# SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-KSB

(Mark One)

[X]   Annual  report under Section 13 or 15(d) of the Securities  Exchange
         Act of 1934 for the fiscal year ended  September 30, 2003.

[  ]  Transition  report  under  Section  13 or  15(d)  of the  Securities
         Exchange  Act of 1934  for the  transition  period
         from ____________ to ____________               .

``

``

|                                | 
|------------------------------- | 
|Delaware                        | 
|(State or other jurisdiction of | 
|incorporation or organization)  | 

``

``

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

|                                | 
|------------------------------- | 
|Title of Each Class             | 
|Common Stock ($0.001 Par Value) | 

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

|          |  | 
|--------- |  | 
|Yes     X |  | 

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

Issuer's revenues for its most recent fiscal year ended September 30, 2003 were $52,925.

The aggregate market value of the
registrant's common stock, $0.001 par value (the only class of voting stock), held by
non-affiliates was approximately $1,732,120 based on the average closing bid and asked
prices for the common stock on January 23, 2004.

As of January 23, 2004 there were 17,022,582 shares outstanding of the issuer's common Stock.

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AlphaRx, Inc.

FORM 10-KSB

For the Year Ended September 30, 2003

INDEX



|          |                                                                                                                               |  |    |    |  | 
|--------- | ----------------------------------------------------------------------------------------------------------------------------- |  | -- | -- |  | 
|          |                                                                                                                               |  |    |   
|          |                                                                                                                               |  |    |   
|PART I.   |                                                                                                                               |  |    |   
|          | Item 1.      Description of Business                                                                                          |  |    | 3  | 
|          | Item 2.      Description of Property                                                                                          |  |    | 15 | 
|          | Item 3.      Legal Proceedings                                                                                                |  |    | 15 | 
|          | Item 4.      Submission of Matters to a Vote of Security Holders                                                              |  |    | 15 | 
|PART II.  |                                                                                                                               |  |    |   
|          | Item 5.      Market for Common Equity and Related Stockholder Matters                                                         |  |    | 15 | 
|          | Item 6.     Management Discussion and Analysis of Financial Condition                                                         |  |    | 17 | 
|          | Item 7.      Financial Statements                                                                                             |  |    | 20 | 
|          | Item 8.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  |    | 20 | 
|PART III. |                                                                                                                               |  |    |   
|          | Item 9.      Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. |  |    | 20 | 
|          | Item 10.      Executive Compensation                                                                                          |  |    | 22 | 
|          | Item 11.      Security Ownership of Certain Beneficial Owners and Management                                                  |  |    | 24 | 
|          | Item 12.      Certain Relationships and Related Transactions                                                                  |  |    | 25 | 
|          | Item 13.      Exhibits and Reports on Form 8-K                                                                                |  |    | 25 | 
|          | Item 14.      Controls and Procedures                                                                                         |  |    | 25 | 
|          | SIGNATURES                                                                                                                    |  |    | 26 | 
|EXHIBITS  |                                                                                                                               |  | 27 |   

2



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PART I

# ITEM 1. DESCRIPTION OF
BUSINESS

# COMPANY BACKGROUND

In this annual report on Form 10-KSB,
the Company, AlphaRx, we, us, and
our, refer to AlphaRx, Inc.

AlphaRx, 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, our common stock
ceased trading on the Pink Sheets L.L.C. and began trading on the Over The Counter
Bulletin Board (OTCBB) under the same symbol. Subsequent to March 19, 2002,
our symbol was changed to ALRX after a consolidation of our common stock on a
1 for 5 basis. All references to our common stock have been retroactively restated.

# COMPANY OVERVIEW

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

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

In August 2003, we out licensed
Indoflex, our lead pharmaceutical product, to Andromaco Inc. for commercialization in
Mexico. We will receive royalties from future product sales.

In August 2003, we delivered our
first shipment of Flexogan to Loblaws Group, one of the largest mass market retailers in
Canada. We continue to make progress on Flexogan sales in Canada. A national roll-out in
the United States is planned for 2004.

We believe the market for advanced
drug delivery systems is large and growing. Based on published data, the market for
orally-administered drugs that utilize drug delivery systems is expected to increase to
approximately $50 billion in 2005 from approximately $10 billion in 1995. We also believe
that pharmaceutical companies that do not themselves have drug delivery technology
expertise will rely upon third parties, such as AlphaRx, to apply such technologies to
their product candidates.

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

3

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independently or jointly

certain off-patent and
over-the-counter (OTC) products utilizing our proprietary drug delivery
technologies.

# PRINCIPAL PRODUCT AND
SERVICES AND PRINCIPAL MARKETS

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) drug delivery systems. Our strategy
is to develop patentable improved formulations of such drugs that are soluble in human
medicines. Our BCD drug delivery technology includes two different approaches to improve
the effectiveness of insoluble drugs and provide new methods of delivery, namely, (i) CLD
(Colloidal Lipid Dispersion System) and (ii) SECRET (Self Emulsifying Controlled Release
Tablet System).

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. The BCD drug delivery
technology is designed to develop drugs with major medical advantages, such as lower
dosing, fewer side effects and alternative dosage forms, as well as commercial advantages,
such as extended patent protection and broader use.

We have a number of drugs under
development, certain of which have been successfully reformulated, utilizing our BCD
technology. Our central strategy is to seek alliances with pharmaceutical companies which
will assist us in completing the reformulation and development of the drugs and which will
initiate clinical trials and commercialize the products.

# PRODUCT PIPLELINE

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

  ----------------------------- ---------------------------- ---------------- -----------------
  Brand Name                    Application                  Delivery Route   Stage
  ----------------------------- ---------------------------- ---------------- -----------------
  ---------------------------------------------------------------------------------------------
  Pharmaceuticals
  ---------------------------------------------------------------------------------------------
  ----------------------------- ---------------------------- ---------------- -----------------
  2.5% Indoflex                 Arthritis Pain               Topical          Phase I Planned
  ----------------------------- ---------------------------- ---------------- -----------------
  ----------------------------- ---------------------------- ---------------- -----------------
  1.5% Flexigan                 Arthritis Pain               Topical
  ----------------------------- ---------------------------- ---------------- -----------------
  ----------------------------- ---------------------------- ---------------- -----------------
  ARX2000/2001                  Anti-inflammation            Oral             Pre-clinical
  ----------------------------- ---------------------------- ---------------- -----------------
  ---------------------------------------------------------------------------------------------
  Consumer Health (over-the-counter)
  ---------------------------------------------------------------------------------------------
  ----------------------------- ---------------------------- ---------------- -----------------
  Flexogan                      Analgesic                    Topical          Market
  ----------------------------- ---------------------------- ---------------- -----------------
  ----------------------------- ---------------------------- ---------------- -----------------
  NuProm                        Acne Control                 Topical          Formulation
  ----------------------------- ---------------------------- ---------------- -----------------
  ----------------------------- ---------------------------- ---------------- -----------------
  H-Relief                      Haemorrhoid control          Topical          Formulation
  ----------------------------- ---------------------------- ---------------- -----------------
  ----------------------------- ---------------------------- ---------------- -----------------
  V-Relief                      Anti-fungal                  Topical          Formulation
  ----------------------------- ---------------------------- ---------------- -----------------`

# OVERVIEW OF THE DRUG
DELIVERY INDUSTRY

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.

