|  |
|--|
|  |
|  |
|  |
|  |

UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C.20549

FORM 10-QSB

(MarkOne)

|        |                                                                              |
|--------|------------------------------------------------------------------------------|
|   | QUARTERLY REPORT UNDER SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE OF 1934 |

For thequarterly period ended September  30,2006

|        |                                                                |
|--------|----------------------------------------------------------------|
|   | TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE EXCHANGE ACT |

For the transitionperiod from                                    to                                

Commission file number: 333-105793

CEPTORCORPORATION

|  |
|--|
|  |  |
|  |

(Nameof Small Business Issuer in ItsCharter)

|                                                              |  |  |                                     |
|--------------------------------------------------------------|--|--|-------------------------------------|
| Delaware                                                     |  |  | 11-2897392                          |
| (Stateor Other Jurisdiction of Incorporation orOrganization) |  |  | (I.R.S. Employer IdentificationNo.) |
| 200International Circle, Suite 5100 Hunt Valley,Maryland     |  |  | 21030                               |
| (Addressof Principal Executive Offices)                      |  |  | (ZipCode)                           |
|                                                              |

Issuer’s Telephone Number:(410) 527-9998

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes        No    

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 ofthe ExchangeAct).    Yes        No    

As ofNovember  22,  2006, there were 15,500,069 shares of theissuer’s common equity outstanding.

Transitional SmallBusiness Disclosure Format (Checkone):    Yes        No    

|  |
|--|
|  |
|  |
|  |
|  |

----

TableofContents

|        |  |  |                                                                                                                                                                                          |  |  |      |  |        |  |
|--------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------|--|--------|--|
|   |  |  |                                                                                                                                                                                     |  |  | Page |
| PartI  |  |  | FINANCIALINFORMATION                                                                                                                                                                     |  |  |      |  |   |  |
| Item1. |  |  | Financial Statements(Unaudited)                                                                                                                                                          |  |  |      |  | 1      |  |
|   |  |  | CondensedBalance Sheet – September 30,2006                                                                                                                                         |  |  |      |  | 1      |  |
|   |  |  | CondensedStatements of Operations for the three- and nine-month periods endedSeptember 30, 2006 and 2005, and for the period fromAugust 11, 1986 (date of inception) to September30,2006 |  |  |      |  | 2      |  |
|   |  |  | CondensedStatement of Changes in Stockholders’ Deficiency for thenine-month period ended September 30,2006                                                                         |  |  |      |  | 3      |  |
|   |  |  | CondensedStatements of Cash Flows for the nine-month periods endedSeptember 30, 2006 and 2005 and for the period fromAugust 11, 1986 (date of inception) to September30, 2006            |  |  |      |  | 4      |  |
|   |  |  | Notesto Condensed FinancialStatements                                                                                                                                                    |  |  |      |  | 6      |  |
| Item2. |  |  | Management’s Discussion and Analysis or Plan ofOperation                                                                                                                           |  |  |      |  | 22     |  |
| Item3. |  |  | Controls andProcedures                                                                                                                                                                   |  |  |      |  | 24     |  |
| PartII |  |  | OTHERINFORMATION                                                                                                                                                                         |  |  |      |  |   |  |
| Item2. |  |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                                                                                               |  |  |      |  | 25     |  |
| Item3. |  |  | Defaults Upon SeniorSecurities                                                                                                                                                           |  |  |      |  | 26     |  |
| Item5. |  |  | OtherInformation                                                                                                                                                                         |  |  |      |  | 27     |  |
| Item6. |  |  | Exhibits                                                                                                                                                                                 |  |  |      |  | 28     |  |
|        |

i

----

Table of Contents

PARTIFINANCIAL INFORMATION

|              |                       |
|--------------|-----------------------|
| Item1.  | Financial Statements. |

CEPTORCORPORATION(A DEVELOPMENT STAGE COMPANY)CONDENSED BALANCESHEET(Unaudited)

|                                                                                                                                                                                               |  |  |                  |   |             |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------------|---|-------------|---|
|                                                                                                                                                                                          |  |  | September30,2006 |
| ASSETS                                                                                                                                                                                        |  |  |                  |   |        |   |
| CurrentAssets:                                                                                                                                                                                |  |  |                  |   |        |   |
| Cash                                                                                                                                                                                          |  |  |                  | $ | 84,008      |   |
| Prepaid expenses and othercurrentassets                                                                                                                                                       |  |  |                  |   | 63,200      |   |
| Totalcurrent assets                                                                                                                                                                           |  |  |                  |   | 147,208     |   |
| Property andequipment, net                                                                                                                                                                    |  |  |                  |   | 41,129      |   |
| Deferred financingcosts                                                                                                                                                                       |  |  |                  |   | 1,460,976   |   |
| Securitydeposit                                                                                                                                                                               |  |  |                  |   | 14,268      |   |
| TOTALASSETS                                                                                                                                                                                   |  |  |                  | $ | 1,663,581   |   |
| LIABILITIESAND STOCKHOLDERS’DEFICIENCY                                                                                                                                                  |  |  |                  |   |        |   |
| CurrentLiabilities:                                                                                                                                                                           |  |  |                  |   |        |   |
| Accountspayable                                                                                                                                                                               |  |  |                  | $ | 3,887,947   |   |
| Accruedexpenses                                                                                                                                                                               |  |  |                  |   | 673,044     |   |
| Convertible notes,net of discounts of$2,980,409                                                                                                                                               |  |  |                  |   | 2,946,327   |   |
| Warrantliability                                                                                                                                                                              |  |  |                  |   | 9,750,587   |   |
| Conversion optionliability                                                                                                                                                                    |  |  |                  |   | 9,313,561   |   |
| Totalcurrentliabilities                                                                                                                                                                       |  |  |                  |   | 26,571,466  |   |
| Commitmentsandcontingencies                                                                                                                                                                   |  |  |                  |   |        |   |
| Stockholders’Deficiency:                                                                                                                                                                |  |  |                  |   |        |   |
| Preferred stock, $0.0001par value; authorized 20,000,000 shares, issued and outstanding –221.40 shares of Series A Convertible Preferred Stock; liquidationpreference –$5,535,000 |  |  |                  |   | 5,535,000   |   |
| Common stock,$0.0001 par value; authorized 100,000,000 shares, issued andoutstanding –15,500,069                                                                                        |  |  |                  |   | 1,550       |   |
| Additional paid-incapital                                                                                                                                                                     |  |  |                  |   | 26,384,834  |   |
| Deficitaccumulated during the developmentstage                                                                                                                                                |  |  |                  |   | (56,829,269 | ) |
| Totalstockholders’deficiency                                                                                                                                                            |  |  |                  |   | (24,907,885 | ) |
| TOTALLIABILITIES AND STOCKHOLDERS’DEFICIENCY                                                                                                                                            |  |  |                  | $ | 1,663,581   |   |
|                                                                                                                                                                                               |

(SeeNotes to Unaudited Condensed FinancialStatements)

1

----

Table of Contents

CEPTOR CORPORATION(A DEVELOPMENTSTAGE COMPANY)CONDENSED STATEMENTS OFOPERATIONS(Unaudited)

|                                                        |  |  |                                       |   |             |                                                                |  |  |  |   |            |   |  |  |  |   |             |   |
|--------------------------------------------------------|--|--|---------------------------------------|---|-------------|----------------------------------------------------------------|--|--|--|---|------------|---|--|--|--|---|-------------|---|
|                                                   |  |  | Three-MonthPeriod Ended September 30, |   |             | Cumulative August11,1986 (Date ofInception) toSeptember30,2006 |
|                                                   |  |  | 2006                                  |   |             | 2005                                                           |
| Revenues:                                              |  |  |                                       |   |        |                                                                |  |  |  |   |       |   |  |  |  |   |        |   |
| Otherincome                                            |  |  |                                       | $ | —     |                                                                |  |  |  | $ | —    |   |  |  |  | $ | 75,349      |   |
| Expenses:                                              |  |  |                                       |   |        |                                                                |  |  |  |   |       |   |  |  |  |   |        |   |
| Researchanddevelopment                                 |  |  |                                       |   | 238,947     |                                                                |  |  |  |   | 3,260,682  |   |  |  |  |   | 13,884,204  |   |
| In-processresearch anddevelopment                      |  |  |                                       |   | —     |                                                                |  |  |  |   | —    |   |  |  |  |   | 5,034,309   |   |
| Generalandadministrative                               |  |  |                                       |   | 326,504     |                                                                |  |  |  |   | 1,036,119  |   |  |  |  |   | 12,200,602  |   |
| Gainon extinguishment ofdebt                           |  |  |                                       |   | —     |                                                                |  |  |  |   | —    |   |  |  |  |   | (698,643    | ) |
| Changein fair value of derivative financialinstruments |  |  |                                       |   | 7,544,948   |                                                                |  |  |  |   | —    |   |  |  |  |   | 4,268,382   |   |
| Interestexpense                                        |  |  |                                       |   | 5,421,577   |                                                                |  |  |  |   | 208,735    |   |  |  |  |   | 13,079,052  |   |
| Interestincome                                         |  |  |                                       |   | —     |                                                                |  |  |  |   | (3,077     | ) |  |  |  |   | (52,318     | ) |
| Totaloperatingexpenses                                 |  |  |                                       |   | 13,531,976  |                                                                |  |  |  |   | 4,502,459  |   |  |  |  |   | 47,715,588  |   |
| Netloss                                                |  |  |                                       |   | (13,531,976 | )                                                              |  |  |  |   | (4,502,459 | ) |  |  |  |   | (47,640,239 | ) |
| Deemedpreferred stockdividends                         |  |  |                                       |   | —     |                                                                |  |  |  |   | —    |   |  |  |  |   | (10,100,616 | ) |
| Netloss available to commonstockholders                |  |  |                                       | $ | (13,531,976 | )                                                              |  |  |  | $ | (4,502,459 | ) |  |  |  | $ | (57,740,855 | ) |
| Losspershare:                                          |  |  |                                       |   |        |                                                                |  |  |  |   |       |   |  |  |  |   |        |   |
| Basicanddiluted                                        |  |  |                                       | $ | (0.87       | )                                                              |  |  |  | $ | (0.46      | ) |  |  |  |   |        |   |
| Weighted-averagecommon sharesoutstanding:              |  |  |                                       |   |        |                                                                |  |  |  |   |       |   |  |  |  |   |        |   |
| Basicanddiluted                                        |  |  |                                       |   | 15,500,069  |                                                                |  |  |  |   | 9,779,248  |   |  |  |  |   |        |   |
|                                                        |

|                                                        |  |  |                                     |   |             |      |  |  |  |   |             |   |
|--------------------------------------------------------|--|--|-------------------------------------|---|-------------|------|--|--|--|---|-------------|---|
|                                                   |  |  | Nine-MonthPeriod Ended September30, |
|                                                   |  |  | 2006                                |   |             | 2005 |
| Revenues:                                              |  |  |                                     |   |        |      |  |  |  |   |        |   |
| Otherincome                                            |  |  |                                     | $ | —     |      |  |  |  | $ | —     |   |
| Expenses:                                              |  |  |                                     |   |        |      |  |  |  |   |        |   |
| Researchanddevelopment                                 |  |  |                                     |   | 1,282,699   |      |  |  |  |   | 6,123,917   |   |
| In-processresearch anddevelopment                      |  |  |                                     |   | —     |      |  |  |  |   | —     |   |
| Generalandadministrative                               |  |  |                                     |   | 2,083,257   |      |  |  |  |   | 2,957,701   |   |
| Gainon extinguishment ofdebt                           |  |  |                                     |   | (387,362    | )    |  |  |  |   | (311,281    | ) |
| Changein fair value of derivative financialinstruments |  |  |                                     |   | 5,218,363   |      |  |  |  |   | —     |   |
| Interestexpense                                        |  |  |                                     |   | 10,716,217  |      |  |  |  |   | 665,612     |   |
| Interestincome                                         |  |  |                                     |   | —     |      |  |  |  |   | (41,897     | ) |
| Totaloperatingexpenses                                 |  |  |                                     |   | 18,913,174  |      |  |  |  |   | 9,394,052   |   |
| Netloss                                                |  |  |                                     |   | (18,913,174 | )    |  |  |  |   | (9,394,052  | ) |
| Deemedpreferred stockdividends                         |  |  |                                     |   | —     |      |  |  |  |   | (9,164,500  | ) |
| Netloss available to commonstockholders                |  |  |                                     | $ | (18,913,174 | )    |  |  |  | $ | (18,558,552 | ) |
| Lossper share:                                         |  |  |                                     |   |        |      |  |  |  |   |        |   |
| Basic anddiluted                                       |  |  |                                     | $ | (1.32       | )    |  |  |  | $ | (1.76       | ) |
| Weighted-averagecommon sharesoutstanding:              |  |  |                                     |   |        |      |  |  |  |   |        |   |
| Basic anddiluted                                       |  |  |                                     |   | 14,363,623  |      |  |  |  |   | 10,515,243  |   |
|                                                        |

(SeeNotes to Unaudited Condensed FinancialStatements)

