UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Q   Annual Report Pursuant to Section 13
or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended:
September 30, 2009

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

Commission File Number: 000-30813

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

|Delaware                                                        | 98-0416123                          
|--------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of                                 | (I.R.S. Employer Identification No.)
|incorporation or organization)                                  |                                     
|                                                               
|200-168 Konrad Crescent, Markham,
      Ontario, Canada L3R 9T9
|(Address of principal executive offices)                       
|                                                               
|(905) 479-3245                                                 
|(Registrant's telephone number, including area
      code)     

|Securities registered pursuant to Section 12(b)
      of the Exchange Act:
|--------------------------------------------------------------------------
|                                                                          
|Title of Each Class                                                       
|Common Stock ($0.0001 par value)                                          

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


Q

NO


 ̈

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


 ̈

Issuer's revenues for its most recent fiscal year ended
September 30, 2009 were $ 377,480.

The aggregate market value of the issuers Common Stock (the
only class of voting stock), held by non-affiliates was approximately $8,775,263
based on the average closing bid and ask price for the Common Stock on December
1, 2009.

As of December 1, 2009 there were 92,371,192 shares outstanding
of the issuers Common Stock.

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AlphaRx, Inc.FORM 10-KFor the
Year Ended September 30, 2009 INDEX

|PART I  |                                                           |   
|------- | --------------------------------------------------------- | --
|        |                                                           |   
|Item 1. | Description of Business                                   | 3 
|Item 2. | Description of Property                                   | 19
|Item 3. | Legal Proceedings                                         | 19
|Item 4. | Submission of Matters to a Vote of Security
      Holders | 19

|PART II |                                                                                            |   
|------- | ------------------------------------------------------------------------------------------ | --
|        |                                                                                            |   
|Item 5. | Market for Common Equity and
      Related Stockholder Matters                             | 20
|Item 6. | Management Discussion and Analysis of Financial
      Condition                            | 22
|Item 7. | Financial Statements for 2009
      and 2008                                               | 28
|Item 8. | Changes in and Disagreements with Accountants
      on Accounting and Financial Disclosure | 28
|Item 8A | Controls and Procedures                                                                    | 28
|Item 8B | Other Information                                                                          | 30

|PART III   |                                                                                                                              |   
|---------- | ---------------------------------------------------------------------------------------------------------------------------- | --
|           |                                                                                                                              |   
|Item 9.    | Directors, Executive
      Officers, Promoters and Control Persons; Compliance with Section 16(a) of
      the Exchange Act. | 30
|Item 10.   | Executive Compensation                                                                                                       | 32
|Item 11.   | Security Ownership of Certain
      Beneficial Owners and Management                                                         | 35
|Item 12.   | Certain Relationships and
      Related Party Transactions                                                                   | 35
|Item 13.   | Exhibits and Reports on Form
      8-K                                                                                       | 35
|Item 14.   | Principal Accountants Fees and
      Services                                                                                | 36
|           |                                                                                                                             
|SIGNATURES | 36                                                                                                                          

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY BACKGROUND

In this annual report on Form 10-K, the "Company," "AlphaRx,"
"we," "us," and "our," refer collectively to AlphaRx, Inc., AlphaRx Canada
Limited, our wholly-owned subsidiary, 85% of AlphaRx International Holdings
Limited and 85% of AlphaRx Life Sciences Limited.

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

Effective June 22, 2006 New Super Limited, an independent Hong
Kong based corporation, subscribed for 1,500 shares of Common Stock of AlphaRx
International Holdings Ltd. (AIH), previously a wholly-owned subsidiary of the
Company. New Super Limited owns 15% of AIH.

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

COMPANY OVERVIEW

We are a pharmaceutical company, engaged in the research and
development of innovative therapeutic products using advanced drug delivery
technologies, which we believe, can be combined with a broad range of
therapeutic products to improve their effectiveness. Our core strength revolves
around our proprietary drug delivery technology - Bioadhesive Colloidal
Dispersion (BCD) drug delivery system, which utilizes nanotechnology to enhance
and improve the medical benefits of FDA approved drugs.

Our primary strategy is to seek alliances with pharmaceutical
companies, which will assist us in completing the reformulations and development
of the drug candidates. Our collaborative partners, licenses, and distributors
have enhanced access to capital and have the financial capability to conduct
clinical trials, and commercialize and distribute the drug candidates.

We have one product  Indaflex, that has completed a Phase II
Proof of Concept clinical trial and has been licensed by one of our partners for
completion of late stage clinical trials and commercialization, and several
product candidates in different stages of preclinical development.

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

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We intend to use our proprietary drug delivery technologies in
collaborative arrangements with pharmaceutical companies to formulate their
existing commercialized drugs as well as drugs under development by them. By
improving drug efficacy and reducing side effects, we believe our drug delivery
technologies will provide pharmaceutical companies with the opportunity to
enhance the commercial value of their existing products and new drug candidates.
We also intend to develop either independently or jointly certain off-patent and
over-the-counter ("OTC") products utilizing our proprietary drug delivery
technologies.

We entered into a Collaboration agreement during August 2009
with Venturepharm Group, a China based company that provides world-class
services for the biotechnology and pharmaceutical industries. Our objectives
include the adaptation of our delivery technology to improve the quality and
efficacy of pharmaceutical products selected for development in China.
Venturepharm Group agrees to provide us with lab space, manufacturing
facilities, regulatory services and distribution services all at a competitive
rate.

We also signed a collaboration and licensing agreement with
Riso Pharma Technology in September 2009. Under the agreement Riso Pharma
Technology will undertake development and potential commercialization of
ARX606T, which makes use of our proprietary formulation technology to deliver a
safe and well-known growth factor topically to patients with severe wounds and
ulcers.

We established a feasibility and option agreement in October
2008 with Gaia BioPharma Limited, a privately held early stage biopharmaceutical
company. We concluded formulation development on GAI-122 during August 2009.
GAI-122 is a drug used for the treatment of delirium caused by prolonged
surgery. GAI-122 is proceeding to the clinical trial materials manufacturing
stage and is expected to enter clinical trials by the middle of 2010. GAI-122 is
protected by 4 United States patent applications.

Development and sales milestone payments could reach $50
million in addition to royalties based on net product sales that utilize our
drug delivery technology. There is no assurance, however, that Gaia BioPharma
Limited will proceed with commercialization of the product candidates.

During March 2008 Cypress Bioscience, Inc. (Cypress)
completed the acquisition of our partner Proprius Pharmaceuticals Inc.
(Propius). Proprius has development and commercialization rights for Indaflex
 our topical cream for the treatment of osteoarthritis of the knee. Additional
funding is now available through Cypress in order to further Phase II and III
human trials for Indaflex and continue the FDA application process. Under the
terms of our agreement, Proprius will undertake completion of clinical trials
for Indaflex and will have exclusive global rights (except for Asia and Mexico)
to sell and or sublicense Indaflex and any successor NSAID products developed by
us. Should clinical trials for Indaflex be successful and sales commence, we
will receive clinical trial completion milestone payments and sales milestone
payments including a milestone payment of $3 million for the successful
completion of the Phase II or Phase III trials. In addition to the milestone
payments, we will receive royalty payments on sales of Indaflex by Proprius, its
affiliates and its sublicensees. There are no assurances or guarantees that
Proprius and or Cypress will continue with human trials and commercialization of
Indaflex. A meeting has been scheduled with the FDA during the first calendar
quarter of 2010 in order to determine the specifics of the next clinical
trials.

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We established AlphaRx International Holdings Limited (AIH)
in 2005 in order to pursue sales and other commercial activities in the Asia
Pacific region with experienced and established partners. To date we have been
limited in our scope due to our limited financial resources. Product approval
and registration for Indaflex and Flexogan continues in the Asia Pacific
region.

In August 2003, we licensed Indaflex, our lead pharmaceutical
product under development, to Industria Farmaceutica Andromaco, S.A. de C.V.
(Andromaco) for commercialization in Mexico. Subject to the terms of the
Agreement, Andromaco has the exclusive and non-transferable manufacturing rights
and distribution rights in Mexico for Indaflex and we receive 15% royalties
based on the gross revenue from product sales. Furthermore, Andromaco is
responsible for funding and completing any clinical and regulatory activities in
support of Indaflex registration in Mexico. The Agreement has an initial term of
five (5) years commencing on the effective date, and it shall automatically be
renewed on terms as provided in the Agreement and shall not be terminated
without cause. In June 2005, Andromaco launched Indaflex into the Mexican
market. We have collected royalties on a regular quarterly basis since that
time.

PRINCIPAL PRODUCT AND SERVICES AND PRINCIPAL MARKETS

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

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

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

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

PRODUCTS AND PRODUCT PIPLELINE

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

Product
    Initial Indication
    Stage of DevelopmentIndaflex*
    Osteoarthritis
    Phase
      IIVansolin
    Pneumonia (MRSA)
    Animal
      (POC)**Zysolin
    Pneumonia (Gram neg.)
    IND
      ToxicologyZysolin
    Biodefense
    Animal
      (POC)Teposolin
    Cancers
    FormulationARX-606T
    Wound
      Healing
    IND
      ToxicologyGAI-122
    Delirium
    IND
      ToxicologyGAI-122
    Stroke
    IND
      ToxicologyARX 2038
    Lipid
      Management
    Human
      POC


*

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

**

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

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

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

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

Vansolin, is a formulation of vancomycin in nanoparticles,
targeting serious MRSA (methicillin resistant staph aureus) infections, such as
nosocomial pneumonia. The Vansolin development program is being funded by a
global specialty pharma, under a feasibility agreement.