4

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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.

In recent years, drug delivery
companies have been able to develop innovative and efficient solutions to some of the
limitations of conventional oral drug administration. For example, the improved oral
delivery system developed by ALZA in the 1980s reduced the side effects and dosing
frequency of the hypertension drug, Procardia(R). The improved product, Procardia XL(R),
resulted in substantially increased sales and the new formulation extended the patent life
on Procardia(R). We believe our BCD Systems have the potential to offer similar
opportunities of improved therapy and extended patent life to pharmaceutical and
biotechnology companies.

# BIOADHESIVE COLLODIAL
DISPERSION (BCD) SYSTEMS

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

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

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

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

5

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3.    
          Expanding the Types of Drugs Capable of Oral Delivery.Some drugs,
          including certain proteins (complex organic compounds of high molecular weight
          containing numerous amino acids) and peptides (low molecular weight compounds
          consisting of two or more amino acids), because of their large molecular size
          and susceptibility to degradation in the GI tract, must currently be
          administered by injection or by continuous infusion, which is typically done in
          a hospital or other clinical setting. We believe our BCD Systems may permit some
          of these drugs to be delivered orally and/or transdermally.

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

# DISTRIBUTION METHODS OF
THE PRODUCTS AND SERVICES

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

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

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

6

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

# PATENTS, TRADEMARKS AND
PROPRIETARY RIGHTS

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

7

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

# Trademarks

We have filed applications in the
United States and China Patent and Trademark Office to register the word mark
ChlorSM and Oralife for oral care products, such as medicated
mouth rinse, professional dental gels and varnish. We also registered the following
trademarks, BCD, Flexogan, AlphaRx,
PhytoScience, NuProm and LipoLette in Canada and
Flexogan, LipoBloc, NuProm, Oralife and
PhytoScience in the United States. In connection with our Internet web site,
we have registered with Network Solutions, Inc., the internet domain name
AlphaRx.com for our corporate website.

# Proprietary Information

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

8

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# GOVERNMENT REGULATION

We are subject to regulation under
various federal laws regarding pharmaceutical products and also various 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.

FDA Approval Process. In the United
States, pharmaceutical products, including any drugs utilizing the BCD Drug Delivery
Systems, 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 We or our officers and
employees, injunctions, product seizure or detention, product recalls, total or partial
suspension of production, FDA withdrawal of approved applications or FDA refusal to
approve pending new drug applications, premarket approval applications, or supplements to
approved applications.

Prior to commencement of clinical
studies involving human beings, preclinical testing of new pharmaceutical products is
generally conducted on animals in the laboratory to evaluate the potential efficacy and
the safety of the product. The results of these studies are submitted to the FDA as a part
of an IND application, which must become effective before clinical testing in humans can
begin. Typically, clinical evaluation involves a time consuming and costly three-phase
process. In Phase I, clinical trials are conducted with a small number of subjects to
determine the early safety profile and the pharmacokinetic pattern of a drug. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specific disease in
order to determine preliminary efficacy, optimal dosages and expanded evidence of safety.
In Phase III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate the
efficacy and safety required by the FDA. The FDA closely monitors the progress of each of
the three phases of clinical testing and may at our discretion, re-evaluate, alter,
suspend or terminate the testing based upon the data which have been accumulated to that
point and our assessment of the risk/benefit ratio to the patient.

The results of the preclinical and
clinical testing on drugs are submitted to the FDA in the form of an NDA for approval
prior to commencement of commercial sales. In responding to an NDA, the FDA may grant
marketing approval, request additional information or deny the application if the FDA
determines that the application does not satisfy our regulatory approval criteria. There
can be no assurance that approvals will be granted on a timely basis, if at all. Failure
to receive approval for any products utilizing the BCD Drug Delivery Systems could have a
material adverse effect on us.

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.

9

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Other Regulations. 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.

# RESEARCH AND DEVELOPMENT

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

We anticipate incurring significant
development expenditures in the future as we continue our efforts to develop our present
technologies and new formulations and as we begin to research other technologies and to
expand clinical studies of certain products. We plan to establish laboratory facilities to
conduct research and development and manufacture of batch forms for clinical evaluations.

# PRODUCT LIABILITY

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

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

# EMPLOYEES

We employ five consultants on a
full-time basis and two staff on a part-time basis. 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.

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# RISK FACTORS

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

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

We have incurred annual operating losses
since our inception. As a result, at September 30, 2003, we had an accumulated deficit of
approximately $4,225,980. Our gross revenues for the years ended September 30, 2003 and
September 30, 2002 were $52,925 and $282 respectively. However, our revenues have not been
sufficient to sustain our operations. Revenue for 2003 consisted primarily of revenue from
the initial sales of Flexogan in Canada. We believe that our profitability will require at
least the successful commercialization of Flexogan in the U.S. We might never be
profitable.

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

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

|. | continued scientific progress in our research programs; . progress with
                    preclinical studies and clinical trials; . the magnitude and scope of our
                    research and development programs; . our ability to establish corporate
                    partnerships and licensing arrangements; . our ability to sell and market our
                    products; . the time and costs involved in obtaining regulatory approvals; . the
                    costs involved in preparing, filing, prosecuting, maintaining,
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

defending
and enforcing patent claims;

|. | the potential need to develop, acquire or license new technologies and
                    products; . the continued ability to refinance demand loans from our founder and
                    officers; and . other factors beyond our control.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At September 30, 2003, we had a
working capital deficiency of approximately $556,784. The independent auditors
report for the year ended September 30, 2003 includes an explanatory paragraph stating
that our recurring losses from operations and working capital deficiency discussed above
raise substantial doubt about our ability to continue as a going concern.

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

11

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Some of our executives have made
loans to us and are entitled to remedies available to a secured creditor, which gives them
a priority over the holders of our common stock.

Some of our executives have made
loans to us under promissory notes. Our obligations under these promissory notes are
secured by substantially all of our assets. If we become insolvent or are liquidated, or
if payment under the promissory notes are accelerated, the holders of the promissory notes
will be entitled to exercise the remedies available to a secured lender under applicable
law which would entitle them to full repayment before any funds could be paid to our
shareholders.

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 andamp;
Johnson, consumer products companies such as Procter andamp; Gamble Co., many of which have
considerably greater financial and other resources than we do and are not as highly
leveraged as we are. These competitors are thus better positioned to spend more on
research and development, employ more aggressive pricing strategies, utilize greater
purchasing power, build stronger vendor relationships and develop broader distribution
channels than we. In addition, our competitors may use aggressive spending on trade
promotions and advertising as a strategy for building market share, at the expense of
their competitors, including us. If we are unable to introduce new and innovative products
that are attractive to consumers, or are unable to allocate sufficient resources to
effectively advertise and promote our products so that they achieve wide spread market
acceptance, we may not be able to compete effectively, and our operating results and
financial condition may be adversely affected.

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

We are engaged in a rapidly changing
and highly competitive field. To date, we have concentrated our efforts primarily on one
pharmaceutical product  Indoflex  for treating arthritis and other
anti-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
and Gamble. Any one of these potential competitors could, at any time, develop products or
a manufacturing process that could render our technology or products noncompetitive 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

12

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found to be invalid or unenforceable.
Our business also is subject to the risk that our issued patents will not provide us with
significant competitive advantages if, for example, a competitor were to independently
develop or obtain similar or superior technologies. To the extent we are unable to protect
our patents and patent applications, our investment in those technologies may not yield
the benefits that we expect.

