur
expenses related to marketing of our products, as our existing and future
business partners and licensees will be involved in the selling of our products,
and related marketing expenditures.

25

---

Depreciation Expense

Depreciation expense totalled $92,279 for the year ended
September 30, 2007 as compared to $74,307 incurred for the same period a year
ago, an increase of $17,973 or about 24%. Our capital asset purchases were
$6,289 for the year ended September 30, 2007. Capital asset purchases during
2006, primarily scientific research equipment, in the amount of $124,011
experienced a full year of depreciation during 2007, leading to the increase in
depreciation expense as compared to 2006, when they experienced only a six-month
depreciation expense.
Interest Expense

We incurred $122,600 in net interest expense during 2007 as a
result of our borrowings and the issuance of promissory notes yielding interest
ranging from 10% - 12% per annum. This compares to $67,410 incurred during 2006.
To mitigate future interest expense, we converted $1,169,793 in promissory notes
into shares of Common Stock of the Company during September 2007.
Minority Interest

We issued 1,500 shares of our subsidiarys Common Stock (AlphaRx
International Holdings Limited "AIH") to New Super Limited ("NSL") in June, 2006
in exchange for a cash infusion of $HK 10 million (about $1,288,826). There are
presently 10,000 shares of Common Stock of AIH issued and outstanding, of which
we own 85%. In accordance with SAB No. 51, we have accounted for the issuance of
our subsidiarys stock as a capital transaction. A minority interest credit of
$44,297 for the year ended September 30, 2007 ($33,316 for the year ended
September 30, 2006) has resulted in a corresponding reduction of our
consolidated expenses, this amount representing NSLs portion of AIHs loss.
Net Loss before Discontinued Operations

The above income and expenses resulted in a net loss before
discontinued operations of $1,754,621 for the year ending September 30, 2007 as
compared to a net loss of $2,540,377 incurred for the same period a year ago.
Discontinued Operations
We determined to discontinue direct sales during 2006 of
Flexogan because: (a) we were not able to source a qualified marketing partner
to take over direct sales of Flexogan; (b) we did not have adequate financial
resources or expertise to market Flexogan on a longer term basis, and (c) we
concluded there was a better overall opportunity for success if we focused on
drug development and enhancement while allowing our partners and potential
partners to market our products in return for royalties and, or license fees.
Net Income from discontinued operations, representing sales
of Flexogan was $4,385 for the year ended September 30, 2007 as compared to
$18,084 for the same period a year ago, a reduction of $13,700 or about 76%.
Direct sales of Flexogan will be nominal in the future.

26

Net Loss

Including the loss from discontinued operations and all other
expense and income items described above, we incurred a net loss of $1,750,236
for the year ended September 30, 2007 as compared to a net loss of $2,522,293
for the year ended September 30, 2006.

Cumulative Translation Adjustment

The cumulative translation adjustment stems from unrealized
foreign exchange gains and losses stemming from translation of foreign currency
subsidiaries into U.S. dollars. Although the cumulative translation adjustment
is reflected in the statement of operations, it is reflected after the net loss
and flows into shareholders equity directly. The cumulative translation
adjustment was $1,280 for the year ended September 30, 2007 as compared to
$5,329 for the year ended September 30, 2006.

Year ended September 30, 2006 as compared to year ended
September 30, 2005

Note that certain expense items relating to 2006 have been
reclassified in 2007 in order to make them comparable to the 2007 presentation.
The discussion below compares the expense items in 2006 before current year
reclassifications of those expense items and should be read in conjunction with
the financial statements filed with our 2006 10KSB filed on or about December
21, 2006. The reclassifications relate to combining Stock Based Compensation
Expense into General and Administrative expenses, and reclassifying the expenses
relating to discontinued operations into General and Administrative expenses.

License Fees and Royalties

In keeping with our central strategy of seeking alliances
with larger pharmaceutical companies, we signed a license agreement with
Proprius Pharmaceuticals, Inc. during April 2006. As a result we recognized and
received $1 million in license fees during the year  our first such revenue
stream. Total revenues for the year ended September 30, 2006 were $1,024,774 as
compared to $4,302 generated a year ago, an increase of $1,020,472. Royalty
revenues from Indaflex sales in Mexico increased to $24,774 for the year ended
September 30, 2006 as compared to $4,302 generated a year ago. Royalty revenues
continue to increase based on increased sales of Indaflex in Mexico.

General and Administrative Expenses

General and administrative expenses including stock based
compensation were $813,231 for the year ended September 30, 2006 as compared to
$650,965 incurred for the same period a year ago, an increase of $162,266 or
about 25%. We incurred about $194,000 in administrative expenses during the
year, in relation to the establishment of Alpharx International Holdings Limited
and Alpha Life Sciences Ltd., our 85% owned subsidiaries. The major
administrative expenses related to our new subsidiaries included hiring of a
general manager for ALS and AIH, initial accounting, legal, regulatory
applications and related travel for our products in China and Hong Kong. There
was no comparable expense in 2005.

Stock Based Compensation Expense and Warrant Amortization

Stock based compensation expense and warrant amortization
totalled $968,837 for the year ended September 30, 2006 as compared to
$2,009,920 for the same period a year ago. We issued warrants in conjunction
with promissory notes during the year ended September 30, 2006. Warrant
amortization for the year totalled $251,720 with no comparable expense in the
previous year. We also issued 3,290,000 options during the year, resulting in
$717,117 in total stock based compensation expense. This compares to issuance of
20,710,000 options during the year ended September 30, 2005, which resulted in
stock based compensation expense of $2,009,920. There remains about $253,000 in
warrant amortization to be expensed in fiscal 2007 as well as $10,720 in stock
based compensation expense related to issuance of options during 2006. We
anticipate issuance of additional options and warrants in the future, which will
continue to result in stock based compensation expense and may result in warrant
amortization expense.

27

---



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 now incurring research and
development expenses both in China for oncology product initiatives and in
Canada for all other product initiatives.

During 2006 we stopped incurring costs related to Indaflex
clinical trials. Effective April, 2006 all future costs related to Indaflex
clinical trials and commercialization are being borne by Proprius
Pharmaceuticals, Inc. in return for full commercialization and sub-licensing
rights in the U.S and other regions.

Research and development expenses totalled $1,417,700 for the
year ended September 30, 2006 as compared to $1,337,503 incurred for the same
period a year ago, an increase of $80,197 or about 6%. We incurred about
$994,000 related to Indaflex clinical trials during 2006 as compared to about
$1,170,000 during 2005, a decrease of about $176,000. Offsetting this decrease
were additional expenditures related to outside consultants of approximately
$118,000, and certain salaried staff now focusing on other initiatives,
increased equipment leases, and research expenditures commencing in China.

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.

Sales and Marketing Expenses

Sales and marketing expenses totalled $59,889 for the year
ended September 30, 2006 as compared to $21,021 incurred during the same period
a year ago, an increase of $38,868 or about 185%. Sales commission of $50,000
was paid in 2006 related to license fees collected with no comparable expense in
2005.

Sales commissions will continue in future, based on
collection of license fee milestones. We also expect to continue business
development expenditures, and sales consulting. We no longer intend to incur
expenses related to marketing of our products, as our business partners and
licensees will be involved in the selling of our products, and related marketing
expenditures.

Depreciation Expense

Depreciation expense totalled $74,307 for the year ended
September 30, 2006 as compared to $54,077 incurred for the same period a year
ago, an increase of $20,230 or about 37%. We purchased about $124,000 in capital
assets, primarily scientific research and testing equipment during 2006, leading
to an increase in depreciation.

Interest Expense

We incurred $67,410 in interest expense during 2006 as a
result of our borrowings and the issuance of promissory notes yielding interest
ranging from 10% - 12% per annum. This compares to $22,804 in net interest
income generated during 2005. Interest income was generated during 2005 from
cash on deposit, such cash being sourced from a private placement completed
during September 2004.

28

---



Minority Interest

We issued 1,500 shares of our subsidiarys Common Stock (AlphaRx
International Holdings Limited "AIH") to New Super Limited ("NSL") in June, 2006
in exchange for a cash infusion of $HK 10 million (about $1,288,826). There are
presently 10,000 shares of Common Stock of AIH issued and outstanding, of which
we own 85%. In accordance with SAB No. 51, we have accounted for the issuance of
our subsidiarys stock as a capital transaction. A minority interest credit of
$33,316 for the year ended September 30, 2006 has resulted in a corresponding
reduction of our consolidated expenses, this amount representing NSLs portion
of AIHs loss.

