AlphaRx, Inc. - Form 10-KSB - Prepared By TNT Filings Inc.

10KSB 1 alpharx10ksb.htm ALPHARX INC. - FORM 10-KSB AlphaRx, Inc. - Form 10-KSB - Prepared By TNT Filings Inc.

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended: September 30, 2005
[ ] 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	98-0177440
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

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

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

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

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

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

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

Issuer's revenues for its most recent fiscal year ended September 30, 2005 were $ 68,549.

The aggregate market value of the issuer's common stock (the only class of voting stock), held by non-affiliates was approximately $4,025,568 based on the average closing bid and ask price for the common stock on December 20, 2005.

As of December 20, 2005 there were 57,508,112 shares outstanding of the issuer's common stock.

AlphaRx, Inc.

FORM 10-KSB

For the Year Ended September 30, 2005

INDEX

PART I

Item 1. Description of Business 3

Item 2. Description of Property 18

Item 3. Legal Proceedings 18

Item 4. Submission of Matters to a Vote of Security Holders 18

PART II

Item 5. Market for Common Equity and Related Stockholder Matters 18

Item 6. Management Discussion and Analysis of Financial Condition 20

Item 7. Financial Statements, as restated 24

Item 8. Changes in and Disagreements with Accountants on Accounting 24

and Financial Disclosure

Item 8A Controls and Procedures 24

Item 8B Other Information 25

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; 27

Compliance with Section 16(a) of the Exchange Act.

Item 10. Executive Compensation 27

Item 11. Security Ownership of Certain Beneficial Owners and Management 30

Item 12. Certain Relationships and Related Transactions 31

Item 13. Exhibits and Reports on Form 8-K 31

Item 14. Controls and Procedures 31

SIGNATURES 32

EXHIBITS 35

PART I

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY BACKGROUND

In this annual report on Form 10-KSB, the "Company," "AlphaRx," "we," "us," and "our," refer to AlphaRx, Inc. and AlphaRx Canada Limited, its wholly-owned subsidiary.

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 L.L.C. 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 for 5 basis. All references to AlphaRx, Inc. common stock have been retroactively restated.

Effective July 1, 2003 AlphaRx, Inc. acquired all of the shares of AlphaRx Canada Limited for nominal value of $1. AlphaRx Canada Limited was dormant until this time. AlphaRx Canada Limited was incorporated under the laws of Ontario in order to streamline sales of the Company's products in the Canadian market. Prior to this time AlphaRx Canada Limited had no material assets or any liabilities and was wholly-owned by the President & CEO of AlphaRx, Inc. The annual report contained herein and the consolidated financial statements reflect the activities of AlphaRx, Inc. and of AlphaRx Canada Limited – its wholly-owned subsidiary.

COMPANY OVERVIEW

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

Our central strategy is to seek alliances with pharmaceutical companies which will assist us in completing the reformulation and development of the drugs and which will initiate clinical trials and commercialize the products.

We have one product in Phase II clinical trial and several products in different stages of preclinical development.

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

We intend to use our proprietary drug delivery technologies in collaborative arrangements with pharmaceutical companies to formulate their existing commercialized drugs as well as drugs under development by them. By improving drug efficacy and reducing side effects, we believe our drug

delivery technologies will provide pharmaceutical companies with the opportunity to enhance the commercial value of their existing products and new drug candidates. We also intend to develop either independently or jointly certain off-patent and over-the-counter ("OTC") products utilizing our proprietary drug delivery technologies.

We will recognize royalty revenues from distribution, licensing and joint venture arrangements only when collection of funds becomes imminent.

In August 2003, we out 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 will have the exclusive and non-transferable manufacturing rights and distribution rights in Mexico for Indaflex and we receive 15% royalties of the gross revenue from product sales. Furthermore, Andromaco is responsible for funding and completing any clinical and regulatory activities in support of Indaflex registration in Mexico. The Agreement has an initial term of five (5) years commencing on the effective date, and it shall automatically be renewed on terms as provided in the Agreement and shall not be terminated without cause. In June, 2005, Andromaco launched Indaflex into the Mexican market. In accordance with our agreement we recognized $4,302 in royalty revenues for the year ended September 30, 2005. We are also attempting to establish other international licensing and distribution arrangements to generate revenues from our existing and future proprietary pharmaceutical products.

We established AlphaRx International Holdings Limited ("AIH") in June, 2005 in order to pursue sales activities in the Asia Pacific region with experienced and established partners. AIH entered into a joint venture agreement with Basin Industrial Limited (a Hong Kong based corporation – "Basin"), whereby AIH and Basin will be equal holders of AlphaAP Inc., a company established in order to manufacture and sell our existing and certain future products. AlphaRx, through AIH, is to provide the products, manufacturing and distribution rights, whereas Basin is to provide funding, manufacturing and marketing expertise.

PRINCIPAL PRODUCT AND SERVICES AND PRINCIPAL MARKETS

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

The increasing need to deliver medication to patients efficiently and with fewer side effects has accelerated the development of new drug delivery systems. Today, medication can be delivered to a patient through many different means of delivery, including transdermal (through the skin), injection, implant and oral methods. These delivery methods, however, continue to have certain limitations. Transdermal patches are often inconvenient to apply can be irritating to the skin and the rate of release can be difficult to control. Injections are uncomfortable for most patients. Implants generally are administered in a hospital or physician's office and frequently are not suitable for home use. Oral administration remains the preferred method of administering medication. Conventional oral drug administration, however, also has limitations in that capsules and tablets have limited effectiveness in providing controlled drug delivery, resulting frequently in drug release that is too rapid (causing incomplete absorption of the drug), irritation to the gastrointestinal (GI) tract and other side effects. In addition capsules and tablets cannot provide localized therapy. Insoluble or poorly soluble drugs are a

major problem for the pharmaceutical industry, with over one-third of the drugs listed in the United States' Pharmacopoeia being insoluble or poorly soluble in water. Further, most approaches used to overcome insolubility result in clinical problems ranging from poor and erratic bioavailability to serious side effects.

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

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

Brand Name	Application	Delivery	Stage
		Route
Pharmaceuticals
2.5% Indaflex	Osteoarthritis	Topical	Phase II*
Rifamsolin	Tuberculosis	Oral	Preclinical underway **
Vansolin	Sepsis	I.V.	Preclinical underway**
Zysolin	Pneumonia	I.V.	Preclinical underway**
Ocusolin	Ocular Infection	Topical	Preclinical underway**
Acusolin	Cataracts	Topical	Preclinical underway**
Binoxan	Ocular Inflammation	Topical
Consumer Health (over-the-counter)
Flexogan	Analgesic	Topical	Market ready*
CoQ10ER	Nutritional Supplement	Oral	Market ready*

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

** Preclinical activities include basic in vitro and in vivo research attempting to adopt our Bioadhesive Colloidal Dispersion delivery system to the respective drug while maintaining or improving efficacy and effectiveness of the active ingredients. We anticipate that clinical trials, if they take place at all, will initially be conducted in Canada, at test sites which are pre-approved by both Health Canada and FDA.

Indaflex is our only prescription drug at the clinical trial stage. As of November, 2005 Phase II clinical trials have commenced. Indaflex is a topical NSAID (Non-Steroidal Anti-inflammatory Drug) 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 GI side-effects found with orally ingested NSAID's. We completed

a Phase I human trial for Indaflex in Canada during March, 2005.

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

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

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

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

Acusolin is a topical ophthalmic solution intended to treat senile cataracts. This early stage drug candidate is currently going through in-vivo studies including biodistribution study, evaluation of the efficacy in cataract animal models and toxicological studies.