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

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

Our business exposes us to the risk of
product liability claims that are a part of human testing, manufacturing and sale of
pharmaceutical products. The administration of drugs to humans, whether in clinical trials
or commercially, can result in product liability claims even if our products are not
actually at fault for causing an injury. Furthermore, our products may cause, or may
appear to cause, adverse side effects or potentially dangerous drug interactions that we
may not learn about or understand fully until the drug is actually manufactured and sold.
Product liability claims can be expensive to defend and may result in large judgments
against us. Even if a product liability claim is not successful, the adverse publicity,
time, and expense involved in defending such a claim may interfere with our business. We
may not have sufficient resources to defend against or satisfy these claims. We currently
maintain $4,000,000 in product liability insurance coverage and plan to increase this
coverage as our products advance. However, these amounts may not be sufficient to protect
us against losses or may be unavailable in the future on acceptable terms, if at all.

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

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

# The market price of our
common stock is volatile.

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

13

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# 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.

# Continued Control by
Current Officers and Directors

The present officers and directors
own approximately 55% of the outstanding shares of Common Stock, and therefore are in a
position to elect all of our Directors and otherwise control the Company, including,
without limitation, authorizing the sale of equity or debt securities of the Company, the
appointment of officers, and the determination of officers salaries. Shareholders
have no cumulative voting rights. (See Security Ownership of Certain Beneficial Owners and
Management)

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

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

# REPORTS TO SECURITY
HOLDERS

AlphaRx is not required to deliver an
annual report to security holders and will not voluntarily deliver a copy of the annual
report to the security holders. Should the Company choose to create an annual report, it
will contain audited financial statements. The Company files all of its required
information with the Securities and Exchange Commission (Commission).

The public may read and copy any
materials that are filed by the Company with the Commission at the Commissions
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the Commission
at 1-800-SEC-0330. The statements and forms filed by the Company with the Commission have
been filed electronically and are available for viewing or copy on the Commission
maintained Internet site that contains reports, proxy, and information statements, and
other information regarding issuers that file

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electronically with the Commission.
The Internet address for this site can be found at: http://www.sec.gov.

# 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 $2,300 a month. We believe that our existing properties are sufficient for
our administrative, research and development needs for the foreseeable future.

# ITEM 3. LEGAL PROCEEDINGS

Farhad Walji vs. AlphaRx, Inc. and
AlphaRx Canada Limited filed in the Supreme Court of British Columbia on August 23, 2002.
Farhad Walji has filed a claim asking for $25,000 plus interest for allegedly providing
$20,000 pursuant to a subscription agreement to purchase common shares of AlphaRxs
stock and damages resulting from lost opportunity. The Company has denied any liability in
this case and is currently defending this action vigorously. Nonetheless, the value of the
entire claim has been accrued in our financial statements as a liability.

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

No matters were submitted to the
Companys shareholders during the quarter ended September 30, 2003.

# 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, 2003)                0.35          0.30
       Third Quarter                (Ended June 30, 2003)                     0.45          0.48
       Second Quarter               (Ended March 31, 2003)                    0.41          0.36
       First Quarter                (Ended December 31, 2002)                 0.56          0.51`

15

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

Records of our stock transfer agent
indicate that as of September 30, 2003, there were approximately 51 record holders of our
common stock. This does not include an indeterminate number of shareholders who may hold
their shares in street name.

# DIVIDENDS

We have never declared any cash
dividends and do not anticipate paying such dividends in the near future. We anticipate
all earnings, if any, over the next twelve (12) to twenty (20) 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.

# RECENT SALES OF
UNREGISTERED SECURITIES

The following is a list of all
unregistered securities issued by AlphaRx during our fiscal year ended September 30, 2003
including where applicable, the identity of the person who purchased the securities, title
of the securities, the exemption relied upon for the issuance and the date issued are
outlined below.

During December, 2002, the Company
conducted a private placement and sold an aggregate of 407,185 restricted shares of the
Companys common stock to foreign investors at a price of $0.55 per share for a total
purchase price of $233,952 in reliance on Rule 506 of Regulation D and/or Section 4(2) of
the Securities Act and to persons outside the United States within the meaning of
Regulation S of the Securities Act in a private transaction that did not involve a public
offering. In connection with this private placement, the Company issued a warrant to
purchase a maximum of 407,185 restricted shares of the Companys common stock with an
exercise price of $1.10 per share.

During March, 2003, the Company
conducted a private placement and sold an aggregate of 506,263 restricted shares of the
Companys common stock to foreign investors at a price of $0.55 per share for a total
purchase price of $278,445 in reliance on Rule 506 of Regulation D and/or Section 4(2) of
the Securities Act and to persons outside the United States within the meaning of
Regulation S of the Securities Act in a private transaction that did not involve a public
offering. In connection with this private placement, the Company issued a warrant to
purchase a maximum of 506,263 restricted shares of the Companys common stock with an
exercise price of $1.10 per share.

Also during March, 2003, the Company
issued an aggregate of 452,500 restricted shares of its common stock to Michael Lee,
Joseph Schwarz, Michael Weisspapir and Sai Ming Wong for services rendered as officers
valued at $0.40 a share in lieu of cash obligations due under the terms of their
employment agreements in reliance on Rule 506 of Regulation D and/or Section 4(2) of the
Securities Act and to persons outside the United States within the meaning of Regulation S
of the Securities Act in a private

16

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transaction that did

not involve a public offering. The
Company made this offering based on the following factors: (1) the issuance was an
isolated private transaction by the Company which did not involve a public offering; (2)
the offerees did not resell the stock but continued to hold it; (3) there were no
subsequent or contemporaneous public offerings of the stock; (4) the stock was not broken
down into smaller denominations; and (5) the negotiations made in connection with the
issuance of the stock took place directly between the offerees and the Company.

During June, 2003, the Company
conducted a private placement and sold an aggregate of 75,524 restricted shares of the
Companys common stock to foreign investors at a price of $0.45 per share for a total
purchase price of $33,985 in reliance on Rule 506 of Regulation D and/or Section 4(2) of
the Securities Act and to persons outside the United States within the meaning of
Regulation S of the Securities Act in a private transaction that did not involve a public
offering. In connection with this private placement, the Company issued a warrant to
purchase a maximum of 75,524 restricted shares of the Companys common stock with an
exercise price of $0.65 per share.

All stock certificates issued exhibit
restrictive legends in accordance with the rules and regulations of the Securities Act.

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

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

# GENERAL

AlphaRx is a drug delivery company
specializing in the development of innovative therapeutic products for the pharmaceutical
and consumer health care market. Our core competence is in the development of novel drug
formulations for therapeutic molecules or compounds that have exhibited poor G.I.
absorption due to poor solubility or have yet be administerable to the human body with an
acceptable delivery method. Our drug delivery system is versatile and offers significant
flexibility in the development of suitable dosage formulations (i.e. oral, topical or
parenteral) to meet the requirements of specific drug molecules. Our primary activities
since inception (August 7, 1997) have been, in addition to research and development,
establishing our offices and research facilities, recruiting personnel, filing patent
applications, developing a business strategy and raising capital. During 2003 we also
started to focus on commercialization of our products commencing with Flexogan in the
Canadian market.