2

----

Table of Contents

CEPTOR CORPORATION(A DEVELOPMENTSTAGE COMPANY)CONDENSED STATEMENT OF CHANGES INSTOCKHOLDERS’DEFICIENCY(Unaudited)

|                                                                                             |        |  |                |        |        |             |        |  |                          |        |           |                                             |  |  |                                    |  |            |  |  |  |  |   |        |  |  |  |  |   |            |   |  |  |  |   |             |   |  |  |  |   |             |   |
|---------------------------------------------------------------------------------------------|--------|--|----------------|--------|--------|-------------|--------|--|--------------------------|--------|-----------|---------------------------------------------|--|--|------------------------------------|--|------------|--|--|--|--|---|--------|--|--|--|--|---|------------|---|--|--|--|---|-------------|---|--|--|--|---|-------------|---|
|                                                                                        |        |  | PreferredStock |        |        | CommonStock |        |  | AdditionalPaid-InCapital |        |           | DeficitAccumulatedDuringtheDevelopmentStage |  |  | TotalStockholders’Deficiency |
|                                                                                             | Shares |  |                | Amount |        |             | Shares |  |                          | Amount |
| Balance,January  1,2006                                                                     |        |  |                |        | 248.15 |             |        |  |                          | $      | 6,203,750 |                                             |  |  |                                    |  | 11,744,120 |  |  |  |  | $ | 1,174  |  |  |  |  | $ | 22,646,665 |   |  |  |  | $ | (37,916,095 | ) |  |  |  | $ | (9,064,506  | ) |
| Commonstock issued January  2006 upon conversion of preferred shares($2.50)                 |        |  |                |        | (10.00 | )           |        |  |                          |        | (250,000  | )                                           |  |  |                                    |  | 100,000    |  |  |  |  |   | 10     |  |  |  |  |   | 249,990    |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Commonstock issued January  2006 upon conversion of replacementnotes($0.375)                |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 855,267    |  |  |  |  |   | 85     |  |  |  |  |   | 320,640    |   |  |  |  |   |        |   |  |  |  |   | 320,725     |   |
| Commonstock issued February  2006 upon conversion of preferred shares($2.50)                |        |  |                |        | (7.00  | )           |        |  |                          |        | (175,000  | )                                           |  |  |                                    |  | 70,000     |  |  |  |  |   | 7      |  |  |  |  |   | 174,993    |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Commonstock issued February  2006 upon conversion of 2005 ConvertibleDebentures ($0.5795)   |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 86,281     |  |  |  |  |   | 9      |  |  |  |  |   | 49,991     |   |  |  |  |   |        |   |  |  |  |   | 50,000      |   |
| Commonstock issued March  2006 upon conversion of preferred shares($2.50)                   |        |  |                |        | (6.75  | )           |        |  |                          |        | (168,750  | )                                           |  |  |                                    |  | 67,500     |  |  |  |  |   | 7      |  |  |  |  |   | 168,743    |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Commonstock issued March  2006 upon exercise of options ($0.359)                            |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 557,102    |  |  |  |  |   | 56     |  |  |  |  |   | 199,944    |   |  |  |  |   |        |   |  |  |  |   | 200,000     |   |
| Expensesincurred pursuant to entering into Stock PurchaseAgreement                          |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  |       |  |  |  |  |   |   |  |  |  |  |   | (38,181    | ) |  |  |  |   |        |   |  |  |  |   | (38,181     | ) |
| Commonstock issued March  2006 upon conversion of 2005 ConvertibleDebentures($0.3373)       |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 148,236    |  |  |  |  |   | 15     |  |  |  |  |   | 49,985     |   |  |  |  |   |        |   |  |  |  |   | 50,000      |   |
| Commonstock issued April  2006 upon conversion of 2005 ConvertibleDebentures ($0.1985)      |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 755,735    |  |  |  |  |   | 76     |  |  |  |  |   | 149,924    |   |  |  |  |   |        |   |  |  |  |   | 150,000     |   |
| Commonstock issued May  2006 upon conversion of preferred shares($2.50)                     |        |  |                |        | (3.00  | )           |        |  |                          |        | (75,000   | )                                           |  |  |                                    |  | 30,000     |  |  |  |  |   | 3      |  |  |  |  |   | 74,997     |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Commonstock issued May  2006 upon conversion of 2005 ConvertibleDebentures($0.1615)         |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 309,598    |  |  |  |  |   | 31     |  |  |  |  |   | 49,969     |   |  |  |  |   |        |   |  |  |  |   | 50,000      |   |
| Commonstock issued May  2006 pursuant to anti-dilution provisions($0.20)                    |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  | 776,230    |  |  |  |  |   | 77     |  |  |  |  |   | 155,169    |   |  |  |  |   |        |   |  |  |  |   | 155,246     |   |
| Incrementalfair value of additional common stock issuable upon conversion ofpreferredshares |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  |       |  |  |  |  |   |   |  |  |  |  |   | 1,439,168  |   |  |  |  |   |        |   |  |  |  |   | 1,439,168   |   |
| Amortizationof deferredcompensation                                                         |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  |       |  |  |  |  |   |   |  |  |  |  |   |       |   |  |  |  |   |        |   |  |  |  |   | 692,837     |   |
| Netloss                                                                                     |        |  |                |        |   |             |        |  |                          |        |      |                                             |  |  |                                    |  |       |  |  |  |  |   |   |  |  |  |  |   | 692,837    |   |  |  |  |   | (18,913,174 | ) |  |  |  |   | (18,913,174 | ) |
| Balance,September  30,2006                                                                  |        |  |                |        | 221.40 |             |        |  |                          | $      | 5,535,000 |                                             |  |  |                                    |  | 15,500,069 |  |  |  |  | $ | 1,550  |  |  |  |  | $ | 26,384,834 |   |  |  |  | $ | (56,829,269 | ) |  |  |  | $ | (24,907,885 | ) |
|                                                                                             |

(SeeNotes to Unaudited Condensed FinancialStatements)

3

----

Table of Contents

CEPTOR CORPORATION(A DEVELOPMENTSTAGE COMPANY)CONDENSED STATEMENTS OF CASHFLOWS(Unaudited)

|                                                                           |  |  |                                            |   |             |                                                                 |  |  |  |   |            |   |  |  |  |   |             |   |
|---------------------------------------------------------------------------|--|--|--------------------------------------------|---|-------------|-----------------------------------------------------------------|--|--|--|---|------------|---|--|--|--|---|-------------|---|
|                                                                      |  |  | Forthe Nine-Month PeriodEnded September30, |   |             | Cumulative August 11, 1986(DateofInception) to September30,2006 |
|                                                                      |  |  | 2006                                       |   |             | 2005                                                            |
| CashFlows Used In OperatingActivities:                                    |  |  |                                            |   |        |                                                                 |  |  |  |   |       |   |  |  |  |   |        |   |
| Netloss                                                                   |  |  |                                            | $ | (18,913,174 | )                                                               |  |  |  | $ | (9,394,052 | ) |  |  |  | $ | (47,640,239 | ) |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities: |  |  |                                            |   |        |                                                                 |  |  |  |   |       |   |  |  |  |   |        |   |
| Depreciationandamortization                                               |  |  |                                            |   | 14,302      |                                                                 |  |  |  |   | 13,432     |   |  |  |  |   | 45,792      |   |
| Write-offof in-process research anddevelopment                            |  |  |                                            |   | —     |                                                                 |  |  |  |   | —    |   |  |  |  |   | 5,034,309   |   |
| Chargefor stock option issued pursuant to spinoffagreement                |  |  |                                            |   | —     |                                                                 |  |  |  |   | —    |   |  |  |  |   | 2,082,500   |   |
| Stock-basedcompensation to employees anddirectors                         |  |  |                                            |   | 113,246     |                                                                 |  |  |  |   | 98,449     |   |  |  |  |   | 230,022     |   |
| Stock-basedcompensation tononemployees                                    |  |  |                                            |   | 579,591     |                                                                 |  |  |  |   | 1,109,175  |   |  |  |  |   | 4,802,822   |   |
| Stock-basedcomponent of payment of legalfees                              |  |  |                                            |   | —     |                                                                 |  |  |  |   | 70,000     |   |  |  |  |   | 70,000      |   |
| Stock-basedcomponent of litigationsettlement                              |  |  |                                            |   | —     |                                                                 |  |  |  |   | —    |   |  |  |  |   | 422,000     |   |
| Gainon extinguishment ofdebt                                              |  |  |                                            |   | (387,362    | )                                                               |  |  |  |   | (311,281   | ) |  |  |  |   | (698,643    | ) |
| Changein fair value of derivative financialinstruments                    |  |  |                                            |   | 5,218,363   |                                                                 |  |  |  |   | —    |   |  |  |  |   | 4,268,382   |   |
| Non-cashinterestexpense                                                   |  |  |                                            |   | 10,499,745  |                                                                 |  |  |  |   | 598,168    |   |  |  |  |   | 12,719,940  |   |
| Changesin assets andliabilities:                                          |  |  |                                            |   |        |                                                                 |  |  |  |   |       |   |  |  |  |   |        |   |
| Prepaidexpenses and other currentassets                                   |  |  |                                            |   | 112,585     |                                                                 |  |  |  |   | 15,228     |   |  |  |  |   | (63,200     | ) |
| Otherassets                                                               |  |  |                                            |   | 4,243       |                                                                 |  |  |  |   | —    |   |  |  |  |   | (14,268     | ) |
| Accountspayable and accruedexpenses                                       |  |  |                                            |   | (758,613    | )                                                               |  |  |  |   | 2,184,268  |   |  |  |  |   | 4,450,957   |   |
| Netcash used in operatingactivities                                       |  |  |                                            |   | (3,517,074  | )                                                               |  |  |  |   | (5,616,613 | ) |  |  |  |   | (14,289,626 | ) |
| CashFlows Used In InvestingActivities:                                    |  |  |                                            |   |        |                                                                 |  |  |  |   |       |   |  |  |  |   |        |   |
| Purchasesof property andequipment                                         |  |  |                                            |   | —     |                                                                 |  |  |  |   | (13,023    | ) |  |  |  |   | (86,921     | ) |
| CashFlows Provided By Financing Activities:                               |  |  |                                            |   |        |                                                                 |  |  |  |   |       |   |  |  |  |   |        |   |
| Proceeds fromissuances of commonstock                                     |  |  |                                            |   | 200,000     |                                                                 |  |  |  |   | 6,250      |   |  |  |  |   | 1,499,516   |   |
| Collectionsof subscriptionsreceivable                                     |  |  |                                            |   | —     |                                                                 |  |  |  |   | 303        |   |  |  |  |   | 303         |   |
| Netproceeds from issuances of preferredstock                              |  |  |                                            |   | —     |                                                                 |  |  |  |   | 7,666,444  |   |  |  |  |   | 10,448,629  |   |
| Acquisitionof treasury stock under putright                               |  |  |                                            |   | —     |                                                                 |  |  |  |   | (916,450   | ) |  |  |  |   | (1,279,125  | ) |
| Acquisitionof treasury stock under purchaseagreement                      |  |  |                                            |   | —     |                                                                 |  |  |  |   | (2,309,250 | ) |  |  |  |   | (2,309,250  | ) |
| Distributiontoshareholders                                                |  |  |                                            |   | —     |                                                                 |  |  |  |   | —    |   |  |  |  |   | (4,260      | ) |
| Capitalcontributed by Xechem International,Inc.                           |  |  |                                            |   | —     |                                                                 |  |  |  |   | —    |   |  |  |  |   | 350,310     |   |
| Proceedsfrom issuance ofdebt                                              |  |  |                                            |   | 3,528,000   |                                                                 |  |  |  |   | —    |   |  |  |  |   | 7,153,000   |   |
| Expenseof issuance of long termdebt                                       |  |  |                                            |   | (561,195    | )                                                               |  |  |  |   | —    |   |  |  |  |   | (1,048,568  | ) |
| Principalpayments on bridgeloans                                          |  |  |                                            |   | —     |                                                                 |  |  |  |   | —    |   |  |  |  |   | (350,000    | ) |
| Netcash provided by financingactivities                                   |  |  |                                            |   | 3,166,805   |                                                                 |  |  |  |   | 4,447,297  |   |  |  |  |   | 14,460,555  |   |
| Netincrease (decrease) incash                                             |  |  |                                            |   | (350,269    | )                                                               |  |  |  |   | (1,182,339 | ) |  |  |  |   | 84,008      |   |
| Cashat the beginning of period                                            |  |  |                                            |   | 434,277     |                                                                 |  |  |  |   | 1,331,513  |   |  |  |  |   | —     |   |
| Cashat the end of period                                                  |  |  |                                            | $ | 84,008      |                                                                 |  |  |  | $ | 149,174    |   |  |  |  | $ | 84,008      |   |
|                                                                           |

(SeeNotes to Unaudited Condensed FinancialStatements)

4

----

Table of Contents

CEPTOR CORPORATION(A DEVELOPMENTSTAGE COMPANY)CONDENSED STATEMENTS OF CASHFLOWS(Unaudited)

|                                                                                                  |  |  |                                            |   |         |                                                                 |  |  |  |   |           |  |  |  |  |   |            |  |
|--------------------------------------------------------------------------------------------------|--|--|--------------------------------------------|---|---------|-----------------------------------------------------------------|--|--|--|---|-----------|--|--|--|--|---|------------|--|
|                                                                                             |  |  | Forthe Nine-Month PeriodEnded September30, |   |         | Cumulative August 11, 1986(DateofInception) to September30,2006 |
|                                                                                             |  |  |                                       |
|                                                                                             |  |  | 2006                                       |   |         | 2005                                                            |
| SupplementalDisclosure of Cash FlowInformation:                                                  |  |  |                                            |   |    |                                                                 |  |  |  |   |      |  |  |  |  |   |       |  |
| Deemeddividend of the beneficial conversion feature of units sold in privateplacement            |  |  |                                            | $ |         |                                                                 |  |  |  | $ | 9,164,500 |  |  |  |  | $ | 10,100,616 |  |
| Issuanceof 2,902,500 shares of common stock upon conversion of preferredshares                   |  |  |                                            |   | 668,750 |                                                                 |  |  |  |   | 6,437,500 |  |  |  |  |   | 7,256,250  |  |
| Issuanceof 100,000 shares of common stock pursuant to stockplan                                  |  |  |                                            |   | — |                                                                 |  |  |  |   | 270,000   |  |  |  |  |   | 270,000    |  |
| Issuanceof 7,500 shares of common stock as compensation for pastservices                         |  |  |                                            |   | — |                                                                 |  |  |  |   | 46,875    |  |  |  |  |   | 46,875     |  |
| Issuanceof 25,000 shares of common stock as compensation for financialplanning                   |  |  |                                            |   | — |                                                                 |  |  |  |   | 75,000    |  |  |  |  |   | 75,000     |  |
| Issuanceof 23,000 shares of common stock in payment of accrued legalfees                         |  |  |                                            |   | — |                                                                 |  |  |  |   | 70,000    |  |  |  |  |   | 70,000     |  |
| Capitalcontribution for repurchase of common stock pursuant to Stock PurchaseAgreement           |  |  |                                            |   | — |                                                                 |  |  |  |   | 424,818   |  |  |  |  |   | 424,818    |  |
| Issuanceof 1,340,267 shares of common stock upon conversion of convertiblenote                   |  |  |                                            |   | 320,725 |                                                                 |  |  |  |   | —   |  |  |  |  |   | 502,600    |  |
| Issuanceof 1,299,850 shares of common stock upon conversion of convertibledebenture              |  |  |                                            |   | 300,000 |                                                                 |  |  |  |   | —   |  |  |  |  |   | 300,000    |  |
| Issuanceof 36,000 shares of common stock as debt issuancecosts                                   |  |  |                                            |   | — |                                                                 |  |  |  |   | —   |  |  |  |  |   | 90,000     |  |
| Issuanceof 451,597 shares of common stock to bridge loan investors andplacementagent             |  |  |                                            |   | — |                                                                 |  |  |  |   | —   |  |  |  |  |   | 550,000    |  |
| Issuanceof 167,610 shares up on conversion of convertiblenotes                                   |  |  |                                            |   | — |                                                                 |  |  |  |   | —   |  |  |  |  |   | 209,512    |  |
| Issuanceof convertible notes in exchange for bridge loans and long-term debtplus accruedinterest |  |  |                                            |   | — |                                                                 |  |  |  |   | —   |  |  |  |  |   | 1,111,240  |  |
|                                                                                                  |

(SeeNotes to Unaudited Condensed FinancialStatements)

5

----

Table of Contents

NOTE1 — BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION

Theaccompanying unaudited Condensed Financial Statements of CepTorCorporation have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financialinformation and the instructions to Form 10-QSB. Accordingly, they donot include all the information and footnotes required by accountingprinciples generally accepted in the United States for completefinancial statements. In the opinion of management all adjustments(which include only normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows forall periods presented have been made. The results of operations for thethree- and nine-month periods ended September  30,  2006are not necessarily indicative of the operating results that may beexpected for the entire year ending December  31,2006.

NOTE 2 — THECOMPANY

Organization

The financial statementspresented are those of CepTor Corporation (the‘‘Company’’), incorporated in August1986 in the State of Delaware.