Zysolin, a formulation of tobramycin in nanoparticles is our
2nd nosocomial product intended for Gram-negative pneumonia in
intubated and mechanically ventilated patients. Zysolin is entering IND
(investigational new drug) toxicology assessment to be completed by mid-2010 and
a Phase I clinical trial is planned for Q3 or Q4 2010. Also USAMRIID
(You-SAM-rid), the U.S. military version of the CDC or Centers for Disease
control and Prevention have completed 2 studies with Zysolin in treatment of
plague and Tulareemia and more studies are forthcoming.

AlphaRx Inc., has entered into an exclusive collaboration and
licensing agreement with Riso Pharma Tech for the development of ARX606T. Under
the terms of the agreement, AlphaRx will give Riso exclusive global rights (with
the exception of Asia) of ARX606T, which makes use of AlphaRx's proprietary
formulation technology to deliver a safe and well known growth factor topically
to patients with severe wounds and ulcers. AlphaRx will earn a double digit
royalty on future sales of ARX606T in all countries covered by the agreement and
Riso will be responsible for all clinical development and commercialization
activities

Teposolin, is a camptothecin compound in nanoparticles
indicated initially for the treatment of ovarian cancer; other indications will
include lung and colon cancer. It is in the formulation stage.

GAI-122 is an injectable nano-emulsion formula intended for
multiple indications including: an adjuvant treatment for hepatitis, the
prevention of post-operative delirium, treatment of stroke and as a
neuroprotectant. GAI-122 is entering an IND toxicology program to be completed
by early 2010 and a Phase I is planned for mid-2010.

The active ingredient in ARX2038 is a synthetic compound with a
combination of unique properties. It demonstrates, heart, neuroprotective and
cholesterol lowering properties. It has extremely low toxicity (no signs of
toxicity at 10,000 mg/kg) and produces no teratogenic, mutagenic or carcinogenic
effects. Allergic reactions are extremely rare. This compound offers outstanding
cardioprotective properties - decreasing heartburn (the primary symptom of
gastroesophageal reflux), improving myocardiodystrophy. It helps in
rehabilitation after myocardial infarction. It decreases erythrocyte
aggregation, improves oxygen balance (heart tissue), blood viscosity and blood
flow. It significantly decreases cholesterol levels (up to 36%), LDL by 20% and
triglycerides by 13% and elevates HDL by 47%. Furthermore, this compound has
more than 25 years of successful clinical applications outside the USA, in the
form of an immediate release tablet. It is highly soluble in water and does not
interact with plasma proteins. It does not interact with other drugs or food
components.

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ARX2038 is a unique extended release formulation of this
compound. A Phase II human study is being planned in the later part of 2010.

BIOADHESIVE COLLOIDAL DISPERSION (BCD) SYSTEMS

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

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

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

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

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

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

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DISTRIBUTION METHODS OF THE PRODUCTS AND SERVICES

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

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

COMPETITION

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

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

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PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS

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

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

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

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

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Trademarks

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

Proprietary Information

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

MANUFACTURING, MARKETING AND SALES

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

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

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

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

11

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GOVERNMENT REGULATION

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

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

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

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

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

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

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

12

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

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

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

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

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

13

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

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

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

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

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

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

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RESEARCH AND DEVELOPMENT

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

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

INSURANCE

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

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

EMPLOYEES

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

RISK FACTORS

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

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

We have incurred annual operating losses since our inception.
As a result, at September 30, 2009 we had an accumulated deficit of
approximately $ 18,061,820. Our revenues for the years ended September 30, 2009
and September 30, 2008 were $377,480 and $97,499 respectively. Our revenues have
not been sufficient to sustain our operations. Revenues for 2009 consisted of
royalty revenues from one customer and consulting revenues and in 2008 revenues
consisted of royalty revenues. In order to achieve profitability our revenue
streams will have to increase and there is no assurance that revenues can
increase to such a level. We may never be profitable.

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

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

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

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

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

At September 30, 2009, we had a working capital deficiency of
approximately $978,820 as compared to a working capital deficiency of $686,919
as at September 30, 2008. The independent auditors' report for the year ended
September 30, 2009 includes an explanatory paragraph stating that our recurring
losses from operations and working capital levels raise substantial doubt about
our ability to continue as a going concern.

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

We are subject to industry and government regulation

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

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We face significant competition in the over-the-counter
health care market.

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

Our competitors may include large pharmaceutical companies
with superior resources.

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

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

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

17

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

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

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

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

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

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

The market price of our Common Stock is volatile.

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

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.

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

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

Lack of Independent Directors

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

Ownership of our Common Stock by Current Officers and
Directors

The present officers and directors own approximately 26.92% of
the outstanding shares of Common Stock, and are therefore no longer in a
position to elect all of our Directors and otherwise control the Company. Any
single shareholder or the management group as a whole can no longer control the
Company. Stockholders have no cumulative voting rights. (See Security Ownership
of Certain Beneficial Owners and Management)

ITEM 2. DESCRIPTION OF PROPERTY

We lease approximately 2,930 square feet in Markham, Ontario,
on a month-to-month basis. Present leasing costs are approximately $3,600 a
month. We believe that our existing properties are sufficient for our
administrative, research and development needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings either against or in favor of
the Company at the present time.

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

At our Annual General Meeting held November 26, 2008 our
stockholders voted in favour of re-electing the board of directors,
re-appointing Schwarz Levitsky Feldman LLP as our auditors and revising the stock option incentive plan for our employees, directors and
advisors. Details of the Stock Option Incentive Plan are described below under
Part II.

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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, 2009)
    0.19
    0.10Third Quarter
    (Ended June 30,
      2009)
    0.12
    0.03Second Quarter
    (Ended March 31, 2009)
    0.04
    0.02First Quarter
    (Ended December 31,
      2008)
    0.06
    0.02Fourth Quarter
    (Ended September 30, 2008)
    0.11
    0.06Third Quarter
    (Ended June 30,
      2008)
    0.15
    0.05Second Quarter
    (Ended March 31, 2008)
    0.26
    0.11First Quarter
    (Ended December 31,
      2007)
    0.28
    0.08


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

Records of our stock transfer agent indicate that as of
December 1, 2009 there were approximately 73 record holders of our Common Stock.
This does not include an indeterminate number of stockholders who may hold their
shares in "street name" or in nominee form.

DIVIDENDS

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

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

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STOCK OPTION PLANS

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

No options were granted nor were any exercised during the year ended September 30, 2009. There remain 14,260,000 options to purchase shares of Common Stock as of September 30, 2009.

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

The intrinsic value of outstanding stock options defined, as the difference between the exercise price and the closing price of the stock on September 30, 2009, for those options that are in the money was $1,800. (September 30, 2008
intrinsic value of nil since no option exercise price was below the closing price on that date).

RECENT SALES OF UNREGISTERED SECURITIES

We did not issue any shares of Common Stock (the only class shares we have) during fiscal 2009. There remain 92,371,192 shares of Common Stock issued and outstanding as of September 30, 2009.

During fiscal 2008, on November 14, 2007 we issued 5,000,000 units consisting of 5,000,000 shares of unregistered Common Stock and warrants to purchase 5,000,000 shares of unregistered Common Stock at an exercise price of $0.10. We received
gross proceeds of $500,000 before commission of 5% or $25,000. The warrants are exercisable at $0.10 per share and expire on December 31, 2009.

In the interest of increased transparency we also issued the following registered shares of Common Stock during the year ended September 30, 2008:

On December 27, 2007 officers, directors and consultants exercised options to purchase 3,430,000 shares of Common Stock at an average exercise price of $0.08 per share;

21

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Also on December 27, 2007 Michael Lee (CEO) exercised warrants to purchase 1,862,228 shares of Common Stock at an exercise price of $0.10 per share;

On February 28, 2008 warrants to purchase 875,000 shares of Common Stock were exercised at a price of $0.10 per share.

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

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes included in Item 7 of this report. Except for the historical information contained herein the foregoing discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein.

General

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

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

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

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

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

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

22

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

Recent Developments

We entered into a Collaboration agreement during August 2009 with Venturepharm Group, a China based company that provides world-class services for the biotechnology and pharmaceutical industries. Our objectives include the adaptation of our delivery
technology to improve the quality and efficacy of pharmaceutical products selected for development in China. Venturepharm Group agrees to provide us with lab space, manufacturing facilities, regulatory services and distribution services all at a
competitive rate.

We also signed a collaboration and licensing agreement with Riso Pharma Technology in September 2009. Under the agreement Risa Pharma will undertake development and potential commercialization of ARX606T, which makes use of our proprietary
formulation technology to deliver a safe and well known growth factor topically to patients with severe wounds and ulcers.

We established a feasibility and option agreement in October 2008 with Gaia BioPharma Limited, a privately held early stage biopharmaceutical company. We concluded formulation development on GAI-122 during August 2009. GAI-122 is a drug used for the
treatment of delirium caused by prolonged surgery. GAI-122 is proceeding to the clinical trial materials manufacturing stage and is expected to enter clinical trials by the middle of 2010. GAI-122 is protected by 4 United States patent
applications.

We entered into a co-development agreement with a US publicly traded company during October 2008 whereby we have been tasked to develop a novel drug formulation using our proprietary drug delivery technology. The company will have an exclusive
option period to complete a commercialization agreement with Us within six months of completion of the formulation. The extent and duration of consulting services for the initial phase have been finalized and work has commenced on the formulation.
There is no assurance that any further consulting services or any other form of revenues will materialize with this company.

During March 2008 Cypress Bioscience, Inc. (Cypress) completed the acquisition of our partner Proprius Pharmaceuticals Inc. (Propius). Proprius has development and commercialization rights for Indaflex  our topical
cream for the treatment of osteoarthritis of the knee. Additional funding is now available through Cypress in order to further Phase II and III human trials for Indaflex and continue the FDA application process. Under the terms of our agreement,
Proprius will undertake completion of clinical trials for Indaflex and will have exclusive global rights (except for Asia and Mexico) to sell and or sublicense Indaflex and any successor NSAID products developed by us. Should clinical trials for
Indaflex be successful and sales commence, we will receive clinical trial completion milestone payments and sales milestone payments including a milestone payment of $3 million for the successful completion of the Phase II trials. In addition to
the milestone payments, we will receive royalty payments on sales of Indaflex by Proprius, its affiliates and its sublicensees. There are no assurances or guarantees that Proprius and or Cypress will continue with human trials of Indaflex.