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

We have launched Flexogan, a series
of over-the-counter topical analgesics, in Canada in August 2003. We expect Flexogan to
incur significant marketing expenditures in 2004 in order to support national sales in
Canada and a pre-launch in U.S.

17

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We signed a licensing agreement with
Andromaco Inc in August 2003 for the commercialization of our lead pharmaceutical products
Indoflex in Mexico. The Company will receive royalties from product sales. We
do not expect marketing approval from the Mexican health authority until the
4th quarter of 2004.

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, 2003 as
compared to year ended September 30, 2002

# Gross Revenue

Gross revenue for the twelve month
period ended September 30, 2003 increased to $52,925 from $282 for the comparable period
ended September 30, 2002, an increase of 1,867%. The significant increase is attributable
to our first commercial sale of the Flexogen products. The gross margin on the sale of our
Flexogen products was $33,415 for the year ended September 30, 2003 as compared to $223
for the comparable period ended September 30, 2002.

# Net Losses

Net losses for the twelve month
period ended September 30, 2003 increased to $1,414,597 from $1,019,290 for the comparable
period ended September 30, 2002, an increase of 39%. This increase in net losses is
principally attributed to stock option expenses.

# Expenses

General and administrative expenses
for the twelve month period ended September 30, 2003 increased to $1,225,140 from $532,551
for the comparable period ended September 30, 2002, an increase of 130%. The increase in
general and administrative expenses during 2003 was due in part to a non-reoccurring
expense of $280,594 related to the grant of stock options.

Research and development expenses
include costs for scientific personnel, supplies, equipment, outsourced clinical and other
research activities, consultants, patent filings, depreciation, utilities, administrative
expenses and an allocation of corporate costs.

Research and development expenses for
the twelve month period ended September 30, 2003 decreased to $186,241 from $445,637 for
the comparable period ended September 20, 2002, a decrease of 58%. The decrease in
research and development expenses was primarily due to a voluntary consulting fee
reduction accepted by all scientific officers.

Included in our general and
administrative expenses were costs associated with marketing and inventory logistics.
Marketing and inventory logistics expenses for the twelve month period ended September 30,
2003 increased to $322,603 from $0 for the comparable period ended September 20, 2002.

18

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# Liquidity And Capital
Resources

As of September 30, 2003 the Company
had a working capital deficiency of $556,784 compared to $29,675 at September 30, 2002.

Since inception, we have financed
operations primarily from the issuance of common stock and promissory notes and expect to
continue this practice to fund our ongoing activities.

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

We expect to continue to spend
capital on:

1.    
          research and development programs; 2. preclinical studies and clinical trials;
          3. regulatory processes; and 4. establishment of our own pilot scale
          manufacturing and marketing capabilities or a search for third party
          manufacturers and marketing partners to manufacture and market our products for
          us.

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

1.    
          the progress, timing and scope of our research and development programs; 2. the
          progress, timing and scope of our preclinical studies and clinical trials; 3.
          the time and cost necessary to obtain regulatory approvals; 4. the time and cost
          necessary to establish our own sales and marketing capabilities or to seek
          marketing partners to market our products for us; 5. the time and cost necessary
          to respond to technological and market developments; and 6. new collaborative,
          licensing and other commercial relationships that we may establish.

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

# Certain Factors that may
Affect Future Results

Certain of the information contained
in this document constitutes forward-looking statements, including but not
limited to those with respect to the future revenues, our development strategy, involve
known and unknown risks, uncertainties, and other factors which may cause our actual
results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the risks and uncertainties associated with a drug delivery
company including a history of net losses, unproven technology, lack of manufacturing
experience, current and potential competitors with significant technical

19

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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

The financial statements required by
Item 7 are set forth on pages F-1 through F-15.

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

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

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

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

# PART III

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

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The following table sets forth, as of
January 26, 2004, the name, age, and position of each of our executive officers and
directors:

`Name                                  Age                Position

     Michael M.  Lee                        40                Chairman of the Board of Director
                                                              Chief Executive Officer

     Marcel Urbanc, C.A.                    47                Chief Financial Officer

     Joseph Schwarz, Ph.D                   48                Chief Scientist

     Michael Weisspapir, MD, Ph.D           47                Chief Medical Officer

     Sandro Persia                          33                Secretary/Treasurer

     Dr. David Milory                       52                Director

     Dr. Ford Moore                         52                Director`

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.

Marcel Urbanc,Mr. Urbanc
obtained his Chartered Accountant designation in 1985 after articling with Arthur Andersen
andamp; Co. for 3 years. Prior to joing the Company, Mr. Urbanc served as Controller and
then VP Finance andamp; CFO of Oasis Technology Ltd., a software company involved in
transaction processing. During his tenure at Oasis private equity funding of approximately
USD $45 Million was raised.

Joseph Schwarz, Ph.D.Dr.
Schwarz is the chief scientist of the Company. Dr. Schwarz has extensive experience in the
research and development of controlled release drug delivery systems, his areas of
expertise cover controlled delivery of drugs, colloidal and microcorpusculate drug
delivery systems, submicron emulsions (SME), transdermal delivery (topical and systemic).
Dr. Schwarz has published more than 40 articles in various scientific journals and has
written over 20 patents and patent applications.

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 andamp; 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 andamp; Maxillofacial Surgery at the University of
Toronto, Toronto General and Toronto Doctors Hospitals in 1982.

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

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

# Compensation of Directors

AlphaRxs directors are not
currently compensated for their services as directors of the Company. Directors currently
are reimbursed for out-of-pocket costs incurred in attending meetings of the Board of
Directors and for expenses incurred for and on behalf of the AlphaRx.

# Board of Directors
Committees

The board of directors has not yet
established an audit committee or a compensation committee. An audit committee typically
reviews, acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the recommendations and performance of independent
auditors, the scope of the annual audits, fees to be paid to the independent auditors, and
internal accounting and financial control policies and procedures. Certain stock exchanges
currently require companies to adopt a formal written charter that establishes an audit
committee that specifies the scope of an audit committees responsibilities and the
means by which it carries out those responsibilities. In order to be listed on any of
these exchanges, we will be required to establish 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, 2003, 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.

# 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, 2003, 2002 and 2001 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).