Nature of Business andDevelopment Stage Operations

The Company is abiopharmaceutical company which had been engaged in the research anddevelopment of therapeutic products for neuromuscular,neurodegenerative and other diseases with a focus on orphan diseases(defined as those which affect less than 200,000 people). Since itsinception, the Company has devoted its efforts and resources to thedevelopment of its receptor mediated drug-targeting platform forneuromuscular and neurodegenerative diseases, and to raising the fundsnecessary to continue this research.

The Company is a developmentstage enterprise which has a limited history of operations and has notgenerated any material revenues since its inception. The Company hasreceived a limited amount of funding through grants and collaborativeresearch efforts in connection with developing its products. TheCompany does not have any products that are approved for commercialdistribution at the present time. As a development stage enterprise,the Company is subject to all of the risks and uncertainties that areassociated with developing a new business.

NOTE 3 —LIQUIDITY AND FINANCIAL CONDITION AND GOING CONCERN

As describedin Note  8, the Company is in default of substantially all of itsnote obligations, which amount to approximately $5,204,000 in aggregateprincipal. These defaults occurred principally as a result of theCompany's failure to make the required payments of principal andinterest under certain of these obligations (which triggered crossdefault provisions under the remaining loans) and to file aregistration statement pursuant to the 2006 6% Convertible Notesand file a post-effective amendment to its registration statement onForm  SB-2 covering shares issuable under the 2005 ConvertibleDebentures within a specified period. The Company is also required tohave sufficient authorized but unissued shares available to net sharesettle its 2005 convertible notes and all of its derivative financialinstruments.   The Company was attempting to negotiate arestructuring plan with respect to its credit obligations; however, noplan to restructure these obligations was finalized due (in part) toremaining issues that the Company is required to resolve with respectto its drug development program that will require the use ofsubstantial additional capital resources. 

The Company hashad difficulty securing the necessary capital to fully execute itsbusiness plan and has not been able to remain current with respect tothe payment terms of all of its operating obligations. In addition, theCompany has substantial convertible debt obligations with terms thatrequire repayment during the next twelve months. The Company hasexhausted substantially all of its capital resources, terminatedsubstantially all of its employees except for its chief executiveofficer and is currently unable to, and does not believe it is likely,to pursue further development of its product candidates. The Companypursued this course of action as a result of having been informed bythe 

6

----

Table of Contents

FDA that its IND remains on hold pending theresolution of two remaining issues. Additional internal research isrequired to fully resolve the FDA issues and complete theCompany’s own internal research program, which the Companyestimates would take an additional twelve to eighteen months tocomplete. The Company lacks the funding that is necessary to resolvethese issues and is currently unable to secure financing commitmentsfor this purpose. Due to these remaining issues and the lack ofadequate funding, the Company has halted development of its programsand has initiated discussions with its trade creditors to settle theirremaining outstanding balances. If the Company is successful in itsefforts to reach settlements with its trade creditors, it may evaluateother research programs as well as its current receptor mediateddrug-targeting platform and may explore the acquisition of otherbusinesses; however, suitable opportunities (if identified) are likelyto require additional capital that is not currently available to theCompany. Accordingly, there can be no assurance that the Company willever become operational. If the Company is not able to settle itsremaining outstanding balances, it will be forced to file forbankruptcy protection. The Company has secured its obligations underthe Debentures with all of its assets. These matters raise substantialdoubt about the Company’s ability to continue as a goingconcern. The financial statements do not include any adjustments thatmay result from the outcome of this uncertainty.

During the ninemonths ended September  30,  2006, the Company received (i)proceeds from exercises of stock options of $200,000, (ii) $3,055,000from the issuance of its 2006 6% Convertible Notes (see Note 8),and (iii) unsecured advances of $473,000. Subsequent toSeptember  30,  2006, the Company received $514,444 fromthe issuance of its 2006 6% Convertible Notes (which includesthe rollover of unsecured advances of $473,000 received prior toSeptember  30,  2006) (see Note 13).

Primarily as theresult of recording non-cash interest expense of $10,499,745, and thenon-cash expense associated with the increase in the fair values of itsderivative financial instruments of $5,218,363, the Company recorded anet loss for the nine-month period ended September  30,2006 of $18,913,174. Non-cash interest expense consisted primarily ofthe excess fair values of its derivative securities included in itsfinancing transactions and amortization of deferred financing costs ofthose financing transactions. The Company used net cash flows in itsoperating activities of $3,517,074 during the nine-month period endedSeptember  30,  2006. The Company’s working capitaldeficiency amounted to $26,424,258 and its development stageaccumulated deficit amounted to $56,829,269 at September30,  2006. The Company will require substantial additionalfunding if it is ever to support the development of its proposedproducts and fund the operations contemplated under its businessplan.

At September  30,  2006, the Company had$5,926,736 in principal of convertible notes outstanding. TheDecember  2004 Convertible Note in the principal amount of$448,736, was due July  3,  2006. There has not been anagreement on amended terms and no assurance that the Company will reachagreement with the note holder on amended terms. The terms of the 2004Convertible Note do not provide for penalties or other payments upondefault, and accordingly, the Company has not accrued a penalty as ofSeptember  30,  2006. Of the remaining debt, (i) $473,000was repaid from proceeds of a closing under the 2006 6%Convertible Note offering subsequent to September  30,2006, (ii) $250,000 in principal plus accrued interest is due beforeDecember  31,  2006, (iii) $3,055,000 in principalrepresenting 2006 6% Convertible Notes mature during the monthsof June  2007, July  2007, August  2007 andSeptember  2007 and (iv) the balance of $1,700,000 mature inDecember  2008. Currently, the Company does not have theavailable cash to repay these obligations as they come due and if thenote holders do not elect to convert their notes at maturity, theCompany will be required to raise additional capital in order to meetthese obligations. The note holders holding $1,700,000 in principalhave a security interest in all the assets of the Company.

Due tothe lack of resources to settle its obligations when due and thepossibility that if the Company files for bankruptcy protection thenote holders will demand payment, the Company has recorded all of itsliabilities as current.

In August  2006, the Companyentered into a letter of intent with Ferring with respect to a proposeddivesture of Ferring’s rights and interests with respect to SOD,subject to the Company’s completion of due diligence, theexecution of a definitive agreement and entry into a written

7

----

Table of Contents

agreement with the FDA on end points governingthe clinical trial of SOD. Due to the lack of resources and thetermination of the employees of Company, the Company currently believesit unlikely that the transactions with Ferring will be further pursuedor ever consummated.

NOTE 4 — SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

Basis of Presentation

TheCompany is a development stage enterprise. Accordingly, the Company hasincluded its cumulative statements of operations and cash flows for theperiod of August  11,  1986 (date of inception) toJune  30,  2006 in accordance with Statement of FinancialAccounting Standards (‘‘SFAS’’) No. 7‘‘Accounting and Reporting by Development StageEnterprises.’’

The Company’s net lossavailable to common shareholders as reported in its statement ofoperations for the period of August  11,  1986 (date ofinception) to September  30,  2006 is $57,740,855 whereasthe deficit accumulated during its development stage as reported on itsbalance sheet at June  30,  2006 is $56,829,269. Thedifference is a result of the acquisition of the Company by Xechem andthe restatement of its assets and liabilities to fair value, whichresulted in the Company’s accumulated deficit, net ofdistributions, from inception through December  31,  2003(the date of merger for financial reporting purposes) beingreclassified to additional paid-in capital, net of a deemed dividend tothe preferred shareholders.

Accounting for Stock-BasedCompensation

Prior to January  1,  2006, theCompany accounted for employee stock transactions in accordance withAccounting Principles Board (‘‘APB’’)Opinion No. 25 ‘‘Accounting for Stock Issued toEmployees.’’ The Company applied the pro forma disclosurerequirements of SFAS No. 123 ‘‘Accounting for Stock-BasedCompensation.’’

Effective January  1,2006, the Company adopted SFAS No. 123R ‘‘Share BasedPayment.’’ This statement is a revision of SFAS StatementNo. 123, and supersedes APB Opinion No. 25, and its relatedimplementation guidance. SFAS 123R addresses all forms of share basedpayment (‘‘SBP’’) awards including sharesissued under employee stock purchase plans, stock options, restrictedstock and stock appreciation rights. Under SFAS 123R, SBP awards resultin a cost that will be measured at fair value on the awards'grant date, based on the estimated number of awards that are expectedto vest and that will result in a charge to operations. The Companyadopted the modified prospective method with respect to accounting forits transition to SFAS 123(R) and had unrecognized compensation cost of$407,425 as deferred compensation at January  1,  2006.Accordingly, the Company recognized expense on the statement ofoperations of $37,686 and $113,058 for the fair value of these stockoptions which vested during the three- and nine-month periods endedSeptember  30,  2006, respectively. The fair value of theseawards was estimated at the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions:risk fee interest rate: 3.3% to 3.6%; expected dividendyield: 0%; expected option life: 10 years; and volatility:108% to 123%.

8

----

Table of Contents

For the three- and nine-month periods endedSeptember  30,  2005, the Company applied APB Opinion No.25, ‘‘Accounting for Stock Issued toEmployees.’’ As required under SFAS No. 148,‘‘Accounting for Stock-based Compensation –Transition and Disclosure,’’ the following table presentspro-forma net loss and basic and diluted loss per share as if the fairvalue-based method had been applied to all awards during thatperiod.

|                                                                    |  |  |                                          |   |            |                                       |  |  |  |   |             |   |
|--------------------------------------------------------------------|--|--|------------------------------------------|---|------------|---------------------------------------|--|--|--|---|-------------|---|
|                                                               |  |  | ThreeMonthPeriod EndedSeptember 30, 2005 |   |            | NineMonthPeriod EndedSeptember30,2005 |
| Net loss available to commonstockholders                           |  |  | $(4,502,459)                             |   |            | $(18,558,552)                         |
| Stock-basedemployee compensation cost, under fair value accounting |  |  |                                          |   | (15,485    | )                                     |  |  |  |   | (44,285     | ) |
| Pro-formanet loss under fair valuemethod                           |  |  |                                          | $ | (4,517,944 | )                                     |  |  |  | $ | (18,602,837 | ) |
| Netloss per share – basic anddiluted                         |  |  |                                          | $ | (0.46      | )                                     |  |  |  | $ | (1.76       | ) |
| Pro-formanet loss per share, basic anddiluted                      |  |  |                                          | $ | (0.46      | )                                     |  |  |  | $ | (1.77       | ) |
|                                                                    |

In thecurrent quarter the Company reclassified certain components of itsstockholders’ equity section to reflect the elimination ofdeferred compensation arising from unvested share-basedcompensation pursuant to the requirements of Staff Accounting BulletinNo. 107, regarding Statement of Financial Accounting Standards No.123(R), ‘‘Share-Based Payment.’’ Thisdeferred compensation was previously recorded as an increase toadditional paid-in capital with a corresponding reduction tostockholders’ equity for such deferred compensation. Thisreclassification has no effect on net income or totalstockholders’ equity as previously reported. The Companywill record an increase to additional paid-in capital asthe share-based payments vest.

Net Loss perShare

Net loss per share is presented under SFAS No. 128‘‘Earnings Per Share.’’ Under SFAS 128,basic net loss per share is computed by dividing net loss per shareavailable to common stockholders by the weighted average shares ofcommon stock outstanding for the period and excludes any potentialdilution. Diluted earnings per share reflect the potential dilutionthat would occur upon the exercise or conversion of all dilutivesecurities into common stock. The computation of loss per share for thethree- and nine-month periods ended September  30,  2006and 2005 excludes potentially dilutive securities because theirinclusion would be anti-dilutive.

Shares of common stock issuableupon the conversion or exercise of potentially dilutive securities areasfollows:

|                        |  |  |              |  |            |      |  |  |  |  |           |  |
|------------------------|--|--|--------------|--|------------|------|--|--|--|--|-----------|--|
|                   |  |  | September30, |
|                   |  |  | 2006         |  |            | 2005 |
| ConvertibleNotes       |  |  |              |  | 41,027,483 |      |  |  |  |  | 1,299,476 |  |
| Warrants               |  |  |              |  | 32,509,897 |      |  |  |  |  | 4,399,900 |  |
| SeriesA PreferredStock |  |  |              |  | 8,794,000  |      |  |  |  |  | 2,541,500 |  |
| Options                |  |  |              |  | 1,971,029  |      |  |  |  |  | 646,695   |  |
| Total                  |  |  |              |  | 84,302,409 |      |  |  |  |  | 8,887,571 |  |
|                        |

Accountingfor Conversion Options Embedded in Convertible Notes and ConvertiblePreferred Stock

The Company accounts for conversion optionsembedded in convertible notes and convertible preferred stock inaccordance with SFAS No. 133 ‘‘Accounting for DerivativeInstruments and Hedging Activities’’ and EITF 00-19‘‘Accounting for Derivative Financial Instruments Indexedto, and Potentially Settled in, a Company’s OwnStock.’’ SFAS 133 generally requires companies tobifurcate conversion options embedded in convertible notes andpreferred shares from their host instruments and to account for them asfree standing derivative financial instruments in accordance with EITF00-19. SFAS 133 provides for an exception to this rule when convertiblenotes and 

9

----

Table of Contents

mandatorily redeemable preferred shares, ashost instruments, are deemed to be conventional as that term isdescribed in the implementation guidance provided in paragraph 61 (k)of Appendix A to SFAS 133 and further clarified in EITF 05-2‘‘The Meaning of ‘Conventional Convertible DebtInstrument’ in Issue No. 00-19.’’ SFAS 133provides for an additional exception to this rule when the economiccharacteristics and risks of the embedded derivative instrument areclearly and closely related to the economic characteristics and risksof the host instrument.

The Company accounts for convertiblenotes (deemed conventional) in accordance with the provisions of EITF98-5 ‘‘Accounting for Convertible Securities withBeneficial Conversion Features,’’ and EITF 00-27‘‘Application of EITF 98-5 to Certain ConvertibleInstruments.’’ Accordingly, the Company records, as adiscount to convertible notes, the intrinsic value of such conversionoptions based upon the differences between the fair value of theunderlying common stock at the commitment date of the note transactionand the effective conversion price embedded in the note. Debt discountsunder these arrangements are amortized over the term of the relateddebt to their earliest date of redemption.

The Company issued$5,305,000 in principal of various convertible notes with embeddedconversion options accounted for as free standing derivative financialinstruments in accordance with SFAS 133 and EITF 00-19 and on the datesof issuance recorded liabilities for conversion options of $5,454,228.The fair value of these embedded conversion options were estimated atthe date of issuance using the Black-Scholes option pricing model withthe following assumptions: risk fee interest rate: 3.3% to5.2%; expected dividend yield: 0%; expected option life:one year to 3 years; and volatility: 130% to 219%. Theaccounting guidance instructs that the conversion options are aderivative liability and are marked to market for each reportingperiod. During the three- and nine-month periods ended September30,  2006, the Company recognized an expense of $4,218,282 and$4,052,457, respectively, for the increase in fair value of thederivative financial instruments. The fair value of these embeddedconversion options were estimated at September  30,  2006using the Black-Scholes option pricing model with the followingassumptions: risk fee interest rate: 4.7%; expected dividendyield: 0%; expected option life: 0.2 to 2.2 years; andvolatility: 219%.