Our 85% owned subsidiary AlphaRx International Holdings Ltd. (AIH), through its wholly owned subsidiary AlphaRx Life Sciences Limited has commenced several research initiatives in China and is responsible for the commercialization of
Indaflex in China.

23

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We suspended application to have the Company listed on the
Toronto Stock Exchange  Venture Market during October 2008 due to market
conditions and our stock price among other factors. Should market conditions
improve in the future we may consider re-applying for this listing. There is no
assurance that we will re-apply for this listing or that we will obtain the
listing, once applied for.

Overview of Results of Operations

The following tables summarize the results of operations for
the years ended September 30, 2009 and 2008 and the quarterly results of
operations for the past two years:

|Year Ended September 30 |  | 2009     |   |  | 2008       |  
|----------------------- |  | -------- | - |  | ---------- | -
|                        |  | **$**    |   |  | **$**      |  
|Net Sales               |  | 377,480  |   |  | 97,499     |  
|Net Loss                |  | (441,876 | ) |  | (1,335,471 | )
|Net Loss Per Share      |  | (0.01    | ) |  | (0.01      | )



|Three                           |  | Sep 30   |   |  | June 30  |   |  | Mar 31  |  |  | Dec 31  |   |  | Sep 30  |   |  | June 30  |   |  | Mar 31   |   |  | Dec 31   |  
|------------------------------- |  | -------- | - |  | -------- | - |  | ------- |  |  | ------- | - |  | ------- | - |  | -------- | - |  | -------- | - |  | -------- | -
|Months                          |  | 2009     |   |  | 2009     |   |  | 2009    |  |  | 2008    |   |  | 2008    |   |  | 2008     |   |  | 2008     |   |  | 2007     |  
|Ended                           |  | **$**    |   |  | **$**    |   |  | **$**   |  |  | **$**   |   |  | **$**   |   |  | **$**    |   |  | **$**    |   |  | **$**    |  
|Net Sales                       |  | 88,815   |   |  | 20,982   |   |  | 164,109 |  |  | 103,574 |   |  | 16,326  |   |  | 46,798   |   |  | 17,243   |   |  | 17,132   |  
|Net Income (Loss)               |  | (208,562 | ) |  | (235,695 | ) |  | 23,420  |  |  | (21,039 | ) |  | (59,077 | ) |  | (294,670 | ) |  | (396,535 | ) |  | (585,189 | )
|Net (Income) Loss per Share (1) |  | (0.01    | ) |  | (0.01    | ) |  | 0.00    |  |  | (0.00   | ) |  | (0.01   | ) |  | (0.01    | ) |  | (0.01    | ) |  | (0.01    | )

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

RESULTS OF OPERATIONS

Year ended September 30, 2009 as compared to year ended
September 30, 2008

Revenues

Revenues totalled $377,480 for the year ended September 30,
2009 as compared to $97,499 generated for the year ended September 30, 2008, an
increase of $279,981 or about 287%. Royalties from Indaflex sales in Mexico
increased to $137,223 from $97,499 generated for the same period a year ago
based on increased sales of Indaflex and an increase in the minimum royalty
payment compared to previous year. We also generated $240,257 in consulting
revenues related to product research on behalf of one of our customers during
the year ended September 30, 2009 with no comparable revenues in the previous
year. We anticipate generating both royalty revenues and consulting revenues in
the new fiscal year.

General and Administrative Expenses

General and administrative expenses were $499,339 for the year
ended September 30, 2009 as compared to $753,118 incurred for the same period a
year ago, a decrease of $253,779 or about 34%.

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Stock based compensation was $73,725 for the year ended September 30, 2008 as compared to $197,795 in 2008, a decrease of $124,070 or about 63%. There are no further amounts remaining to be amortized related to warrants or options as at
September 30, 2009. We anticipate issuance of additional options and warrants in the future, which may result in stock based compensation expense and warrant amortization expense.

General and administrative salary and consulting fees totalled $175,871 for the year ended September 30, 2009 as compared to $198,723 incurred for the same period a year ago, a decrease of $22,852 or about 12%. The decrease stems from
salary reductions and reduced consulting efforts. Head count remains static in the general and administrative category with 3 full time and 1 part time staff.

We incurred $35,787 in investor relations expenses for the year ended September 30, 2009 as compared to $117,135 incurred in the same period a year ago, a decrease of $81,348 or about 69%. We incurred no expenses for the year ended
September 30, 2009 related to a listing application of the Toronto Stock Exchange as compared to $124,380 incurred during 2008. We also incurred $27,031 in sponsorship fees related the listing application in 2008 with no comparable expense
in the current year.

We recovered $120,000 in financial consulting expenses during 2008 thereby reducing overall general and administrative expenses in 2008. There was no comparable expense recovery during fiscal 2009.

We realized a foreign exchange loss of $49,189 for the year ended September 30, 2009 as compared to a foreign exchange gain of $15,694 generated during the same period a year ago, an increase of $64,883 between years.

Non-salary administrative expenses incurred in China totalled $10,660 for the year ended September 30, 2009 as compared to $53,237 incurred in the same period a year ago, a decrease of $42,577 or about 80%. Until revenue potential
becomes more evident, China overheads are being kept to a minimum.

We incurred travel expenses of $63,733 for the year ended September 30, 2009 as compared to $92,399 incurred during the same period a year ago, a decrease of $28,666 or about 31%. Reduced travel particularly to China has served to
decrease this expense as compared to prior year.

Research and Development Expenses

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

We incurred $204,731 in research and development expenses during the year ended September 30, 2009 as compared to $583,195 incurred in the same period a year ago, a decrease of $378,464 or about 65%.

Research and development staff costs and external consulting services totalled $139,379 for the year ended September 30, 2009 as compared to $331,632, a decrease of $192,253 or about 58%. Salary reductions, benefits eliminations and
reduced external consulting services served to reduce this expense when compared to prior year.

Animal testing did not occur during the year ended September 30, 2009 as it was deemed there are adequate product candidates on which to continue other non-animal research and testing. During the year ended September 30, 2008 we incurred
$152,711 in animal testing expenses.

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Finally equipment leasing for research and development activities totalled $11,151 during the year ended September 30, 2009 as compared to $29,708, a reduction of $18,557 or about 62%. Certain equipment leases have terminated and others
are coming to the end of their lease term.

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

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

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

Depreciation Expense

Depreciation expense totalled $61,288 for the year ended September 30, 2009 as compared to $78,269 incurred for the same period a year ago, a decrease of $16,981 or about 22%. We did not purchase any property plant and equipment during
the year as compared to purchases of $10,141 for the year September 30, 2008. Fully depreciated assets no longer attracting depreciation expense more than offset the additional depreciation expense stemming from capital asset purchases made in
2008.

Interest Expense

We incurred $54,154 in net interest expense during 2009 as a result of our borrowings and the issuance of promissory notes yielding interest ranging from 10% - 12% per annum. This compares to $35,857 incurred during 2008 an increase of
$18,297 or about 51%.

To reduce interest expense in 2008, we converted $1,169,793 in promissory notes into shares of Common Stock of the Company during September 2007. We also used the proceeds from a private placement completed during November 2007 to repay all
outstanding debt as of December 31, 2007. Further borrowings from January to September 2008 and during fiscal 2009 resulted in increasing interest expense incurred. We will continue to seek funding in the form of Promissory Notes, which will result
in ongoing interest expense until more permanent equity or other forms of funding are sourced.

Loss from Continuing Operations and Net Loss

As a result of the above revenues and expenses, we incurred a loss from continuing operations of $(442,032) for the year ended September 30, 2009 as compared to $(1,352,940) incurred for the same period a year ago, an improvement of
$910,908 or about 67%. Revenues increased by $279,981 and expenses decreased by $630,927 in the year ended September 30, 2009 as compared to the previous year.

Net Loss was $(442,032) for the year ended September 30, 2009 as compared to a net loss of $(1,350,819) incurred for the same period a year ago. The net loss in 2008 was reduced by the gain from discontinued operations of $2,121.

Cumulative Translation Adjustment and Comprehensive Loss

The cumulative translation adjustment (CTA) stems from unrealized foreign exchange gains and losses resulting from translation of foreign currency subsidiaries into U.S. dollars. Although the CTA is reflected in the statement of
operations, it is reflected after the net loss and flows into stockholders equity/(deficiency) directly. The CTA was a $4,373 gain for the
year ended September 30, 2009 as compared to a loss of $(81) for the year ended
September 30, 2008. Netting the CTA against the Net Loss for the year results in
comprehensive loss of $(437,503) for the year ended September 30, 2009 as
compared to a comprehensive loss of $(1,335,552) incurred for the year ended
September 30, 2008.

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Liquidity And Capital Resources

At September 30, 2009, we had a working capital deficiency of
approximately $978,820 as compared to a working capital deficiency of $686,919
as at September 30, 2008. We have licensing arrangements with Andromaco and
Proprius Pharmaceuticals, Inc., which provide our royalty and licensing revenues
based on achieving milestones and/or sales of our products. We also generate
certain consulting revenues from time to time in conjunction with our research
and development. We continue to seek out licensing and royalty arrangements and
distribution arrangements with established and experienced partners in order to
expand our revenue base.