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`LONG
                                                                                                  TERM
                                                                                              COMPENSATION
                NAME AND                                                                 SECURITIES UNDERLYING
           PRINCIPAL POSITION                YEAR        SALARY ($)        BONUS ($)           OPTION (#)
----------------------------------------- ------------ ---------------- ---------------- -----------------------
----------------------------------------- ------------ ---------------- ---------------- -----------------------
Michael M. Lee.....................          2003               83,652                0                 150,000
  President and C.E.O.
                                             2002              230,000                0                      --
                                             2001               74,000                0                      --
Joseph Schwarz.....................          2003               56,992                0                  80,000
 Chief Scientist
                                             2002              150,000                0                      --
                                             2001               84,000                0                      --
Michael Weisspapir................           2003               46,992                0                  80,000
 Chief Medical Scientist
                                             2002              114,000                0                      --
                                             2001               63,000                0                      --

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

Employment Agreements

The Company has entered into an
employment agreement with Michael M. Lee on July 1, 2000, pursuant to which Mr. Lee is
employed as President. The agreement, as amended, provides that Mr. Lee will devote all of
his business time to the Company in consideration of an annual salary of $24,000 for the
period July 1, 2000 to December 31, 2000, $36,000 for the period January 1, 2001 to June
30, 2001, $160,000 for the period July 1, 2001 to December 31, 2001, $240,000 for the
period January 1, 2002 to December 31, 2002 and $36,000 for the period January 1, 2003 to
December 31, 2003. In addition, pursuant to the employment agreement, Mr. Lee was granted
a ten-year option to purchase 400,000 shares of Common Stock at an exercise price equal to
$0.05 per share, immediately exercisable from the date of the grant, and expiring ten
years thereafter.

The Company has entered into an
employment agreement with Dr. Joseph Schwarz. Pursuant to which Dr. Schwarz is employed as
Chief Scientist for a term of three years commencing on July 1, 2000. Pursuant to the
employment agreement, effective as of July 1, 2000, as amended, Dr. Schwarz will devote
his full time to the Company in consideration of an annual salary of $24,000 for the
period July 1, 2000 to December 31, 2000, $96,000 for the period January 1, 2001 to June
30, 2001, $120,000 for the period July 1, 2001 to December 31, 2001, $160,000 for the
period January 1, 2002 to December 31, 2002 and $36,000 for the period January 1, 2003 to
December 31, 2003. Dr. Schwarz was granted ten-year options to purchase an aggregate
250,000 shares of Common Stock at an exercise price equal to $0.10 per share.

The Company has entered into an
employment agreement with Dr. Michael Weisspapir. Pursuant to the agreement, as amended,
Dr. Weisspapir is employed as Senior Scientist for a term ending in December 31, 2003. Dr.
Weisspapir will devote his full time to the Company in consideration of an annual salary
of $12,000 for the period July 1, 2000 to December 31, 2000, $72,000 for the period
January 1, 2001 to June 30, 2001, $96,000 for the period July 1, 2001 to December 31,
2001, $120,000 for the period January 1, 2002 to December 31, 2002 and $36,000 for the
period January 1, 2003 to December 31, 2003. Dr. Weisspapir was granted ten-year options
to purchase an aggregate 200,000 shares of Common Stock at an exercise price equal to
$0.10 per share.

The following table sets forth the
individual grants of stock options made during the fiscal year ended September 30, 2003 to
each of the named executive officers.

23

---

`----------------------------- --------------- -------------------- ----------------- --------------------
Name                          Options         % of Total  Granted  Exercise   Price  Expiration Date
                              Granted # (1)   to   Employees   in  (3)
                                              Fiscal Year (2)
----------------------------- --------------- -------------------- ----------------- --------------------
----------------------------- --------------- -------------------- ----------------- --------------------
Michael M. Lee                150,000         27%                  $0.69             Feb. 10, 2008
----------------------------- --------------- -------------------- ----------------- --------------------
----------------------------- --------------- -------------------- ----------------- --------------------
Marcel Urbanc                 80,000          14%                  $0.63             Feb. 10, 2008
----------------------------- --------------- -------------------- ----------------- --------------------
----------------------------- --------------- -------------------- ----------------- --------------------
Joseph Schwarz                80,000          14%                  $0.63             Feb. 10, 2008
----------------------------- --------------- -------------------- ----------------- --------------------
----------------------------- --------------- -------------------- ----------------- --------------------
Michael Weisspapir            80,000          14%                  $0.63             Feb. 10, 2008
----------------------------- --------------- -------------------- ----------------- --------------------

(1) The options reflected in this table were all granted under the Company's 2003 Stock Option Plan (the "Plan"). The date of grant
is 5 years prior to the expiration date listed.

(2) Based on an aggregate of 555,000 options granted to employees of the Company in fiscal 2003.

(3) Exercise price is the fair market value on the date of grant as determined in accordance with the Plan.`

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, 2003 by the named executive officers. Value of unexercised options is
considered to be the difference between exercise price and market price of $0.35 per share
on September 30, 2003. No options were exercised by the named executive officers during
fiscal 2003.

`----------------------------- --------------------------------------- -------------------------------------------
Name                          Number  of   Exercisable   Options  at  Value of Unexercised  In-The-Money Options
                              Fiscal           Year-End          (#)  at       Fiscal        Year-End        (#)
                              Exercisable/Unexercisable               Exercisable/Unexercisable
----------------------------- --------------------------------------- -------------------------------------------
----------------------------- --------------------------------------- -------------------------------------------
Michael M. Lee                400,000/150,000                         $100,000/$0
----------------------------- --------------------------------------- -------------------------------------------
----------------------------- --------------------------------------- -------------------------------------------
Marcel Urbanc                 50,000/30,000                           $0/$0
----------------------------- --------------------------------------- -------------------------------------------
----------------------------- --------------------------------------- -------------------------------------------
Joseph Schwarz                250,000/80,000                          $62,500/$0
----------------------------- --------------------------------------- -------------------------------------------
----------------------------- --------------------------------------- -------------------------------------------
Michael Weisspapir            200,000/80,000                          $62,500/$0
----------------------------- --------------------------------------- -------------------------------------------`

# 2000 Stock Option Plan

The 2000 Stock Option Plan was
adopted in fiscal 1999 authorizing the issuance of 1,600,000 shares to officers, key
employees, certain independent contractors, and non-employee directors. An aggregate of
1,150,000 options were granted to key employees and officers of the Company in fiscal
1999. The 2000 Stock Option Plan was terminated in fiscal 2001.

# 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

24

---

officers or directors of the
Corporation, to a Stock Option Committee, composed of members of the board of directors.

The Corporation has reserved 1,500,000
common shares under the 2003 Plan for issuance under option or restricted stock purchase
agreements. 645,000 options had been granted under this Plan as of January 26, 2004.

# 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 100,000,000 shares of common stock, each of which has a par value of $0.0001.
17,022,582 shares of common stock have been issued and are outstanding as of January 26,
2004.

`Name and Address          Amount and Nature of                Percent of
                  Of Owner                    Beneficial Owner                  Class
                  Michael Lee(1)                     7,580,726 shares           44.53%
                  Joseph Schwarz(2)                  602,500 shares              3.54%
                  Michael Weisspapir(2)              457,500 shares              2.67%
                  Sandro Persia(2)                   16,000 shares      less than 0.1%
                  Ford Moore(3)                      492,579 shares              2.89%
                  Marcel Urbanc(2)                   0 shares                    0.00%
                  David Milroy(3)                    0 shares                    0.00%
                  All directors and officers         9,149,305 shares           53.63%
                  as a group (7 persons)

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

# ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

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

25

---

(a)    
          Exhibits. Exhibits required to be attached by Item 601 of Regulation S-B are
          listed in the Index to Exhibits beginning on page 27 of this Form 10-KSB, which
          is incorporated herein by reference. (b) Reports on Form 8-K. AlphaRx filed no
          reports on Form 8K during the fourth quarter of the period covered by this
          annual report.