The Company also determined that theconversion option embedded in its Series A Preferred stock is not afree-standing derivative in accordance with the implementation guidanceprovided in paragraph 61 (l) of Appendix A to SFAS133.

Accounting for Warrants and Freestanding DerivativeFinancial Instruments

The Company accounts for the issuanceof common stock purchase warrants and other freestanding derivativefinancial instruments in accordance with the provisions of EITF 00-19.Based on the provisions of EITF 00-19, the Company classifies as equityany contracts that (i) require physical settlement or net-sharesettlement or (ii) gives the Company a choice of net-cash settlement orsettlement in its own shares (physical settlement or net-sharesettlement). The Company classifies as assets or liabilities anycontracts that (i) require net-cash settlement (including a requirementto net-cash settle the contract if an event occurs and if that event isoutside the control of the Company) or (ii) give the counterparty achoice of net-cash settlement or settlement in shares (physicalsettlement or net-share settlement).

The terms of theCompany’s December  2005 Convertible Debentures (see Note8) provide for a conversion price in certain situations based on afloating conversion price which results in an indeterminable number ofshares of common stock potentially issued upon conversion. Underaccounting guidance provided by EITF 00-19, as of December31,  2005, the Company had liabilities of $3,130,957 representingthe fair value of warrants to purchase approximately 6.0  millionshares of common stock which had been granted to non-employees forservices rendered or as components of other financing instruments. TheCompany recorded additional liabilities for the fair value of warrantsgranted during the nine-month period ended September  30,2006 in the aggregate of $5,453,724. The fair value of these awards wasestimated at the date of grant using the Black-Scholes option pricingmodel with the following assumptions: risk fee interest rate:4.7% to 5.1%; expected dividend yield: 0%;expected option life: 3 years to 5 years; and volatility: 106%to 219%.

10

----

Table of Contents

The accounting guidance instructs that thewarrants are a derivative liability and are marked to market for eachreporting period. During the three- and nine-month periods endedSeptember  30,  2006, the Company recognized a charge of$3,326,666 and $1,165,906, respectively, for the increase in fair valueof the derivative financial instruments. The fair value of these awardswas estimated at September  30,  2006 using theBlack-Scholes option pricing model with the following assumptions: riskfee interest rate: 4.7%; expected dividend yield: 0%;expected option life: 1.4 years to 5.0 years; and volatility:219%.

Recently Issued AccountingPronouncements

In February  2006, the FinancialAccounting Standards Board (‘‘FASB’’)issued SFAS No. 155, which is an amendment of SFAS No. 133 and 140.This Statement: a) permits fair value re-measurement for any hybridfinancial instrument that contains an embedded derivative thatotherwise would require bifurcation, b) clarifies which interest-onlystrip and principal-only strip are not subject to the requirements ofSFAS 133, c) establishes a requirement to evaluate interests insecuritized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation, d) clarifies thatconcentrations of credit risk in the form of subordination are notembedded derivatives, e) amends SFAS 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other thananother derivative financial instrument. This Statement is effectivefor financial statements for fiscal years beginning afterSeptember  15,  2006. Earlier adoption of this Statement ispermitted as of the beginning of an entity’s fiscal year,provided the entity has not yet issued any financial statements forthat fiscal year. The Company is evaluating if this Statement will havean impact on the financial statements of the Company.

InMarch  2006, the FASB issued SFAS No. 156, which amends FASBStatement No. 140. This Statement establishes, among other things, theaccounting for all separately recognized servicing assets and servicingliabilities. This Statement amends SFAS 140 to require that allseparately recognized servicing assets and servicing liabilities beinitially measured at fair value, if practicable. This Statementpermits, but does not require, the subsequent measurement of separatelyrecognized servicing assets and servicing liabilities at fair value. Anentity that uses derivative instruments to mitigate the risks inherentin servicing assets and servicing liabilities is required to accountfor those derivative instruments at fair value. Under this Statement,an entity can elect subsequent fair value measurement to account forits separately recognized servicing assets and servicing liabilities.By electing that option, an entity may simplify its accounting becausethis Statement permits income statement recognition of the potentialoffsetting changes in fair value of those servicing assets andservicing liabilities and derivative instruments in the same accountingperiod. This Statement is effective for financial statements for fiscalyears beginning after September  15,  2006. Earlieradoption of this Statement is permitted as of the beginning of anentity’s fiscal year, provided the entity has not yet issued anyfinancial statements for that fiscal year. The Company believes thisStatement will not have an impact on the financial statements of theCompany once adopted.

In September 2006, the FASB issued SFAS No.157, ‘‘Fair Value Measurements’’(‘‘SFAS 157’’). This statement defines fairvalue, establishes a framework for measuring fair value in accordancewith accounting principles generally accepted in the United States(‘‘GAAP’’), and expands disclosures about fairvalue measurements. SFAS 157 does not require any new fair valuemeasurements. However, for some entities, the application of SFAS 157will change current practice. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years, with earlier applicationpermitted. The Company does not expect SFAS 157 to have a materialimpact on the Company's financial position or results ofoperations.

In September 2006, the staff of the Securities andExchange Commission issued Staff Accounting Bulletin No. 108(‘‘SAB 108’’) which provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current yearmisstatement. SAB 108 becomes effective in fiscal 2007. The Company isevaluating the effect that the adoption of SAB 108 may have on itspreviously issued financial statements.

11

----

Table of Contents

NOTE 5 — PREPAIDEXPENSES

Prepaid expense consists primarily of unamortizedpremiums paid to carriers for insurance policies and retainers paid forprofessional services to be rendered.

NOTE 6 — DEFERREDFINANCING COSTS

The Company capitalizes the costs and expensesincurred in entering into its debt obligations which are then amortizedover the term of the debt. During the year ended December31,  2005, the Company incurred $104,408 in deferred financingcosts associated with its December  2005 Convertible Debenturesoffering. During the three- and nine-month period endedSeptember  30,  2006, the Company incurred $950,469 and$1,757,515, respectively, in deferred financing costs associated withits 2006 6% Convertible Notes offering. During the three- andnine-month periods ended September  30,  2006, the Companyamortized $316,292 and $400,947 of deferred financing costs,respectively, to non-cash interest expense.

NOTE 7 —ACCRUED EXPENSES

Accrued expenses at September  30,2006 are asfollows:

|                                  |  |  |  |   |         |  |
|----------------------------------|--|--|--|---|---------|--|
| Financialinvestor relations fees |  |  |  | $ | 188,278 |  |
| Interest onconvertible notes     |  |  |  |   | 266,466 |  |
| Professionalfees                 |  |  |  |   | 35,000  |  |
| Liquidatingdamages               |  |  |  |   | 183,300 |  |
| Total                            |  |  |  | $ | 673,044 |  |
|                                  |

Inconnection with the sale of Series A Preferred Stock in a privateplacement, pursuant to the placement agent agreement, the Company hadagreed to spend up to 3% of the gross proceeds from its privateplacement on financial investor relations activities, all of which wasaccrued as ‘‘Financial Investor RelationsFees’’ and charged to additional paid-in capital uponeach closing of the private placement.

NOTE 8 —CONVERTIBLE NOTES

Note Obligations in Default

The Company is in default of substantially all of its noteobligations, which amount to approximately $5,204,000 in aggregateprincipal. These defaults occurred principally as a result of theCompany's failure to make the required payments of principal andinterest under certain of these obligations (which triggered crossdefault provisions under the remaining loans) and to file aregistration statement covering shares issuable under the 6%Convertible Notes and to file a post-effective amendment to itsregistration statement on Form  SB-2 covering shares issuableunder the 2005 Convertible Debentures within a specified period. TheCompany is also required to have sufficient authorized but unissuedshares available to net share settle its 2005 convertible notes and allof its derivative financial instruments. As of  September30, 2006, the Company, on a fully diluted basis, had  96,881,562shares issued and potentially issuable in connection with all of itsoutstanding common stock convertible instruments, stock options andderivative financial instruments. As a result of closings underthe 6% Convertible Note offering subsequent to September 30,2006, the Company does not have sufficient authorized but unissuedshares of common stock.

The Company has obtained waivers frominvestors holding its (i) December 2004 Convertible Note with respectto the Company's non-payment of principal on July 3, 2006, and(ii)  note holders with respect to its 2006 6% ConvertibleNote registration obligation. The Company was attempting to negotiate arestructuring plan with respect to its credit obligations; however, noplan to restructure these obligations was finalized due (in part) tothe notice that the Company received from the FDA regarding theremaining issues that needed to be resolved under its drug development

12

----

Table of Contents

program.  Although the Company hasobtained default waivers for certain defaults and is attempting toobtain waivers for other default conditions, the Company cannot provideassurance that it will, and since there are cross default provisions inthe debt obligations, the Company has classified all liabilities ascurrent.

Convertible Promissory Notes

Pursuantto an offer dated October  22,  2004 as amendedNovember  15,  2004 made to the holders of certainconvertible notes, the Company issued $901,728 of convertible notes dueDecember  8,  2005 in exchange for convertible notes in theprincipal amount of $825,000 plus accrued interest of $76,728 (the‘‘December 2004 ConvertibleNotes’’).

The December  2004 ConvertibleNotes were convertible into shares of the Company's common stockat $1.25 per share in amounts equal to the outstanding principalcancelled, plus accrued interest at 10% through the date ofconversion. In April  2005, the Company renegotiated certainterms of the December  2004 Convertible Notes to extend thematurity date until July  3,  2006 and in exchange theCompany (1) increased the contractual interest rate effectiveDecember  8,  2005 to 12%, (2) reduced theconversion rate from $1.25 to $0.75 per share and (3) eliminated theCompany's right to call the December  2004 ConvertibleNotes (the ‘‘Amended December  2004 ConvertibleNotes’’).

On December  9,  2005, theCompany amended a portion of the Amended December  2004Convertible Notes that was payable to Harbor Trust datedDecember  9,  2004, in the principal amount of $452,991 byreducing the conversion price to $0.375 from $0.75 per share (the‘‘Amended December  2005 HarborNote’’). The affect of this modification wasinsignificant since approximately 50% of the note was convertedin December  2005 and the remainder was converted inJanuary  2006. The Amended December  2005 Harbor Note bearsinterest at the rate of 10% per year through December8,  2005 and 12% per year thereafter. The AmendedDecember  2005 Harbor Note was fully converted on January27,  2006.

The remaining Amended December  2004Convertible Note in the principal amount of $448,736 which was dueJuly  3,  2006, is currently being renegotiated to amendthe maturity date or conversion terms. There has not been an agreementon amended terms and no assurance the Company will reach agreement withthe note holder. The terms of the December  2004 Convertible Notedo not provide for penalties or other payments upon default, andaccordingly, the Company has not accrued any as of June30,  2006. The conversion price was adjusted to $0.15 from $0.75pursuant to the 2006 6% Convertible Note offering whichcommenced June  1,  2006 (see below).

As ofSeptember  30,  2006, the principal amount of $448,736remains outstanding under the December  2004 ConvertibleNote.

2005 Harbor Note

On December9,  2005, the Company issued a convertible promissory note (the‘‘2005 Harbor Note’’) in the principalamount of $250,000 which bears interest at the rate of 6% perannum. All unpaid principal and interest under the 2005 Harbor Notewill be due and payable on December  9,  2006. The 2005Harbor Note is convertible, in whole or in part, at any time, intocommon stock at an adjusted conversion price of $0.15 per share(adjusted pursuant to the 2006 6% Convertible Note offeringcommenced on June  1,  2006, see below), subject to certainlimitations on conversion as set forth in the 2005 Harbor Note,including where the resulting number of shares converted on acumulative basis, would exceed 19.99% of the total number ofshares of common stock outstanding and, subject to a conversion priceadjustment in the event the Company offers or sells an option notpursuant to an approved stock plan to acquire common stock at a priceper share less than the conversion price. The conversion optionfeatured in this note is being accounted for as a free standingderivative financial instrument in accordance with SFAS 133 and EITF00-19. The fair value of the conversion option was to $294,505 atSeptember  30,  2006.

As of September30,  2006, the principal amount of $250,000 remains outstandingunder the 2005 Harbor Note. The amount of the unamortized discount ofthis note, based on the original allocation of proceeds to the carryingamount of the note and the free standing conversion option, amounts to$15,064.

13

----

Table of Contents

2005 ConvertibleDebentures

On December  9,  2005, the Companyentered into a securities purchase agreement (the‘‘Securities Purchase Agreement’’) withCornell Capital Partners, LP (‘‘CornellCapital’’) pursuant to which Cornell Capital haspurchased, in a private placement, secured convertible debentures inthe aggregate principal amount of $2,000,000 (the ‘‘2005Convertible Debentures’’), which bear interest at therate of 8% per annum. Pursuant to the Securities PurchaseAgreement, the Company issued a 2005 Convertible Debenture in theprincipal amount of $1,000,000 on each of December  9,2005 and December  28,  2005. Each 2005 ConvertibleDebenture has a three-year maturity from the date of issuance and wassubject to earlier conversion or redemption pursuant to itsterms.

Cornell Capital has the right to convert a portion or allof the outstanding principal and interest under the 2005 ConvertibleDebentures into shares of common stock at a conversion price per shareequal to the lesser of $0.9765 (105% of the closing bid price ofthe common stock on December  8, 2005) (the ‘‘FixedPrice’’) or (ii) 95% of the lowest closing bidprice of the common stock for the twenty trading days immediatelypreceding the conversion date (the ‘‘FloatingPrice’’ and together with the Fixed Price, the‘‘Conversion Price’’), subject toadjustment as provided in the 2005 Convertible Debentures; provided,that any such conversion based on the Floating Price will generally belimited to $150,000 of principal outstanding under the 2005 ConvertibleDebentures in any thirty day period; and further provided, that CornellCapital may not convert the 2005 Convertible Debentures into shares ofcommon stock if such conversion would result in Cornell Capital,together with its affiliates, beneficially owning in excess of4.9% of the then issued and outstanding shares of common stock.The Conversion Price and number of shares of common stock issuable uponconversion of the 2005 Convertible Debentures is subject to certainexceptions and adjustment for stock splits and combinations and otherdilutive events.

Subject to the terms and condition of the 2005Convertible Debentures, the Company had the right at any time uponthree business days notice to redeem the 2005 Convertible Debentures,in whole or in part. If the closing bid price of the common stock, isless than the Fixed Price at the time of the redemption, the Company isobligated to pay, in addition to the principal and accrued interestbeing redeemed, a redemption premium of 8% of the principalamount being redeemed (the ‘‘RedemptionAmount’’). If the closing bid price is greater than theFixed Price, the Company may redeem up to 50% of the principalamount at the Redemption Amount and the remaining 50% at thegreater of the (x) Redemption Amount or (y) the market value of thecommon stock. In addition, Cornell Capital will receive a three-yearwarrant to purchase 25,000 shares of common stock for every $100,000redeemed by the Company, on a pro rata basis, at an exercise price pershare of $0.9765 (the ‘‘RedemptionWarrant’’).

If an Event of Default (as such term isdefined in the 2005 Convertible Debentures) occurs, any principal andaccrued interest outstanding will become immediately due and payable,in cash or common stock, at Cornell Capital’selection.