Net Loss before Discontinued Operations

The above income and expenses resulted in a net loss before
discontinued operations of $2,343,284 for the year ending September 30, 2006 as
compared to a net loss of $4,046,380 incurred for the same period a year ago.

Discontinued Operations

During 2003 the Company introduced Flexogan products to the
Canadian market. Marketing of these products was underway, and initial orders
from customers were received. Further growth in sales resulted in 2004,
primarily as a result of one order from a national drug chain. Repeat orders
were proving to be more challenging during 2004 and 2005, even while an expanded
marketing campaign was underway.

We completed a private placement during late 2004 in order to
fund our core research and development activities as well as continuation of our
marketing campaign for Flexogan. Although substantial amounts were spent on
marketing during 2005, sales growth did not materialize. This was due, in large
part, to new competitive product introductions into the pain relief segment of
the market by large pharmaceutical companies and other independents. Marketing
and sales programs for these competitive products were substantial, and
significantly larger than we could afford if we were to compete effectively. We
continued to sell our products into 2006 while seeking marketing and sales
partners to take over the Flexogan line.

We determined to discontinue direct sales of Flexogan
because: (a) we were not able to source a qualified marketing partner to take
over direct sales of Flexogan; (b) we did not have adequate financial resources
or expertise to market Flexogan on a longer term basis, and (c) we concluded
there was a better overall opportunity for success if we focused on drug
development and enhancement while allowing our partners and potential partners
to market our products in return for royalties and, or license fees.

Loss from discontinued operations described above totalled
$179,009 for the year ended September 30, 2006 as compared to a loss of $805,744
for the same period a year ago, a reduction of $626,735. The reduction in loss
was due primarily to reduced marketing expenditures. For the year ended
September 2006 we incurred $34,251 in sales and marketing expenses for Flexogan
products as compared to $640,538 incurred for the same period a year ago, a
reduction of $606,287.

Net Loss

Including the loss from discontinued operations and all other
expense and income items described above, we incurred a net loss of $2,522,293
for the year ended September 30, 2006 as compared to a net loss of $4,852,124
for the year ended September 30, 2005.

29

---



Cumulative Translation Adjustment

The cumulative translation adjustment stems from unrealized
foreign exchange gains and losses stemming from translation of foreign currency
subsidiaries into U.S. dollars. Although the cumulative translation adjustment
is reflected in the statement of operations, it is reflected after the net loss
and flows into shareholders equity directly. There was no comparable cumulative
translation adjustment in 2005.

Liquidity And Capital Resources

As of September 30, 2007 the Company had a working capital
deficiency of $559,439 as compared to a working capital deficiency of $176,129
as at September 30, 2006. We have licensing arrangements with Andromaco,
Proprius Pharmaceuticals, Inc. and AlphaAP Inc., which provide our royalty and
licensing revenues based on achieving milestones and/or sales of our products.
We also generate certain consulting revenues 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, and to that effect, we have borrowed approximately
$154,000 subsequent to September 30, 2007 for working capital purposes. We have
also issued 5,000,000 shares of Common Stock subsequent to September 30, 2007
for working capital purposes. 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.

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 shareholders, 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 shareholders.

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, but unrelated to direct sales.

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.

30

---



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, discontinued operations
liabilities and accrued liabilities, the Company is committed to the following
contractual obligations and commitments.

|                            | 2008     | 2009    | 2010  
|--------------------------- | -------- | ------- | ------
|Operating Lease Obligations | $ 75,849 | $25,788 | $2,194
|Notes Payable (1)           | 167,804  | -       | -     
|Total                       | $243,653 | $25,788 | $2,194

(1) Includes accrued interest accruing at rates ranging from
10% -12% per annum and is net of a discount of $65,962.

Certain Factors that may Affect Future Results

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

ITEM 7. FINANCIAL STATEMENTS FOR 2007 AND 2006

The financial statements for the fiscal year ending September
30, 2007 and 2006, required by Item 7 are set forth on pages F-1 through F-18.

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

Not applicable

31

---



ITEM 8A. CONTROLS AND PROCEDURES

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

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of September 30, 2007, the chief
executive officer and the chief financial officer have concluded that the
Companys disclosure controls and procedures (as defined in Rule 13a-14(c) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective to
ensure that information required to be disclosed by the Company in reports that
the Company files or submits under the Securities Exchange Act, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.

Changes in Internal Controls

The chief executive officer and the chief financial officer
and principal accounting officer have concluded that there were no significant
changes in the Companys internal controls over financial reporting or in any
other areas that could significantly affect the Companys internal controls
subsequent to the date of their most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

ITEM 8B. OTHER INFORMATION

None

PART III

Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) Of The exchange act

The following table sets forth, as of December 18, 2007, the
name, age, and position of each of our executive officers and directors:

| | Name                         | Age | Position                               | Term           
| | ---------------------------- | --- | -------------------------------------- | ---------------
| |                              |     |                                        |                
| | Michael M. Lee               | 44  | Chairman of the Board of
    Directors
| |                              |     | Chief Executive Officer                | since 8/8/1997 
| |                              |     |                                        |                
| | Marcel Urbanc, C.A.          | 51  | Chief Financial Officer and            |                
| |                              |     | Principal Accounting Officer           |                
| |                              |     |                                        |                
| | Joseph Schwarz, Ph.D         | 53  | Chief Scientist                        |                
| |                              |     |                                        |                
| | Michael Weisspapir, MD, Ph.D | 51  | Chief Medical Officer                  |                
| |                              |     |                                        |                
| | Sandro Persia                | 37  | Secretary/Treasurer                    |                
| |                              |     |                                        |                
| | Dr. David Milroy             | 56  | Director                               | since 4/15/2003
| |                              |     |                                        |                
| | Dr. Ford Moore               | 56  | Director                               | Since 4/15/2003

32

---



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

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

Joseph Schwarz, Ph.D.: Dr. Schwarz is 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.

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

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

Ford Moore, D.D.S. F.R.C.D. (C): Dr. Moore is a 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.

33

---



Compensation of Directors



Board of Directors Committees

We were not able to attract an independent director with
financial experience to sit on our board or our audit committee. The two
independent board members who sat on the audit committee had no financial
experience. It was determined that the audit committee be disbanded until
appropriate qualified independent directors can be located. Based on the size of
the organization  seven full time employees, and 3 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.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

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

Based solely upon our review of the copies of such forms that
we received during the fiscal year ended September 30, 2007, we believe that
each person who at any time during the fiscal year was a director, officer, or
beneficial owner of more than ten percent of our Common Stock complied with all
Section 16(a) filing requirements during such fiscal year.

CODE OF ETHICS

We have not adopted a 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 10. EXECUTIVE COMPENSATION

Summary Compensation

The table below summarizes the compensation received by the
Company's Chief Executive Officer for the fiscal years ended September 30, 2007,
2006 and 2005 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").