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

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

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

BIOADHESIVE COLLOIDAL DISPERSION (BCD) SYSTEMS

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

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

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

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

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

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

DISTRIBUTION METHODS OF THE PRODUCTS AND SERVICES

We intend to have the BCD Systems used with as many pharmaceutical products as possible. Our primary strategy is to establish collaborative relationships with pharmaceutical and biotechnology companies to develop improved therapeutic products utilizing our BCD Systems technology. The products will be jointly developed, with the collaborative partner having primary responsibility to clinically test, manufacture, market and sell the product, and we retaining ownership of our technologies. We believe that our partnering strategy will enable 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 of products.

We have identified as potential partners three top tier drug companies we believe have drugs which can derive potential benefits utilizing the BCD Systems and have initiated preliminary discussions with some

of these companies. There can be no assurance that any of these discussions will lead to our entering into a development agreement with a collaborative partner or, if such agreement is entered into, that such collaboration will lead to the successful development of a product.

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

COMPETITION

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

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

PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS

It is our policy to file patent applications in the United States and certain foreign jurisdictions. We currently have one issued United States patent under the title "Toothpaste comprising bioadhesive submicron emulsion for improved delivery of antibacterial and anticaries agents" for the use of certain oral care products which has never been developed. This patent was issued on September 12, 2000 and will expire on June 17, 2019. We also have four United States patent pending applications as follows: "Vehicle for topical delivery of anti-inflammatory compounds" for the use of Indaflex to increase efficacy of non steroidal anti-inflammatory drugs, "Colloidal solid lipid vehicle for pharmaceutical application" 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.

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 issues and we cannot be certain that others have not filed patent applications for technology covered by our pending applications or that we were the first to file patent applications for such technology. Competitors may have filed applications for, or may have received patents and may obtain additional patents and proprietary rights relating to, compounds or processes that may block our patent rights or compete without infringing our patent rights. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or commercial advantage to us.

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

Trademarks

We have 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 agreements that prohibit the disclosure of confidential information to anyone outside of us. 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.

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

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

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

treatment or best standard of care, in the anticipation that significant clinical efficacy can be demonstrated. After clearance of the initial CTA application, the manufacturer has certain reporting responsibilities to the HPFB.

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

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

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

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

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

The process of completing clinical testing and obtaining regulatory approval for a new product is, in general, likely to take a number of years and require the expenditure of substantial resources. If an application is submitted, there can be no assurance that the HPFB or FDA will review and approve the marketing application in a timely manner. Even after initial approval has been obtained, further studies may be required by an agency to provide additional data or may be voluntarily conducted to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the HPFB and FDA require post-market surveillance programs to monitor a product's side effects. Results of post-marketing programs may limit or expand the further marketing of

products. It is not possible to accurately predict the time required for new product approval or the extent of clinical testing and documentation that may be required by regulatory authorities. Any delays in obtaining, or failing to obtain, regulatory approvals would significantly delay the development of markets and the receipt of revenues from the sale of these products.

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

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

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

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

RESEARCH AND DEVELOPMENT

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

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

PRODUCT LIABILITY AND OTHER INSURANCE

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

Although we currently maintain product liability insurance of approximately $5,000,000 through third party insurers that provides coverage for product liability claims, there can be no assurance that:

we will be able to maintain product liability insurance on acceptable terms;

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

any insurance will provide adequate protection against potential liabilities.

We have obtained Directors and Officers Liability insurance coverage in the amount of CDN $1,000,000 in order to be able to attract additional independent directors. There is no assurance, however, that such coverage would be adequate to protect us in the event of a claim. Renewal of this insurance is unlikely as the cost is prohibitive for the amount of coverage obtained.

EMPLOYEES

We have six full time employees, and three 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 excellent.

RISK FACTORS

We provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business and our products. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could 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, 2005, we had an accumulated deficit of approximately $ 12,011,944. Our gross revenues for the years ended September 30, 2005 and September 30, 2004 were $ 68,549 and $383,834 respectively. Our revenues have not been sufficient to sustain our operations. Revenue for 2005 and 2004 consisted primarily of revenue from sales of Flexogan in Canada. 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.

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 demand loans from our private lenders;
our ability to sell and market our products; and
other factors beyond our control.

At September 30, 2005, we had a working capital deficiency of approximately $75,925 as compared to positive working capital of $2,183,913 as at September 30, 2004. The independent auditors' report for the year ended September 30, 2005 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. However, our products may never become commercially successful.

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.

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

We are engaged in a rapidly changing and highly competitive field. To date, we have concentrated our efforts primarily on one pharmaceutical product -- Indaflex – for treating osteoarthritis and other inflammatory indications. Like the market for any pharmaceutical product, the market for treating arthritis and these other indications has the potential for rapid, unpredictable and significant technological change.

Competition is intense from specialized biotechnology companies, major pharmaceutical and chemical companies and universities and research institutions. We currently have no products approved for sale in the U.S. If we are successful in obtaining approval for one of our products, our future competitors will have substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we do. Major companies in the field of osteoporosis treatment include Novartis, Wyeth, Merck, Eli Lilly, Aventis and Procter & Gamble Co. Any one of these potential competitors could, at any time, develop products or a manufacturing process that could render our technology or products non-competitive or obsolete.

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

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

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

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

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

Our business exposes us to the risk of product liability claims that are a part of human testing, manufacturing and sale of pharmaceutical products. The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims even if our products are not actually at fault for causing an injury. Furthermore, our products may cause, or may appear to cause, adverse side effects or potentially dangerous drug interactions that we may not learn about or understand fully until the drug is actually manufactured and sold. Product liability claims can be expensive to defend and may result in large judgments against us. Even if a product liability claim is not successful, the adverse publicity, time, and expense involved in defending such a claim may interfere with our business. We may not have sufficient resources to defend against or satisfy these claims. We currently maintain CAD$3,000,000 in product liability insurance coverage and CAD$3,000,000 in umbrella coverage including product liability. However, these amounts may not be sufficient to protect us against losses or may be unavailable in the future on acceptable terms, if at all.

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

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

The market price of our common stock is volatile.

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

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

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.

Lack of Independent Directors

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

Ownership of our Common Stock by Current Officers and Directors

The present officers and directors own approximately 16.55% of the outstanding shares of common stock, and are therefore no longer in a position to elect all of our Directors and otherwise control the Company. The Company can no longer be controlled by any single shareholder or the management group as a

whole. Shareholders have no cumulative voting rights. (See Security Ownership of Certain Beneficial Owners and Management)

ITEM 2. DESCRIPTION OF PROPERTY

We lease approximately 2,930 square feet in Markham, Ontario, under a lease which expires on November 30, 2008 for approximately $2,600 a month. We believe that our existing properties are sufficient for our administrative, research and development needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

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

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

During the quarter ended September 30, 2005 no matters were submitted to a vote of security holders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION

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

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

		High $	Low $
Fourth Quarter	(Ended September 30, 2005)	0.13	0.07
Third Quarter	(Ended June 30, 2005)	0.14	0.09
Second Quarter	(Ended March 31, 2005)	0.16	0.12
First Quarter	(Ended December 31, 2004)	0.37	0.09
Fourth Quarter	(Ended September 30, 2004)	0.47	0.28
Third Quarter	(Ended June 30, 2004)	0.53	0.37
Second Quarter	(Ended March 31, 2004)	0.50	0.14
First Quarter	(Ended December 31, 2003)	0.45	0.14

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

Records of our stock transfer agent indicate that as of September 30, 2005, there were approximately 90 record holders of our common stock. As of December 20, 2005 there were approximately 93 record holders of our common stock. This does not include an indeterminate number of shareholders who may hold their shares in "street name".