Pursuant to the Securities Purchase Agreement, onDecember  9,  2005, the Company issued to Cornell Capital awarrant to purchase 1,000,000 shares of common stock at an exerciseprice per share of $1.023 (110% of the closing bid price of thecommon stock on December  8,  2005) and (ii) 268,817 sharesof common stock, and (iii) on each of December  9,  2005and December  28,  2005, the Company made a cash payment toan affiliate of Cornell Capital of $80,000 for expenses incurred inconnection with the transaction.

Assignment of 2005Convertible Debentures

On June  29,  2006, theCompany entered into an assignment agreement(‘‘Assignment Agreement’’) by and betweenCornell Capital, The Longview Fund, LP(‘‘Longview’’), Alpha CapitalAktiengesellschaft (‘‘Alpha’’), EllisInternational Ltd. (‘‘Ellis’’) and MomonaCapital Corp. (‘‘Momona’’) (each an‘‘Assignee’’) which provides for, amongother things, the assignment of the unpaid and unconverted amountsoutstanding under each of the 2005 Convertible Debentures to theAssignees in the amounts listed in the Assignment Agreement. Theaggregate unpaid and unconverted principal amount of $1,700,000 underthe 2005 Convertible Debentures was assigned. The aggregate

14

----

Table of Contents

purchase price paid by the Assignees was$1,914,180, of which $1,836,000 is being paid for principal (whichincludes the Redemption Amount) and $78,180 represents accruedinterest.

The Company now owes in the principal amounts of$700,000 and $400,000 to Longview and $300,000, $200,000 and $100,000to Alpha, Ellis and Momona, respectively, in proportion to theirassignment from Cornell Capital. All of the terms and conditions remainunchanged in the 2005 Convertible Debentures except that the AssignmentAgreement provides that the Company may not redeem the 2005 ConvertibleDebentures, in whole or in part.

Pursuant to the SecuritiesPurchase Agreement, the Company granted a security interest in all ofits assets to Cornell Capital to secure its obligations under the 2005Convertible Debentures, which security interest will be transferred tothe Assignees pursuant to the Assignment Agreement.

As ofSeptember  30,  2006, $1,700,000 of principal of the 2005Convertible Debentures remains outstanding. The conversion optionfeatured in these Debentures is being accounted for as a free standingderivative financial instrument in accordance with SFAS 133 and EITF00-19. The fair value of the conversion option amounted to $3,138,792at September  30,  2006. The amount of the unamortizeddiscount of these Debentures, based on the original allocation ofproceeds to the carrying amount of the note and the free standingconversion option, amounts to $1,060,478.

2006 6%Convertible Notes

On May  26,  2006, theCompany entered into a placement agency agreement with BrookshireSecurities Corporation for a private offering of one-year 6%convertible notes in an aggregate principal amount of up to $6,000,000(the ‘‘2006 6% ConvertibleNotes’’).

The Company offered the 2006 6%Convertible Notes on a ‘‘best efforts’’basis only to ‘‘accredited investors’’ (asdefined in Rule 501 (a) of Regulation D under Section 4(2) of theSecurities Act of 1933, as amended) by offer letter dated May25,  2006 (the ‘‘Offer Letter’’),which sets forth the terms and conditions of the offering.

The2006 6% Convertible Notes are payable one year after the date offunding, or earlier upon acceleration following the occurrence of an‘‘Event of Default’’, as defined in the2006 6% Convertible Notes. Interest on the 2006 6%Convertible Notes will accrue from the date of issue at 6% perannum, or 12 % per annum upon the occurrence of an Event ofDefault.

The principal of, and accrued interest on, the 20066% Convertible Notes is convertible into shares of common stock,at the option of the holders of the 2006 6% Convertible Notes,at an initial conversion price per share of $0.15, subject toadjustment for certain issuances or events that will result in dilution(the ‘‘Fixed Conversion Price’’). Since the2006 6% Convertible Notes had not been fully converted orrepurchased for 200% of their principal amount bySeptember  30,  2006, on October  1,  2006, theconversion price will be the lesser of (i) the Fixed Conversion Priceand (ii) 90% of the lowest closing price (or, if no closingprice is available, the average of closing bid and asked prices) of theCompany’s common stock for the 20 trading days immediatelypreceding the date on which a notice of conversion is delivered (the‘‘Floating ConversionPrice’’).

Purchasers of 2006 6% ConvertibleNotes who have not previously purchased shares of the Company’sSeries A Convertible Preferred Stock, par value $0.0001 per share (the‘‘Preferred Stock’’) will receive, withoutadditional consideration, five-year warrants to purchase a number ofadditional shares of common stock equal to 100% of the number ofshares that the purchaser may initially acquire upon conversion of the2006 6% Convertible Notes, at an initial exercise price of $0.30per share, subject to adjustment for certain issuances and events thatwill result in dilution.

Purchasers of 2006 6% ConvertibleNotes who purchased shares of Preferred Stock, will be issued a numberof additional shares of common stock upon conversion of the PreferredStock, based upon the principal amount of 2006 6% ConvertibleNotes purchased relative to the total purchase price of the shares ofPreferred Stock purchased, which will effectively reduce the per shareconversion price of the Preferred Stock so that it is the same as theconversion price per share of the 2006 6% Convertible Notes, orto the extent purchasers have converted shares of Preferred Stock, butnot sold 

15

----

Table of Contents

the common stock received upon conversion,the Company will issue a number of additional shares of common stockthat will provide equivalent value, in each case without additionalconsideration. The Company will issue warrants to purchase a number ofadditional shares of common stock at $0.15 that will provide equivalentvalue, to those purchasers of 2006 6% Convertible Notes who havesold or otherwise disposed of shares of common stock received uponconversion of Preferred Stock. The Company also will reduce to $0.30the per share exercise price of warrants purchasers of the 20066% Convertible Notes received with their purchase of PreferredStock, to the extent of the principal amount of 2006 6%Convertible Notes purchased relative to the total purchase price forthe shares of Preferred Stock, subject to the Company’s right,after the registration statement referred to below has becomeeffective, to force the exercise of those warrants on 20 days’notice by offering to purchase those warrants for a nominal price ifthe closing price per share of the common stock exceeds $0.45 for tenconsecutive trading days.

The Company has agreed to file aregistration statement to register for resale the shares of commonstock that purchasers of 2006 6% Convertible Notes may acquireupon conversion of the 2006 6% Convertible Notes or exercise ofthe warrants, as well as any additional shares of common stock whichmay be issued as part of the offering. Since the Company failed to filea registration statement for the resale of these shares byAugust  21,  2006, the Company will be obligated to paypurchasers of the 2006 6% Convertible Notes liquidated damagesin an amount equal to 2% of the principal amount of the 20066% Convertible Notes for each month, or portion of a month, forwhich the Company fails to timely file the registration statement oruntil the registration statement becomes effective, but in no event maythe liquidated damages exceed 18% of the principal amount of the2006 6% Convertible Notes. At September  30,  2006,the Company has accrued $183,300 as estimated liquidated damages, whichrepresents the damages which would be due with a potential delay of sixmonths in the filing of its registration statement.

As acondition to their purchase of the 2006 6% Convertible Notes,purchasers have agreed that they will not sell, transfer or otherwisedispose of any securities of the Company prior to the 150th day afterJune  1,  2006, except that the restrictive periodapplicable to shares of common stock that were acquired, or may beacquired, upon conversion of shares of Preferred Stock held by thepurchaser, expired on August  20,  2006 to the extent ofthe total purchase price paid by the purchaser for 2006 6%Convertible Notes bears in relation to the total purchase price paidfor the Preferred Stock.

The Company will pay a cash fee equal to10% of the gross proceeds from the sale of the 2006 6%Convertible Notes for purchasers obtained through the assistance of theplacement agent, a portion of which may be reallocated to otherregistered broker-dealers participating in the offering, and reimbursethe placement agent for $15,000 of its legal expenses. The Company alsowill issue to the placement agent, or its designee(s), at each closing,a five-year warrant to purchase such number of shares of common stockat an exercise price of $0.15 per share equal to 10% of suchnumber of shares of common stock into which the 2006 6%Convertible Notes sold through the placement agent at such closing areconvertible. In addition, the Company has agreed to reduce to $0.30 theper share exercise price of warrants to purchase shares of common stockissued to the placement agent previously, as placement agent for ourPreferred Stock.

The Harbor Trust, has agreed to a pledge of its2005 Harbor Note dated December  9,  2005 issued in thename of The Harbor Trust in the principal amount of $250,000 to securea non-recourse obligation to increase the return to purchasers ofPreferred Stock to the extent required to protect investors from a losson their investment to the extent of such collateral, measured on theearlier of May  20,  2007 or the date on which all the 20066% Convertible Notes offered have been sold or otherwisedisposed of, including by conversion. In consideration for theagreements made by The Harbor Trust, at each closing the Company will(i) pay The Harbor Trust a yield enhancement incentive fee equal to10% of the aggregate gross proceeds of the 2006 6%Convertible Notes receiving the benefit of such protection (the‘‘Yield Protected Notes’’), plus (ii) issueto The Harbor Trust, for nominal consideration, five-year warrants topurchase, for the principal amount thereof, (A) 2006 6%Convertible Notes having a principal amount equal to 10% of theprincipal amount of the Yield Protected Notes sold in the Offering, and(B) five-year warrants to purchase a number of shares of 

16

----

Table of Contents

common stock equal to 10% of theshares of common stock that purchasers of the Yield Protected Notessold in the offering may acquire upon exercise of the warrants theyreceived with the purchase of the Yield Protected Notes, at an exerciseprice of $0.30 per share. In no event will the total yield enhancementincentive fee, plus the placement agent fee, paid by the Company exceed10% of the gross proceeds of the offering.

FromJune  1,  2006 through September  30,  2006, wesold an aggregate principal amount of $3,055,000 of 2006 6%Convertible Notes. We issued five-year warrants to purchase anaggregate of 13,366,667 shares of common stock, at an initial exerciseprice of $0.30 per share to purchasers of $2,005,000 of 2006 6%Convertible Notes who had not previously purchased our Preferred Stock.We will issue to those purchasers of $1,050,000 of 2006 6%Convertible Notes who had previously purchased Preferred Stock, uponthe conversion of their Preferred Stock, 6,580,000 additional shares ofcommon stock and adjust the exercise price to $0.30 on warrants topurchase an aggregate of 210,000 shares of common stock received uponthe purchase of the Preferred Stock. Pursuant to the terms of the6% Notes Offering, we issued (i) warrants to purchase $305,500of 2006 6% Convertible Notes at an exercise price of $305,500and attached warrants to purchase 2,036,667 shares of common stock, and(ii) a warrant to purchase 1,336,667 shares of common stock at anexercise price of $0.30, as yield enhancement fees.

Of the$2,005,000 in principal purchased by those investors who had notpreviously purchased the Company’s Preferred Stock, the Companyrecognized a debt discount of $1,475,536 at date of issuance based onan allocation of the proceeds based on relative fair values of the 20066% Convertible Notes, the warrants and the conversion option, asdetermined by the Black-Scholes option pricing model. Since the Companyis required to account for its derivative financial instruments asliabilities (see Note 4), the Company recorded the full fair values ofthe warrants and the conversion options at date of issuance of the 20066% Convertible Notes of $3,026,713 and $2,912,266, respectively,as liabilities and charged non-cash interest expense. The fair value ofthe warrants and conversion option was estimated at the date ofissuance using the Black-Scholes option pricing model with thefollowing assumptions: risk fee interest rate: 4.7% to5.1%; expected dividend yield: 0%; expected option life:3 years to 5 years; and volatility: 173% to219%. The Company marks to market these derivative financialinstruments at each reporting date.

Of the $1,050,000 inprincipal purchased by those investors who had previously purchased theCompany’s Preferred Stock, the Company recognized a debtdiscount of $1,050,000 at date of issuance based on the (i) fair valuesof the conversion option, (ii) the incremental increase in fair valueof the additional shares of common stock to be issued upon conversionof the Preferred Stock and (iii) the change in fair value of theunderlying warrants associated with the Preferred Stock due to thechange in exercise price, as determined by the Black-Scholes optionpricing model. Since the Company is required to account for itsderivative financial instruments as liabilities (see Note 4), theCompany recorded the incremental fair value of the Preferred Stockwarrants and the full fair value of the conversion options at date ofissuance of the 2006 6% Convertible Notes of $13,679 and$1,569,120, respectively, as liabilities and charged the excess tonon-cash interest expense. The fair value of these derivatives wasestimated at the date of grant using the Black-Scholes option pricingmodel with the following assumptions: risk fee interest rate:4.7% to 5.1%; expected dividend yield: 0%;expected option life: 3 years to 5 years; and volatility: 173%to 219%. The Company marks to market these derivative financialinstruments at each reporting date. In addition, the Company chargednon-cash interest expense and credited equity for the incrementalincrease in fair value of the additional shares of common stockissuable upon conversion of the Preferred Stock.

Adjustmentsto Outstanding Convertible Securities and Other Rights to PurchaseCommon Stock Resulting from 2006 6% Convertible NotesOffering

Pursuant to the terms of the 2006 6%Convertible Note offering, the conversion prices on certain convertiblesecurities were adjusted to the conversion price of the 2006 6%Convertible Notes.

The Amended December  2004 ConvertibleNote and the 2005 Harbor Note in the principal amount of $448,736 and$250,000, respectively and with adjusted conversion prices of $0.75 pershare 

17

----

Table of Contents

and $0.375 per share, respectively, willadjust their conversion prices to $0.15 per share. As a result of thisadjustment, the Company anticipates that it will issue an additional2,882,338 and 1,501,667 shares, respectively, assuming conversion atmaturity.

The Company evaluated the revision in the AmendedDecember  2004 Convertible Note to determine whether thereduction in the conversion price resulted in the issuance of asubstantially different debt instrument. The Company determined thatafter giving effect to the substantial increase in the fair value ofthe beneficial conversion feature that resulted from reducing theconversion price, it had issued a substantially different debtinstrument which resulted in a constructive extinguishment of theoriginal debt instrument. Accordingly, the Company recorded a gain onthe extinguishment of debt in the amounts of $387,362 for the AmendedDecember  2005 Convertible Note that is included in theaccompanying statement of operations for the nine-month period endedSeptember  30,  2006.

Since the incremental fairvalue of the Company's common stock which would be issued uponconversion, as determined by the Black-Scholes option pricing model,was in the aggregate greater than the principal balance of individualnotes, the Company recorded an original issuance discount equal to thefair value of this beneficial conversion feature, limited to theprincipal balance of the notes. This debt discount is being amortizedas non-cash interest expense over the remaining term of the AmendedDecember  2004 Convertible Note. During the nine-month periodended September  30,  2006, the Company amortized anaggregate of $448,736 of the debt discount which is included ininterest expense in the accompanying statement of operations.Assumptions relating to the estimated fair value of the beneficialconversion features, are as follows: risk-free interest rate of5.1%; expected dividend yield zero percent; expected option lifeof 1.5 years; and current volatility of 165.4%.