34

---



|NAME AND PRINCIPAL POSITION      | YEAR | SALARY ($) | BONUS ($) | LONG TERM COMPENSATION 
    SECURITIES UNDERLYING OPTION (#)
|-------------------------------- | ---- | ---------- | --------- | ------------------------------------------------------------
|Michael M. Lee                   | 2007 | 51,068     | 0         | 0                                                           
|President
    & C.E.O.           | 2006 | 110,279    | 0         | 800,000                                                     
|                                 | 2005 | 45,510     | 0         | 13,000,000                                                  
|Joseph
    Schwarz               | 2007 | 114,170    | 0         | 0                                                           
|Chief
    Scientist              | 2006 | 123,946    | 0         | 200,000                                                     
|                                 | 2005 | 125,267    | 0         | 3,000,000                                                   
|Michael
    Weisspapir           | 2007 | 103,073    | 0         | 0                                                           
|Chief
    Medical Scientist      | 2006 | 111,508    | 0         | 200,000                                                     
|                                 | 2005 | 114,534    | 0         | 3,000,000                                                   
|Marcel
    Urbanc                | 2007 | 34,473     | 0         | 0                                                           
|Chief
    Financial Officer and  | 2006 | 25,939     | 0         | 200,000                                                     
|Principal
    Accounting Officer | 2005 | 52,664     | 0         | 270,000                                                     

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, 2007 by
the named executive officers. Value of unexercised options is considered to be
the difference between exercise price and market price of $0.08 per share on
September 28, 2007 (last trading day prior to September 30, 2007). No options
were exercised by the named executive officers during fiscal 2007 or any prior
year.

|Name               | Number
    of Exercisable Options at |  | Value
    of Unexercised In-The-Money
|------------------ | ------------------------------------ |  | -------------------------------------
|                   | Fiscal Year-End (#)                  |  | Options at Fiscal Year-End (#)       
|                   | Exercisable/Unexercisable            |  | Exercisable/Unexercisable            
|                   |                                      |  |                                      
|Michael M. Lee     | 14,350,000/0                         |  | $4,000/$0                            
|Marcel Urbanc      | 550,000/0                            |  | $1,000/$0                            
|Joseph Schwarz     | 3,530,000/0                          |  | $1,000/$0                            
|Michael Weisspapir | 3,480,000/0                          |  | $1,000/$0                            

* On October 17, 2005 the following options were granted to
the above named executive officers: M. Lee  800,000; J. Schwarz  200,000; M.
Weisspapir  200,000; and M Urbanc  200,000. These options vested 100% during
October 2006, and are exercisable at $0.075 each. These are the only unexercised
"in the money" options as at September 30, 2007.

2003 Stock Option Plan

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

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

35

---

2004 Stock Option Plan

The 2004 Plan is administered by the board of directors,
which determines which directors, officers, employees, consultants, scientific
advisors and independent contractors of the Company are to be granted options,
the number of shares subject to the options granted, the exercise price of the
options, and certain terms and conditions of the options. The board of directors
may delegate administration of the 2004 Plan, including the power to grant
options to persons who are not officers or directors of the Corporation, to a
Stock Option Committee, composed of members of the board of directors. The board
of directors, in its sole discretion, may amend, modify or terminate the 2004
Plan at any time without restriction. However, no amendment may, without
stockholder approval, increase the total number of shares of stock which may be
issued under the 2004 Plan (other than increases to reflect stock dividends,
stock splits or other relevant capitalization changes). There are 24,000,000
authorized shares of our Common Stock that are not issued or outstanding,
reserved for implementation of the 2004 Plan.
On November 15, 2004 the Company granted 13,220,000 options
under the 2004 Plan to 14 individuals including officers, directors and
consultants. On January 10, 2005 the Company granted 7,000,000 options under the
2004 Plan to Michael Lee  President. On February 8, 2005 the Company granted
390,000 options under the 2004 Plan to 5 individuals including officers,
employees and consultants. On May 25, 2005 the Company granted 100,000 options
under the 2004 Plan to a consultant of the Company. On October 17, 2005 the
Company granted 3,290,000 options to employees and directors of the Company as
well as to one external consultant. There are no options remaining to be granted
under the 2004 Plan.
2006 Stock Option Plan

A majority of shareholders approved the 2006 Option Plan at
the Annual General Meeting held March 29, 2006. Under this plan up to 5,000,000
options may be granted. As of December 17, 2007 we have granted 90,000 of these
options exercisable at $0.10 per share of Common Stock.

|                                                        | Equity Compensation Plan Information
|------------------------------------------------------- | ------------------------------------
|                                                        | Number of
    Securities            
|                                                        | to be
    issued upon               
|                                                        | exercise
    of                     
|                                                        | outstanding options,                
|                                                        | warrants,
    and rights            
|                                                        |                                     
|                                                        |                                     
|                                                        |                                     
|                                                        |                                     
|Equity                                                  |                                     
|Compensation                                            |                                     
|Plans
    Approved                                      |                                     
|by
    Security                                         |                                     
|Holders                                                 | 25,810,000                          
|                                                        |                                     
|Equity                                                  | None                                
|Compensation Plans Not Approved by
    Security Holders |                                     
|Total                                                   | 25,810,000                          

* This amount
represents options made available to management, employees and consultants as
approved by shareholders at the Annual General Meeting held March 29, 2006. None
of these options have been granted to date.

36

---

As at December 18, 2007, no options have been exercised from
any of the above-mentioned plans.
There are 86,203,964 shares of Common Stock issued and
outstanding as at December 18, 2007.
Item 11. Security Ownership Of Certain Beneficial Owners And
Management

The following table sets forth information with respect to
ownership of the Companys securities by its officers and directors and by any
person (including any "group") who is the beneficial owner of more than 5% of
the Companys Common Stock. The total number of shares authorized is 250,000,000
shares of Common Stock, each of which has a par value of $0.0001. As of December
18, 2007 there were 86,203,964 shares of Common Stock issued and outstanding.

|Name and Address             | Amount and Nature of | Percent of
|---------------------------- | -------------------- | ----------
|Of Owner                     | Beneficial Owner     | Class     
|                             |                      |           
|Michael Lee (1)              | 11,327,886 shares    | 13.14%    
|Joseph Schwarz (2)           | 637,500 shares       | 0.74%     
|Ford Moore (3)               | 3,398,179 shares     | 3.94%     
|Michael Weisspapir
      (2) | 457,500 shares       | 0.53%     
|David Milroy (3)             | 1,756,933 shares     | 2.04%     
|Marcel Urbanc (2)            | 120,000 shares       | 0.14%     
|Sandro Persia (2)            | 16,000 shares        | 0.02%     
|All directors and officers   | 10,322,265 shares    | 20.55%    
|as a group (7
      persons) |                      |           

(1)

Item 12. Certain Relationships And Related Party Transactions

During the year ended September 30, 2007 Michael Lee CEO and
Director has loaned us about $89,597 including accrued interest of $11,421.
These notes carry interest at 12% per annum and are unsecured. These funds were
used for general corporate purposes. We also converted $85,960 in promissory
notes owing to Mr. Lee into 1,719,000 shares of Common Stock at a conversion
price of $0.05 on September 21, 2007.

37

---

During the year ended September 30, 2006, Michael Lee loaned
us $153,148 on which $16,357 of interest was accrued. We issued promissory notes
to Mr. Lee promising to repay the loan amounts within one year issuance.
On September 21, 2007 we converted all of the promissory
notes and accrued interest owing to Dr. Ford Moore or $145,280 into 2,905,600
shares of Common Stock at a conversion price of $0.05 per share.
During the year ended September 30, 2006, Dr. Ford Moore,
Director, has loaned us $107,363 on which $10,056 in interest has accrued. These
notes carried interest at the rate of 12% per annum and were unsecured. These
funds were used for general corporate purposes.
On September 21, 2007 we converted all of the promissory
notes and accrued interest owing to Dr. David Milroy or $66,597 into 1,331,933
shares of Common Stock at a conversion price of $0.05 per share.
During the year ended September 30, 2006, Dr. David Milroy,
Director, loaned us $61,873 on which $7,708 in interest was accrued. We issued
promissory notes to Dr. Milroy promising to repay the loan amounts within one
year of issuance. These notes carried interest at the rate of 12% per annum and
were unsecured. These funds were used for general corporate purposes.
The Companys managing director of its 85% owned subsidiary -AlphaRx
International Holdings Limited, is Edward Lee, the brother of Michael Lee 
President & CEO of the Company. Edward Lee was paid approximately $77,000 for
the year ended September 30, 2007 in base salary plus statutory pension and
benefit contributions. The Company is also committed to pay $25,000 to Edward
Lee in conjunction with the sourcing of funds for the purchase of Common Stock
subsequent to September 30, 2007.
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,
in which the amount involved exceeds $60,000 and in which any director or
executive officer, or any security holder who is known to the Company to own of
record or beneficially more than five percent of the Company's Common Stock, or
any member of the immediate family of any of the foregoing persons, had a
material interest.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits

Exhibits required to be attached by Item 601 of Regulation
S-B are listed in the Index to Exhibits beginning after Item 14 of this Form
10-KSB, which is incorporated herein by reference.
(b) Reports on Form 8-K

