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

General

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

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

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

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

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

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

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

Recent Developments

We entered into a feasibility and option agreement with Gaia Biopharma Limited, a privately held, early stage biopharmaceutical company, during October 2008.
Under the agreement we will use our proprietary nano drug delivery platforms to formulate two injectable products. Should development and commercialization of these product candidates proceed beyond the formulation stage, we could earn development and sales milestones as well as royalties based on net sales.

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

One of our most promising drug candidates is Zysolin that uses an inhalable version of the drug Tobramycin (an antibiotic used to treat Gram-negative bacteria) to treat Gram-negative pneumonia. We have completed animal testing on Zysolin and are in the process of preparing protocols for Phase I/II human trials. We have completed safety and efficacy testing on Streptomycin (a drug used to treat tuberculosis) and are seeking collaborative partner(s) to initiate human trials on this product candidate. We continue to test formulations and conduct research on Vansolin (MRSA- pneumonia) and Streptomycin (tuberculosis). The delivery route for all of the above product candidates is Intravenous (I.V.) or Intratracheal (I.T.). Our objectives for the remainder of this fiscal year include:

•

Complete pre-clinical studies of Zysolin and prepare protocol for Phase I/II human trials;

•

Initiate Phase I human trials for Zysolin.

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

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

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

Overview of Results of Operations

The following tables summarize the results of operations for the years ended September 30, 2008 and 2007 and the quarterly results of operations for the past two years:

Year Ended September 30        2008        2007
                                  $           $
Net Sales                    97,499     170,441
Net Loss                (1,335,457) (1,750,236)
Net Loss Per Share           (0.01)      (0.03)

Three Sep 30 2008 June 30 2008 Mar 31 2008 Dec 31 2007 Sep 30 2007 Jun 30 2007 Mar 31 2007 Dec 31 2006

Months             $            $           $           $           $           $           $           $
Ended
Net           16,326       46,798      17,243      17,132      95,891      35,856      27,365      11,329
Sales
Net Loss    (59,252)    (293,761)   (397,255)   (585,189)   (227,583)   (462,236)   (469,640)   (590,777)
Net Loss      (0.01)       (0.01)      (0.01)      (0.01)      (0.01)      (0.01)      (0.01)      (0.01)
per
Share(1)

NOTE (1) Net Loss per share on a quarterly basis may not equal net Loss per
share for the six-month periods due to rounding.

RESULTS OF OPERATIONS

Year ended September 30, 2008 as compared to year ended September 30, 2007

Revenues

Revenues totalled $97,499 for the year ended September 30, 2008 as compared to $170,441 generated for the year ended September 30, 2007, a decrease of $72,942 or about 43%. Royalties from Andromaco based on Indaflex sales in Mexico increased to $97,499 from $81,602 generated for the same period a year ago based on increased sales of Indaflex. Royalties from our joint venture AlphaAP Inc. ceased as our joint venture partner is no longer pursuing sales of Flexogan in the Asia region. Finally we did not generate any consulting revenues during the year ended September 30, 2008 as compared to $76,000 generated a year ago. We anticipate generating both royalty revenues and consulting revenues in the new fiscal year.

General and Administrative Expenses

General and administrative expenses were $753,118 for the year ended September 30, 2008 as compared to $1,023,684 incurred for the same period a year ago, a decrease of $270,566 or about 26%.

Warrant amortization was $197,795 for the year ended September 30, 2008 as compared to $318,718 in 2006, a decrease of $120,923 or about 38%. There are no further amounts remaining to be amortized related to warrants or options as at September 30, 2008. We anticipate issuance of additional options and warrants in the future, which will continue to result in stock based compensation expense and may result in warrant amortization expense.

General and administrative salary and consulting fees totalled $198,723 for the year ended September 30, 2008 as compared to $283,774 incurred for the same period a year ago, a decrease of $85,051 or about 30%. The decrease stems from salary reductions and reduced consulting efforts. Head count remains static in administration category with 3 full time and 1 part time staff.

We recovered $120,000 in previously incurred financial consulting expenses, thereby reducing general and administrative expenses by the same amount. There were no comparable recoveries in the previous year.

We incurred $117,135 in investor relations expenses for the year ended September 30, 2008 as compared to $67,078 incurred in the same period a year ago, an increase of $50,057 or about 75%. We also incurred $124,380 in expenses pursuant to an application to list on the Toronto Stock Exchange - Venture market, with no comparable expenses in the previous year.

We realized $15,694 in foreign exchange gains during the year ended September 30, 2008 as compared to a foreign exchange loss of $136,558 incurred during the same period a year ago, a decrease of $152,252.

Non-salary administrative expenses incurred in China totalled $53,237 for the year ended September 30, 2008 as compared to $26,980 incurred in the same period a year ago, an increase of $26,257 or about 97%. The increase was primarily a result of $18,089 in increased travel expenses during 2008 as compared to fiscal 2007.

Research and Development Expenses

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

We incurred $583,195 in research and development expenses during the year ended September 30, 2008 as compared to $727,046 incurred in the same period a year ago, a decrease of $143,851 or about 20%. The decrease stems primarily from a reduction of $179,134 in research and development expenses incurred in China during fiscal 2008 as compared to fiscal 2007.