DIVIDENDS

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

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

Equity Compensation Plan Information

Number of Securities Weighted-Average Number of securities remaining

to be issued upon Exercise Price of available for future issuance

exercise of outstanding outstanding under equity compensation plans

options, warrants, and options, warrants, (excluding securities reflected in

rights and rights the first two columns)

Equity 25,720,000 $0.16 None

Compensation

Plans

Approved by

Security

Holders

Equity None None None

Compensation

Plans Not

Approved by

Security

Holders

Total 25,720,000 $0.16 None

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

On February 8, 2005 we issued options to purchase up to 390,000 shares of common stock to employees and consultants of the Company. These options have an exercise price of $0.15, vest 100% on February 8, 2006, and expire on February 8, 2015. On May 25, 2005 we issued options to purchase up to 100,000 shares of common stock to a consultant of the Company. These options have an exercise price of $0.13, vest 100% on May 25, 2005 and expire on May 25, 2010.

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

RECENT SALES OF UNREGISTERED SECURITIES

We did not issue any unregistered securities during the year ended September 30, 2005.

During the three months ended December 31, 2004 we issued 5,203,470 shares of common stock pursuant to the conversion of $520,437 in convertible debt. We also issued warrants to purchase 10,406,940 shares of common stock at $0.30 per share in connection with the conversion of debt. These securities were registered pursuant to an SB-2 filed in September, 2004 and related amendments filed periodically until August, 2005.

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

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

GENERAL

AlphaRx is a drug delivery company specializing in the development of innovative therapeutic products for the pharmaceutical and consumer health care market. Our core competence is in the development of novel drug formulations for therapeutic molecules or compounds that have exhibited poor G.I. absorption due to poor solubility or have yet be administerable to the human body with an acceptable delivery method. Our drug delivery system is versatile and offers significant flexibility in the development of suitable dosage formulations (i.e. oral, topical or parenteral) to meet the requirements of specific drug molecules.

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

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

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

Please refer to the table under Product Pipeline, Item 1 for the current status of our product research and development activities. We have one pharmaceutical drug in the clinical trial stage (Phase 1 completed in March, 2005, Phase II underway as of November, 2005), and several pharmaceutical drugs in the preclinical stage.

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 drug delivery system to the specific drug in order to improve that drug's effectiveness; and (iii) we do not maintain a time control system to differentiate research and development activities.

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

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

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

We intend to continue investing in the further development of our drug delivery technologies and to actively seek collaborators and licensees to accelerate the development and commercialization of products incorporating our drug delivery systems. Depending upon a variety of factors, including collaborative

arrangements, available personnel and financial resources, we will conduct or fund clinical trials on such products and will undertake the associated regulatory activities.

RESULTS OF OPERATIONS

Year ended September 30, 2005 as compared to year ended September 30, 2004 as restated

Gross Revenue and Gross Margin

Gross revenues for the year ended September 30, 2005 decreased to $68,549 from $383,824 generated a year ago, a decrease of $315,275 or 82%. Based on the funds available to us we determined not to continue with aggressive and costly marketing programs related to direct sales of Flexogan, and focus our financial resources on completing Phase I and initiating Phase II for Indaflex clinical trials. Introduction of new products from major drug companies also increased competition in the pain relief category. We will continue to utilize existing distribution partners and seek out new distribution partners for Flexogan and other products in order to generate royalty revenues, and will not for the foreseeable future, pursue direct sales via marketing and advertising programs. We generated $4,302 in royalty revenues for the year ended September 30, 2005 with no comparable royalty revenues in the prior year.

Gross margin for the year ended September 30, 2005 was $39,441 or about 58% of sales versus $230,501 or about 60% of sales for the prior year. Excluding royalty revenue of $4,302 our gross margin on direct sales was $35,139 or about 55%. We reduced our pricing in late fiscal 2004 to remain competitive, and the full year of reduced pricing as compared to 2004 was the major cause of reduced gross margin.

General and Administrative Expenses

General and administrative expenses were $851,310 for the year ended September 30, 2005 as compared to $597,313 for the prior year, an increase of $253,997 or about 43%. Legal fees related primarily to patent applications increased to about $162,000 from about $74,000 in the prior year and increase of about $88,000. Stock based compensation expense related to granting of options to consultants was $62,300 with no comparable expense in the prior year. We also entered into a financial services advisory agreement during 2005, incurring an expense of $80,000 with no comparable expense in the prior year. Finally, investor relations expenses increased to about $47,700 from $20,025 incurred in the prior year, an increase of about $27,675.

Stock Based Compensation Expense

We decided to adopt the fair value accounting method for employee stock options as per SFAS 123(R) using the modified retrospective application method, effective April 1, 2005. Resultingly, we recorded $2,009,920 in stock based compensation expense related to employee options granted during the year. There was no comparable expense in the prior year.

Research and Development Expense

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.

Research and development expenses for the year ended September 30, 2005 totalled $1,337,503 as compared to $ 360,467 incurred for the same period a year ago, an increase of $977,036 or approximately 271%. We completed Phase 1 clinical trials and initiated Phase II clinical trials for Indaflex during the

year ended September 30, 2005. We incurred about $1,170,000 for Indaflex trials for the year ending September 30, 2005 inclusive of test batch manufacture, salaries, benefits, consulting expense, and equipment leasing as compared to about $192,000 incurred for the prior year – an increase of about $978,000. Additional development expenditures will consume most of our financial resources until the trials have been completed.

Sales and Marketing Expense

Sales and marketing expenses were $661,559 for the year ended September 30, 2005 as compared to $786,243 incurred for the same period a year ago, a decrease of $124,684 or about 16%. With limited funding available, and increased competition from new products, we curtailed marketing expenditures during our fourth quarter and focused our remaining resources on Indaflex clinical trials.

Depreciation

Depreciation was $54,077 for the year ended September 30, 2005 as compared to $36,447 for the same period a year ago, an increase of $17,630 or about 48%. Additional research equipment purchases of about $103,000 during the latter half of fiscal 2004 and about $45,000 during 2005 have served to increase depreciation expense during 2005.

Interest income/expense

We generated interest income of $22,804 for the year ended September 30, 2005 as compared to net interest expense incurred of $1,154,000 for the same period a year ago. Included in net interest expense for 2004 is $1,161,000 in interest charges related to the issuance of convertible debt with a beneficial conversion feature in March, 2004. The Company generated interest income from term deposits as a result of a private placement completed in September, 2004 in the amount of $3,410,027, net of issuance expenses.

Net Loss

The above income and expenses resulted in a net loss of $4,852,124 for the year ended September 30, 2005 as compared to a net loss, as restated, of $ 2,933,840 for the same period a year ago.

Liquidity And Capital Resources

As of September 30, 2005 the Company had a working capital deficiency of $75,925 as compared to positive working capital or $2,183,913 at September 30, 2004. We are actively seeking additional capital to continue Phase II clinical trials and maintain operations.

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

We currently do not have sufficient resources to complete the commercialization of all of our proposed products or to carry out our business strategy. Therefore, we will 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 may be dilutive to our existing shareholders, and debt financing, if available, may involve restrictive covenants on our business.

We expect to continue to spend capital on:

1. research and development programs;
2. preclinical studies and clinical trials;
3. sales and marketing activities; and
4. regulatory processes.

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

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

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

Certain Factors that may Affect Future Results

Certain of the information contained in this document constitutes "forward-looking statements", including but not limited to those with respect to the future revenues, our development strategy, involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risks and uncertainties associated with a drug delivery company including a history of net losses, unproven technology, lack of manufacturing experience, current and potential competitors with significant technical 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 2005 AND AS RESTATED FOR 2004

The financial statements for the fiscal year ending September 30, 2005 and, as restated for the fiscal year ending September 30, 2004, required by Item 7 are set forth on pages F-1 through F-18.