On May 13, 2005 we informed the SEC of the necessity to
restate certain prior periods based on the beneficial conversion feature related
to the issuance of senior convertible debt during the period February to April
2004.
On May 16, 2005 we filed an amended 8K regarding the original
8K filed May 13, 2005.
On May 18, 2005 we filed an 8K regarding the entry into a
material definitive agreement between AlphaRx International Holdings Limited ("AIH"),
a wholly owned subsidiary, and Basin Industrial Ltd., an independent, wholly
owned subsidiary of Advanced Pharmaceutical Ltd.
38

---

On June 3, 2005 we filed an 8K regarding a press release
issued on June 2, 2005 commenting on Indaflex Phase 1 clinical trial results.
On June 6, 2005 we filed an 8K regarding a Joint Venture
established between AIH and Basin Industrial Ltd. AlphaAP Inc., the Joint
Venture to be established, will be used to market certain products in the Asia
Pacific Region.
On June 17, 2005 we filed an 8K regarding the official launch
of Indaflex in Mexico. Indaflex must complete further clinical trials in Canada
and the United States to be able to market Indaflex in those countries.
On June 28, 2005 we filed an 8K reporting that the test
batches for our Indaflex clinical trials were completed.
On June 29, 2005 we filed an 8K describing in more detail,
the Joint Venture agreement between AIH (our wholly owned subsidiary) and Basin
Industrial Ltd. (a wholly owned subsidiary of Advanced Pharmaceutical Ltd.).
Both parties will own 50% of AlphaAP Inc., a company to be established.
On July 13, 2005 we released an 8K indicating that Health
Canada provided approval for Phase 2 human trials with Indaflex.
On July 14, 2005 we filed an 8K regarding board approval to
allow AlphaAP Inc. (50% owned Joint Venture) to buy up to 10% of our outstanding
Common Stock in the open market.
On July 18, 2005 we filed an 8K regarding a press release,
providing an update on our antibiotic development program.
On April 19, 2006 we reported on a press release regarding a
license agreement that we entered into with Proprius Pharmaceuticals, Inc. Under
the agreement, we will receive an upfront payment of $1 million and will be
eligible to receive additional clinical and sales milestone payments of up to
$116 million for the successful development and commercialization of Indaflex,
as well as royalties on all future sales.
On May 3, 2006 we reported on a press release regarding a
joint venture agreement entered into between our wholly owned subsidiary 
AlphaRx International Holdings Ltd and China Lianyungang City Golden Enterprises
Limited ("China Party") to establish a Joint Venture company in mainland China.
The China Party has agreed to provide funding of up to RMB 250 million (about
$31 million) to establish a manufacturing facility and a distribution network in
order to produce and market certain products and to develop new novel branded
generic products in China.
On November 6, 2006, we filed an 8K reporting on a
Feasibility and Option Agreement with a global pharmaceutical company based in
U.S. We have concluded our feasibility agreement as of September 30, 2007 and
are not contracted for any further license fee, consulting fee, or other
payments.
On December 21, 2006 we issued a press release announcing
results of operations for the year ended September 30, 2006.
On May 14, 2007 we issued a press release regarding the top
line results from the Indaflex 2.5% Topical Indomethacin Cream exploratory phase
II clinical trials in osteoarthritis of the knee (INDF-200).

39

---

On November 14, 2007 we announced the unregistered sale of
5,000,000 units consisting of 5,000,000 shares of Common Stock and warrants to
buy 5,000,000 shares of Common Stock at $0.10 per unit. The Company received
gross proceeds of $500,000. AlphaRx will not file a registration statement
covering such Common Stock.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees: For the year ended September 30, 2007 we
incurred approximately $27,751 in external audit fees, and quarterly reviews in
connection with statutory and regulatory filings to our principal accountants as
compared to approximately $25,814 for the year ended September 30, 2006.
Audit-Related Fees: For the years ended September 30,
2007 and 2006 we incurred no fees for assurance and related services by the
principal accountant.
Tax Fees: For the year ended September 30, 2007 and 2006
we incurred no tax related fees to our principal accountant.
All Other Fees: For the year ended September 30, 2007 and
2006 we paid no other fees to our principal accountant.

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

SIGNATURES

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

DATED: December 19, 2007

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


40

---

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 19, 2007
ALPHARx, INC.
Directors:

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


41

---



|                 
|-----------------
|INDEX TO EXHIBITS
|                 
|EXHIBIT          
|NO.              
|                 
|3(i)(a)          
|3(i)(b)          
|3(i)(c)          
|3(ii)            
|10.1             
|10.2             
|10.3             
|10.4             
|31.1             
|31.2             
|32.1             
|32.2             

42

---

ALPHARx, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND AUDIT REPORT
SEPTEMBER 30, 2007 AND 2006
TABLE OF
              CONTENTSCONSOLIDATED FINANCIAL STATEMENTS FOR 2007 AND 2006
              PAGE (S)REPORT OF
              INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              F-2CONSOLIDATED
              BALANCE SHEETS FOR 2007 AND 2006
              F-3CONSOLIDATED
              STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR 2007 AND 2006
              F-4CONSOLIDATED
              STATEMENTS OF SHAREHOLDERS EQUITY/(DEFICIT) FOR 2007 AND 2006
              F-5CONSOLIDATED
              STATEMENTS OF CASH FLOWS FOR 2007 AND 2006
              F-6NOTES TO
              CONSOLIDATED FINANCIAL STATEMENTS
              F-7-18

F-1

---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

AlphaRx, Inc.

We have audited the accompanying consolidated
balance sheets of AlphaRx, Inc. (incorporated in the State of Delaware) as at
September 30, 2007 and 2006 and the related consolidated statements of
operations and comprehensive loss, cash flows and stockholders equity (deficit)
for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of AlphaRx, Inc. as at September 30, 2007 and 2006 and the
results of its operations and comprehensive loss and its cash flows for the
years then ended in accordance with generally accepted accounting principles in
the United States of America.

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

|                         | "SCHWARTZ LEVITSKY
              FELDMAN LLP"
|------------------------ | ---------------------------------------------
|                         |                                              
|                         |                                              
|Toronto, Ontario, Canada | Chartered Accountants                        
|December 3, 2007         | Licensed Public
              Accountants    

F-2

---

ALPHARx, INC. 
CONSOLIDATED BALANCE SHEETS 
AS AT SEPTEMBER 30, 2007 AND 2006
(All amounts in US Dollars)

|                                                                         |   |              |   |             
|------------------------------------------------------------------------ | - | ------------ | - | ------------
|                                                                         |   | 2007         |   | 2006        
|CURRENT ASSETS                                                           |   |              |   |             
|                                                                         |   |              |   |             
|Cash and Cash Equivalents                                                | $ | 128,328      | $ | 987,753     
|Marketable Securities                                                    |   | -            |   | 176,418     
|Accounts Receivable, net (note 3)                                        |   | 11,804       |   | 10,771      
|Prepaid Expenses and Other Assets                                        |   | 6,582        |   | 9,506       
|Discontinued Operations (note 4)                                         |   | -            |   | 4,474       
|TOTAL CURRENT ASSETS                                                     |   | 146,714      |   | 1,188,922   
|                                                                         |   |              |   |             
|PROPERTY, PLANT & EQUIPMENT, net
              (note 5)                  |   | 217,626      |   | 282,679     
|                                                                         |   |              |   |             
|TOTAL ASSETS                                                             |   | 364,340      |   | 1,471,601   
|                                                                         |   |              |   |             
|CURRENT LIABILITIES                                                      |   |              |   |             
|Accounts Payable and Accrued
              Liabilities (note 6)          |   | 519,519      |   | 532,509     
|Notes Payable (note 7)                                                   |   | 167,804      |   | 780,323     
|Discontinued Operations (note 4)                                         |   | 18,829       |   | 52,218      
|TOTAL CURRENT LIABILITIES                                                |   | 706,152      |   | 1,365,050   
|                                                                         |   |              |   |             
|MINORITY INTEREST (note 9)                                               |   | 116,986      |   | 161,283     
|Going Concern (note 1)                                                   |   |              |   |             
|Contingencies and Commitments
              (notes 8 and 10)             |   |              |   |             
|Related Party Transactions (note
              15)                       |   |              |   |             
|SHAREHOLDERS DEFICIT                                                    |   |              |   |             
|Common Stock: $ 0.0001 par value,                                        |   |              |   |             
|Authorized: 250,000,000 shares;
              Issued and outstanding:    |   |              |   |             
|2007: 81,203,964; 2006: 57,508,112
              (notes 11,13,14 and 18) |   | 8,122        |   | 5,752       
|Additional paid-in capital                                               |   | 15,824,162   |   | 14,479,082  
|Accumulated Other Comprehensive Loss                                     |   | (6,609)      |   | (5,329)     
|Deficit                                                                  |   | (16,284,473) |   | (14,534,237)
|                                                                         |   |              |   |             
|TOTAL SHAREHOLDERS DEFICIT                                              |   | (458,798)    |   | (54,732)    
|                                                                         |   |              |   |             
|TOTAL LIABILITIES AND SHAREHOLDERS
              DEFICIT                | $ | 364,340      | $ | 1,471,601   