# ITEM 14. CONTROLS
AND PROCEDURES

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

(a) Evaluation of
Disclosure Controls and Procedures

Based on their evaluation as of
September 30, 2003, 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.

(b) Changes in Internal
Controls

Based on their evaluation as of
September 30, 2003, the chief executive officer and the chief financial officer have
concluded that there were no significant changes in the Companys internal controls
over financial reporting or in any other areas that could significantly affect the
Companys internal controls subsequent to the date of his most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.

26

---

# 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: January 26, 2004

                                                             ALPHARx, INC.


                                                             By: /s/ Michael M. Lee
                                                             Michael M.  Lee,
                                                             President


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: January 26, 2004

                                                             Directors:


                                                                      /s/ Michael M. Lee
                                                                      Michael M.  Lee, Director


                                                                      /s/ David Milory
                                                                      David Milroy, Director


                                                                      /s/ Ford Moore
                                                                      Ford Moore, Director`

27

---

### INDEX TO EXHIBITS

|Exhibit No. | Page No. | Description                                                                                                                                                                            
|----------- | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i)(a)     | *        | Certificate of Incorporation dated August 8, 1997 (incorporated
                           by                                       reference to the Form 10-SB filed on June 16, 2000.
|3(i)(b)     | *        | Amendment to Certificate of Incorporation dated January 26, 2000
                           (incorporated by reference to the Form 10-SB filed on June 16, 2000).                      
|3(i)(c)     | *        | Amended and Restated Certificate of Incorporation dated July 20, 2000 (incorporated by reference to the
                           Form 10-KSB filed on December 31, 2001).            
|3(ii)       | *        | Bylaws dated August 11, 1997 (incorporated by reference to the Form                             10-SB
filed on June 16, 2000).                                                         
|10.1        | *        | 2000 Stock Option Plan adopted June 20, 2000 (incorporated by reference to the Form 10-KSB filed on
                           December 31, 2001).                                     
|10.2        | *        | Michael Lee Employment Agreement dated July 1, 2000 (incorporated by reference to the Form 10-KSB filed on
                           December 31, 2001).                              
|10.3        | *        | Amendment to Michael Lee Employment Agreement dated August 20, 2001 (incorporated by reference to the Form
                           10-KSB filed on December 31, 2001).              
|10.4        | *        | Dr. Joseph Schwarz Employment Agreement dated July 1, 2000 (incorporated by reference to the Form 10-KSB
                           filed on December 31, 2001).                       
|10.5        | *        | Amendment to Dr. Joseph Schwarz Employment Agreement dated August 20, 2001 (incorporated by reference to
                           the Form 10-KSB filed on December 31, 2001).       
|10.6        | *        | Dr. Michael Wiesspapir Employment Agreement dated July 1, 2000(incorporated by reference to the Form 10-KSB
                           filed on December 31, 2001).                    
|10.7        | *        | Amendment to Dr. Michael Wiesspapir Employment Agreement dated August 20, 2001 (incorporated by reference
                           to the Form 10-KSB filed on December 31, 2001).   
|31.1        | Attached | Certification of C.E.O. Pursuant to Section 302 of the Sarbanses-Oxley Act of 2002.                                                                                                    
|31.2        | Attached | Certification of C.F.O. Pursuant to Section 302 of the Sarbanses-Oxley Act of 2002.                                                                                                    
|32.1        | Attached | Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of Title 18 United States Code.                                                                                    
|32.2        | Attached | Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of Title 18 United States
                           Code.                                                       

28

---

ALPHARx, INC.

CONSOLIDATED FINANCIAL
STATEMENTS AND AUDIT REPORT

SEPTEMBER 30, 2003 AND SEPTEMBER
30, 2002

TABLE OF CONTENTS

|                                                | 
|----------------------------------------------- | 
|CONSOLIDATED FINANCIAL STATEMENTS               | 
|INDEPENDENT AUDITOR'S REPORT                    | 
|CONSOLIDATED BALANCE SHEET                      | 
|CONSOLIDATED LIABILITY AND SHAREHOLDERS' EQUITY | 
|CONSOLIDATED STATEMENT OF OPERATIONS            | 
|CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY  | 
|CONSOLIDATED STATEMENT OF CASH FLOWS            | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      | 

F-1

---

# REPORT OF INDEPENDENT
AUDITORS

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

We have audited the consolidated
balance sheet of AlphaRx, Inc. (incorporated in the State of Delaware) as of September 30,
2003, and the consolidated statement of operations, cash flows and changes in
shareholders equity (deficiency) for the year then ended. These consolidated
financial statements are the responsibility of the companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audit.

We conducted our audit in accordance
with generally accepted auditing standards in the United States of America. 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 consolidated financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.

In our opinion, these consolidated
financial statements present fairly, in all material respects, the financial position of
the Company as of September 30, 2003, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting principles in the
United States of America.

The accompanying consolidated
financial statements have been prepared assuming 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 and has recurring negative working capital that
raises 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 uncertainly. Should the Company be unable to continue as a going
concern, certain assets and liabilities will have to be adjusted to their liquidation
values.

The consolidated financial statements
of AlphaRx, Inc. as of September 30, 2002 were audited by another auditor whose report
dated December 23, 2003, expressed an unqualified opinion on those consolidated financial
statements.

Toronto, OntarioJanuary
19, 2004

/s/ Schwartz Levitsky
Feldman LLPSchwartz Levitsky Feldman LLPChartered Accountants

F-2

---

# ALPHARx, INC.

# CONSOLIDATED BALANCE
SHEETS

# AS AT SEPTEMBER 30,
2003 AND 2002

`ASSETS

                                                                              September 30          September 30
                                                                                  2003                  2002

CURRENT ASSETS

   Cash                                                                   $            24,520              $       0
   Accounts Receivable (note 3)                                                        27,662                      0
   Prepaid Expenses                                                                     3,690                 29,385
   Inventory (note 4)                                                                 141,905
                                                                                                              52,141


     TOTAL CURRENT ASSETS                                                             197,777                 81,526


PROPERTY, PLANT and EQUIPMENT, (note 5)                                                 126,535                117,102





OTHER ASSETS

   Licensing Right (note 6)                                                           230,000                      0
                                                                                                ---------------------





TOTAL ASSETS                                                                      $   554,312    $           198,628`

F-3

---

# ALPHARx, INC.

# CONSOLIDATED BALANCE
SHEETS

# AS AT SEPTEMBER 30,
2003 AND 2002

# CONSOLIDATED
LIABILITIES AND SHAREHOLDERS EQUITY

`September 30          September 30
                                                                                    2003                  2002
CURRENT LIABILITIES
   Bank Indebtedness                                                        $                  0            $    9,202

   Accounts Payable and Accrued Liabilities (note 7)                                     254,724                24,680
   Notes Payable (note 8)                                                                474,837                52,319
   Litigation Liabilities (note 9)                                                        25,000                25,000
                                                                                    ------------               -------
        TOTAL CURRENT LIABILITIES                                                        754,561               111,201
                                                                                    ------------               -------

CONTINGENCIES and COMMITMENTS (note 9 and 10)

SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $ 0.0001 par value,
   Authorized 100,000,000 shares, issued and
  outstanding 16,920,082 shares (2002 - 15,327,341 shares) (note 11)                       1,692                 1,533
   Additional paid-in capital                                                          4,024,039             2,897,277
   Deficit                                                                           (4,225,980)           (2,811,383)









TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)                                                (200,249)                87,427
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           $   554,312           $   198,628`

F-4

---

# ALPHARx, INC.

# CONSOLIDATED STATEMENTS
OF OPERATIONS

# FOR THE YEARS ENDED
SEPTEMBER 30, 2003 AND 2002

`September 30
                                                                                      2003               2002
SALES                                                                            $  52,925           $    282

COST OF SALES                                                                       19,510                 59

           GROSS MARGIN                                                             33,415                223


SELLING AND ADMINISTRATIVE EXPENSES                                              1,225,140            532,551
RESEARCH AND DEVELOPMENT EXPENSES                                                  186,241            445,637
DEPRECIATION                                                                        26,764             22,531
                                                                        ------------------- ------------------
                                                                        ------------------- ------------------
LOSS FROM OPERATIONS                                                           (1,404,730)        (1,000,496)

OTHER INCOME AND EXPENSES

   Other Income                                                                     10,133              6,206
   Litigation Claims (note 9)                                                                        (25,000)
   Loss on Investment                                                             (20,000)
                                                                        ------------------- ------------------
                                                                        ------------------- ------------------
                                                                                   (9,867)           (18,794)
                                                                        ------------------- ------------------
                                                                        ------------------- ------------------

         LOSS BEFORE INCOME TAXES                                              (1,414,597)        (1,019,290)

INCOME TAX (note 12)                                                                     0                  0

NET LOSS                                                                     $ (1,414,597)       $(1,019,290)

NET LOSS PER COMMON SHARE, BASIC and DILUTED                                          (0.09)             (0.07)
                                                                        =================== ==================
                                                                        ======================================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                            15,858,421         14,011,522
                                                                        =================== ==================
                                                                        ======================================`

F-5

---

# ALPHARx, INC.

# CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

# FOR THE YEARS ENDED
SEPTEMBER 30, 2003 AND 2002

`Common Stock                Additional        Retained               Total
                      Number of                           Paid-in         Earnings          Shareholders'
                          Shares        Amount            Capital         (Deficits)          Equity

Balance at             49,513,330      $   4,951       $  1,386,779    $  (1,792,093)        $(400,363)
September 30,
2001

Issuances of            6,451,993            645            536,551                             537,196
stock -
  Common

Share                 (44,772,259)        (4,477)             4,477                                   0
Consolidation

Issue of                4,134,277            414            969,470                             969,884
Stock-
  Common

Net loss for the                                                           (1,019,290)       (1,019,290)
Year ending
September 30,
2002

Balance at             15,327,341          1,533          2,897,277        (2,811,383)           87,427
September 30,
2002

Issuances of            1,592,741            159            846,168                             846,327
stock-
 Common

Issuance of Stock                                           280,594                             280,594
 Options for consulting services


Net loss for the                                                           (1,414,597)       (1,414,597)
Year ending
September 30,
2003
                       ______________________________________________________________
                       16,920,082          1,692          4,024,039        (4,225,980)         (200,249)`

F-6

---

# ALPHARx, INC.

# CONSOLIDATED
STATEMENTS OF CASH FLOWS

# FOR THE YEARS ENDED
SEPTEMBER 30, 2003 AND 2002

`September 30
                                                                                       2003                2002
CASH FLOWS FROM OPERATING ACTIVITIES
   Net Loss                                                                       $   (1,414,597)    $   (1,019,290)
   Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation                                                                            26,764             22,531
   Shares Issued For Services Rendered                                                    273,436                  0
    Options Issued For Services Rendered                                                  280,594                  0

        Changes in assets and liabilities:
           Increase in Inventory                                                         (89,764)           (52,141)
           Increase in Accounts Receivable                                               (27,662)                 0
           (Increase) Decrease in Prepaid Expenses                                         25,695           (29,385)
           Increase (Decrease) in Accounts Payable and Accrued                            230,044          (291,433)
           Liabilities
           Increase in Litigation Liabilities                                                  0             25,000
                                                                                 ------------------ ----------------
                                                                                 ------------------ ----------------

NET CASH USED IN OPERATING ACTIVITIES                                                   (695,490)       (1,344,718)
                                                                                 ------------------ ---------------
                                                                                 ------------------ ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
          Proceeds from sales of Investments                                                   0             46,408
          Purchase of Licensing Rights                                                  (230,000)                 0
          Purchase of Machinery and Equipment                                              (36,197)            (4,278)

                                                                                 ------------------ ---------------
                                                                                 ------------------ ---------------
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES                                        (266,197)            42,130
                                                                                 ------------------ ---------------
                                                                                 ------------------ ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
          Decrease in bank indebtedness                                                   (9,202)           (7,057)
          Issuance (Payment) of Notes Payable, net (note 8)                               422,518         (197,435)
       Proceeds from Issuance of Common Stock                                             572,891         1,507,080

                                                                                 ------------------ ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                 986,207         1,302,588
                                                                                 ------------------ ---------------
                                                                                 ------------------ ---------------


NET INCREASE IN CASH                                                                       24,520                 0

CASH, beginning of year                                                                         0                 0
                                                                                 ------------------ ---------------
                                                                                 ------------------ ---------------

CASH, end of year                                                                $         24,520               $  0
SUPPLEMENTARY DISCLOSURE:
The statement of cash flows using  indirect  method as defined under  Statement
of Financial Accounting Standard of No. 95.`

F-7

---

# ALPHARX, INC.

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# SEPTEMBER 30, 2003

# NOTE 1. NATURE OF
BUSINESS AND GOING CONCERN

ALPHARX, INC. (the Company) was
incorporated under the laws of the State of Delaware on August 8, 1997. The company is an
emerging pharmaceutical company specializing in the formulation of therapeutic products
using proprietary drug delivery technologies. The company was formally known as LOGIC TECH
INTERNATIONAL, INC., and had its corporate name amended during the fiscal year of 2000.

Effective July 1, 2003 the Company
acquired all of the shares of AlphaRx Canada Limited for nominal value of $1. AlphaRx
Canada Limited was dormant until this time. AlphaRx Canada Limited was incorporated under
the laws of Ontario in order to streamline sales of the Companys products in the
Canadian market. Prior to this time AlphaRx Canada Limited had no material assets or any
liabilities and was wholly owned by the President andamp; CEO of the Company. The
consolidated financial statements reflect the activities of the Company and of AlphaRx
Canada Limited  its wholly owned subsidiary. All material inter-company accounts and
transactions have been eliminated.

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

# NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

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

# Cash

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

# Fair Value of Financial
Instruments

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

F-8

---

# 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s is not exposed to significant interest rate risk, credit
risk or currency risks arising from these financial instruments.

# Inventory

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

# Foreign Currency
Translation

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

# Earnings or Loss Per
Share

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

# Income Taxes

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

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

# Property and Equipment

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

F-9

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

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

# Research and Development

All research and development costs
are charged to expense as incurred. These costs include research and development, travel
to explore and evaluate new products, product licensing, and various legal and
professional fees incurred for preparation of patent applications.

# Revenue Recognition

Sales represent the invoiced value of
goods supplied to customers. Revenues are recognized upon the passage of title to the
customers, provided that the collection of the proceeds of sales are reasonably assured.