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

Not applicable

ITEM 8A. CONTROLS AND PROCEDURES

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

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of September 30, 2005, the chief executive officer and the chief financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act, as amended is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in Internal Controls

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

ITEM 8B. OTHER INFORMATION

None.

PART III

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

The following table sets forth, as of December 20, 2005, the name, age, and position of each of our executive officers and directors:

Name	Age	Position	Term

Michael M. Lee	42	Chairman of the Board of Directors
		Chief Executive Officer	Since 8/8/1997

Marcel Urbanc, C.A.	49	Chief Financial Officer and
		Principal Accounting Officer

Joseph Schwarz, Ph.D	51	Chief Scientist

Michael Weisspapir, MD, Ph.D	49	Chief Medical Officer

Sandro Persia	35	Secretary/Treasurer

Dr. David Milroy	54	Director	Since 4/15/2003

Dr. Ford Moore	54	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 the chief scientist of the Company. Dr. Schwarz has extensive experience in the research and development of controlled release drug delivery systems, his areas of expertise cover controlled delivery of drugs, colloidal and microcorpusculate drug delivery systems, submicron emulsions (SME), transdermal delivery (topical and systemic). Dr. Schwarz has published more than 40 articles in various scientific journals and has written over 20 patents and patent applications. Dr. Schwarz was the senior scientist at Pharmos Ltd., a publicly traded U.S. pharmaceuticals company from 1991 to 1995. From 1995 to 1997 he was the senior scientist in the research and development department of TEVA Pharmaceuticals Ltd. From 1997 to 1998, Dr. Schwarz was the senior scientist of D-PHARM, a pharmaceuticals concern located in Israel. From 1998 to 1999 Dr. Schwarz served as a part time consultant to the Company and has been with the company since that time.

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

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

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

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

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

Compensation of Directors

Effective as of March 29, 2005, non-management directors receive an annual fee of CDN $3,000 as well as meeting attendance fees of CDN $500 or CDN $250. 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 or our audit committee. The two independent board members who sat on the audit committee had no financial experience. It was determined that the audit committee be disbanded until appropriate qualified independent directors can be located. Based on the size of the organization – six full time employees, and 3 part time consultants, effective financial controls can still be maintained without an audit committee.

The board of directors has not yet established a compensation committee.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

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

Based solely upon our review of the copies of such forms that we received during the fiscal year ended September 30, 2005, 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 code of ethics at this time, as our focus has been on our growth and product development. Our board of directors is currently reviewing and evaluating a proposal to adopt a comprehensive code of ethics for our executive officers and directors.

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, 2005, 2004 and 2003 and each other executive officer of the Company who received compensation in excess of $40,000 for services rendered during any of those years ("named executive officers").

				LONG TERM
				COMPENSATION
				SECURITIES
NAME AND				UNDERLYING
PRINCIPAL POSITION	YEAR	SALARY ($)	BONUS ($)	OPTION (#)
Michael M. Lee	2005	45,510	0	13,000,000
President & C.E.O.(1)	2004	29,531	0	--
	2003	83,652	0	150,000
Joseph Schwarz	2005	125,267	0	3,000,000
Chief Scientist (1)	2004	22,731	0	--
	2003	56,992	0	80,000

Michael Weisspapir 2005 114,534 0 3,000,000

Chief Medical Scientist (1) 2004 59,100 0 --

2003 46,992 0 80,000

Marcel Urbanc 2005 52,664 0 270,000

Chief Financial Officer 2004 36,218 0 --

2003 13,000 0 80,000

1. The above officers accepted 392,500 restricted shares in lieu of their salary between 10/1/2002 and 3/31/2003.

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

The following table sets forth certain information regarding exercises of stock options during the fiscal year ended September 30, 2005 by the named executive officers. Value of unexercised options is considered to be the difference between exercise price and market price of $0.09 per share on September 30, 2005. No options were exercised by the named executive officers during fiscal 2005.

Name	Number of Exercisable Options at	Value of Unexercised In-The-Money
	Fiscal Year-End (#)	Options at Fiscal Year-End (#)
	Exercisable/Unexercisable	Exercisable/Unexercisable

Michael M. Lee	6,550,000/7,000,000	$0/$0
Marcel Urbanc	100,000/250,000	$0/$0
Joseph Schwarz	330,000/3,000,000	$0/$0
Michael Weisspapir	280,000/3,000,000	$0/$0

On October 17, 2005 the following options were granted to the above named executive officers: M. Lee – 800,000; M Urbanc – 200,000; J. Schwarz – 200,000 and M. Weisspapir – 200,000. These options are not included in the table above as they were granted subsequent to our fiscal year end.

2003 Stock Option Plan

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

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

2004 Stock Option Plan

The 2004 Plan is administered by the board of directors, which determines which directors, officers, employees, consultants, scientific advisors and independent contractors of the Company are to be granted options, the number of shares subject to the options granted, the exercise price of the options, and certain terms and conditions of the options. The board of directors may delegate administration of the 2004 Plan, including the power to grant options to persons who are not officers or directors of the Corporation, to a Stock Option Committee, composed of members of the board of directors. The board of directors, in its sole discretion, may amend, modify or terminate the 2004 Plan at any time without restriction. However, no amendment may, without stockholder approval, increase the total number of shares of stock which may be issued under the 2004 Plan (other than increases to reflect stock dividends, stock splits or other relevant capitalization changes). There are 24,000,000 authorized shares of our Common Stock that are not issued or outstanding, reserved for implementation of the 2004 Plan.

On November 15, 2004 the Company granted 13,220,000 options under the 2004 Plan to 14 individuals including officers, directors and consultants. On January 10, 2005 the Company granted 7,000,000 options under the 2004 Plan to Michael Lee – President. On February 8, 2005 the Company granted 390,000 options under the 2004 Plan to 5 individuals including officers, employees and consultants. On May 25, 2005 the Company granted 100,000 options under the 2004 Plan to a consultant of the Company. On October 17, 2005 the Company granted 3,290,000 options to employees and directors of the Company as well as to one external consultant. There are no options remaining to be granted under the 2004 Plan.

Equity Compensation Plan Information

Number of Securities Weighted- Number of securities

to be issued upon Average remaining available

exercise of Exercise Price of for future issuance

outstanding options, outstanding under equity

warrants, and rights options, compensation plans

warrants, and (excluding securities

rights reflected in the first

two columns

Equity 25,720,000 $0.16 None

Compensation

Plans Approved

by Security

Holders

Equity None None None

Compensation

Plans Not

Approved by

Security Holders

Total 25,720,000 $0.16 None

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 July 7, 2005 there were 57,508,112 shares of common stock issued and outstanding.

Name and Address	Amount and Nature of	Percent of
Of Owner	Beneficial Owner	Class

Michael Lee⁽¹⁾	7,580,726 shares	13.18%
Joseph Schwarz⁽²⁾	602,500 shares	1.05%
Ford Moore⁽³⁾	492,579 shares	0.86%
Michael Weisspapir⁽²⁾	457,500 shares	0.80%
David Milroy⁽³⁾	350,000 shares	0.60%
Marcel Urbanc⁽²⁾	20,000 shares	0.03%
Sandro Persia⁽²⁾	16,000 shares	0.03%
All directors and officers	9,519,305 shares	16.55%
as a group (7 persons)

^{(1) Director and Officer ⁽²⁾Officer ⁽³⁾Director

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as disclosed in this annual report, during the past two years, there
have been no material transactions, series of similar transactions or currently
proposed transactions, to which the Company was or is to be a party, in which
the amount involved exceeds $60,000 and in which any director or executive
officer, or any security holder who is known to the Company to own of record or
beneficially more than five percent of the Company's common stock, or any member
of the immediate family of any of the foregoing persons, had a material
interest.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. Exhibits required to be attached by Item 601 of Regulation S-B
are listed in the Index to Exhibits beginning on page 28 of this Form 10-KSB,
which is incorporated herein by reference.
(b) On December 16, 2004 we reported the issuance of a press release
regarding the manufacture of test batches for our Indaflex clinical trials.
On May 13, 2005 we informed the SEC of the necessity to
restate certain prior periods based on the beneficial conversion feature related
to the issuance of senior convertible debt during the period February to April,
2004.
30