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

F - 3

---



ALPHARx, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS 
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006

|                                                                                                               |   | 2007        |   | 2006       
|-------------------------------------------------------------------------------------------------------------- | - | ----------- | - | -----------
|                                                                                                               |   |             |   |            
|Consulting Revenue                                                                                             | $ | 76,000      | $ | -          
|License Fees and Royalties                                                                                     |   | 81,602      |   | 1,024,774  
|Royalties from Joint Venture                                                                                   |   | 12,839      |   | -          
|TOTAL REVENUES                                                                                                 |   | 170,441     |   | 1,024,774  
|                                                                                                               |   |             |   |            
|General and Administrative Expenses                                                                            |   | 1,023,684   |   | 1,944,910  
|Research and Development Expenses                                                                              |   | 727,046     |   | 1,417,700  
|Sales and Marketing Expenses                                                                                   |   | 3,750       |   | 94,140     
|Depreciation                                                                                                   |   | 92,279      |   | 74,307     
|LOSS FROM OPERATIONS                                                                                           |   | (1,676,318) |   | (2,506,283)
|                                                                                                               |   |             |   |            
|OTHER EXPENSES                                                                                                 |   |             |   |            
|                                                                                                               |   |             |   |            
|Interest Expense, net                                                                                          |   | (122,600)   |   | (67,410)   
|                                                                                                               |   |             |   |            
|LOSS BEFORE INCOME TAXES                                                                                       |   | (1,798,918) |   | (2,573,693)
|                                                                                                               |   |             |   |            
|Income Tax (note 12)                                                                                           |   | -           |   | -          
|                                                                                                               |   |             |   |            
|LOSS BEFORE MINORITY INTEREST                                                                                  |   | (1,798,918) |   | (2,573,693)
|Minority Interest (note 9)                                                                                     |   | 44,297      |   | 33,316     
|LOSS BEFORE DISCONTINUED OPERATIONS                                                                            |   | (1,754,621) |   | (2,540,377)
|Gain from Operations of
              Discontinued                                                             |   |             |   |            
|Component (note 4)                                                                                             |   | 4,385       |   | 18,084     
|NET LOSS                                                                                                       |   | (1,750,236) |   | (2,522,293)
|Cumulative Translation Adjustment                                                                              |   | (1,280)     |   | (5,329)    
|COMPREHENSIVE LOSS                                                                                             | $ | (1,751,516) | $ | (2,527,622)
|                                                                                                               |   |             |   |            
|Net Loss per Common Share, Basic
              and Diluted, before and after discontinued operations (note 11) | $ | (0.03)      | $ | (0.04)     
|                                                                                                               |   |             |   |            
|Weighted Average Number of Common
              Shares Outstanding                                             |   | 60,096,837  |   | 57,508,112 

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

F - 4

---



ALPHARx, INC. 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY/(DEFICIT) 
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006 
(All amounts in US Dollars)

|                                                                | Common Stock |        |             |             |              
|--------------------------------------------------------------- | ------------ | ------ | ----------- | ----------- | -------------
|                                                                |              |        |             | Accumulated |              
|                                                                |              |        | Additional  | Other Com-  |              
|                                                                | Number of    |        | Paid in     | prehensive  |              
|                                                                | Shares       | Amount | Capital     | Loss        | (Deficit)    
|                                                                |              |        |             |             |              
|                                                                |              |        |             |             |              
|Balance as of September 30,
              2005                  | 57,508,112   | $5,752 | $12,163,243 | -           | $(12,011,944)
|Issuance of Stock Options
              for consulting services |              |        | 233,838     |             |              
|Stock Based Compensation                                        |              |        | 483,279     |             |              
|Warrants                                                        |              |        | 504,495     |             |              
|Net Loss 2006                                                   |              |        |             |             | (2,522,293)  
|Subsidiary Common Stock
              Issuance                  |              |        | 1,094,227   |             |              
|Foreign Currency Translation                                    |              |        |             | (5,329)     |              
|Balance as of September 30,
              2006                  | 57,508,112   | $5,752 | $14,479,082 | $(5,329)    | $(14,534,237)
|Issuance of Stock for
              services                    | 300,000      | 30     | 29,970      |             |              
|Warrants                                                        |              |        | 131,905     |             |              
|Stock Based Compensation                                        |              |        | 15,752      |             |              
|Debt Conversion                                                 | 23,395,852   | 2,340  | 1,167,453   |             |              
|Foreign Currency Translation                                    |              |        |             | (1,280)     |              
|Net Loss 2007                                                   |              |        |             |             | (1,750,236)  
|Balance as of September 30,
              2007                  | 81,203,964   | $8,122 | $15,824,162 | $(6,609)    | $(16,284,473)

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

F - 5

---



ALPHARx, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006 
(All amounts in US Dollars)

|                                                                                                                                                                                                                                                                                                                        |   | 2007        |   | 2006       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | - | -----------
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|CASH FLOWS FROM OPERATING
              ACTIVITIES                                                                                                                                                                                                                                                                      |   |             |   |            
|Net Loss                                                                                                                                                                                                                                                                                                                | $ | (1,750,236) | $ | (2,522,293)
|Adjustments to reconcile net loss to
              net cash used in operating activities:                                                                                                                                                                                                                               |   |             |   |            
|Depreciation and amortization                                                                                                                                                                                                                                                                                           |   | 92,279      |   | 74,307     
|Warrant Amortization                                                                                                                                                                                                                                                                                                    |   | 318,718     |   | 251,720    
|Employee stock based compensation
              expense                                                                                                                                                                                                                                                                 |   | 15,752      |   | 483,279    
|Options/Common Stock Issued For
              Services Rendered                                                                                                                                                                                                                                                         |   | 30,000      |   | 233,838    
|Changes in assets and liabilities:                                                                                                                                                                                                                                                                                      |   |             |   |            
|(Increase)/Decrease in Marketable
              Securities                                                                                                                                                                                                                                                              |   | 176,418     |   | (176,418)  
|Decrease/(Increase) in Accounts
              Receivable                                                                                                                                                                                                                                                                |   | (1,033)     |   | 29,475     
|Decrease in Prepaid Expenses                                                                                                                                                                                                                                                                                            |   | 2,924       |   | 3,230      
|Accrued Interest on Notes Payable                                                                                                                                                                                                                                                                                       |   | 12,538      |   | 65,333     
|Increase/(Decrease) in Accounts
              Payable and Accrued Liabilities                                                                                                                                                                                                                                           |   | (12,990)    |   | 166,734    
|Discontinued Operations (note 4)                                                                                                                                                                                                                                                                                        |   | (28,915)    |   | 91,155     
|Minority Interest                                                                                                                                                                                                                                                                                                       |   | (44,297)    |   | 161,283    
|NET CASH USED IN OPERATING
              ACTIVITIES                                                                                                                                                                                                                                                                     |   | (1,188,842) |   | (1,138,357)
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|CASH FLOWS FROM INVESTING
              ACTIVITIES                                                                                                                                                                                                                                                                      |   |             |   |            
|Purchase of Machinery and Equipment                                                                                                                                                                                                                                                                                     |   | (6,289)     |   | (124,011)  
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|NET CASH USED IN INVESTING
              ACTIVITIES                                                                                                                                                                                                                                                                     |   | (6,289)     |   | (124,011)  
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|CASH FLOWS FROM FINANCING
              ACTIVITIES                                                                                                                                                                                                                                                                      |   |             |   |            
|Issuance of 15% equity in subsidiary
              Common Stock                                                                                                                                                                                                                                                         |   | -           |   | 1,094,227  
|Issuance of Notes Payable net of
              repayment                                                                                                                                                                                                                                                                |   | 353,133     |   | 967,765    
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|NET CASH PROVIDED BY FINANCING
              ACTIVITIES                                                                                                                                                                                                                                                                 |   | 353,133     |   | 2,061,992  
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|Effect of exchange rate changes on
              cash and cash equivalents                                                                                                                                                                                                                                              |   | (17,427)    |   | (5,329)    
|NET INCREASE/(DECREASE) IN CASH                                                                                                                                                                                                                                                                                         |   | (859,425)   |   | 794,295    
|CASH, and cash equivalents,
              beginning of year                                                                                                                                                                                                                                                             |   | 987,753     |   | 193,458    
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|CASH, and cash equivalents, end of
              year                                                                                                                                                                                                                                                                   | $ | 128,328     | $ | 987,753    
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|SUPPLEMENTARY DISCLOSURE:The statement of cash flows
              has been prepared using the indirect method as defined under SFAS
              No. 95. On September 21, 2007 the Company converted promissory
              notes in the amount of $1,169,793 into 23,395,852 shares of Common
              Stock. |   |             |   |            
|                                                                                                                                                                                                                                                                                                                        |   |             |   |            
|Income Tax Paid                                                                                                                                                                                                                                                                                                         | $ | -           | $ | -          
|Interest Paid                                                                                                                                                                                                                                                                                                           | $ | 45,183      | $ | 5,073      