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

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

We expect to continue to spend capital on:

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

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

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

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

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Off Balance Sheet Arrangements

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

Contractual Obligations and Commitments

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

|                            |   | 2010    |  |   | 2011   |  |   | 2012  |  |  | 2013 |  |  | 2014 | 
|--------------------------- | - | ------- |  | - | ------ |  | - | ----- |  |  | ---- |  |  | ---- | 
|Operating Lease Obligations | $ | 23,923  |  | $ | 10,911 |  | $ | 8,066 |  |  | -    |  |  | -    | 
|Notes Payable (1)           |   | 585,284 |  |   | -      |  |   | -     |  |  | -    |  |  | -    | 
|Total                       | $ | 609,207 |  | $ | 10,911 |  | $ | 8,066 |  |  | -    |  |  | -    | 

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

Certain Factors that may Affect Future Results

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

ITEM 7. FINANCIAL STATEMENTS FOR 2009 AND 2008

The financial statements for the fiscal year ending September
30, 2009 and 2008, required by Item 7 are set forth on pages F-1 through F-21.

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

Not applicable

ITEM 8A. CONTROLS AND PROCEDURES

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Managements Report on Internal Controls over Financial Reporting

The Companys chief executive officer and the Companys chief financial officer and principal accounting officer are responsible for establishing and maintaining adequate disclosure controls and procedures over financial reporting for the
Company. Internal control over financial reporting is a process by which, under the supervision of the Chief Financial Officer and Principle Accounting Officer, and effected by our Board of Directors and management, reasonable assurance is provided
regarding the reliability, thoroughness and timeliness of financial statement preparation and related disclosures for external purposes.

Policies and procedures pertaining to financial reporting include:

|(i)   | providing reasonable assurance that transactions are recorded accurately, thoroughly and on a timely basis to allow for preparation of financial statements in accordance with generally accepted accounting principles;
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                         
|(ii)  | providing reasonable assurance that our expenditures and receipts are effected only in accordance with managements authorizations and existing approved policies;                                                      
|      |                                                                                                                                                                                                                         
|(iii) | providing reasonable assurance regarding the prevention or detection of unauthorized transactions, use of assets and accounting errors which may have a material effect on our financial statements.                    

Due to inherent limitations, internal controls over financial reporting cannot provide absolute assurance that misstatements can be prevented or detected.

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of September 30, 2009, and in connection with the preparation of this Annual Report on Form 10-K the chief executive officer and the chief financial officer and principal accounting 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, with one exception as described below, 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.

During our evaluation we have identified one material weakness in our internal controls over financial reporting. This weakness relates to the small number of staff on hand such that complete segregation of incompatible duties is not possible. The
sole accounting staff member does not allow for an effective segregation of duties and as such this could lead to delays in reporting of transactions and other shortcomings in the financial reporting process. Despite this shortcoming management
believes there are adequate offsetting and additional duties and procedures to ensure that adequate control over financial reporting is maintained in an effective manner.

Changes in Internal Controls

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

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Due to the small size of our Company this Annual Report on Form
10-K does not include an attestation report regarding internal control over
financial reporting pursuant to temporary rules in effect that permit us to
provide only managements report in the Annual Report on Form 10-K.

ITEM 8B. OTHER INFORMATION

None.

PART III

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

The following table sets forth, as of December 1, 2009, the
name, age, and position of each of our executive officers and directors:

|Name                         | Age | Position                                                         | Term           
|---------------------------- | --- | ---------------------------------------------------------------- | ---------------
|Michael M. Lee               | 46  | Chairman of the Board of
      Directors Chief Executive Officer | since 8/8/1997 
|Marcel Urbanc, C.A.          | 53  | Chief Financial Officer and Principal
      Accounting Officer   |                
|Joseph Schwarz, Ph.D         | 55  | Chief Scientist                                                  |                
|Michael Weisspapir, MD, Ph.D | 53  | Chief Medical Officer                                            |                
|Sandro Persia                | 39  | Secretary/Treasurer                                              |                
|Dr. David Milroy             | 58  | Director                                                         | since 4/15/2003
|Dr. Ford Moore               | 58  | Director                                                         | Since 4/15/2003

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

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

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

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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 Seneca College based in Toronto.

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

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

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

Compensation of Directors

Our two independent directors did not receive any compensation for the year ended September 30, 2009 or 2008. Directors are reimbursed for direct out-of-pocket expenses for attendance at meetings of the Board of Directors and for expenses incurred
for and on behalf of the Company.

Board of Directors Committees

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

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

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

31

---

Based solely upon our review of the copies of such forms that
we received during the fiscal year ended September 30, 2009, we believe that
each person who at any time during the fiscal year was a director, officer, or
beneficial owner of more than ten percent of our Common Stock complied with all
Section 16(a) filing requirements during such fiscal year.

CODE OF ETHICS

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

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation

The table below summarizes the compensation received by the
Company's Chief Executive Officer for the fiscal years ended September 30, 2009,
2008 and 2007 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").

|NAME AND PRINCIPAL
      POSITION | YEAR | SALARY ($) | BONUS ($) | LONG TERM COMPENSATION SECURITIES
      UNDERLYING OPTION (#)
|--------------------------------- | ---- | ---------- | --------- | -------------------------------------------------------------
|Michael M. Lee                    | 2009 | 50,504     | 0         | 0                                                            
|President & C.E.O.                | 2008 | 21,209     | 0         | 0                                                            
|                                  | 2007 | 51,068     | 0         | 0                                                            
|Joseph Schwarz                    | 2009 | 43,198     | 0         | 0                                                            
|Chief Scientist                   | 2008 | 89,614     | 0         | 0                                                            
|                                  | 2007 | 114,170    | 0         | 0                                                            
|Michael Weisspapir                | 2009 | 43,198     | 0         | 0                                                            
|Chief Medical Scientist           | 2008 | 82,023     | 0         | 0                                                            
|                                  | 2007 | 103,073    | 0         | 0                                                            
|Marcel Urbanc                     | 2009 | 24,623     | 0         | 0                                                            
|Chief Financial Officer and       | 2008 | 47,765     | 0         | 0                                                            
|Principal Accounting Officer      | 2007 | 34,473     | 0         | 0                                                            

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

The following table sets forth certain information regarding
exercises of stock options during the fiscal year ended September 30, 2009 by
the named executive officers. Value of unexercised options is considered to be
the difference between exercise price and market price of $0.12 per share on
September 30, 2009. No options were exercised by the named executive officers
during fiscal 2009.

32

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|Name               | Shares acquired on exercise (#) | Value Realized (1) ($) | Number of Exercisable
      Options at Fiscal Year-End (#)
      Exercisable/ Unexercisable | Value of Unexercised In-The-Money Options at Fiscal Year-End ($) Exercisable/ Unexercisable
|------------------ | ------------------------------- | ---------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|Michael M. Lee     | -                               | -                      | 7,000,000/0                                                                                 | 0/0                                                                                        
|Marcel Urbanc      | -                               | -                      | 270,000/0                                                                                   | 0/0                                                                                        
|Joseph Schwarz     | -                               | -                      | 3,000,000/0                                                                                 | 0/0                                                                                        
|Michael Weisspapir | -                               | -                      | 3,000,000/0                                                                                 | 0/0                                                                                        

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

2000 and 2003 Stock Option Plans - cancelled

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

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

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

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

2008 Stock Option Plan

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

33

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

|Equity Compensation Plan
      Information                      
|----------------------------------------------------------------
|                                                                
|                                                                
|Equity
      Compensation Plans Approved by Security Holders    
|                                                                
|Equity
      Compensation Plans Not Approved by Security Holders
|                                                                
|Total**                                                         

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

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

34

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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth information with respect to
ownership of the Companys securities by its officers and directors and by any
person (including any group) who is the beneficial owner of more than 5% of
the Companys Common Stock. The total number of shares authorized is 250,000,000
shares of Common Stock, each of which has a par value of $0.0001. As of December
1, 2009 there were 92,371,192 shares of Common Stock issued and outstanding.

|Name and Address                                  | Amount and Nature of | Percent of
|------------------------------------------------- | -------------------- | ----------
|Of Owner                                          | Beneficial Owner     | Class     
|Michael Lee (1)                                   | 16,825,834 shares    | 18.22%    
|Joseph Schwarz (2)                                | 602,500 shares       | 0.65%     
|Ford Moore (3)                                    | 4,158,179 shares     | 4.50%     
|Michael Weisspapir (2)                            | 457,500 shares       | 0.50%     
|David Milroy (3)                                  | 2,556,933 shares     | 2.77%     
|Marcel Urbanc (2)                                 | 250,000 shares       | 0.27%     
|Sandro Persia (2)                                 | 18,000 shares        | 0.02%     
|All directors and officers as a group (7 persons) | 24,868,946 shares    | 26.92%    

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

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS**

Mr. Lee, CEO and director loaned us $5,604 during the year
ended September 30, 2009. Interest accrued on all loans outstanding to Mr. Lee
totalled $8,586 as of September 30, 2009. The Company also repaid $8,000 in
principal to extinguish one of the Promissory Notes owing to Mr. Lee during
fiscal 2009.

During the year ended September 30, 2008 Michael Lee CEO and
Director has loaned us approximately $207,828 plus accrued interest of $3,422.
These notes carry interest at 12% per annum and are unsecured. These funds were
used for general corporate purposes. Of these amounts approximately $164,000 was
repaid during the year ended September 30, 2008.

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

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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



35

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(b) Reports on Form 8-K
On November 14, 2007 we announced the unregistered sale of 5,000,000 units consisting of 5,000,000 shares of Common Stock and warrants to buy 5,000,000 shares of Common Stock at $0.10 per unit. The Company received gross proceeds of
$500,000. AlphaRx will not file a registration statement covering such Common Stock.

On December 28, 2007 we announced the exercise of 3,430,000 options to purchase Common Stock and the cancellation of 7,660,000 options to purchase shares of Common Stock by certain directors, officers and employees. Also, we announced the exercise
of 1,862,228 warrants to purchase shares of Common Stock by our President and CEO - Michael Lee. The Form 8-K related to this announcement was filed on December 31, 2007.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees:For the year ended September 30, 2009 we incurred $24,775 in external audit fees, and quarterly reviews in connection with statutory and regulatory filings to our principal accountants as compared to approximately $30,228
for the year ended September 30, 2008.