The 2005Convertible Debentures in the principal of $1,700,000 plus accruedinterest, with a Fixed Conversion Price (as that term is defined in the2005 Convertible Debentures) of $0.9765, adjusted to a Fixed ConversionPrice of $0.15. In addition, the exercise price of the warrants issuedto Cornell Capital, for the purchase of 1,000,000 shares of commonstock at $1.023 per share has been reduced to $0.15 per share. As theterms of 2005 Convertible Debentures provide for a lower of FixedConversion Price or Floating Conversion Price (as both terms aredefined in the 2005 Convertible Debentures) at conversion, the numberof shares of common stock issuable upon conversion isindeterminate.

Certain options granted pursuant to our 2004Incentive Stock Plan and certain shares of common stock issued uponexercise of those options, contain anti-dilution provisions whichprovide for a reduction of the exercise price if the Company sellscommon stock or issues convertible securities at a per share price lessthan their exercise price of $0.359 (fair market value on the date ofgrant). As a result of the anti-dilution provision, the Company issuedan additional 776,231 shares of common stock and increased theremaining unexercised option by an additional 776,230 shares of commonstock issuable upon exercise to the optionees.

NOTE 9 —EQUITY TRANSACTIONS

During the nine-month period endedSeptember  30,  2006, the Company issued the followingsecurities.

Common Stock Issued Upon Conversion of Series APreferred Stock

During the nine-month period endedSeptember  30,  2006, the Company issued 267,500 shares ofcommon stock upon conversion of 26.75 shares of PreferredStock.

Shares Issued Upon Exercise of Options Pursuant to2004 Incentive Stock Plan

In March  2006, the Companyissued fully-vested, five-year options to purchase an aggregate of1,114,206 shares of its common stock at $0.359 per share pursuant tothe 2004 Incentive Stock Plan, to two financial consultants forservices previously provided, of which options were exercised as to anaggregate of 557,102 shares of common stock for proceeds to the Companyof $200,000. Pursuant to 

18

----

Table of Contents

anti-dilution provisions contained in theoption agreements, the Company issued an additional 776,230 shares ofcommon stock during May  2006 in connection with executing theterm sheet for the 2006 6% Convertible Noteoffering.

Conversion of Amended December  2004Convertible Note

In January  2006, the holder of theCompany’s Amended December  2004 Convertible Note electedto convert the remaining principal balance plus accrued interest of$320,725 into 855,267 shares of common stock at a conversion price of$0.375 per share.

Conversion of December  2005Convertible Debenture

During the nine-month period endedSeptember  30, 2006, a holder of the Company’sDecember  2005 Convertible Debentures elected to convert aportion of its aggregate principal balance of $300,000 into 1,299,850shares of common stock at a conversion price pursuant to the terms ofthe December  2005 ConvertibleDebentures.

Insufficient Authorized but Unissued Shares ofCommon Stock

On May  9,  2006, the Board ofDirectors authorized an amendment to the Company's Amended andRestated Certificate of Incorporation to increase the number ofauthorized shares of capital stock from 120,000,000 shares to270,000,000 shares, of which 250,000,000 shares would be designated ascommon stock and 20,000,000 shares would be designated as PreferredStock. Unless the proposed amendment is approved by the stockholders,the Company will not be able to satisfy its obligations in theagreements relating to those securities. If the stockholders do notapprove the amendment, the Company will be in default of itsobligations under those agreements, and the holders of those securitiesmay accelerate payment of the Company's obligations, obtainliquidated damages under certain of those agreements and pursue otherlegal remedies against the Company that would have a material adverseaffect on the Company’s ability to remain in existence.

Asof November 21, 2006, due to closings under the 2006 6%Convertible Note offering, subsequent to the balance sheet date, fullydiluted shares of common stock exceeds 100  million shares (seeNote  13).

NOTE 10 — STOCK BASEDCOMPENSATION

The Company, since its inception has grantednon-qualified stock options to various employees and non-employees atthe discretion of the Board of Directors under its 2004 Incentive StockPlan and its 2006 Incentive Stock Plan (the‘‘Plans’’). Both Plans have substantiallythe same terms. Substantially all options granted to date have exerciseprices equal to the fair value of the underlying common stock at thedate of grant and terms ranging from three to ten years. Vestingperiods range from fully vested at the date of grant to fouryears.

The fair value of all awards is estimated at the date ofgrant using the Black-Scholes option pricing model. Assumptionsrelating to the estimated fair value of stock options that the Companygranted prior to January  1,  2006 that were previoulsyaccounted for and recorded under the intrinsic value method prescribedunder APB 25 are described in Note 3. Pursuant to SFAS 123R, theCompany recognized expense on the statement of operations of $37,686and $113,058 for the fair value of those stock options granted prior toJanuary  1,  2006 and which vested during the three- andnine-month periods ended September  30,  2006,respectively.

During March  2006, the Company granted stockoptions to acquire an aggregate of 1,514,206 shares of common stock tothree consultants. The option agreements for two of the consultantscontained anti-dilution protection of the exercise price and the numberof shares issuable upon conversion in the event the Company issuedcommon stock at a price less then the exercise price contained in theiroption. Each option was exercisable at a price of $0.359 per share fora period of up to five years from issuance. All of these options werefully vested and non forfeitable on their date of 

19

----

Table of Contents

issuance. The Company charged the estimatedfair value of $579,591 to compensation expense during the nine-monthperiod ended September  30,  2006 with respect to theseoptions. Assumptions relating to the estimated fair value of thesestock options (as determined by the Black-Scholes option pricingmodel), which the Company accounted for in accordance with SFAS 123(R)and EITF 96-18, are as follows: risk-free interest rate of 4.7%;expected dividend yield zero percent; expected option life of5 years; and current volatility of129.6%.

Pursuant to the 2006 6% Convertible Noteoffering commencing in May  2006, the options for the twoconsultants who had the anti-dilution protection were adjusted for thedilutive effect of the offering. The two consultants were issued anaggregate of 776,230 additional shares of common stock of which thefair value of $155,246 was charged to non-cash interest expense as acomponent of the 2006 6% Convertible Note Offering. In addition,they were granted an additional option, pursuant to the 2006 IncentiveStock Plan, to acquire an aggregate of 776,230 shares of common stockat an exercise price of $0.15 per share, of which the fair value (asdetermined by the Black-Scholes option pricing model) of $158,144 wascharged to non-cash interest expense as a component of the 20066% Convertible Note offering. Assumptions related to theestimated fair value of the stock options at the date of adjustment,which the Company accounted for in accordance with SFAS 123R andEITF-96-18 were: risk fee interest rate: 5.1%; expected dividendyield: 0%; expected option life: 5 years; and volatility:173%. The exercise price on their remaining unexercised optionswas adjusted to $0.15 per share.

During June  2006, theCompany granted stock options to acquire an aggregate of 16,000 sharesof common stock to three directors of the Company. Each option wasexercisable at a price of $0.21 per share for a period of up to tenyears from issuance. All of these options vest over three years andwere non forfeitable on their date of issuance. The fair value of theseoptions (as determined by the Black-Scholes option pricing model) was$3,360 and the Company amortized $188 to compensation expense duringthe nine-month period ended September  30,  2006 withrespect to these options. Assumptions relating to the estimated fairvalue of these stock options, which the Company accounted for inaccordance with SFAS 123(R) and EITF 96-18 are as follows: risk-freeinterest rate of 5.1%; expected dividend yield zero percent;expected option life of 10 years; and current volatility of220.3%.

The risk-free rate is based on the U.S. Treasuryyield curve in effect at the time of grant. The Company has not paiddividends to date and does note expect to pay dividends in theforeseeable future due to its substantial accumulated deficit andlimited capital resources. Accordingly, expected dividends yields arezero. Historical cancellations and forfeitures of stock options areinsignificant. The Company will adjust its assumptions relating to itsexpectations of future vesting and terms of options at such times thatadditional data indicates that changes in these assumptions arenecessary. Expected volatility is principally based on thehistorical volatility of the Company’s stock.

A summary ofoption activity for the nine-month period ended September30,  2006 is asfollows:

|                                  |  |  |        |  |           |                                     |  |  |                                                |   |      |                         |  |  |          |  |  |  |   |         |  |
|----------------------------------|--|--|--------|--|-----------|-------------------------------------|--|--|------------------------------------------------|---|------|-------------------------|--|--|----------|--|--|--|---|---------|--|
| Options                          |  |  | Shares |  |           | Weighted−AverageExercisePrice |  |  | Weighted−AverageRemainingContractualTerm |   |      | AggregateIntrinsicValue |
| Outstandingat January  1,2006    |  |  |        |  | 646,695   |                                     |  |  |                                                | $ | 3.08 |                         |  |  |     |  |  |  |   |    |  |
| Granted                          |  |  |        |  | 3,082,666 |                                     |  |  |                                                | $ | 0.18 |                         |  |  |     |  |  |  |   |    |  |
| Exercised                        |  |  |        |  | 1,333,332 |                                     |  |  |                                                | $ | 0.15 |                         |  |  |     |  |  |  |   |    |  |
| Forfeitedorexpired               |  |  |        |  | 425,000   |                                     |  |  |                                                | $ | 2.45 |                         |  |  |     |  |  |  |   |    |  |
| Outstandingat September  30,2006 |  |  |        |  | 1,971,029 |                                     |  |  |                                                | $ | 0.66 |                         |  |  | 4.4years |  |  |  | $ | 201,440 |  |
| Exercisable atSeptember  30,2006 |  |  |        |  | 1,865,883 |                                     |  |  |                                                | $ | 0.54 |                         |  |  | 4.2years |  |  |  | $ | 200,000 |  |
|                                  |

The weighted-averagegrant-date fair value of options granted during the nine-month periodended September  30,  2006 and 2005 amounted to $0.25 and$4.56, respectively. 

As of September  30,2006, the Company has $294,366 of unrecognized compensation costrelated to non-vested share-based compensation arrangements, whichrepresents the fair value of stock 

20

----

Table of Contents

options that the Company accounted for underAPB 25 through December  31,  2005. These costs areexpected to be recognized over a weighted-average period of 3.1years. 

NOTE 11 — ADOPTION OF SHAREHOLDER RIGHTSPLAN

At its February  2006 board meeting, the directors ofthe Company unanimously approved the adoption of a shareholder rightsplan pursuant to which the Company issued one preferred share purchaseright for each share of the Company’s common stock held byshareholders of record as of the close of business on March7,  2006. Each right will entitle the holder to purchase oneone-hundredth of a share of Series B Preferred Stock at an exerciseprice of $168. These preferred shares are structured so that the valueof one one-hundredth of a preferred share will approximate the value ofone share of the Company’s common stock. The purpose of the planis to protect the long-term value of the Company for its shareholdersand to protect shareholders from various abusive takeover tactics,including attempts to acquire control of the Company at an inadequateprice. The plan is designed to give the Company’s Board ofDirectors sufficient time to study and respond to an unsolicitedtakeover attempt. Adoption of the plan was unanimously approved by theCompany’s directors

The terms of the plan provide for theCompany’s shareholders of record at the close of business onMarch  7,  2006 to receive one right for each outstandingcommon share held. In general, the rights will become exercisable if aperson or group acquires 15% or more of the Company’scommon stock or announces a tender offer or exchange offer for15% or more of the Company’s common stock. Depending onthe circumstances, the effect of the exercise of rights will vary. Whenthe rights initially become exercisable, as described above, eachholder of a right will be allowed to purchase one one-hundredth of ashare of a newly created series of the Company’s preferredshares at an exercise price of $168. However, if a person acquires15% or more of the Company’s common stock in atransaction that was not approved by the Board of Directors, each rightwould instead entitle the holder (other than such an acquiring person)to purchase common stock at 50% of the market price of theCompany’s common stock at that time.

The rights willexpire on March  6,  2016. The Company may redeem therights for $0.0001 each at any time until the tenth business dayfollowing public announcement that a person or group has acquired15% or more of its outstanding common stock.

NOTE 12— ADOPTION OF 2006 INCENTIVE STOCK PLAN

The 2006 IncentiveStock Plan was approved by the Company’s Board of Directors atits February  2006 meeting. The Company intends to submit the2006 Incentive Stock Plan for approval of its stockholders within 12months of the effective date of the Plan. The purpose of the 2006Incentive Stock Plan is to provide an incentive to retain in the employof and as directors, officers, consultants, advisors and employees ofthe Company, persons of training, experience and ability, to attractnew directors, officers, consultants, advisors and employees whoseservices are considered valuable, to encourage the sense ofproprietorship and to stimulate the active interest of such personsinto the development and financial success of the Company. Under the2006 Incentive Stock Plan, the Company is authorized to issue incentivestock options intended to qualify under Section 422 of the Code,non-qualified stock options, and restricted stock. The 2006 IncentiveStock Plan is administered by the Board of Directors or theCompensation Committee. The Company reserved 2,730,090 shares of commonstock for issuance under the 2006 Incentive Stock Plan. Options toacquire 776,230 shares of common stock at $0.15 per share were issuedto two financial consultants upon initiation of the 2006 6%Convertible Note offering pursuant to anti-dilution provisionscontained in the initial grant of options to these two consultants (seeNote 10).

NOTE 13 — SUBSEQUENT EVENTS

Offeringof 2006 6% Convertible Notes

During October2006, the Company sold an aggregate principal amount of $514,444 of2006 6% Convertible Notes and issued five-year warrants topurchase an aggregate of 651,847 shares of 

21

----

Table of Contents

common stock at an initial exercise price of$0.30 per share. Pursuant to the terms of the 2006 6%Convertible Notes, the Company will issue 2,611,113 additional sharesof common stock to those purchasers who had previously purchasedPreferred Stock and adjust the exercise price on the warrants theyreceived when they purchased the Preferred Stock to purchase 83,333shares of common stock to $0.30. The shares of common stock issuableupon conversion of these securities, increased the fully diluted sharesof common stock in excess of 100  millionshares.

Unsecured Advances

Subsequent toSeptember  30, 2006, the Company received in the aggregate,$145,000 in unsecured advances. These advances carry an interest rateof 6% and will be repaid out of the next closing under the 20066% Convertible Note offering.

Resignation ofDirectors and Officers

Effective October  31,2006 all of the Company’s employees resigned, except for WilliamPursley, the Company’s Chief Executive Officer, who has agreedto serve through December  31,  2006.

EffectiveNovember  1,  2006 and November  16,  2006,John W. Griffin, M.D. and Leonard A. Mudry, respectively, each resignedas a director of the Company.

Ferring Letter ofIntent

In August  2006, the Company entered into aletter of intent with Ferring International Center, S.A.(‘‘Ferring’) with respect to a proposed divestureof Ferring’s rights and interests with respect to recombinanthuman copper zinc superoxide dismutase(‘‘SOD’’), subject to the Company’scompletion of due diligence, the execution of a definitive agreementand entry into a written agreement with the FDA on end points governingthe clinical trial of SOD. Due to the lack of resources and thetermination of the employees of Company, the Company currently believesit unlikely that the transactions with Ferring will be further pursuedor ever consummated.

SEC Comment Letter

TheCompany, in its Annual Report on Form  10-KSB for the year endedDecember 31, 2004 recorded compensation cost for a stock option grantedto its Chief Executive Officer at the time it was spun-off from itsformer parent. On November 20, 2006, the SEC advised the Company thatit had certain comments regarding the valuation of that award.While the Company believes it has a reasonable basis for the accountingtreatment of this award, these comments could impact theCompany's prior periodic filings, including filings that areincorporated by reference into registration statements.   TheCompany is in the process of reviewing the SEC's commentsregarding this award but is currently unable to determine what changes,if any may be required to its accounting for this award or to quantifyany possible impact on its financial statements.

|              |                                                                 |
|--------------|-----------------------------------------------------------------|
| Item2.  | Management’s Discussion and Analysis orPlan of Operation. |

The following discussion of our plan ofoperations should be read in conjunction with our financial statementsand notes thereto appearing elsewhere in thisdocument.