# Use of Estimates

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

# Long-Lived Assets

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

# Intangible Assets

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

F-10

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# Concentrations of Credit
Risks

The Companys receivables are
unsecured and are generally due in 30 Days. Currently, the Company does not have a wide
variety of customers, however, the Company is continuously broadening its customer base.

# Recent Pronouncements

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

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

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

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

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

SFAS No. 149  Amendment of SFAS
133 on derivative instruments and hedging activities. This statement amends and clarifies
financial accounting and reporting for derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS 133,
accounting for derivative instruments and hedging activities.

SFAS No. 150 Accounting for
certain financial instruments with characteristics of both liabilities and equity. This
statement establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.

The Company believes that the above
standards would not have a material impact on its financial position, results of
operations or cash flows.

F-11

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# NOTE 3. ACCOUNTS
RECEIVABLE

`2003                2002

                                                                              $                    $
Accounts receivable                                                                 29,742                   0
Less:  Allowance for doubtful accounts                                               2,080                   0


                                                                                    27,662                   0`

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

# NOTE 4. INVENTORY

Inventory comprised the following:

`2003                2002

                                                                           $                   $
Raw materials                                                                       26,757              52,141
Finished goods                                                                     115,148                   0


                                                                                   141,905              52,141`

# NOTE 5. PROPERTY, PLANT
andamp; EQUIPMENT

`2003                2002
                                                                           $                   $
           Leasehold Improvements                                                    1,837               1,837
           Furniture and Fixtures                                                     11,656              11,656
           Machinery and Equipment                                                   170,072             133,874
           Automobile                                                               22,067              22,067


           COST                                                                    205,632             169,434


           Less: Accumulated depreciation

                 Leasehold Improvements                                                460                 276
                 Furniture and Fixtures                                                5,709               4,044
                 Machinery and Equipment                                              59,496              38,993
                 Automobile                                                         13,432               9,019


                                                                                    79,097              52,332


           NET                                                                     126,535             117,102`

F-12

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# NOTE 6. LICENSING RIGHT

In January 2003, the Company entered
into a sub-licence agreement with a third party drug research company for the world-wide
commercialization of an experimental cancer drug. The cost of this sub-licence agreement
was $230,000 which was paid by cash of $190,000 and shares with a value of $40,000. Costs
to bring this drug to market are currently prohibitive for the Company, however,
management believes it may recover the cost for these rights should full scale development
not proceed.

# NOTE 7. ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES

Accounts payable and accrued
liabilities are comprised of the following:

`2003                2002

                                                                           $                   $

Trade payable                                                                      205,654              24,680
Accrued liabilities                                                                 49,070                   0


                                                                                   254,724              24,680`

# NOTE 8. NOTES PAYABLE

At September 30, 2003, the Company
has notes payable of $474,837. These notes are unsecured and bear interest at 0%-12% per
annum.

# NOTE 9. LITIGATION
LIABILITY

The Company is a defendant in a
lawsuit, filed by a prospective investor alleging breach of contract, which seeks damages
totaling $25,000. The Company believes the suit is without merit, however, to remain
conservative, the entire claim has been accrued in the financial statements.

# NOTE 10. COMMITTMENTS

Leases

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

`Year                        Amount

                           2004                     $  46,811
                           2005                        46,811
                           2006                        46,811
                           2007                        34,451
                           2008 and beyond             34,451`

F-13

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# NOTE 11. COMMON STOCK

The Company is authorized to issue
100,000,000 shares of common stock. As of September 30, 2003, 16,920,082 shares of such
common stock has been issued and remains outstanding Common stock has a stated par value
of $0.0001 per share. During the year, the Company issued 913,448 shares of common stock
at a price of $0.55 per share, 75,524 shares of common stock at a price of $0.45 per share
and 637,500 shares for services rendered with a fair value of $273,436. Out of these
637,500 shares, 452,500 shares were issued to management for consulting fees at a price of
$0.40 per share. 40,000 shares previously issued were returned to the Company as no
consideration had been received.

# NOTE 12. INCOME TAXES

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

`2003                2002

                                                                         $                   $
Deferred tax assets:

       Operating loss carry forwards                                             1,455,175             906,789
                Valuation allowance                                              1,455,175             906,789



       Net deferred tax assets                                                           0                   0`

These losses expire in varying
amounts between 2010 and 2023.

# NOTE 13. STOCK OPTION
PLAN

The Company has a Stock Option Plan
(Plan) under which officers, key employees, certain independent contractors, and
non-employee directors may be granted options to purchase shares of the Companys
authorized but unissued common stock. Since the fiscal year of 2001, the option plan was
terminated. Under this Plan, the option exercise price is US$0.10. Outstanding stock
options granted under the Plan will remain in effect until the expiration date specified
in those options. Options currently expire no later than 10 years from the grant date and
generally vest within five years. Proceeds received by the Company from exercises of stock
options are credited to common stock and additional paid-in capital. Additional
information with respect to the Plans stock option activity is as follows:

`Number      of     Weighted
                                                           Shares             Average
                                                                              Exercise Price
                                                           ---------------    ----------------
                                                           ===============    ================
Options exercisable at September 30, 2003                    1,150,000                 $0.10
                                                           ===============    ================`

F-14

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The Company adopted a new option plan
on February 10, 2003 under which options to purchase 1,500,000 common shares will be
granted to certain key employees and directors. Under the Plan, the option exercise price
and its fair market value are determined to be US$0.63-US$0.69. All options will expire on
February 10, 2008 and will vest, and become exercisable in three installments. Proceeds
received by the Company from exercises of stock options are credited to common stock and
additional paid-in capital. Additional information with respect to the Plans stock
option activity is as follows:

`Number      of     Weighted
                                                           Shares             Average
                                                                              Exercise Price
                                                           ---------------    ----------------
Outstanding at February 10, 2003 (plan adoption)              1,500,000                 $0.65
Granted                                                         645,000                 $0.63
Exercised                                                            0                  $0.00

Cancelled                                                            0                  $0.00

                                                           ---------------    ----------------
                                                           ---------------    ----------------
Outstanding as of September 30, 2003                            645,000                  $0.63
                                                           ===============    ================
                                                           ===============    ================
Options exercisable at September 30, 2003                       268,333                  $0.63
                                                           ===============    ================`

The Company granted 645,000 options
to consultants during the year. The fair value of each option grant was recorded at as
consulting expense in these consolidated financial statements using the Black-Scholes
option pricing model.

# NOTE 14. WARRANTS

The Company has the following
warrants outstanding to purchase common stock at September 30, 2003:

`Warrants  issued in conjunction  with financing  costs whereby one warrant           913,448
           entitles  the holder to purchase  one share of common stock at an exercise
           price of $1.10, expiring December 19, 2004.

           Warrants  issued in conjunction  with financing  costs whereby one warrant
           entitles  the holder to purchase  one share of common stock at an exercise
           price of $0.65, expiring June 17, 2005.                                               75,524
                                                                                            ------------
                                                                                            ------------
                                                                                                988,972
                                                                                            ============`

# NOTE 15. SEGMENTED
INFORMATION

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

# NOTE 16.
RECLASSIFICATIONS

F-15

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

F-16