Audit-Related Fees:For the years ended September 30, 2009 and 2008 we incurred no fees for assurance and related services by the principal accountant.

Tax Fees: For the year ended September 30, 2009 we incurred NIL tax fees with our principal accountants as compared to $4,732 in non-corporate tax related fees for the year ended September 30, 2008.

All Other Fees:For the year ended September 30, 2009 we incurred $1,613 in other fees with our principal accountants related to our application to the Toronto Stock Exchange  Venture market (for the year ended September 30, 2008 we
incurred $2,478).

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

SIGNATURES

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

DATED: December 4, 2009

ALPHARx, INC.

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

By: /s/ Marcel Urbanc 
Marcel Urbanc 
Chief Financial Officer and 
Principal Accounting Officer



36

---

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

DATED: December 4, 2009

ALPHARx, INC.

Directors:

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

/s/ David Milroy 
David Milroy, Director

/s/ Ford Moore 
Ford Moore, Director



37

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|INDEX TO EXHIBITS
|-----------------
|                 
|EXHIBIT NO.      
|                 
|3(i)(a)          
|                 
|3(i)(b)          
|                 
|3(i)(c)          
|                 
|3(ii)            
|                 
|10.1             
|                 
|10.2             
|                 
|10.3             
|                 
|10.4             
|                 
|10.5             
|                 
|31.1             
|                 
|31.2             
|                 
|32.1             
|                 
|32.2             

39

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|ALPHARx, INC.   CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008       
|------------------------------------------------------------------------------------
|                                                                                    
|TABLE OF CONTENTS                                                                   
|                                                                                    
|CONSOLIDATED FINANCIAL STATEMENTS FOR 2009 AND 2008                                 
|                                                                                    
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                             
|                                                                                    
|CONSOLIDATED BALANCE SHEETS FOR 2009 AND 2008                                       
|                                                                                    
|CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
      LOSS FOR 2009 AND 2008
|                                                                                    
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY FOR
      2009 AND 2008         
|                                                                                    
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 2009 AND 2008                             
|                                                                                    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                          

F - 1

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of AlphaRx, Inc. (incorporated in the State of Delaware) as at September 30, 2009 and 2008 and the related consolidated statements of operations and comprehensive loss, cash flows and
stockholders deficiency for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AlphaRx, Inc. as at September 30, 2009 and 2008 and the results of its operations and its cash flows for the
years then ended in accordance with generally accepted accounting principles in the United States of America.

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

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

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

F - 2

---

ALPHARx, INC.CONSOLIDATED BALANCE
SHEETSAS AT SEPTEMBER 30, 2009 AND, 2008(All amounts in
US Dollars)

|                                                               |   | 2009        |   |   | 2008        |  
|-------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|CURRENT ASSETS                                                 |   |             |   |   |             |  
|Cash and Cash Equivalents                                      | $ | 14,006      |   | $ | 24,623      |  
|Accounts
      Receivable (Note 3)                             |   | 42,330      |   |   | 8,429       |  
|TOTAL CURRENT ASSETS                                           |   | 56,336      |   |   | 33,052      |  
|PROPERTY, PLANT and
      EQUIPMENT, net                       |   | 78,237      |   |   | 149,498     |  
|TOTAL ASSETS                                                   |   | 134,573     |   |   | 182,550     |  
|CURRENT LIABILITIES                                            |   |             |   |   |             |  
|Accounts Payable and
      Accrued Liabilities                 |   | 414,872     |   |   | 316,306     |  
|Notes
      Payable (Note 7)                                   |   | 585,284     |   |   | 403,665     |  
|Deferred Revenue                                               |   | 35,000      |   |   | -           |  
|TOTAL CURRENT
      LIABILITIES                                |   | 1,035,156   |   |   | 719,971     |  
|Going Concern (Note 1)                                         |   |             |   |   |             |  
|Commitments (Note 9)                                           |   |             |   |   |             |  
|Related Party Transactions (Note 14)                           |   |             |   |   |             |  
|STOCKHOLDERS
      DEFICIENCY                                 |   |             |   |   |             |  
|Common Stock: $ 0.0001 par value,                              |   |             |   |   |             |  
|Authorized: 250,000,000
      shares; Issued and outstanding   |   |             |   |   |             |  
|September 30, 2009 and 2008: 92,371,192
      (Notes 10,12,13) |   | 9,238       |   |   | 9,238       |  
|Additional
      paid-in capital                               |   | 17,052,076  |   |   | 16,978,351  |  
|Deficit                                                        |   | (18,061,820 | ) |   | (17,619,944 | )
|Accumulated Other Comprehensive Loss                           |   | (2,317      | ) |   | (6,690      | )
|Non-controlling Interest
      (Note 8)                        |   | 102,240     |   |   | 101,624     |  
|TOTAL DEFICIENCY                                               |   | (900,583    | ) |   | (537,421    | )
|TOTAL LIABILITIES AND DEFICIENCY                               | $ | 134,573     |   | $ | 182,550     |  



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

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

F - 3

---

ALPHARx, INC.CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSSFOR THE YEARS ENDED SEPTEMBER 30,
2009 AND 2008 (All amounts in US Dollars)

|                                                                    |   | 2009       |   |   | 2008        |  
|------------------------------------------------------------------- | - | ---------- | - | - | ----------- | -
|License Fees and
      Royalties                                    | $ | 137,223    |   | $ | 97,499      |  
|Consulting Revenues                                                 |   | 240,257    |   |   | -           |  
|TOTAL REVENUES                                                      |   | 377,480    |   |   | 97,499      |  
|General and Administrative Expenses                                 |   | 499,339    |   |   | 753,118     |  
|Research and
      Development Expenses                             |   | 204,731    |   |   | 583,195     |  
|Depreciation                                                        |   | 61,288     |   |   | 78,269      |  
|LOSS FROM OPERATIONS                                                |   | (387,878   | ) |   | (1,317,083  | )
|OTHER EXPENSES                                                      |   |            |   |   |             |  
|Interest Expense, net                                               |   | (54,154    | ) |   | (35,857     | )
|LOSS BEFORE INCOME TAXES                                            |   | (442,032   | ) |   | (1,352,940  | )
|Income Tax (Note 11)                                                |   | -          |   |   | -           |  
|LOSS FROM CONTINUING OPERATIONS                                     |   | (442,032   | ) |   | (1,352,940  | )
|Gain from Operations of
      Discontinued Component (Note 4)       |   | -          |   |   | 2,121       |  
|NET LOSS BEFORE NON-CONTROLLING
      INTEREST                      |   | ( 442,032  | ) |   | ( 1,350,819 | )
|Non-Controlling
      Interest in Loss of consolidated subsidiaries |   | (156       | ) |   | (15,348     | )
|NET LOSS                                                            | $ | ( 441,876  | ) | $ | (1,335,471  | )
|Translation Adjustment                                              |   | 4,373      |   |   | (81         | )
|COMPREHENSIVE LOSS                                                  |   | ( 437,503  | ) |   | (1,335,552  | )
|Per Share Data                                                      |   |            |   |   |             |  
|Net Loss per Share, basic and diluted                               | $ | (0.01      | ) | $ | (0.01       | )
|Weighted Average Number
      of Common Shares Outstanding          |   | 92,371,192 |   |   | 90,088,635  |  

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

F - 4

---

ALPHARx, INC.CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS DEFICIENCYFOR THE YEARS ENDED SEPTEMBER 30, 2009 AND
2008(All amounts in US Dollars)

|                                       |  | Common Stock |  |   |        |  |   |            |  |   |             |   |   |             |   |   |               |   |   |             |  
|-------------------------------------- |  | ------------ |  | - | ------ |  | - | ---------- |  | - | ----------- | - | - | ----------- | - | - | ------------- | - | - | ----------- | -
|                                       |  |              |  |   |        |  |   |            |  |   | Accumulated |   |   |             |   |   | Total         |   |   |             |  
|                                       |  |              |  |   |        |  |   | Additional |  |   | Other Com-  |   |   |             |   |   | AlphaRx Inc.  |   |   | Non-        |  
|                                       |  | Number of    |  |   |        |  |   | Paid in    |  |   | prehensive  |   |   |             |   |   | Stockholders |   |   | controlling |  
|                                       |  | Shares       |  |   | Amount |  |   | Capital    |  |   | Loss        |   |   | Deficiency  |   |   | Deficiency    |   |   | Interest    |  
|Balance as of
      September 30, 2007 |  | 81,203,964   |  | $ | 8,122  |  | $ | 15,824,162 |  | $ | (6,609      | ) | $ | (16,284,473 | ) | $ | (458,798      | ) | $ | 116,986     |  
|Warrants Amortization                  |  |              |  |   |        |  |   | 131,832    |  |   |             |   |   |             |   |   | 131,832       |   |   |             |  
|Warrants exercised                     |  | 2,737,228    |  |   | 273    |  |   | 273,450    |  |   |             |   |   |             |   |   | 273,723       |   |   |             |  
|Stock Options exercised                |  | 3,430,000    |  |   | 343    |  |   | 274,407    |  |   |             |   |   |             |   |   | 274,750       |   |   |             |  
|Private Placement                      |  | 5,000,000    |  |   | 500    |  |   | 474,500    |  |   |             |   |   |             |   |   | 475,000       |   |   |             |  
|Foreign currency translation           |  |              |  |   |        |  |   |            |  |   | (81         | ) |   |             |   |   | (81           | ) |   | (14         | )
|Non- controlling interest              |  |              |  |   |        |  |   |            |  |   |             |   |   |             |   |   |               |   |   | (15,348     | )
|Net Loss 2008                          |  |              |  |   |        |  |   |            |  |   |             |   |   | (1,335,471  | ) |   | (1,335,471    | ) |   |             |  
|Balance as of
      September 30, 2008 |  | 92,371,192   |  | $ | 9,238  |  | $ | 16,978,351 |  |   | (6,690      | ) |   | (17,619,944 | ) |   | (639,045      | ) |   | 101,624     |  
|Warrants issued for services           |  |              |  |   |        |  |   | 73,725     |  |   |             |   |   |             |   |   | 73,725        |   |   |             |  
|Foreign Currency Translation           |  |              |  |   |        |  |   |            |  |   | 4,373       |   |   |             |   |   | 4,373         |   |   | 772         |  
|Non- controlling interest              |  |              |  |   |        |  |   |            |  |   |             |   |   |             |   |   |               |   |   | (156        | )
|Net Loss 2009                          |  |              |  |   |        |  |   |            |  |   |             |   |   | (441,876    | ) |   | (441,876      | ) |   |             |  
|Balance as of September 30,
      2009 |  | 92,371,192   |  | $ | 9,238  |  | $ | 17,052,076 |  | $ | (2,317      | ) |   | (18,061,820 | ) | $ | (1,002,823    | ) | $ | 102,240     |  