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

F - 6

---



ALPHARX INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
SEPTEMBER 30, 2007 AND 2006 
(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 85% 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.

Effective April 22, 2005 AIH entered into a Joint Venture
agreement with Basin Industrial Limited (a British Virgin Islands Company and a
wholly-owned subsidiary of Advance Pharmaceutical Co. Ltd.). The Joint Venture,
AlphaAP Inc., is involved in manufacturing and marketing of certain of the
Companys existing products.

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

The consolidated financial statements reflect the activities
of the Company, 100% of AlphaRx Canada Limited and 85% of AIH and ALS (AIHs
wholly-owned subsidiary). All material inter-company accounts and transactions
have been eliminated.

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

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.

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, amounts on
deposit with banks, and any other highly liquid investments purchased with a
maturity of three months or less 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, 2007 the Company had
only cash on deposit. As at September 30, 2006 the Company had a bank term
deposit in the amount of $855,318, with the remaining amounts being held as cash
on deposit.

F - 7

---

Trading Securities

We consider our investment portfolio and marketable equity
investments as trading in nature as defined in SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Accordingly, these
investments are recorded at fair value, which is based on quoted market rates.
Any gains and losses are recognized in earnings in the current period.
Fair Value of Financial Instruments

The carrying amounts of the Companys accounts receivable,
accounts payable, accrued liabilities, and notes payable approximates their fair
values because of the short maturity of these instruments.
Long-Term Financial Instruments

The fair value of each of the Corporations long-term
financial assets is based on the amount of future cash flows associated with
each instrument discounted using an estimate of what the Company's current
borrowing rate for similar instruments of comparable maturity would be.
It is of the managements opinion that the Company is not
exposed to significant interest rate risk, credit risk or currency risks arising
from these financial instruments.
Inventory

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

The Company maintains the books and records of 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 which is the method mandated by SFAS 52 where the functional currency is
the foreign currency. Under the current rate method all assets and liabilities
are translated at the current rate, 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 shareholders equity.
Earnings or Loss Per Share

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

F-8

---

Income Taxes

The Company accounts for income tax under the provision of
Statement of Financial Accounting Standards No. 109, which requires recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statement or tax returns.
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of assets
and liabilities.
Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based on a
judgmental assessment of available evidence, by a valuation allowance for the
amount of any tax benefits which are more likely, based on current
circumstances, not expected to be realized.
Property Plant and Equipment

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

Furniture and Fixtures
                     7 yearsMachinery and Equipment
                     3 - 7 yearsLeasehold Improvements
                     10 years


The Company capitalizes expenditures that materially increase
assets lives and expenses ordinary repairs and maintenance to operations as
incurred. When assets are sold or disposed or otherwise fully depreciated, the
cost and related accumulated 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 products, raw materials, lab supplies and
other costs related directly to research and development of new and existing
products.

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
not recognized until 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.

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 policy is not to accept returns, however,
under certain circumstances returns are accepted to maintain good customer
relations.

Use of Estimates

F - 9

---

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. Significant estimates include
the fair valuation of warrants issued and estimated lives of capital assets.
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,
amortization, stock based compensation, and valuation allowances.
Long-Lived Assets

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

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

The Companys receivables are unsecured and are generally due
in 30 Days. Reserves for uncollectible receivables are determined by us
periodically based on best estimates available and historical data, as well as
the economic and financial status of our 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 three licensees for all of its revenues. Should any of
these licensees discontinue sales of our products, or stop commercialization
efforts 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.

Stock Based Compensation

In December 2004 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123(R)  "Share Based
Payment" (SFAS 123(R)). SFAS 123(R) requires us to recognize compensation cost
to 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 adopted the fair value accounting for employee stock options as per SFAS
123(R) using the modified retrospective application method, effective April 1,
2005. Under this standard the Company records compensation cost related to
unvested stock options by recognizing the unamortized fair value of those stock
options as of the grant date over the remaining vesting period with no change in
historical reported earnings.

F -10

---

Comprehensive Income

The Company follows Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement establishes
reporting standards and presentation methods of comprehensive income and its
components. Comprehensive income is net income plus certain items that are
recorded directly to shareholders 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

SFAS 155- In February 2006, the FASB issued SFAS 155
"Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB
Statements No. 133 and 140". This Statement amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement resolves issues addressed in Statement 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets." SFAS 155 is effective in fiscal
years beginning after September 15, 2006.
SFAS 156  In March 2006, the FASB issued SFAS 156
"Accounting for Servicing of Financial Assets".

This Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. SFAS 156 is effective in fiscal
years beginning after September 15, 2006.

SFAS 157  In September 2006, the FASB issued SFAS 157 "Fair
Value Measurements". This Statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. SFAS 157 is
effective in fiscal years beginning after November 15, 2007.

SFAS 158  In September 2006, the FASB issued SFAS 158
"Employers Accounting for Defined Benefit Pension and Other Postretirement
Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)". This
Statement improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. SFAS 158 is effective as of the end
of the fiscal year ending after December 15, 2006.

F -11

---

SFAS 159- In February
2007, the FASB issued SFAS 159 "The Fair Value Option for Financial Assts and
Financial Liabilities  Including an amendment of FASB 115. This Statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reportedearnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair
value measurement by entities in the future.

FIN 48  In June 2006, the FASB issued FIN 48 "Accounting for
Uncertainty in Income Taxes". This interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements
in accordance with FASB Statement No. 109  Accounting for Income Taxes.

The Company believes that the above standards would not have
a material impact on its financial position, results of operations or cash flows
with the exception of SFAS 123(Revised), which does and may continue to have a
material impact on results of operations.

|                                            |  |         |  |        
|------------------------------------------- |  | ------- |  | -------
|NOTE 3.
              ACCOUNTS RECEIVABLE   |  |         |  |        
|                                            |  | 2007    |  | 2006   
|                                            |  |         |  |        
|Accounts receivable                         |  | $11,804 |  | $10,771
|Less: Allowance for bad
              debts |  | -       |  | -      
|                                            |  |         |  |        
|                                            |  | $11,804 |  | $10,771

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

NOTE 4. DISCONTINUED OPERATIONS

We determined to discontinue direct sales of Flexogan during
2005 because: (a) we were not able to source a qualified marketing partner to
take over direct sales of Flexogan; (b) we did not have adequate financial
resources or expertise to market Flexogan on a longer term basis, and (c) we
concluded there was a better overall opportunity for success if we focused on
drug development and enhancement while allowing our partners and potential
partners to market our products in return for royalty and, or license payments.