On May 16, 2005 we filed an amended 8K regarding the original 8K filed May
13, 2005.
On May 18, 2005 we filed an 8K regarding the entry into a
material definitive agreement between AlphaRx International Holdings Limited ("AIH"),
a wholly owned subsidiary, and Basin Industrial Ltd., an independent, wholly
owned subsidiary of Advanced Pharmaceutical Ltd..
On June 3, 2005 we filed an 8K regarding a press release issued on June 2,
2005 commenting on Indaflex Phase 1 clinical trial results.
On June 6, 2005 we filed an 8K regarding a Joint Venture
established between AIH and Basin Industrial Ltd. AlphaAP Inc., the Joint
Venture to be established, will be used to market certain products in the Asia
Pacific Region.
On June 17, 2005 we filed an 8K regarding the official launch
of Indaflex in Mexico. Indaflex must complete further clinical trials in Canada
and the United States to be able to market Indaflex in those countries.
On June 28, 2005 we filed an 8K reporting that the test batches for our
Indaflex clinical trials were completed.
On June 29, 2005 we filed an 8K describing in more detail,
the Joint Venture agreement between AIH (our wholly owned subsidiary) and Basin
Industrial Ltd. (a wholly owned subsidiary of Advanced Pharmaceutical Ltd.).
Both parties will own 50% of AlphaAP Inc., a company to be established.
On July 13, 2005 we released an 8K indicating that Health Canada provided
approval for Phase 2 human trials with Indaflex.
On July 14, 2005 we filed an 8K regarding board approval to allow AlphaAP
Inc. (50% owned Joint Venture) to buy up to 10% of our outstanding common stock
in the open market.
On July 18, 2005 we filed an 8K regarding a press release, providing an
update on our antibiotic development program.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees : For the year ended September 30, 2005 we
incurred approximately $22,073 in external audit fees, and quarterly reviews in
connection with statutory and regulatory filings to our principal accountants as
compared to approximately $20,650 for the year ended September 30, 2004.

Audit-Related Fees: For the year ended September 30, 2005
we incurred no fees for assurance and related services by the principal
accountant. Similarly we incurred no fees for the year ended September 30, 2004.

Tax Fees: For the year ended September 30, 2005 we incurred approximately
$3,230 in tax related fees to our principal accountant as compared to
approximately $2,993 for the year ended September 30, 2004.

All Other Fees: For the year ended September 30, 2005 and 2004 we paid no
other fees to our principal accountant.

31

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 29, 2005}

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

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 29, 2005

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

INDEX TO EXHIBITS

EXHIBIT	PAGE
NO.	NO.	DESCRIPTION

3(i)(a)	*	Certificate of Incorporation dated August 8, 1997 (incorporated by
		reference to the Form 10-SB filed on June 16, 2000).
3(i)(b)	*	Amendment to Certificate of Incorporation dated January 26, 2000
		(incorporated by reference to the Form 10-SB filed on June 16, 2000).
3(i)(c)	*	Amended and Restated Certificate of Incorporation dated July 20, 2000
		(incorporated by reference to the Form 10-KSB filed on December 31, 2001).
3(ii)	*	Bylaws dated August 11, 1997 (incorporated by reference to the Form
		10-KSB filed on June 16, 2000).
10.1	*	2000 Stock Option Plan adopted June 20, 2000 (incorporated by reference to the
		Form 10-KSB filed on December 31, 2001).
10.2	*	Manufacturing and Distribution License Agreement with Industria Farmaceutica
		Andromaco, S.A. de C.V. (incorporated by reference to the Form 10KSB filed on
		July 8, 2005).
31.1	35	Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of
		2002.
31.2	36	Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of
		2002.
32.1	37	Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of Title 18
		United States Code.
32.2	38	Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of Title
		18 United States Code.

EXHIBIT 31.1

I, Michael Lee, President and Chief Executive Officer of AlphaRx, certify that:

1. I have reviewed this annual report on Form 10-KSB of AlphaRx, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;

5. We have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 29, 2005

/s/ Michael Lee

Michael Lee, President and Chief Executive Officer

EXHIBIT 31.2

I, Marcel Urbanc, Principal Accounting Officer and Chief Financial Officer of AlphaRx, certify that:

1. I have reviewed this annual report on Form 10-KSB of AlphaRx, Inc.;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;

5. We have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: December 29, 2005

/s/ Marcel Urbanc

Marcel Urbanc, Chief Financial Officer and Principal Accounting Officer

EXHIBIT 32.1

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

In connection with the annual report of AlphaRx, Inc. on Form 10-KSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof, Michael Lee, as chief executive officer of AlphaRx, Inc., does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1. This 10-KSB report fully complies with the requirements of Section 13(a) of the Exchange Act; and

2. The information contained in this 10-KSB report fairly presents, in all material respects, the financial condition and result of operations of AlphaRx, Inc.

/s/ Michael Lee
Michael Lee
President and Chief Executive Officer
December 29, 2005

EXHIBIT 32.2

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

In connection with the annual report of AlphaRx, Inc. on Form 10-KSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof, Marcel Urbanc, as chief financial officer and principal accounting officer of AlphaRx, Inc., does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1. This 10-KSB report fully complies with the requirements of Section 13(a) of the Exchange Act; and

2. The information contained in this 10-KSB report fairly presents, in all material respects, the financial condition and result of operations of AlphaRx, Inc.

/s/ Marcel Urbanc
Marcel Urbanc
Chief Financial Officer and Principal Accounting Officer
December 29, 2005

ALPHARx, INC.

CONSOLIDATED FINANCIAL STATEMENTS AND AUDIT REPORT

SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004, AS RESTATED

TABLE OF CONTENTS

CONSOLIDATED FINANCIAL STATEMENTS FOR 2005, AND AS PAGE(S) RESTATED FOR 2004

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2

CONSOLIDATED BALANCE SHEETS FOR 2005, AND AS RESTATED FOR 2004	F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR 2005, AND AS RESTATED FOR 2004	F-4

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR 2005, AND AS RESTATED FOR 2004	F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 2005, AND AS RESTATED FOR 2004	F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-7-17

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of AlphaRx, Inc. (incorporated in the State of Delaware) as at September 30, 2005 and 2004 and the related consolidated statements of operations, cash flows and stockholders' equity for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AlphaRx, Inc. as at September 30, 2005 and 2004 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 accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Should the Company be unable to continue as a going concern, certain assets and liabilities will have to be adjusted to their liquidation values.

	"SCHWARTZ LEVITSKY FELDMAN LLP"

Toronto, Ontario, Canada
December 9, 2005	Chartered Accountants

F - 2

ALPHARx, INC.