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

F - 5

---

ALPHARx, INC.CONSOLIDATED STATEMENTS OF CASH
FLOWSFOR THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008(All
amounts in US Dollars)

|                                                                                  |   | 2009     |   |   | 2008       |  
|--------------------------------------------------------------------------------- | - | -------- | - | - | ---------- | -
|CASH FLOWS FROM
      OPERATING ACTIVITIES                                        |   |          |   |   |            |  
|Net Loss                                                                          | $ | (441,876 | ) | $ | (1,335,471 | )
|Adjustments to reconcile net
      loss to net cash used in operating activities: |   |          |   |   |            |  
|Depreciation and
      amortization                                               |   | 61,288   |   |   | 78,269     |  
|Stock
      based compensation                                                    |   | 73,725   |   |   | 197,795    |  
|Changes in assets and liabilities:                                                |   |          |   |   |            |  
|Decrease/(Increase) in Accounts
      Receivable                                  |   | (33,901  | ) |   | 3,375      |  
|Decrease in Prepaid Expenses                                                      |   | -        |   |   | 6,582      |  
|Accrued Interest on Notes Payable                                                 |   | 46,131   |   |   | 18,602     |  
|Increase/(Decrease) in Accounts Payable and
      Accrued Liabilities             |   | 98,566   |   |   | (203,213   | )
|Increase in Deferred
      Revenue                                                |   | 35,000   |   |   | -          |  
|Discontinued Operations (Note 4)                                                  |   | -        |   |   | (18,829    | )
|Non Controlling Interest                                                          |   | (156     | ) |   | (15,348    | )
|NET CASH USED IN OPERATING ACTIVITIES                                             |   | (161,223 | ) |   | (1,268,238 | )
|CASH FLOWS FROM
      INVESTING ACTIVITIES                                        |   |          |   |   |            |  
|Purchase of Machinery and Equipment                                               |   | -        |   |   | (10,141    | )
|NET CASH USED IN
      INVESTING ACTIVITIES                                       |   | -        |   |   | (10,141    | )
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |   |          |   |   |            |  
|Issuance of Common Stock                                                          |   | -        |   |   | 1,023,473  |  
|Issuance of Notes Payable, net of repayments                                      |   | 138,717  |   |   | 181,974    |  
|NET CASH PROVIDED BY
      FINANCING ACTIVITIES                                   |   | 138,717  |   |   | 1,205,447  |  
|Effect of exchange rate changes on cash
      and cash equivalents                |   | 11,889   |   |   | (30,773    | )
|NET DECREASE IN CASH                                                              |   | (10,617  | ) |   | (103,705   | )
|CASH and cash equivalents, beginning of
      year                                |   | 24,623   |   |   | 128,328    |  
|CASH and cash
      equivalents, end of year                                      | $ | 14,006   |   | $ | 24,623     |  
|SUPPLEMENTARY DISCLOSURE:                                                         |   |          |   |   |            |  
|Income Tax Paid                                                                   | $ | -        |   | $ | -          |  
|Interest Paid                                                                     | $ | 6,227    |   | $ | 23,419     |  

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

F - 6

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ALPHARX INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2009 AND 2008(All amounts in US Dollars)

NOTE 1. NATURE OF BUSINESS AND GOING CONCERN

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

Effective June 30, 2006, AlphaRx International Holdings Limited (a British Virgin Island company and an 85% owned subsidiary of AlphaRx Inc.) (AIH) acquired 100% of Alpha Life Sciences Ltd. (ALS) for a nominal amount and the
assumption of approximately $63,000 of related party liabilities. ALS is primarily involved in research and development of drugs in the Asian market.

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

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash and Cash Equivalents

Cash includes cash on hand, and amounts on deposit with banks. Cash equivalents include any other highly liquid cash investments purchased with maturity of three months or less which are readily convertible to cash. The carrying amount approximates
fair value because of the immediate liquidity or
short maturity of these instruments. As at September 30, 2009 and 2008 the Company had only cash on deposit and petty cash on hand.

F - 7

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Accounts Receivable

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

Financial Instruments

a) Fair Value

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

b) Interest rate, currency and credit risk

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

Long-Term Financial Instruments

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

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

Foreign Currency Translation

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

Earnings or Loss Per Share

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

F - 8

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Income Taxes

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

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

Property Plant and Equipment

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

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

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

Research and Development

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

Revenue Recognition

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

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

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

F - 9

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Use of Estimates

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

Long-Lived Assets

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

Concentrations of Credit Risks and Revenues

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

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

Investment in Joint Venture

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

Stock Based Compensation

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

F -10

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Comprehensive Income

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

Recent Pronouncements

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

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

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

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

F -11

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

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

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

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

F -12

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

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

F -13

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

|NOTE 3. ACCOUNTS RECEIVABLE     |   |        |  |   |       | 
|------------------------------- | - | ------ |  | - | ----- | 
|                                |   | 2009   |  |   | 2008  | 
|Trade Accounts
      Receivable | $ | 40,350 |  | $ | 6,076 | 
|Other Accounts Receivable       |   | 1,980  |  |   | 2,353 | 
|                                | $ | 42,330 |  | $ | 8,429 | 

The Company carries accounts receivable at the amounts it deems
to be collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on managements best estimates.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that becomes uncollectible could differ from those
estimated. No reserve for bad debts was established as at September 30, 2009 and
2008 as all amounts were deemed collectible.

NOTE 4. DISCONTINUED OPERATIONS

The Company discontinued direct sales of Flexogan during 2005.
The statements of income for the Discontinued Operations are seen below. No
balance sheet items remain as at September 30, 2009 and 2008.

|Income Statements                       |   | 2009 |  |   | 2008  | 
|--------------------------------------- | - | ---- |  | - | ----- | 
|Sales                                   | $ | -    |  | $ | 2,121 | 
|Cost of Sales                           |   | -    |  |   | -     | 
|Gross Margin                            |   | -    |  |   | 2,121 | 
|Income Taxes                            |   | -    |  |   | -     | 
|Gain from Discontinued
      Operations | $ | -    |  | $ | 2,121 | 

NOTE 5. PROPERTY, PLANT & EQUIPMENT

|                                                  |   | 2009    |  |   | 2008    | 
|------------------------------------------------- | - | ------- |  | - | ------- | 
|Leasehold Improvements                            | $ | -       |  | $ | 22,891  | 
|Furniture and Fixtures                            |   | 16,140  |  |   | 28,060  | 
|Machinery and Equipment                           |   | 198,988 |  |   | 339,502 | 
|COST                                              |   | 215,128 |  |   | 390,453 | 
|Less: Accumulated
      depreciation/amortization |   |         |  |   |         | 
|Leasehold Improvements                            |   | -       |  |   | 20,149  | 
|Furniture and Fixtures                            |   | 12,837  |  |   | 19,943  | 
|Machinery and Equipment                           |   | 124,054 |  |   | 200,863 | 
|                                                  |   | 136,891 |  |   | 240,955 | 
|NET                                               | $ | 78,237  |  | $ | 149,498 | 

F -14

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The cost and accumulated depreciation of $347,860 ($201,353 in
2008) for property, plant and equipment and leasehold improvements that are
fully depreciated or amortized, has been removed.

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the
following:

|                                                      |   | 2009    |  |   | 2008    | 
|----------------------------------------------------- | - | ------- |  | - | ------- | 
|Accounts Payable                                      | $ | 303,010 |  | $ | 290,939 | 
|Accrued Liabilities for services
      rendered but   |   |         |  |   |         | 
|not invoiced as of
      September 30, 2009 and 2008: |   |         |  |   |         | 
|Professional services (legal, audit,
      financial) |   | 20,795  |  |   | 21,112  | 
|Management Salary                                     |   | 68,225  |  |   | -       | 
|Other                                                 |   | 22,842  |  |   | 4,255   | 
|                                                      | $ | 414,872 |  | $ | 316,306 | 

NOTE 7. NOTES PAYABLE

The Company and its subsidiaries issued $138,717 in promissory
notes, net of repayments during the year ended September 30, 2009. ($385,063
during the year ended September 30, 2008). The newly issued and existing
promissory notes bear interest at rates of 8% - 12% per annum and are repayable
on or before the first anniversary date of issuance.

Promissory notes issued during the three months ended December
31, 2007 were issued together with warrants. This in turn required a discount to
be established and amortized over the life of the promissory notes. As all
promissory notes were repaid prior to December 31, 2007 the unamortized discount
was brought into income accordingly. The Company issued additional promissory
notes during the remainder of fiscal 2008 without any warrants or other
attachments.

Included in Promissory Notes payable are $49,813 in Notes
Payable including accrued interest of $8,586 to Michael Lee  CEO at September
30, 2009. (As at September 30, 2008 Notes Payable plus accrued interest of
$3,422 owing to Mr. Lee totalled $47,250). See also Related Party Transactions
Note 14.