F-12

---



The statements of income and balance sheets for the Discontinued Operations
are seen below:

|                                                       |                       |  |          
|------------------------------------------------------ | --------------------- |  | ---------
|Income
              Statements                        | 2007                  |  | 2006     
|                                                       |                       |  |          
|Sales                                                  | $
              4,385 |  | $27,176  
|Cost of
              Sales                            | -                     |  | 9,092    
|Gross Margin                                           | 4,385                 |  | 18,084   
|                                                       |                       |  |          
|Income Taxes                                           | -                     |  | -        
|                                                       |                       |  |          
|Gain from
              Discontinued Operations        | $
              4,385 |  | $18,084  
|                                                       |                       |  |          
|Balance
              Sheets                           |                       |  |          
|                                                       |                       |  |          
|Other Assets                                           | -                     |  | 4,474    
|Total
              Current Assets                     | -                     |  | 4,474    
|                                                       |                       |  |          
|Accounts
              Payable and Accrued Liabilities | 18,829                |  | 52,218   
|                                                       |                       |  |          
|Total
              Current Liabilities                | 18,829                |  | 52,218   
|                                                       |                       |  |          
|Net Assets
              (Liabilities)                 | $(18,829)             |  | $(47,744)
|                                                       |                       |  |          
|NOTE 5.
              PROPERTY, PLANT & EQUIPMENT      |                       |  |          

|                                                          |  | 2007     |  | 2006    
|--------------------------------------------------------- |  | -------- |  | --------
|                                                          |  |          |  |         
|Leasehold
              Improvements                      |  | $22,891  |  | $20,481 
|Furniture &
              Fixtures                        |  | 27,546   |  | 35,770  
|Machinery &
              Equipment                       |  | 380,265  |  | 456,894 
|                                                          |  |          |  |         
|COST                                                      |  | 430,702  |  | 513,145 
|                                                          |  |          |  |         
|Less:
              Accumulated depreciation/amortization |  |          |  |         
|                                                          |  |          |  |         
|Leasehold Improvements                                    |  | 15,846   |  | 10,082  
|Furniture & Fixtures                                      |  | 14,852   |  | 19,492  
|Machinery & Equipment                                     |  | 182,378  |  | 200,892 
|                                                          |  |          |  |         
|                                                          |  | 213,076  |  | 230,466 
|                                                          |  |          |  |         
|NET                                                       |  | $217,626 |  | $282,679

The cost and accumulated depreciation for those capital
assets, which are fully depreciated or amortized, have been removed.

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the
following:

|                                                                            |   | 2007    |   | 2006   
|--------------------------------------------------------------------------- | - | ------- | - | -------
|                                                                            |   |         |   |        
|                                                                            |   |         |   |        
|Accounts
              Payable                                              | $ | 359,131 | $ | 334,046
|Accrued
              Liabilities for services rendered but not invoiced as |   |         |   |        
|at September
              30, 2007 and 2006                                |   | 160,388 |   | 198,463
|                                                                            |   |         |   |        
|                                                                            | $ | 519,519 | $ | 532,509

Accrued liabilities as at September 30, 2006 included an
amount of $30,000, which was paid out in the form of Common Stock during fiscal
2007.

NOTE 7. NOTES PAYABLE

The Company and its subsidiaries issued $221,228 in
promissory notes, net of repayments during the year ended September 30, 2007.
($967,765 during the year ended September 30, 2006). The Company also converted
$1,169,793 of Notes Payable including accrued interest into 23,395,852 shares of
Common Stock during fiscal 2007. These promissory notes bear interest at rates
of 10% - 12% per annum and are repayable on or before the first anniversary date
of issuance. See also Note 15  Related Party

Transactions and Note 18  Subsequent Events.

In conjunction with these promissory notes the Company issued
warrants. (See also Note 14  Warrants). This in turn required a discount to be
established and amortized over the life of the promissory notes.

F -13

---



September 30,
                     2007
                     2006Promissory
                     Notes Issued, net ofrepayments and
                     conversions:
                     $221,228
                     $967,765Unamortized
                     Discount
                     (65,962)
                     (252,775)Interest
                     accrued
                     12,538
                     65,333Promissory
                     Notes Payable
                     $167,804
                     $780,323


NOTE 8. LITIGATION LIABILITIES

The Company received court documentation that the lawsuit
filed against it in 2002 was dismissed as of May 2006. Accordingly the remaining
litigation liability has been reversed, as the Company is no longer liable for
any damages or legal fees related to this action.

NOTE 9. MINORITY 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. (USD $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 minority 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.

NOTE 10. COMMITMENTS

Operating Leases

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

Year
                     Amount$2008
                     75,8492009
                     25,7882010
                     2,194TOTAL
                     $ 103,831


NOTE 11. COMMON STOCK

The Company is authorized to issue up to 250,000,000 shares
of Common Stock. As of September 30, 2007, there are 81,203,964 shares of Common
Stock issued and outstanding, with a stated par value of $0.0001 per share.
(2006  57,508,112 issued and outstanding)

During fiscal 2007 the Company issued 300,000 shares of
Common Stock in exchange for services rendered. The Company also converted
$1,169,793 in promissory notes including accrued interest into 23,395,852 shares
of Common Stock on September 21, 2007. See also Note 18  Subsequent Events.
There was no Common Stock issued during 2006.

F -14

---



Net Loss per share of Common Stock is not based on fully
diluted shares since the effect would be anti-dilutive. The Company has warrants
outstanding to purchase 14,336,663 shares of Common Stock (note 14) and options
to purchase 30,720,000 shares of Common Stock (note 13) as at September 30, 2007
such that, on a fully diluted basis there would be 126,260,627 shares of Common
Stock issued and outstanding if all warrants and all options were to be
exercised. (As at September 30, 2006 there would be 147,840,803 shares
outstanding on a fully diluted basis if all warrants and options were
exercised). See also Note 18-Subsequent events for warrants which have expired
since September 30, 2007.

NOTE 12. INCOME TAXES

The regional sources of taxable income (loss) for the years
ended September 30, 2007 and 2006 were as follows:

|                      |   | 2007        |   | 2006       
|--------------------- | - | ----------- | - | -----------
|                      |   |             |   |            
|North America         | $ | (893,571)   | $ | (1,255,794)
|Outside North America |   | (293,528)   |   | (205,123)  
|                      |   |             |   |            
|                      | $ | (1,187,099) | $ | (1,460,917)

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

|                         |   | 2007      |   | 2006     
|------------------------ | - | --------- | - | ---------
|                         |   |           |   |          
|Deferred tax assets:     |   |           |   |          
|                         |   |           |   |          
|North America            | $ | 3,403,970 | $ | 3,073,348
|Outside North America    |   | 44,029    |   | 30,768   
|                         |   |           |   |          
|Less Valuation allowance |   | 3,447,999 |   | 3,104,117
|                         |   |           |   |          
|Net deferred tax assets  |   | -         |   | -        

These losses expire in varying amounts between 2010 and 2026.
The tax rates being used to determine deferred tax assets are estimated at 37%
for North America and 15% for outside North America. Deferred tax assets relate
primarily to non-capital operating loss carryforwards incurred since inception.

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

|                              | 2007 | 2006
|----------------------------- | ---- | ----
|                              |      |     
|Combined Statutory Rates      | 31%  | 34% 
|Non-deductible expenses       | (10) | (14)
|Change in valuation allowance | (21) | (20)
|                              |      |     
|Effective tax rate            | 0%   | 0%  

NOTE 13. STOCK OPTION PLANS

The Company has a Stock Option Plan (the " 2000 Plan") under
which directors, officers, key employees, and certain independent contractors
were granted 1,150,000 options to purchase shares of the Companys authorized
but unissued Common Stock. This initial option plan was terminated in 2001.