CONSOLIDATED BALANCE SHEETS

AS AT SEPTEMBER 30, 2005 AND 2004, AS RESTATED (Note 18)

		2005		2004
CURRENT ASSETS

Cash and Cash Equivalents	$	193,458	$	2,856,042
Accounts Receivable, net (note 3)		41,883		49,930
Prepaid Expenses		17,043		67,640
Inventory (note 4)		81,166		180,272

TOTAL CURRENT ASSETS		333,550		3,153,884


PROPERTY, PLANT & EQUIPMENT, net (note 5)		232,975		241,533
OTHER ASSETS
Licensing Right (note 6)		1		1

TOTAL ASSETS		556,526		3,395,418

CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities (note 7)		384,475		279,071
Notes Payable (note 8 and 18)		-		665,900
Litigation Liabilities (note 9)		25,000		25,000
TOTAL CURRENT LIABILITIES		409,475		969,971

CONTINGENCIES & COMMITMENTS (note 9 and 10)

SHAREHOLDERS' EQUITY
Common Stock: $ 0.0001 par value,
Authorized: 250,000,000 shares 2005 and 2004; Issued
and outstanding: 57,508,112; (2004 – 52,304,642) (note 11)		5,752		5,232
Additional paid-in capital		12,163,243		9,580,035
Deficit		(12,011,944)		(7,159,820)

TOTAL SHAREHOLDERS' EQUITY		157,051		2,425,447

TOTAL LIABILITIES AND SHAREHOLDERS'		$ 556,526	$	3,395,418
EQUITY

F - 3

ALPHARx, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004, AS RESTATED

	2005	2004

SALES	$ 68,549	$ 383,824

COST OF SALES	29,108	153,323

GROSS MARGIN	39,441	230,501


GENERAL AND ADMINISTRATIVE EXPENSE	851,310	597,313
STOCK BASED COMPENSATION EXPENSE	2,009,920	-
RESEARCH AND DEVELOPMENT EXPENSE	1,337,503	360,467
SALES AND MARKETING EXPENSE	661,559	786,243
DEPRECIATION	54,077	36,447
LOSS FROM OPERATIONS	(4,874,928)	(1,549,970)

OTHER INCOME AND EXPENSES

Interest income/(expense), net	22,804	(1,153,871)
Write down of Licensing Rights (note 6)	-	(229,999)
	22,804	(1,383,870)

LOSS BEFORE INCOME TAXES	(4,852,124)	(2,933,840)

INCOME TAX (note 12)	--	--

NET LOSS	$ (4,852,124)	$ (2,933,840)

NET LOSS PER COMMON SHARE, BASIC &
DILUTED	(0.08)	(0.13)

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING	57,251,521	22,741,117

F - 4

ALPHARx, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004, AS RESTATED

	Common Stock		Additional		Total
	Number of		Paid-in		Shareholders'
	Shares	Amount	Capital	(Deficit)	Equity(Deficit)

Balance at
September 30,
2003	16,920,082	$1,692	$4,024,039	$(4,225,980)	$(200,249)
Issuances of
Common Stock
for consulting,
legal services	100,000	11	29,990		30,001

Conversion of
Promissory Notes	3,752,340	375	1,535,859		1,536,234

Commission on
Promissory Notes
and Common
Stock Issued	4,308,186	431	580,120		580,551

Issuances of
Common Stock	27,224,034	2,723	3,410,027		3,412,750

Net Loss, as restated,
for the year ending
September 30, 2004				(2,933,840)	(2,933,840)

Balance, as of
September 30,
2004	52,304,642	$5,232	$9,580,035	$(7,159,820)	$2,425,447

Conversion of
Promissory Notes	5,203,470	520	510,988		511,508

Issuance of
Stock Options
for consulting services			62,300		62,300

Stock Based
compensation expense			2,009,920		2,009,920

Net Loss for
the year			(4,852,124)		(4,852,124)

Balance, as of
September 30,
2005	57,508,112	$5,752	$12,163,243	$ (12,011,944)	$ 157,051

F - 5

ALPHARx, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004, AS RESTATED

		2005		2004

CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(4,852,124)	$	(2,933,840)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization		54,077		36,447
Write down of licensing rights		-		229,999
Shares Issued For Services Rendered		-		610,552
Stock based compensation expense		2,009,920		-
Options Issued For Services Rendered		62,300		-
Interest expense on convertible debt		-		1,161,000
Changes in assets and liabilities:
(Increase)/Decrease in Inventory		99,106		(38,367)
(Increase)/Decrease in Accounts Receivable		8,047		(22,268)
(Increase)/Decrease in Prepaid Expenses		50,597		(63,950)
Increase in Accounts Payable and Accrued Liabilities		105,404		24,347

NET CASH USED IN OPERATING ACTIVITIES		(2,462,673)		(996,080)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of Machinery & Equipment		(45,519)		(151,445)

NET CASH USED IN INVESTING ACTIVITIES		(45,519)		(151,445)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of Notes Payable, net (note 8)		(154,392)		191,063
Proceeds from Issuance of Common Stock (net)		-		3,787,984

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(154,392)		3,979,047

NET INCREASE/(DECREASE) IN CASH	(2,662,584)			2,831,522

CASH, and cash equivalents, beginning of year		2,856,042		24,520

CASH, and cash equivalents, end of year	$	193,458	$	2,856,042
SUPPLEMENTARY DISCLOSURE:
The statement of cash flows has been prepared using indirect
method as defined under Statement of Financial Accounting
Standard of No. 95.
Income Tax Paid	$	0	$	0
Interest Paid	$	0	$	154,674

F - 6

ALPHARX INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND 2004, AS RESTATED

NOTE 1. NATURE OF BUSINESS AND GOING CONCERN

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

Effective April 22, 2005 AlphaRx International Holdings Limited (a British Virgin Island company and a wholly-owned subsidiary of AlphaRx Inc.) entered into a Joint Venture agreement with Basin Industrial Limited (a British Virgin Islands Company and a wholly-owned subsidiary of Advance Pharmaceutical Co. Ltd.). The Joint Venture, AlphaAP Inc., will be involved in manufacturing and marketing of certain of the Company's existing products and certain future products in the far east. Alpha AP Inc. remains inactive as of September 30, 2005 and will commence activities once local health authorities grant approval to commence over the counter sales of certain products.

The consolidated financial statements reflect the activities of the Company, AlphaRx Canada Limited and AlphaRx International Holdings Limited – its wholly owned subsidiaries. All material inter-company accounts and transactions have been eliminated.

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

The carrying amount of the Company's accounts receivable, accounts payable, accrued liabilities, litigation liabilities and notes payable approximates their fair value because of the short maturity of these instruments.

F - 7

Long-Term Financial Instruments

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

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

Inventory

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

Foreign Currency Translation

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

Earnings or Loss Per Share

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

Income Taxes

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

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

Property 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:

F - 8

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 deprecation are removed from the accounts and any gain or loss is included in the statement of income and retained earnings.

Research and Development

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

Revenue Recognition

Sales represent the invoiced value of goods supplied to customers. Revenues are recognized upon the passage of title to the customers, provided that the collection of the proceeds from sales are reasonably assured. A reserve for returns is considered periodically based on actual or anticipated returns from customers. The Company policy is not to accept returns, however, under certain circumstances returns are accepted to maintain good customer relations.

Use of Estimates

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

Long-Lived Assets

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

Intangible Assets

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

Concentrations of Credit Risks and Revenues

The Company's receivables are unsecured and are generally due in 30 Days. Currently, the Company does not have a diverse customer base as approximately 75% of revenues were derived from two

F - 9

customers during the year ended September 30, 2005, similar to 2004. The majority of the Company's customers are blue chip, publicly traded companies.

Stock Based Compensation

The Company has adopted the fair value accounting for employee stock options as per SFAS 123(R) using the modified retrospective application method, effective April 1, 2005. The fair value of the stock options are amortized into income over the vesting period of the options.

Recent Pronouncements

SFAS No. 151 - "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, "Inventory Pricing," that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.

SFAS 123 (Revised) - "Share Based Payment," which will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged.

SFAS 152 - In December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate TimeSharing Transactions - an amendment of FASB Statements No. 66 and 67" ("SFAS 152"). This statement amends FASB Statement No. 66 "Accounting for Sales of Real Estate" to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 "Accounting for Real Estate Time-Sharing Transactions" ("SOP 04-2"). SFAS 152 also amends FASB Statement No. 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects" to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005.