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

NOTE 8. NON-CONTROLLING INTEREST

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

F -15

---

NOTE 9. COMMITMENTS

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

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

NOTE 10. COMMON STOCK

The Company is authorized to issue up to 250,000,000 shares of
Common Stock. As of September 30, 2009 and 2008, there were 92,371,192 shares of
Common Stock issued and outstanding, with a stated par value of $0.0001 per
share.

The Company did not issue any shares of Common Stock during the
year ended September 30, 2009. During the year ended September 30, 2008 the
Company issued 11,167,228 shares of Common Stock as follows:

On November 14, 2007 the Company issued 5,000,000 units, each
unit consisting of one share of Common Stock and a warrant to purchase a share
of Common Stock. The Warrants expire December 31, 2009 and are exercisable at
$0.10 per share;

On December 27, 2007 officers, directors and consultants
exercised options to purchase 3,430,000 shares of Common Stock at an average
exercise price of $0.08 per share;

Also on December 27, 2007 Michael Lee (CEO) exercised warrants
to purchase 1,862,228 shares of Common Stock at an exercise price of $0.10 per
share;

On February 28, 2008 warrants to purchase 875,000 shares of
Common Stock were exercised at a price of $0.10 per share.

Net Loss per share of Common Stock is not based on diluted
shares since the effect would be anti-dilutive. The Company has warrants
outstanding to purchase 8,000,000 shares of Common Stock and options outstanding
to purchase 14,260,000 shares of Common Stock as at September 30, 2009. On a
fully diluted basis there would be 114,631,192 shares of Common Stock issued and
outstanding if all warrants and all options were to be exercised. Refer to Notes
12 and 13 respectively for more details on options and warrants. (As at
September 30, 2008 there would have been 113,891,192 shares outstanding on a
diluted basis if all outstanding warrants and options were exercised).

F -16

---

NOTE 11. INCOME TAXES

The regional sources of tax losses for the years ended
September 30, 2009 and 2008 were as follows:

|                      |   | 2009     |   |   | 2008       |  
|--------------------- | - | -------- | - | - | ---------- | -
|North America         | $ | (305,980 | ) | $ | (1,266,180 | )
|Outside North America |   | (78,953  | ) |   | (99,852    | )
|                      | $ | (384,933 | ) | $ | (1,366,032 | )

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

|Year of                       |   |               |  |  | Year of |  |   |           |  |  | Year of |  |   | Outside    |  |  | Year of | 
|----------------------------- | - | ------------- |  |  | ------- |  | - | --------- |  |  | ------- |  | - | ---------- |  |  | ------- | 
|Origin                        |   | United States |  |  | Expiry  |  |   | Canada    |  |  | Expiry  |  |   | North      |  |  | Expiry  | 
|                              |   |               |  |  |         |  |   |           |  |  |         |  |   | America    |  |  |         | 
|1998                          | $ | 212,899       |  |  | 2018    |  |   |           |  |  |         |  |   |            |  |  |         | 
|1999                          |   | 795,878       |  |  | 2019    |  |   |           |  |  |         |  |   |            |  |  |         | 
|2000                          |   | 6,179         |  |  | 2020    |  |   |           |  |  |         |  |   |            |  |  |         | 
|2001                          |   | 292,351       |  |  | 2021    |  |   |           |  |  |         |  |   |            |  |  |         | 
|2002                          |   | 1,017,792     |  |  | 2022    |  |   |           |  |  |         |  |   |            |  |  |         | 
|2003                          |   | 1,189,476     |  |  | 2023    |  |   |           |  |  |         |  |   |            |  |  |         | 
|2004                          |   | 790,108       |  |  | 2024    |  |   |           |  |  |         |  |   |            |  |  |         | 
|2005                          |   | 2,166,634     |  |  | 2025    |  |   | 732,448   |  |  | 2015    |  |   |            |  |  |         | 
|2006                          |   | 1,764,202     |  |  | 2026    |  |   | 682,619   |  |  | 2016    |  |   | 205,123    |  |  | 2013    | 
|2007                          |   | 1,530,976     |  |  | 2027    |  |   |           |  |  |         |  |   | 293,528    |  |  | 2014    | 
|2008                          |   | 1,266,180     |  |  | 2028    |  |   |           |  |  |         |  |   | 99,852     |  |  | 2015    | 
|2009                          |   | 208,940       |  |  | 2029    |  |   | 97,040    |  |  |         |  |   | 78,953     |  |  | 2016    | 
|TOTAL                         | $ | 11,241,615    |  |  |         |  | $ | 1,512,107 |  |  |         |  | $ | 677,456    |  |  |         | 
|CONSOLIDATED TAX
      LOSSES |   |               |  |  |         |  |   |           |  |  |         |  | $ | 13,431,178 |  |  |         | 

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

|                               |   | 2009       |   |   | 2008       |  
|------------------------------ | - | ---------- | - | - | ---------- | -
|Deferred tax assets:           |   |            |   |   |            |  
|North America                  | $ | 4,400,034  |   | $ | 4,214,654  |  
|Outside North America          |   | 101,618    |   |   | 89,775     |  
|Sub-total                      |   | 4,501,652  |   |   | 4,304,429  |  
|Less Valuation
      allowance |   | (4,501,652 | ) |   | (4,304,429 | )
|Net deferred
      tax assets  |   | -          |   |   | -          |  

The valuation allowance as of September 30, 2009 and 2008
totalled $4,501,652 and $4,304,429 respectively which consisted primarily of
established reserves for deferred tax assets on non-capital operating loss carry
forwards for our entities in United States and our foreign entities. The tax
rates being used to determine deferred tax assets are estimated at 34.5% for
North America and 15% for outside North America.

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

|                                    |  | **2009** |   |  | **2008** |  
|----------------------------------- |  | -------- | - |  | -------- | -
|Combined Statutory Rates            |  | 31.3%    |   |  | 34.5%    |  
|Non-deductible expenses             |  | (9       | ) |  | (8       | )
|Change in valuation
      allowance |  | (22.3    | ) |  | (26.5    | )
|Effective tax rate                  |  | 0%       |   |  | 0%       |  

F -17

---



As of September 30, 2009 the Company had no unrecognized tax
benefits and as such required no adjustments to the financial statements. The
Company records any interest and penalties related to tax matters within general
and administrative expenses on the accompanying consolidated statements of
operations and comprehensive loss. These amounts are not material to the
consolidated financial statements for the periods presented. The Companys US
and Canadian tax returns are subject to examination by respective tax
authorities. Generally tax years 2006  2009 remain open to examination by those
respective tax authorities. (IRS in the United States and Canada Customs and
Revenue Agency in Canada).

NOTE 12. STOCK OPTION PLANS

No options were granted nor were any exercised during the year
ended September 30, 2009. There remains 14,260,000 options to purchase shares of
Common Stock as of September 30, 2009.

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

The intrinsic value of outstanding stock options defined, as
the difference between the exercise price and the closing price of the stock on
September 30, 2009, for those options that are in the money was $1,800.
(September 30, 2008 intrinsic value of nil since no option exercise price was
below the closing price on that date).

Proceeds received by the Company from exercises of stock
options are credited to Common Stock and additional paid-in capital. Additional
information with respect to the plans stock option activity is seen in the
table below. The weighted average exercise price and remaining contractual life
for all options seen at the bottom of the table was calculated by multiplying
the number of options by the exercise prices or remaining lives and dividing the
result by the total number of options. During fiscal 2008, with the agreement of
the option holders, the option expiry date for all remaining 2004 Plan options
was accelerated to June 30, 2012. All options now expire on or before June 30,
2012. The table below reflects remaining contractual life of the options as of
September 30, 2009.

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

F -18

---

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

|                                            |  | Number         |      |  |            |  |  |             |  |  | Share    |      |  |           |  |  |              | 
|------------------------------------------- |  | -------------- | ---- |  | ---------- |  |  | ----------- |  |  | -------- | ---- |  | --------- |  |  | ------------ | 
|2008 Stock                                  |  | Granted,       |      |  |            |  |  |             |  |  | Price on |      |  |           |  |  | Remaining    | 
|Incentive Plan                              |  | (exercised),   |      |  |            |  |  | Exercise    |  |  | Date of  |      |  | Expiry    |  |  | Contractual  | 
|                                            |  | (cancelled) or |      |  | Date       |  |  | Price $     |  |  | Grant $  |      |  | Date      |  |  | Life (Years) | 
|                                            |  | (expired)      |      |  |            |  |  |             |  |  |          |      |  |           |  |  |              | 
|                                            |  | 12,720,000     |      |  | 15/11/2004 |  |  | 0.15        |  |  | 0.11     |      |  | 6/30/2012 |  |  | 2.75         | 
|                                            |  | 500,000        |      |  | 15/11/2004 |  |  | 0.40  0.50 |  |  | 0.11     |      |  | 6/30/2012 |  |  | 2.75         | 
|                                            |  | 7,000,000      |      |  | 10/1/2005  |  |  | 0.16        |  |  | 0.14     |      |  | 6/30/2012 |  |  | 2.75         | 
|                                            |  | 390,000        |      |  | 8/2/2005   |  |  | 0.15        |  |  | 0.14     |      |  | 6/30/2012 |  |  | 2.75         | 
|                                            |  | 100,000        |      |  | 5/25/2005  |  |  | 0.13        |  |  | 0.13     |      |  | 6/30/2012 |  |  | 2.75         | 
|                                            |  | 3,290,000      |      |  | 10/17/2005 |  |  | 0.075       |  |  | 0.08     |      |  | 6/30/2012 |  |  | 2.75         | 
|Total Grant                                 |  | 24,000,000     |      |  |            |  |  |             |  |  |          |      |  |           |  |  |              | 
|Exercised                                   |  | (2,730,000     | )    |  | 12/27/2007 |  |  | 0.075       |  |  | -        |      |  | -         |  |  | -            | 
|Cancelled                                   |  | (6,640,000     | )    |  | 12/28/2007 |  |  | -           |  |  | -        |      |  | -         |  |  | -            | 
|Expired                                     |  | (460,000       | )    |  | 2/10/2008  |  |  | -           |  |  | -        |      |  | -         |  |  | -            | 
|Remaining                                   |  | 14,170,000     |      |  |            |  |  |             |  |  |          |      |  |           |  |  |              | 
|Granted                                     |  | 90,000         |      |  | 1/3/2007   |  |  | 0.10        |  |  | 0.10     |      |  | 1/3/2012  |  |  | 2.26         | 
|Total                                       |  | 14,260,000     |      |  |            |  |  |             |  |  |          |      |  |           |  |  |              | 
|Weighted Average of Options
      Remaining |  |                | 0.15 |  |            |  |  |             |  |  |          | 2.73 | 