Overview

We are a development-stagebiopharmaceutical company and had been focusing on the development ofproprietary, cell-targeted therapeutic products for the treatment ofneuromuscular and neurodegenerative diseases. Our goal is to increasethe quality and quantity of life of people suffering with thesediseases. Primary efforts had been focused on moving our lead productinto phase I clinical trials for Duchenne musculardystrophy.

Capital Resources and CashRequirements

We have had difficulty securing the necessarycapital to fully execute our business plan and have not been able toremain current with respect to the payment terms of all of ouroperating obligations. 

22

----

Table of Contents

In addition, we have substantial convertibledebt obligations with terms that require repayment during the nexttwelve months. We have exhausted substantially all of our capitalresources, terminated substantially all of our employees (except forour chief executive officer) and we are currently unable to, and do notbelieve it is likely, to pursue further development of our productcandidates. We have pursued this course of action as a result of havingbeen informed by the FDA that our IND remains on hold pending theresolution of two remaining issues. Additional internal research isrequired to fully resolve the FDA issues and complete our own internalresearch program, which we estimate would take an additional twelve toeighteen months to complete. We lack the funding that is necessary toresolve these issues and are currently unable to secure financingcommitments for this purpose. Due to these remaining issues and thelack of adequate funding, we have halted development of our programsand have initiated discussions with our trade creditors to settle theirremaining outstanding balances. If we are successful in our efforts toreach settlements with our trade creditors, we may evaluate otherresearch programs as well as our current receptor mediateddrug-targeting platform and may explore the acquisition of otherbusinesses; however, suitable opportunities (if identified) are likelyto require additional capital that is not currently available us.Accordingly, there can be no assurance that we will ever becomeoperational. If we are not able to settle our remaining outstandingbalances, we will be forced to file for bankruptcy protection. We havesecured our obligations under the Debentures with all of our assets.These matters raise substantial doubt about our ability to continue asa going concern. The financial statements do not include anyadjustments that may result from the outcome of thisuncertainty.

During the nine months ended September30,  2006, we received (i) proceeds from exercises of stockoptions of $200,000, (ii) $3,055,000 from the issuance of our 20066% Convertible Notes(see Note 8), and (iii) unsecuredadvances of $473,000. Subsequent to September  30,  2006,we received $514,444 from the issuance of our 2006 6%Convertible Notes (which includes the rollover of unsecured advances of$473,000 received prior to September  30,  2006) (see Note13).

Primarily as the result of recording non-cash interestexpense of $10,499,745, and the non-cash expense associated with theincrease in the fair values of its derivative financial instruments of$5,218,363, we recorded a net loss for the nine-month period endedSeptember  30,  2006 of $18,913,174. Non-cash interestexpense consisted primarily of the excess fair values of its derivativesecurities included in its financing transactions and amortization ofdeferred financing costs of those financing transactions. We used netcash flows in its operating activities of $3,517,074 during thenine-month period ended September  30,  2006. Our workingcapital deficiency amounted to $26,424,258 and our development stageaccumulated deficit amounted to $56,829,269 at September30,  2006.

At September  30,  2006, we had$5,926,736 in principal of convertible notes outstanding. TheDecember  2004 Convertible Note in the principal amount of$448,736, was due July  3,  2006. There has not been anagreement on amended terms and no assurance that we will reachagreement with the note holder on amended terms. The terms of the 2004Convertible Note do not provide for penalties or other payments upondefault, and accordingly, we have not accrued a penalty as ofSeptember  30, 2006. Of the remaining debt, (i) $473,000 wasrepaid from proceeds of a closing under the 2006 6% ConvertibleNote offering subsequent to September  30,  2006, (ii)$250,000 in principal plus accrued interest is due beforeDecember  31,  2006, (iii) $3,055,000 in principalrepresenting 2006 6% Convertible Notes mature during the monthsof June  2007, July  2007, August  2007 andSeptember  2007 and (iv) the balance of $1,700,000 mature inDecember  2008. Currently, we do not have the available cash torepay these obligations as they come due and if the note holders do notelect to convert their notes at maturity, we will be required to raiseadditional capital in order to meet these obligations. The note holdersholding $1,700,000 in principal have a security interest in all of ourassets.

As of the date hereof, we are in default in our paymentobligations under (i) the December 2004 Convertible Note which was dueon July 3, 2006 in the principal amount plus accrued interest of$544,827, (ii) the Debentures and the 2006 6% Convertible Notes(which each contain cross default provisions), as a result of theDecember 2004 Convertible Note default, in the principal amounts plusaccrued interest of $1,826,867 and $3,645,949, respectively. Inaddition, we are in default under the 

23

----

Table of Contents

Debentures for failure to file apost-effective registration statement by July 10, 2006 as required bythe Debentures. We are also in default under the 2006 6%Convertible Notes for failure to file a registration statement withinthe 20-day grace period after the August 21, 2006 filing deadline.

On November 20, 2006, the 2004 Convertible Note holder agreed torevise the maturity date of the Note to December 31, 2006. On November21, 2006, the 6% Convertible Note holders have waived thedefault under their agreement and agreed to extend the registrationstatement filing requirement to December 31, 2006. We are currentlyattempting to have the registration statement filing requirementextended in the 2005 Convertible Debentures.

In August2006, the Company entered into a letter of intent with Ferring withrespect to a proposed divesture of Ferring’s rights andinterests with respect to SOD, subject to the Company’scompletion of due diligence, the execution of a definitive agreementand entry into a written agreement with the FDA on end points governingthe clinical trial of SOD. Due to the lack of resources and thetermination of the employees of Company, the Company currently believesit unlikely that the transactions with Ferring will be further pursuedor ever consummated.

If we are able to secure suitable financingwe may continue the development of our technologies, explore thedevelopment of other technologies or we may acquire or merge into otherbusinesses. If we decide to pursue any of these options, we willrequire substantial additional financing which we may or may not beable to obtain.

Research, Development andManufacturing

Our primary efforts to date have been raisingcapital and moving our lead product into phase I clinicaltrials for Duchenne muscular dystrophy. During the nine-month periodended September  30,  2006 we had focused our efforts onresponding to the FDA questions received after submission of ourinvestigational drug application in January  2006. We have beeninformed by the FDA that our IND remains on hold pending the resolutionof two remaining issues. Additional internal research is required tofully resolve the FDA issues and complete our own internal researchprogram, which we estimate would take an additional twelve to eighteenmonths to complete. As of November  16,  2006, we are notproceeding with any further research or development of our currentproposed products.

Off Balance SheetArrangements

Currently, we do not have any off balancesheet arrangements which would require disclosure in our financialstatements.

Employees

As of November  21,2006, we had one full timeemployee.

Properties

We currently lease ourexecutive offices in Hunt Valley, Maryland consisting of approximately5,200 square feet for approximately $7,400 per month. This leaseexpires on December  31,  2006. If financing is available,we may secure facilities suitable for the activities to beundertaken.

|               |                         |
|---------------|-------------------------|
| Item 3.  | Controls andProcedures. |

EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNALCONTROLS

As of the end of the period covered by this Report, wecarried out an evaluation of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inSecurities Exchange Act of 1934 Rule 13-d-15 (e) and 15d-15(e)). Basedupon that evaluation and management’s assessment of thepotential effects of the material weakness described below, our Chief

24

----

Table of Contents

Executive Officer concluded that as of theend of the period covered by this Report, our disclosure controls andprocedures were not effective to enable us to record, process,summarize and report information required to be included in ourperiodic SEC filings within the required time period.

DISCLOSURECONTROLS AND INTERNAL CONTROLS

Disclosure controls areprocedures that are designed with the objective of ensuring thatinformation required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, as amended, such as this Report, isrecorded, processed, summarized, and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls arealso designed with the objective of ensuring that such information isaccumulated and communicated to our Chief Executive Officer, asappropriate, to allow timely decisions regarding required disclosure.Internal controls are procedures which are designed with the objectiveof providing reasonable assurance that our transactions are properlyauthorized, recorded, and reported and our assets are safeguardedagainst unauthorized or improper use, and to permit the preparation ofour financial statements in conformity with generally acceptedaccounting principles.

We consider the effectiveness of ourinternal controls over financial reporting as part of the quarterlyevaluations of our procedures. In connection therewith, we reported,for the year ended December  31,  2005, that we identifiedcertain matters that we believed constituted material weaknesses (assuch term is defined under the Public Company Accounting OversightBoard Auditing Standard No. 2) in our internal controls over financialreporting. The first such material weakness related to our ability toensure that the accounting for our equity-based transactions isaccurate and complete and the second related to our limited segregationof duties.

With respect to the first material weakness, duringthe year ended December  31,  2005, we adopted a policy ofhaving our Chief Financial Officer review all of our agreements toensure that we identify the applicable accounting treatments toevaluate any areas that may involve the application of highlyspecialized accounting principles including, but not necessarilylimited to, complex equity transactions. Our Chief Financial Officerwas terminated, effective October  31, 2006, and as a result ourChief Executive Officer (who is now our sole employee) is responsiblefor the financial affairs of the Company. In circumstances where we maybecome (or contemplate becoming) a party to transactions that wouldinvolve the application of accounting principles in which our expertiseis limited, we would engage the services of outside specialists, ifnecessary.

With respect to the second material weakness, whichrelates to our segregation of duties, although we believe our riskswith respect to this matter are minimal, we still acknowledge that itwould be beneficial for the Company to have sufficient personnel tosegregate certain procedures. We believe that having no segregation ofduties still constitutes a material deficiency in our system. However,we currently have exhausted substantially all of our financialresources. We believe that the costs we would incur to increase ourstaff (solely for this purpose) exceed the potential reduction in risk.Our Chief Executive Officer is monitoring this situation to determineif these circumstances change. If the situation changes and sufficientcapital is secured, it is our intention to increase staffing within ourgeneral accounting and financial functions.

There has been achange in our internal controls over financial reporting due to onlyhaving one employee who is responsible for all financialreporting.

PART IIOTHER INFORMATION

|              |                                                            |
|--------------|------------------------------------------------------------|
| Item2.  | Unregistered Sales of Equity Securities and Useof Proceeds |

During the period covered by this Report, we havenot issued unregistered securities which have not been‘‘previously reported’’ as defined in Rule12b-2 of the Exchange Act, except;

On July  18,2006, we issued 2006 6% Convertible Notes to accreditedinvestors in the aggregate principal amount of $950,000 under the6% Notes Offering. Pursuant to the 6% Notes Offering, on

25

----

Table of Contents

July  18,  2006 we (i) issued tocertain investors who did not previously invest in our Preferred Stock,warrants to purchase an aggregate of 4,833,333 shares of our commonstock at $0.30 per share, (ii) we increased the number of shares ofcommon stock to which our previously issued Preferred Stock wouldconvert into by 1,410,000 and reduced the exercise price of thewarrants to purchase 45,000 shares of our common stock, issued as apart of the Preferred Stock, to $0.30 per share.

On July18,  2006, we issued a warrant to purchase a 2006 6%Convertible Note in the principal amount of $95,000 with an attachedwarrant to purchase 633,333 shares of our common stock at$0.30 per share, at an exercise price of $95,000 and awarrant to purchase 483,333 shares of our common stock at $0.15 pershare as yield enhancement fees for the 6% NotesOffering.

On August  17,  2006, we issued 20066% Convertible Notes to accredited investors in the aggregateprincipal amount of $300,000 under the 6% Notes Offering.Pursuant to the 6% Notes Offering, on August  17,2006 we increased the number of shares of our common stock to which ourpreviously issued Preferred Stock would convert into by 1,880,000 andreduced the exercise price of the warrants to purchase 60,000 shares ofour common stock, issued as a part of the Preferred Stock, to $0.30 pershare.

On August  17,  2006, we issued a warrant topurchase a 2006 6% Convertible Note in the principal amount of$30,000 with an attached warrant to purchase 200,000 shares of ourcommon stock at $0.30 per share, at an exercise price of$30,000 as yield enhancement fees for the 6% NotesOffering.

On September  28,  2006, we issued 20066% Convertible Notes to accredited investors in the aggregateprincipal amount of $180,000 under the 6% Notes Offering.Pursuant to the 6% Notes Offering, on September28,  2006, we issued certain investors who did not previouslyinvest in our Preferred Stock, warrants to purchase an aggregate of1,200,000 shares of our common stock at $0.30 per share.

On September  28,  2006, we issued a warrant to purchasea 2006 6% Convertible Note in the principal amount of $18,000with an attached warrant to purchase 120,000 shares of our common stockat $0.30 per share, at an exercise price of $18,000 and a warrant topurchase 120,000 shares of our common stock at $0.15 per share as yieldenhancement fees for the 6% Notes Offering.

OnOctober  19,  2006, we issued 2006 6% ConvertibleNotes to accredited investors in the aggregate principal amount of$514,444 under the 6% Notes Offering. Pursuant to the 6%Notes Offering, on October  19,  2006 we (i) issued certaininvestors who did not previously invest in our Preferred Stockoffering, warrants to purchase an aggregate of 651,847 shares of ourcommon stock at $0.30 per share, (ii) increased the number of shares ofcommon stock to which our previously issued Preferred Stock wouldconvert into by 2,611,113 and reduced the exercise price of thewarrants to purchase 83,333 shares of common stock, issued as a part ofthe Preferred Stock, to $0.30 per share.

On October19,  2006, we issued a warrant to purchase a 2006 6%Convertible Note in the principal amount of $51,444 with an attachedwarrant to purchase 342,963 shares of our common stock at $0.30 pershare, at an exercise price of $51,444 and a warrant to purchase 65,185shares of our common stock at $0.15 per share as yield enhancement feesfor the 6% Notes Offering.

|              |                                 |
|--------------|---------------------------------|
| Item3.  | Defaults Upon Senior Securities |

As of thedate hereof, the Company is in default in its payment obligations under(i) the December 2004 Convertible Note which was due on July 3, 2006 inthe principal amount plus accrued interest of $544,827, (ii) the 2005Convertible Debentures and the 2006 6% Convertible Notes (whicheach contain cross default provisions), as a result of the December2004 Convertible Note default, in the principal amounts plus accruedinterest of $1,826,867 and $3,645,949, respectively. In addition, theCompany is in default under the 2005 Convertible Debentures for failureto file a post-effective amendment to its registration statement onForm  SB-2 by July 10, 2006 as required by the 2005 ConvertibleDebentures. The Company is also in default under the 2006 6%Convertible Notes for failure to file a registration statement withinthe 20-day grace period after the August 21, 2006 filing deadline.