SFAS 153 - In December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005.

SFAS 154- In May 2005, the FASB issued SFAS 154 "Accounting Changes and Error Corrections". The statement replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires companies to apply voluntary changes in

F -10

accounting principles retrospectively whenever practicable. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

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

NOTE 3. ACCOUNTS RECEIVABLE

		2005		2004

Accounts receivable	$	44,794	$	51,576
Less: Allowance for doubtful accounts		2,911		1,646

	$	41,883	$	49,930

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

NOTE 4. INVENTORY

Inventory comprised the following:

		2005		2004

Raw materials	$	-	$	59,844
Finished goods		81,166		120,428

	$	81,166	$	180,272

NOTE 5. PROPERTY, PLANT & EQUIPMENT
		2005		2004

Leasehold Improvements	$	21,553	$	19,948
Furniture & Fixtures		31,590		25,089
Machinery & Equipment		335,264		293,475

COST		388,407		338,512

Less: Accumulated depreciation/amortization

Leasehold Improvements		7,598		3,573
Furniture & Fixtures		13,003		8,679
Machinery & Equipment		134,831		84,727

		155,432		96,979

NET	$	232,975	$	241,533

F -11

NOTE 6. LICENSING RIGHT

In January 2003, the Company entered into a sub-licence agreement with a third party drug research company for the world-wide commercialization of an experimental cancer drug. The cost of this sub-licence agreement was $230,000 which was paid by cash of $190,000 and shares with a value of $40,000. Costs to bring this drug to market are currently prohibitive for the Company, and having unsuccessfully attempted to resell these commercialization rights, they have been written down to a nominal value.

NOTE 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of the following:

		2005		2004


Trade Accounts Payable	$	275,363	$	177,962
Accrued Liabilities		109,112		101,109

	$	384,475	$	279,071

NOTE 8. NOTES PAYABLE

All notes payable outstanding as at September 30, 2004 were either converted into common stock plus warrants to purchase common stock, or repaid during the year. Of the notes payable, $520,347 were converted into common stock plus warrants to purchase common stock, and the remaining notes were repaid in cash. Issuance costs served to increase Shareholders' Equity by a net amount of $511,508.

EITF 98-5 and EITF 00-27 requires recognition of a conversion feature that is in-the-money at issuance as additional paid in capital, measured by allocating a portion of the proceeds equal to the intrinsic value of that feature. The senior convertible notes were issued at a conversion price less than the quoted market price on the date of issue. Accordingly, during 2004, interest expense of $1,161,000 was recognized and additional paid in capital was increased by the same amount via a restatement of previously reported amounts. See also Note 18 – Restatement.

NOTE 9. LITIGATION LIABILITY

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

NOTE 10. COMMITTMENTS

Leases

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

Year	Amount

2006	$72,535
2007	$71,221
2008	$56,741

F -12

2009	$17,118
2010	$ 1,890

TOTAL	$219,505

NOTE 11. COMMON STOCK

During July, 2004, the majority of the Company's stockholders, by written consent, agreed to increase the authorized number of common shares to 250,000,000 from the existing authorization for 100,000,000.

The Company is hence authorized to issue up to 250,000,000 shares of common stock. As of September 30, 2005, there remains issued and outstanding 57,508,112 shares of common stock which has a stated par value of $0.0001 per share.

During 2005, convertible notes totalling $520,347 were converted into 5,203,470 shares of common stock at $0.10 per share and 10,406,940 warrants to purchase shares of common stock at an exercise price of $0.30 per share. These warrants expire between September 1, 2007 and October 13, 2007.

During 2004, the Company issued 100,000 shares of common stock at a price of $0.30 per share for consulting and legal services; $375,234 of convertible promissory notes were converted into 3,752,340 shares of common stock at $0.10 per share; 1,313,542 shares were issued in lieu of cash commission for the placement of promissory notes at a value of $131,354; 27,224,034 shares were issued at $0.15 per share in connection with a private placement, and 2,994,644 shares were issued in lieu of cash commission at a value of $449,197 in connection with the private placement of stock. Total proceeds from the private placement, net of cash value of all commissions and other issuance expenses of $90,304, was $3,412,750.

NOTE 12. INCOME TAXES

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

		2005		2004

Deferred tax assets:

Operating loss carry forwards	$	2,872,665	$	1,927,500
Valuation allowance		2,872,665		1,927,500

Net deferred tax assets		0		0

These losses expire in varying amounts between 2010 and 2024.

NOTE 13. STOCK OPTION PLANS

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

F -13

from exercises of stock options are credited to common stock and additional paid-in capital. Additional information with respect to the Plan's stock option activity is as follows:

	Number of	Weighted
	Shares	Average
		Exercise
		Price
Options exercisable at September 30, 2003, 2004	1,150,000	$0.10
and 2005

The Company adopted a new option plan on February 10, 2003 under which options to purchase 1,500,000 common shares will be granted to certain key employees, consultants and directors. Under the Plan, the option exercise price and its fair market value are determined to be US$0.50 -US$0.69. All options will expire on February 10, 2008 and will vest, and become exercisable in three instalments. Proceeds received by the Company from exercises of stock options are credited to common stock and additional paid-in capital. Additional information with respect to the Plan's stock option activity is as follows:

	Number of	Weighted
	Shares	Average
		Exercise
		Price
Outstanding at February 10, 2003 (plan adoption)	0
Granted during fiscal 2003	645,000	$0.63
Exercised	0	$0.00
Cancelled	75,000	$0.63
Outstanding as of September 30, 2004 and 2005	570,000	$0.63
Options exercisable at September 30, 2005	570,000	$0.63

The Company granted 645,000 stock options to consultants during fiscal 2003. We recognized $280,594 in administrative expenses related to the granting of these options during fiscal 2003. The fair value of each option granted during 2003 was determined using the Black-Scholes Option Pricing Method.

The Company did not grant any stock options during fiscal 2004. The Company, via written consent from a majority of the holders of common stock, approved the adoption of a new option plan during July, 2004. Under this plan the Company can issue up to 24,000,000 options to purchase common stock. Under this plan the Company granted the following options to employees and consultants during fiscal 2005:

	Number of	Weighted
	Shares	Average
		Exercise
		Price
Outstanding at July 24, 2004 (plan adoption)	0
Granted during fiscal 2004	0
Granted during fiscal 2005	20,710,000	$0.16
Exercised/Cancelled	0
Outstanding as of September 30, 2005	20,710,000	$0.16
Options exercisable at September 30, 2005	600,000	$0.39

F -14

Additional information with respect to the Plan's stock option activity is as follows:

Grant	Quantity	Option	Expiry	Fair Value	Risk	Expected	Expected	Expected
Date	Granted	Price			Free	Life	Volatility	Dividend
					Rate
Nov 15,	13,220,000	$0.15	Nov 15,	$1,448,922	2.32%	10	185%	NIL
2004		to	2014			years
		$0.50
Jan 10,	7,000,000	$0.15	Feb 8,	$1,045,056	2.02%	10	177%	NIL
2005			2015			years
Feb 8,	390,000	$0.15	Feb 8,	$53,894	1.93%	10	156%	NIL
2005			2015			years
May 25,	100,000	$0.13	May 25,	$7,627	2.00%	10	70%	NIL
2005			2015			years
	20,710,000			$2,555,499

Of these options, 600,000 which were granted to consultants vest immediately, and the remaining 20,110,000 were granted to employees including directors and vest on the first anniversary of the grant date.

The Company has adopted the fair value accounting for employee stock options as per SFAS 123(R) using the modified retrospective application method, effective April 1, 2005. Resultingly, the Company recorded $2,009,920 in stock based compensation expense related to employee options during the year using the Black-Scholes option pricing model. The Company also recorded $62,300 in administrative expenses related to the options granted to consultants using the Black-Scholes option pricing model. See also subsequent event note below.