NOTE 13. WARRANTS

The Company issued 3,000,000 warrants during the year ended
September 30, 2009 in exchange for financial advisory services. The Company
recorded $73,725 in stock based compensation for the year ended September 30,
2009 (2008- $197,795). No income tax benefit has been realized as a result of
warrant amortization expenses during 2009 and 2008. Stock based compensation is
included in general and administrative expenses seen on the consolidated
statement of operations and comprehensive loss. Stock based compensation for
fiscal 2009 was calculated using the Black-Sholes pricing model and the
following assumptions: expected volatility of 115%, risk free rate of return of
3.65%, expected life of 5 years, and a nil dividend rate.

During the year ending September 30, 2008 warrants to purchase
9,339,435 shares of common stock expired and warrants to purchase 2,737,228
shares of common stock were exercised and an exercise price of $0.10 per share.
Of these warrants, 1,862,228 had a remaining weighted average contractual life
of 0.69 years when exercised, and 875,000 warrants had a remaining contractual
life of 15 days when exercised. Warrants to purchase 5,770,000 shares of common
stock were granted during fiscal 2008, of which 770,000 were cancelled pursuant
to an application for listing of the Companys stock on the Toronto Venture
Exchange. Of these warrants, 5,000,000 were issued as a result of a private
placement, and 770,000 were issued pursuant to a promissory note issued during
the year. All of the warrants entitle the holder to purchase one share of Common Stock on or before
the expiry date. All of the warrants granted during 2008 have a 2-year
contractual life upon issuance.

F -19

---

Warrant amortization for the fiscal 2008 year was calculated
using the Black-Sholes pricing model and the following assumptions: expected
volatility of 127%, risk free rate of return of 4%, expected life of 2 years and
a nil dividend rate.

As at September 30, 2009 there were 8,000,000 warrants issued
and outstanding (September 30, 2008 -7,260,000). Additional details regarding
warrant activity and warrants outstanding as of September 30, 2009 and 2008 are
seen in the table below.

|Outstanding                                |  |                                                                                           |  |   | Weighted |  |  |        |  |  |            |  |  | Weighted           |  |  |                                                                                                                         | 
|------------------------------------------ |  | ----------------------------------------------------------------------------------------- |  | - | -------- |  |  | ------ |  |  | ---------- |  |  | ------------------ |  |  | ----------------------------------------------------------------------------------------------------------------------- | 
|as at                                      |  |                                                                                           |  |   | Average  |  |  |        |  |  |            |  |  | Average            |  |  |                                                                                                                         | 
|September                                  |  |                                                                                           |  |   | Exercise |  |  |        |  |  |            |  |  | Contractual        |  |  |                                                                                                                         | 
|30, 2007                                   |  |                                                                                           |  |   | Price    |  |  |        |  |  |            |  |  | Life (Years)       |  |  |                                                                                                                         | 
|14,336,663                                 |  |                                                                                           |  | $ | 0.22     |  |  |        |  |  |            |  |  | 0.53               |  |  |                                                                                                                         | 
|Activity during fiscal
      2008 and 2009 |  |                                                                                           |  |   |          |  |  |        |  |  |            |  | 
|5,000,000                                  |  | Granted November 14, 2007 as part of a Private Placement of
      5,000,000 units @ $0.10 | 
|770,000                                    |  | Granted during
      Q1, 2008 based on issuance of Promissory Notes @ $0.10               | 
|(1,862,228)                                |  | Exercised December 27, 2007 @ $0.10 per share                                             |  |   |          |  |  |        | 
|(770,000)                                  |  | Cancelled
      January 5, 2008 with the agreement of the warrant holder                  | 
|(875,000)                                  |  | Exercised February 28, 2008 @ $0.10 per share                                             |  |   |          |  |  |        | 
|(9,339,435)                                |  | Expired during
      fiscal 2008                                                          |  |   |          |  |  |        |  |  |            | 
|7,260,000                                  |  | Balance September 30, 2008                                                                |  |   |          |  |  |        |  |  |            | 
|(2,260,000)                                |  | Expired during
      fiscal 2009                                                          |  |   |          |  |  |        |  |  |            | 
|3,000,000                                  |  | Granted in exchange for advisory services April 1, 2009 @ $0.03 per
      share           | 
|8,000,000                                  |  | Balance
      September 30, 2009                                                          |  |   |          |  |  |        |  |  |            | 
|                                           |  |                                                                                           |  |   |          |  |  |        |  |  |            |  |  |                    |  |  |                                                                                                                         | 
|                                           |  |                                                                                           |  |   |          |  |  | Share  |  |  |            |  |  |                    |  |  |                                                                                                                         | 
|Outstanding                                |  |                                                                                           |  |   |          |  |  | Price  |  |  |            |  |  |                    |  |  |                                                                                                                         | 
|as at                                      |  |                                                                                           |  |   |          |  |  | on     |  |  |            |  |  | Remaining          |  |  |                                                                                                                         | 
|September                                  |  |                                                                                           |  |   | Exercise |  |  | Grant  |  |  | Expiry     |  |  | Contractual        |  |  |                                                                                                                         | 
|30, 2009                                   |  | Issue Date                                                                                |  |   | Price $  |  |  | Date $ |  |  | Date       |  |  | Life
      (Years) |  |  | Reason for
      Issuance                                                                                               | 
|5,000,000                                  |  | 12/31/2007                                                                                |  |   | 0.10     |  |  | 0.26   |  |  | 12/31/2009 |  |  | 0.25               |  |  | Private Placement of Units completed on Nov 14, 2007 and consisting of one share of common
      stock and one warrant. | 
|3,000,000                                  |  | 4/1/2009                                                                                  |  |   | 0.03     |  |  | 0.03   |  |  | 3/31/2014  |  |  | 4.50               |  |  | Issued in exchange
      for financial advisory services.                                                               | 
|                                           |  |                                                                                           |  |   |          |  |  |        |  |  |            |  |  |                    |  |  |                                                                                                                         | 
|                                           |  |                                                                                           |  |   | Weighted |  |  |        |  |  |            |  |  | Weighted           |  |  |                                                                                                                         | 
|                                           |  |                                                                                           |  |   | Average  |  |  |        |  |  |            |  |  | Average            |  |  |                                                                                                                         | 
|                                           |  |                                                                                           |  |   | Exercise |  |  |        |  |  |            |  |  | Contractual        |  |  |                                                                                                                         | 
|Total                                      |  |                                                                                           |  |   | Price    |  |  |        |  |  |            |  |  | Life
      (Years) |  |  |                                                                                                                         | 
|8,000,000                                  |  |                                                                                           |  |   | 0.07     |  |  |        |  |  |            |  |  | 1.84               |  |  |                                                                                                                         | 

F -20

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NOTE 14. RELATED PARTY TRANSACTIONS

The Company sourced some of its funding during the year from
one director. Mr. Lee, CEO and director loaned the Company $5,604 during the
year ended September 30, 2009. Interest accrued on all loans outstanding to Mr.
Lee (the only loans remaining from directors) totalled $8,586 as of September
30, 2009. The Company also repaid $8,000 in principal to extinguish one of the
Promissory Notes owing to Mr. Lee during fiscal 2009. The total loan amounts
including accrued interest owing to Mr. Lee as of September 30, 2009 was
$49,813. (September 30, 2008 - $47,250)

Mr. Lee loaned the Company approximately $43,828 during the
year ended September 30, 2008 taking back promissory notes. Interest accrued on
these loans totalled approximately $3,422 as at September 30, 2008. Interest
rates on all promissory notes outstanding range from 8% - 12% per annum. The
loans are repayable on or before the first anniversary date of issuance and are
unsecured.

NOTE 15. SEGMENTED INFORMATION

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

Revenues

The Company derived revenues from royalties and from consulting
services for the year ended September 30, 2009 and 2008.

|                                     |   | Years ended September 30, | 
|------------------------------------ | - | ------------------------- | 
|Revenue Stream                       |   | 2009                      | 
|Third Party
      Royalties (Mexico) |   | 137,223                   | 
|Consulting Fees (North America)      |   | 240,257                   | 
|Total
      Revenues                 | $ | 377,480                   | 
|                                     |   |                           | 
|Long Lived
      Assets              |   |                           | 
|                                     |   |                           | 
|                                     |   | Years ended September 30, | 
|Long Lived Assets                    |   | 2009                      | 
|North America                        | $ | 78,237                    | 
|Asia                                 |   | -                         | 
|Total Long
      Lived Assets        | $ | 78,237                    | 

NOTE 16. RECLASSIFICATIONS

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

NOTE 17. SUBSEQUENT EVENTS

Management has reviewed subsequent events through the date of
filing the Annual Report on Form 10-K that includes these consolidated financial
statements with the US Securities and Exchange Commission. There were no
material subsequent events since November 11, 2009 (audit completion date) that
would require recognition or note disclosure in these financial statements.

F -21

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