F-15

---

The Company adopted a new option plan on February 10, 2003
under which options to purchase 1,500,000 common shares were granted to certain
key employees, consultants and directors. Only 570,000 options were granted
under this Plan.
The Company, via written consent from a majority of the
holders of Common Stock, approved the adoption of a new option plan during July
2004. Under this plan the Company has issued the maximum number of options
permitted totalling 24,000,000 options to purchase Common Stock.
A majority of shareholders approved the 2006 Option Plan at
the Annual General Meeting held March 29, 2006. Under this plan up to 5,000,000
options may be granted and during the year ended September 30, 2007 the Company
granted 40,000 options to two consultants in exchange for committee advisory
services. The Company also granted 50,000 options to a sales and marketing
consultant in relation to his services. These options were granted on January 3,
2007 and will vest on November 10, 2007.
The Company recorded $15,752 in stock based compensation
expense related to employee and consultant options for services rendered during
the year using the Black-Scholes option-pricing model (2006 -$717,117). This
expense comprises a portion of general and administrative expenses seen on the
consolidated statement of operations and comprehensive loss. There remains no
further unamortized stock compensation to be expensed in relation to the options
granted to date.
Proceeds received by the Company from exercises of stock
options are credited to Common Stock and additional paid-in capital. Additional
information with respect to the plans stock option activity is as follows:

|                 |            |            |             | Share Price |             | Remaining   
|---------------- | ---------- | ---------- | ----------- | ----------- | ----------- | ------------
|                 | Number     |            | Exercise    | on Date of  |             | Contractual 
|Option Plan      | Granted    | Issue Date | Price $     | Grant $     | Expiry Date | Life (Years)
|                 |            |            |             |             |             |             
|2000             | 1,150,000  | 6/30/2000  | 0.10        | 0.10        | 6/30/2010   | 2.75        
|                 |            |            |             |             |             |             
|2003             | 480,000    | 2/10/2003  | 0.63  0.69 | 0.63        | 2/10/2008   | 0.36        
|                 | 20,000     | 5/5/2003   | 0.55        | 0.51        | 5/5/2008    | 0.84        
|                 | 70,000     | 5/10/2003  | 0.50        | 0.50        | 5/10/2008   | 0.85        
|                 |            |            |             |             |             |             
|2004             | 12,720,000 | 15/11/2004 | 0.15        | 0.11        | 15/11/2014  | 7.12        
|                 | 500,000    | 15/11/2004 | 0.40  0.50 | 0.11        | 15/11/2009  | 2.12        
|                 | 7,000,000  | 10/1/2005  | 0.16        | 0.14        | 10/1/2015   | 7.28        
|                 | 390,000    | 8/2/2005   | 0.15        | 0.14        | 8/2/2015    | 7.34        
|                 | 100,000    | 25/05/2005 | 0.13        | 0.13        | 25/05/2010  | 2.65        
|                 | 3,290,000  | 17/10/2005 | 0.075       | 0.08        | 17/10/2015  | 8.05        
|                 |            |            |             |             |             |             
|2006             | 90,000     | 3/1/2007   | 0.10        | 0.10        | 3/1/2012    | 4.26        
|                 |            |            |             |             |             |             
|Total            | 25,810,000 |            |             |             |             |             
|                 |            |            |             |            
|Weighted Average | 0.16       |            |             | 6.82       

NOTE 14. WARRANTS

The Company recorded $318,718 in warrant amortization for the
year ended September 30, 2007 (2006- $251,720). This expense comprises a portion
of general and administrative expenses seen on the consolidated statement of
operations and comprehensive loss. Additional details regarding warrants are
seen in the tables below.

F -16

---



|                 |            |          | Share  |            |             |                                                                   
|---------------- | ---------- | -------- | ------ | ---------- | ----------- | ------------------------------------------------------------------
|Number           |            |          | Price  |            | Remaining   |                                                                   
|Granted          |            |          | on     |            | Contractual |                                                                   
|and              |            | Exercise | Grant  | Expiry     | Life        |                                                                   
|Exercisable      | Issue Date | Price $  | Date $ | Date       | (Years)     | Reason for
              Issuance                                 
|                 |            |          |        |            |             |                                                                   
|670,275          | 12/19/2003 | 1.10     | 0.18   | 12/19/2007 | 0.22        | Financing costs                                                   
|5,204,160        | 10/13/2004 | 0.30     | 0.13   | 10/13/2007 | 0.04        | Conversion of
              Promissory Notes and Private Placement
|1,577,453        | 2/13/2006  | 0.10     | 0.13   | 2/13/2008  | 0.37        | Issuance of
              Promissory Notes                        
|3,182,000        | 3/31/2006  | 0.10     | 0.20   | 3/31/2008  | 0.50        | Issuance of
              Promissory Notes                        
|300,000          | 6/30/2006  | 0.10     | 0.10   | 6/30/2008  | 0.75        | Issuance of
              Promissory Notes                        
|465,000          | 9/30/2006  | 0.10     | 0.10   | 9/30/2008  | 1.00        | Issuance of
              Promissory Notes                        
|1,500,000        | 12/31/2006 | 0.10     | 0.09   | 12/31/2008 | 1.25        | Issuance of
              Promissory Notes                        
|807,775          | 3/31/2007  | 0.10     | 0.10   | 3/31/2009  | 1.50        | Issuance of
              Promissory Notes                        
|630,000          | 9/30/2007  | 0.10     | 0.08   | 9/30/2009  | 2.00        | Issuance of
              Promissory Notes                        
|                 |            |          |        |            |             |                                                                   
|14,336,663       |            |          |        |            |             |                                                                   
|                 |            |          |        |            |             |                                                                   
|Weighted Average | 0.22       |          |        | 0.53       |            

As at September 30, 2006 there were 59,692,691 warrants
issued and outstanding. During the year ending September 30, 2007, 45,356,028
warrants expired. No warrants issued and outstanding have been exercised as at
September 30, 2007. All of the warrants entitle the holder to purchase one share
of Common Stock on or before the expiry date. See also Note 18  Subsequent
Events for warrants that have been or will be issued and for warrants that have
expired since September 30, 2007.

NOTE 15. RELATED PARTY TRANSACTIONS

The Company sourced some of its funding during the year from
the directors. The directors loaned the Company approximately $78,177 during the
year ended September 30, 2007 taking back promissory notes (2006- $322,385).
Interest accrued on these loans totals approximately $11,421as at September 30,
2007 (2006 - $34,120). Interest rates on these loans range from 10% - 12% per
annum. The loans are repayable on or before the first anniversary date of
issuance and are unsecured.

The Companys managing director of its 85% owned subsidiary -AlphaRx
International Holdings Limited, is Edward Lee, the brother of Michael Lee 
President & CEO of the Company. He is paid approximately $77,000 per annum base
salary plus statutory pension and benefit contributions, a fair market value
salary. The Company is also committed to pay $25,000 to Edward Lee in
conjunction with the sourcing of funds for the
purchase of Common Stock subsequent to September 30, 2007. See Subsequent Events
Note 18.

F -17

---



NOTE 16. 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 majority of the Companys revenues for the year ended
September 30, 2007 were derived from royalties received from one of its
partners. For the year ended September 30, 2006 the Company derived the majority
of its revenues from license fees.

|                                                  | Years ended September 30,
|------------------------------------------------- | -------------------------
|Revenue Stream                                    | 2007                     
|License Fees
              (North America)        | -                        
|Third Party
              Royalties (Mexico)      | 81,602                   
|Royalties from
              Joint Venture (Asia) | 12,839                   
|Consulting Fees
              (North America)     | 76,000                   
|Total Revenues                                    | $170,441                 
|                                                  |                          
|Long Lived Assets                                 |                          
|                                                  | Years ended September 30,
|Long Lived Assets                                 | 2007                     
|North America                                     | $215,796                 
|Asia                                              | 1,830                    
|Total Long Lived
              Assets             | $217,626                 

NOTE 17. RECLASSIFICATIONS

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

NOTE 18. SUBSEQUENT EVENTS

The Company issued 5,000,000 shares of restricted Common
Stock on November 14, 2007 via a private placement. The Common Stock was issued
at $0.10 per share. As a result the Company had 86,203,964 shares of Common
Stock outstanding as of November 14, 2007. The Company is also committed to
issue 5,000,000 warrants to purchase Common Stock at $0.10 per share of Common
Stock on or before December 31, 2007 in conjunction with the issuance of these
5,000,000 shares.

The Company has issued approximately $154,000 in unsecured
Promissory Notes since September 30, 2007. These notes bear interest at 12% per
annum, and are repayable within one year of issue date. The Company is also
committed to issue 770,000 warrants exercisable at $0.10 per share of Common
Stock on or before December 31, 2007 in conjunction with the issuance of these
promissory notes.

Warrants issued and outstanding as at September 30, 2007 to
purchase 5,204,160 shares of Common Stock at $0.30 expired on October 13, 2007.

F -18

---