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

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

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

Sales and Marketing Expenses

We did not incur any sales and marketing expenses for the year ended September 30, 2008 as compared to $3,750 incurred in the same period a year ago. Our marketing efforts may increase in the future as our product candidates approach Phase I and Phase II testing. Our marketing efforts will focus on sourcing a licensee, collaborative partner or other arrangements in order to complete clinical trials and commercialize our product candidates.

Depreciation Expense

Depreciation expense totalled $78,269 for the year ended September 30, 2008 as compared to $92,279 incurred for the same period a year ago, a decrease of $14,010 or about 15%. Our capital asset purchases were $10,141 and $6,289 for the years ended September 30, 2008 and 2007 respectively. Fully depreciated assets no longer attracting depreciation expense more than offset the additional depreciation expense stemming from capital asset purchases.

Interest Expense

We incurred $35,857 in net interest expense during 2008 as a result of our borrowings and the issuance of promissory notes yielding interest ranging from 10% - 12% per annum. This compares to $122,600 incurred during 2007. To reduce interest expense in 2008, we converted $1,169,793 in promissory notes into shares of Common Stock of the Company during September 2007. We also used the proceeds from a private placement completed during November 2007 to repay all outstanding debt as of December 31, 2007. Further borrowings from January to September, 2008 resulted in the interest expense incurred. We will continue to seek funding in the form of Promissory Notes which will cause interest expense to be incurred.

Minority Interest

We issued 1,500 shares of our subsidiary's Common Stock (AlphaRx International Holdings Limited "AIH") to New Super Limited ("NSL") in June, 2006 in exchange for a cash infusion of $HK 10 million (about $1,288,826). There are presently 10,000 shares of Common Stock of AIH issued and outstanding, of which we own 85%. In accordance with SAB No. 51, we have accounted for the issuance of our subsidiary's stock as a capital transaction. A minority interest credit of $15,362 for the year ended September 30, 2008 ($44,297 for the year ended September 30, 2007) has resulted in a corresponding reduction of our consolidated expenses, this amount representing NSL's portion of AIH's loss.

Loss before Discontinued Operations

The above income and expenses resulted in a loss before discontinued operations of $1,337,578 for the year ending September 30, 2008 as compared to a net loss of $1,754,621 incurred for the same period a year ago.

Discontinued Operations

We determined to discontinue direct sales during 2006 of Flexogan because: (a) we were not able to source a qualified marketing partner to take over direct sales of Flexogan; (b) we did not have adequate financial resources or expertise to market Flexogan on a longer term basis, and (c) we concluded there was a better overall opportunity for success if we focused on drug development and enhancement while allowing our partners and potential partners to market our products in return for royalties and, or license fees.

The gain from operations of discontinued component, representing sales of Flexogan, was $2,121 for the year ended September 30, 2008 as compared to $4,385 for the same period a year ago, a reduction of $2,264 or about 52%. Direct sales of Flexogan have now ceased entirely.

Net Loss

Including the loss from discontinued operations and all other expense and income items described above, we incurred a net loss of $1,335,457 for the year ended September 30, 2008 as compared to a net loss of $1,750,236 for the year ended September 30, 2007.

Cumulative Translation Adjustment

The cumulative translation adjustment stems from unrealized foreign exchange gains and losses stemming from translation of foreign currency subsidiaries into U.S. dollars. Although the cumulative translation adjustment is reflected in the statement of operations, it is reflected after the net loss and flows into shareholders' equity directly. The cumulative translation adjustment was $95 for the year ended September 30, 2008 as compared to $1,280 for the year ended September 30, 2007.

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

Consulting Revenue

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

License Fees and Royalties

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

Royalties from Joint Venture

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

General and Administrative Expenses

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

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

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

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

Research and Development Expenses

Research and development expenses include costs for scientific personnel, supplies, equipment, outsourced clinical and other research activities, consultants, and other costs directly related to research and development of new and existing products. We are incurring research and development expenses both in China via our 85% owned subsidiary AlphaRx Life Sciences Ltd. and in Canada via our wholly owned subsidiary AlphaRx Canada Ltd.

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

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

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

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

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

Sales and Marketing Expenses

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

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

Depreciation Expense

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

Interest Expense

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

Minority Interest

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

Loss before Discontinued Operations

The above income and expenses resulted in a loss before discontinued operations of $1,754,621 for the year ending September 30, 2007 as compared to a net loss of $2,540,377 incurred for the same period a year ago.

Discontinued Operations

We determined to discontinue direct sales during 2006 of Flexogan because: (a) we were not able to source a qualified marketing partner to take over direct sales of Flexogan; (b) we did not have adequate financial resources or expertise to market Flexogan on a longer term basis, and (c) we concluded there was a better overall opportunity for success if we focused on drug development and enhancement while allowing our partners and potential partners to market our products in return for royalties and, or license fees.

Net Income from discontinued operations, representing sales of Flexogan was $4,385 for the year ended September 30, 2007 as compared to $18,084 for the same period a year ago, a reduction of $13,700 or about 76%. Direct sales of Flexogan will be nominal in the future.

Net Loss

Including the loss from discontinued operations and all other expense and income items described above, we incurred a net loss of $1,750,236 for the year ended . . .