Cortland and Hughs, LLP

123 Norris Way

Ocean, CA 93456

987 345 0987

March 28, 2006

Mr. Gerald Clury, CEO

Cylan Pharmaceutical

234 Park Drive

Newton, CA 34589

Dear Mr. Clury

Cylan has contracted with Heath and Human Services(HHS) to manufacture Tamflu in preparation for a potential bird flu pandemic. Since a 30 percent payment will be received upon signing and the remainder when the doses are placed in the stockpile, when is revenue realized? According to a special rule released by the SEC, we can recognize revenue once we place Tamiflu into a Strategic National Stockpile.

In a special rule released by the SEC, revenue can be recognized once the drugs are placed in theStrategic National Stockpile. Companies must meet all requirements under the generally accepted accounting principles (GAAP) except for delivery of the product and inventory segregation (SEC, No. 33-8642, Part II, 2005). The three-year contract requires Cylan to maintain a fresh stockpile of Tamiflurather than actually delivering the product. In addition, no segregation of inventory is required and Cylan is permitted to sell drugs to other customers. Thus, the SEC requires a disclosure describing the market value of the stockpiled inventory, the rotation schedule, terms and conditions of the contract, and any third party sales (SEC, No. 33-8642, Part III, 2005).

Prior to the SEC’s special rule, the precedent for recognizing revenue for vaccine stockpiles came under GAAP and the Parness case. Revenue is recognized when it is realized or realizable and earned,and delivery of the product usually satisfies those criteria (FAS5, 1984, ¶¶83 &84, 2005). Since Tamiflu will not be delivered, the contract would have fallen under the category of a “bill and hold” transaction unless there was a pandemic (SEC, SAB101, 1999). However, Cylan would not have meet two of seven conditions for revenue recognition: a fixed schedule for delivery of the goods, and segregated inventory (SEC, AAER 108; SEC, No. 33-8642, Part II, 2005).

Please contact me at (345) 598-4598 if you have any additional questions.

Sincerely

MavisSeaver

Engagement Partner

Mr. Gerald Clury

March 28, 2006

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REFERENCES

Financial Accounting Standards Board (FASB). 1984. CON5—Recognition and measurement in financial statements of business enterprises, ¶83 & ¶84—Revenues and gains. Statement of Financial Accounting Standards. (2005). Financial Accounting Research System (FARS). Published by the Financial Accounting Standards Board.

Securities and Exchange Commission (SEC). (December 3, 1999) Staff Accounting Bulletin: No. 101 (SAB101). Revenue recognition in financial statements. Securities and Exchange Commission. 17 CFR Part 211. Retrieved on 03/03/2006 from

Securities and Exchange Commission (SEC). (August 5, 1986). AAER 108--Accounting and auditing enforcement release. In the Matter of Stewart Parness. Retrieved on 03/02/2006 from http.

Securities and Exchange Commission (SEC). (December 5, 2005). 17 CRF Parts 213, 241, and 271 [Release Nos. 33-8642l 34-52885; IC-27187]. Commission guidance regarding accounting for sales of vaccines and bioterror countermeasures to the Federal Government for placement into the pediatric vaccine stockpile or the strategic national stockpile. Retrieved on 03/02/2006 from