Had the Company continued to use APB 25, and not reflected employee stock based compensation expense, net loss and net loss per share both pre-tax and after tax basis would have been as follows:

	As reported using	Pro Forma per
	SFAS 123(R)	APB 25

Stock Based compensation	$ 2,072,220	$ 62,300

Net Loss (pre-tax/after tax)	$(4,852,124)	$(2,842,204)

Basic and Diluted Loss per share	$(0.08)	$(0.05)

NOTE 14. WARRANTS

The Company has the following warrants outstanding to purchase common stock at September 30, 2004 and 2005:

F -15

2005 2004

Warrants issued in conjunction with financing costs whereby

one warrant entitles the holder to purchase one share of

common stock at an exercise price of $1.10, expiring

December 19, 2005. 670,275 670,275

Warrants issued in conjunction with financing costs whereby

one warrant entitles the holder to purchase one share of

common stock at an exercise price of $0.65 expiring June 17,

2006. 75,524 75,524

Warrants issued in return for financial advisory services

whereby one warrant entitles the holder to purchase one share

of common stock at an exercise price of $0.05, expiring

September 1, 2007. 3,000,000 3,000,000

Warrants issued in conjunction with financing costs whereby

one warrant entitles the holder to purchase one share of

common stock at an exercise price of $0.15, expiring

September 1, 2007. 2,994,642 2,994,642

Warrants issued in conjunction with financing costs whereby

one warrant entitles the holder to purchase one share of

common stock at an exercise price of $0.30, expiring

September 1, 2007 2,287,669 2,287,669

Warrants issued in conjunction with conversion of promissory

notes and in conjunction with the private placement completed

during July and September, 2004. One warrant entitles the

holder to purchase one share of common stock at an exercise

price of $0.30, expiring September 1, 2007. 39,931,492 34,728,712

Warrants issued in conjunction with the conversion of

promissory notes and in conjunction with the private

placement completed during July and September, 2004. One

warrant entitles the holder to purchase on share of common

stock at an exercise price of $0.30, expiring October 13, 2007. 5,204,160 -

Warrant issued in conjunction with financing costs whereby

one warrant entitles the holder to purchase one share of

common stock at an exercise price of $0.05, expiring January

1, 2005. - 250,000

54,163,762 44,006,822

NOTE 15. SEGMENTED INFORMATION

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

F -16

NOTE 16. RECLASSIFICATIONS

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

NOTE 17. SUBSEQUENT EVENTS

On October 17, 2005 the Company granted 3,290,000 options under the Plan to employees including directors and officers. The exercise price of these options is $0.075 and all options vest on the first anniversary date of the grant.

On December 2, 2005 the Company extended the expiry date of $1.10 warrants. There were 670,275 warrants exercisable at $1.10 per share, expiring December 19, 2005. The expiry period was extended to December 19, 2007.

NOTE 18. RESTATEMENT OF 2004 FINANCIAL STATEMENTS

EITF 98-5 and EITF 00-27 requires recognition of a conversion feature that is in-the-money at issuance as additional paid in capital, measured by allocating a portion of the proceeds equal to the intrinsic value of that feature including the value of the warrants, which was applicable in this instance. The warrants were valued using Black –Scholes Pricing Method. The debt discount on the beneficial conversion has been limited to the proceeds received and has been amortized over the term of the convertible debt.

Previously reported results during fiscal 2004 did not include recognition of a conversion feature that is in-the-money at issuance as additional paid in capital, measured by allocating a portion of the proceeds equal to the intrinsic value of that feature. Restatement for the year ended September 30, 2004 was as follows:

Net Loss as previously reported:	$(1,772,840)

Interest expense per EITF 98-5	(1,161,000)
and EITF 00-27:

Net Loss, as restated:	$(2,933,840)

F -17

PART I
Item 1.	Description of Business	3
Item 2.	Description of Property	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18

PART II
Item 5.	Market for Common Equity and Related Stockholder Matters	18
Item 6.	Management Discussion and Analysis of Financial Condition	20
Item 7.	Financial Statements, as restated	24
Item 8.	Changes in and Disagreements with Accountants on Accounting	24
	and Financial Disclosure
Item 8A	Controls and Procedures	24
Item 8B	Other Information	25
PART III
Item 9.	Directors, Executive Officers, Promoters and Control Persons;	27
	Compliance with Section 16(a) of the Exchange Act.
Item 10.	Executive Compensation	27
Item 11.	Security Ownership of Certain Beneficial Owners and Management	30
Item 12.	Certain Relationships and Related Transactions	31
Item 13.	Exhibits and Reports on Form 8-K	31
Item 14.	Controls and Procedures	31

SIGNATURES		32

EXHIBITS		35

	Number of Securities	Weighted-Average	Number of securities remaining
	to be issued upon	Exercise Price of	available for future issuance
	exercise of outstanding	outstanding	under equity compensation plans
	options, warrants, and	options, warrants,	(excluding securities reflected in
	rights	and rights	the first two columns)

Equity	25,720,000	$0.16	None
Compensation
Plans
Approved by
Security
Holders

Equity	None	None	None
Compensation
Plans Not
Approved by
Security
Holders


Total	25,720,000	$0.16	None

Michael Weisspapir	2005	114,534	3,000,000
Chief Medical Scientist (1)	2004	59,100	--
	2003	46,992	80,000
Marcel Urbanc	2005	52,664	270,000
Chief Financial Officer	2004	36,218	--
	2003	13,000	80,000

	Number of Securities	Weighted-	Number of securities
	to be issued upon	Average	remaining available
	exercise of	Exercise Price of	for future issuance
	outstanding options,	outstanding	under equity
	warrants, and rights	options,	compensation plans
		warrants, and	(excluding securities
		rights	reflected in the first
			two columns

Equity	25,720,000	$0.16	None
Compensation
Plans Approved
by Security
Holders

Equity	None	None	None
Compensation
Plans Not
Approved by
Security Holders

Total	25,720,000	$0.16	None

	2005	2004

Warrants issued in conjunction with financing costs whereby
one warrant entitles the holder to purchase one share of
common stock at an exercise price of $1.10, expiring
December 19, 2005.	670,275	670,275

Warrants issued in conjunction with financing costs whereby
one warrant entitles the holder to purchase one share of
common stock at an exercise price of $0.65 expiring June 17,
2006.	75,524	75,524

Warrants issued in return for financial advisory services
whereby one warrant entitles the holder to purchase one share
of common stock at an exercise price of $0.05, expiring
September 1, 2007.	3,000,000	3,000,000

Warrants issued in conjunction with financing costs whereby
one warrant entitles the holder to purchase one share of
common stock at an exercise price of $0.15, expiring
September 1, 2007.	2,994,642	2,994,642

Warrants issued in conjunction with financing costs whereby
one warrant entitles the holder to purchase one share of
common stock at an exercise price of $0.30, expiring
September 1, 2007	2,287,669	2,287,669

Warrants issued in conjunction with conversion of promissory
notes and in conjunction with the private placement completed
during July and September, 2004. One warrant entitles the
holder to purchase one share of common stock at an exercise
price of $0.30, expiring September 1, 2007.	39,931,492	34,728,712

Warrants issued in conjunction with the conversion of
promissory notes and in conjunction with the private
placement completed during July and September, 2004. One
warrant entitles the holder to purchase on share of common
stock at an exercise price of $0.30, expiring October 13, 2007.	5,204,160	-

Warrant issued in conjunction with financing costs whereby
one warrant entitles the holder to purchase one share of
common stock at an exercise price of $0.05, expiring January
1, 2005.	-	250,000

	54,163,762	44,006,822