On November 20, 2006, the 2004 Convertible Note holder agreed toextend the maturity date of the Note to December 31, 2006. On November21, 2006, the 6% Convertible Note holders have 

26

----

Table of Contents

waived the default under their agreement andagreed to extend the registration statement filing requirement toDecember 31, 2006. The Company is currently attempting to have theregistration statement filing requirement extended in the 2005Convertible Debentures.

|               |                  |
|---------------|------------------|
| Item 5.  | OtherInformation |

Effective October  31,  2006 all of theCompany’s employees resigned, except for William Pursley, theCompany’s Chief Executive Officer, who has agreed to servethrough December  31,  2006.

Effective October31,  2006, Donald Fallon resigned as Senior Vice President,Finance and Administration, Chief Financial Officer and Secretary andNorman Barton, M.D., Ph.D. resigned as Executive Vice President andChief Medical Officer of the Company.

Effective November1,  2006 and November  16,  2006, John W. Griffin,M.D. and Leonard A. Mudry, respectively, each resigned as a director ofthe Company.

None of such resignations were as a result of anydisagreement with the Company on any matter relating to its operations,policy or practices.

FORWARD-LOOKING STATEMENTS

ThisQuarterly Report on Form 10-QSB contains forward-looking statements (asdefined in Section 27A of the Securities Act and Section 21E of theSecurities Exchange Act of 1934 (the ‘‘ExchangeAct’’). To the extent that any statements made in thisReport contain information that is not historical, these statements areessentially forward-looking. Forward-looking statements can beidentified by the use of words such as‘‘expects,’’‘‘plans’’‘‘will,’’‘‘may,’’‘‘anticipates,’’ believes,’’‘‘should,’’‘‘intends,’’‘‘estimates,’’ and other words of similarmeaning. These statements are subject to risks and uncertainties thatcannot be predicted or quantified and consequently, actual results maydiffer materially from those expressed or implied by suchforward-looking statements. Such risks and uncertainties include,without limitation, our ability to raise capital to finance thedevelopment of our products, the effectiveness, profitability and themarketability of those products, our ability to protect our proprietaryinformation, general economic and business conditions, the impact oftechnological developments and competition, including entry ofnewly-developed alternative drug technologies, our expectations andestimates concerning future financial performance and financing plans,adverse results of any legal proceedings, the impact of current,pending or future legislation and regulation on the healthcareindustry, our ability to satisfy government and commercial customersusing our technology, our ability to develop manufacturing capabilitiesor the inability to enter into acceptable relationships with one ormore contract manufacturers for our products and key components and theability of such contract manufacturers to manufacture products orcomponents of an acceptable quality on a cost-effective basis, thevolatility of our operating results and financial condition, ourability to attract or retain qualified senior management personnel,including sales and marketing and scientific personnel and other risksdetailed from time to time in our filings with the SEC. We do notundertake any obligation to publicly update any forward-lookingstatements. As a result, you should not place undue reliance on theseforward-looking statements.

We also use market data and industryforecasts and projections throughout this prospectus, which we haveobtained from market research, publicly available information andindustry publications. These sources generally state that theinformation they provide has been obtained from sources believed to bereliable, but that the accuracy and completeness of the information arenot guaranteed. The forecasts and projections are based on industrysurveys and the preparers’ experience in the industry, and theprojected amounts may not be achieved. Similarly, although we believethat the surveys and market research others have performed arereliable, we have not independently verified this information.Forecasts and other forward-looking information obtained from thesesources are subject to the same qualifications and the additionaluncertainties accompanying any estimates of future market size, revenueand market acceptance of products and services.

27

----

Table of Contents

|              |          |
|--------------|----------|
| Item6.  | Exhibits |

|               |   |     |             |  |  |                                                                                                                                                                                                                                                                                                                               |
|---------------|---|-----|-------------|--|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |   |     | Description |
|               | 2 | .1  |             |  |  | Certificateof Ownership and Merger of CepTor Corporation into CepTor Research andDevelopment Company (incorporated by reference herein to Exhibit 2.1 tothe Company’s Current Report on Form 8-K dated January31,  2005 (the ‘‘January 20058-K’’))                                              |
|               | 3 | .1  |             |  |  | Amended andRestated Certificate of Incorporation, dated January  27,2005 (incorporated herein by reference to Exhibit 3.1 to theJanuary  2005 8-K)                                                                                                                                                                            |
|               | 3 | .2  |             |  |  | Certificate ofCorrection to Amended and Restated Certificate of Incorporation(incorporated herein by reference to Exhibit 3.1 to theCompany’s Current Report on Form 8-K, dated February10,  2005)                                                                                                                      |
|               | 3 | .3  |             |  |  | Amended and RestatedBy-laws (incorporated herein by reference to Exhibit 3.2 to theJanuary  2005 8-K)                                                                                                                                                                                                                         |
|               | 4 | .1  |             |  |  | Form of CommonStock Certificate (incorporated herein by reference to Exhibit 4.1 tothe Company’s Annual Report on Form 10-KSB for the fiscal yearended December  31,  2004 (the ‘‘200410-KSB’’))                                                                                                |
|               | 4 | .2  |             |  |  | CepTorAgreement, dated March  31,  2004 (the‘‘CepTor Agreement’’), by and among WilliamPursley, Xechem and the Company (incorporated herein by reference toExhibit 4.1 to the Company’s Current Report on Form8-K, dated December  9,  2004 (the ‘‘2004Form 8-K’’))     |
|               | 4 | .3  |             |  |  | FirstAmendment to CepTor Agreement effective April  23,  2004,by and among William Pursley, the Company and Xechem (incorporatedherein by reference to Exhibit 4.2 to the 20048-K)                                                                                                                                            |
|               | 4 | .4  |             |  |  | Second Amendment to CepTorAgreement, dated December  9,  2004, by and among WilliamPursley, the Company and Xechem (incorporated by reference to Exhibit4.3 to the 2004 8-K)                                                                                                                                                  |
|               | 4 | .5  |             |  |  | Form of UnitWarrant (incorporated by reference to Exhibit 4.4 to theCompany’s Registration Statement on Form SB-2 as filed with theSEC on February  11,  2005 (the ‘‘FormSB-2’’))                                                                                                               |
|               | 4 | .6  |             |  |  | Form of Amendedand Restated Convertible Promissory Note (incorporated herein byreference to Exhibit 4.7 to the 200410-KSB)                                                                                                                                                                                                    |
|               | 4 | .7  |             |  |  | Form of Subscription Agreement(incorporated herein by reference to Exhibit 4.6 to the FormSB-2)                                                                                                                                                                                                                               |
|               | 4 | .8  |             |  |  | Securities Purchase Agreement,dated June  17,  2005 by and between the Company, Xechemand William Pursley (incorporated herein by reference to Exhibit 99.01to the Company’s Current Report on Form 8-K filed on June20,  2005)                                                                                         |
|               | 4 | .9  |             |  |  | Common Stock PurchaseAgreement, dated October  7,  2005, between the Company andFusion Capital Fund II, LLC (‘‘Fusion’’)(incorporated herein by reference to Exhibit 10.1 to theCompany’s Current Report on Form 8-K, filed October11,  2005 (the ‘‘October 20058-K’’)) |
|               | 4 | .10 |             |  |  | RegistrationRights Agreement, dated October  7,  2005, between theCompany and Fusion (incorporated herein by reference to Exhibit 4.2 tothe October  2005 8-K)                                                                                                                                                                |
|               | 4 | .11 |             |  |  | CommonStock Warrant with Fusion, dated October  7,  2005(incorporated by reference herein to Exhibit 4.1 to the October2005 8-K)                                                                                                                                                                                              |
|               |

28

----

Table of Contents

|               |               |     |             |  |  |                                                                                                                                                                                                                                                                                                      |
|---------------|---------------|-----|-------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |               |     | Description |
|               | 4             | .12 |             |  |  | Agreement between theCompany and Brown Advisory Securities, LLC, dated May20, 2005 (incorporated herein by reference to Exhibit 4.1 tothe Company’s Registration Statement on Form SB-2 as filed withthe SEC on October 17, 2005 (the ‘‘October 2005SB-2’’))      |
|               | 4             | .13 |             |  |  | SecuredConvertible Debenture, dated December 9, 2005, issued by the Company toCornell Capital (incorporated herein by reference to Exhibit 4.1 to ourCurrent Report on Form 8-K, filed December 15, 2005(‘‘December 20058-K’’))                                              |
|               | 4             | .14 |             |  |  | Warrant issued toCornell Capital, dated December 9, 2005 (incorporated herein byreference to Exhibit 4.2 to the December  20058-K)                                                                                                                                                                   |
|               | 4             | .15 |             |  |  | Form of Redemption Warrant toCornell Capital (incorporated herein by reference to Exhibit 4.3 to theDecember  2005 8-K)                                                                                                                                                                              |
|               | 4             | .16 |             |  |  | $250,000Convertible Promissory Note, dated December 9, 2005, to Harbor Trust(incorporated herein by reference to Exhibit 4.4 to the December2005 8-K)                                                                                                                                                |
|               | 4             | .17 |             |  |  | $452,991.10 AmendedPromissory Note, dated December 9, 2005, to Harbor Trust (incorporatedherein by reference to Exhibit 4.5 to the December  20058-K)                                                                                                                                                |
|               | 4             | .18 |             |  |  | Secured Convertible Debenture,dated December  28,  2005, issued by the Company to CornellCapital (incorporated herein by reference to Exhibit 4.10 to theCompany’s Registration Statement on Form SB-2, datedDecember  29,  2005 (‘‘December 2005SB-2’’))              |
|               | 4             | .19 |             |  |  | Non-QualifiedOption Certificate and Addendum thereto, dated March  3,2006, to Little Gem Life Sciences Fund, LLC (incorporated herein byreference to Exhibit 4.18 to the Company’s Annual Report on Form10-KSB for the year ended December  31,  2005(‘‘200510-KSB’’)) |
|               | 4             | .20 |             |  |  | Non-QualifiedOption Certificate and Addendum thereto, dated March  3,2006, to Peter Chung (incorporated herein by reference to Exhibit 4.19to the 2005 10-KSB)                                                                                                                                       |
|               | 4             | .21 |             |  |  | Placement AgencyAgreement (incorporated herein by reference to Exhibit 1.1 to theCompany’s Current Report on Form 8-K filed with the SEC onJune  2,  2006)                                                                                                                                     |
|               | 4             | .22 |             |  |  | Form ofSubscription Agreement (incorporated herein by reference to Exhibit 4.1to the Company’s Current Report on Form 8-K filed with the SECon June  2,  2006)                                                                                                                                 |
|               | 4             | .23 |             |  |  | Form of6% Convertible Note (incorporated herein by reference to Exhibit4.2 to the Company’s Current Report on Form 8-K filed with theSEC on June  2,2006)                                                                                                                                      |
|               |   4 | .24 |             |  |  | Form of Common StockPurchase Warrant (incorporated herein by reference to Exhibit 4.3 tothe Company’s Current Report on Form 8-K filed with the SEC onJune  2,2006)                                                                                                                            |
|               |   4 | .25 |             |  |  | Assignment Agreement,dated June  29,  2006 (incorporated herein by reference toExhibit 4.3 to the Company’s Current Report on Form8-K filed with the SEC on July  6,2006)                                                                                                                      |
|               |   4 | .26 |             |  |  | Secured ConvertibleDebenture with Longview Fund, LP, dated June  29,  2006(incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,2006)                                                                                       |
|               |   4 | .27 |             |  |  | Secured ConvertibleDebenture with Longview Fund, LP, dated June  29,  2006(incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,  2006)                                                                                     |
|               |

29

----

Table of Contents

|               |               |     |             |  |  |                                                                                                                                                                                                                                                                                                                      |
|---------------|---------------|-----|-------------|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |               |     | Description |
|               |   4 | .28 |             |  |  | SecuredConvertible Debenture with Alpha Capital, Aktiengesellschaft, datedJune  29,  2006 (incorporated herein by reference toExhibit 4.3 to the Company’s Current Report on Form 8-K filedwith the SEC on July  6,2006)                                                                                       |
|               |   4 | .29 |             |  |  | Secured ConvertibleDebenture with Ellis International Ltd., dated June  29,2006 (incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,2006)                                                                                                 |
|               |   4 | .30 |             |  |  | Secured ConvertibleDebenture with Momona Capital, dated June  29,  2006(incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,2006)                                                                                                          |
|               |   4 | .31 |             |  |  | Warrant, dated June29,  2006 (incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,2006)                                                                                                                                                    |
|               |   4 | .32 |             |  |  | Securities PurchaseAgreement, dated August  14,  2006, by and between theCompany and the signatories thereto (incorporated herein by referenceto Exhibit 4.32 to the Company’s Quarterly Report on Form 10-QSBfor the quarterly period ended June  30,  2006(‘‘June 30, 200610-QSB’’)) |
|               | 10            | .1  |             |  |  | EmploymentAgreement, dated March  31,  2004, by and between WilliamH. Pursley and the Company (incorporated herein by reference to Exhibit10.1 to the Form SB-2)                                                                                                                                                     |
|               | 10            | .2  |             |  |  | Founders’Plan (incorporated herein by reference to Exhibit 10.5 to the FormSB-2)                                                                                                                                                                                                                               |
|               | 10            | .3  |             |  |  | 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.6 to the FormSB-2)                                                                                                                                                                                                                          |
|               | 10            | .4  |             |  |  | Deferred Stock Plan forNon-Employee Directors under the 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200410-KSB)                                                                                                                                                                |
|               | 10            | .5  |             |  |  | 2006 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200510-KSB)                                                                                                                                                                                                                        |
|               | 10            | .6  |             |  |  | Sublease Agreement, datedMarch  4,  2004, by and between the Company and MillenniumInorganic Chemicals, Inc. (incorporated herein by reference to Exhibit10.7 to the Form SB-2)                                                                                                                                      |
|               | 10            | .7  |             |  |  | ExclusiveLicense Agreement, dated September  15,  2004, between theCompany and JCR Pharmaceuticals Company, Ltd. (incorporated herein byreference to Exhibit 10.8 to the FormSB-2)                                                                                                                                   |
|               | 10            | .8  |             |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between William H. Pursley andthe Company (incorporated herein by reference to Exhibit 10.9 to theOctober  2005 SB-2)                                                                                                                                      |
|               | 10            | .9  |             |  |  | SecuritiesPurchase Agreement, dated December 9, 2005, between the Company andCornell Capital (incorporated herein by reference to Exhibit 10.1 tothe December  2005 8-K)                                                                                                                                             |
|               | 10            | .10 |             |  |  | SideLetter, dated December 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.2 to theDecember  2005 8-K)                                                                                                                                                               |
|               | 10            | .11 |             |  |  | InvestorRegistration Rights Agreement, dated December 9, 2005, between theCompany and Cornell Capital (incorporated herein by reference toExhibit 10.3 to the December  20058-K)                                                                                                                                     |
|               | 10            | .12 |             |  |  | Security Agreement, datedDecember 9, 2005, between the Company and Cornell Capital (incorporatedherein by reference to Exhibit 10.4 to the December  20058-K)                                                                                                                                                        |
|               |

30

----

Table of Contents

|               |    |     |             |  |  |                                                                                                                                                                                                                                                                                                     |
|---------------|----|-----|-------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |    |     | Description |
|               | 10 | .13 |             |  |  | Rights Agreement,dated March  7,  2006, between the Company and AmericanStock Transfer & Trust Company (incorporated herein by reference toExhibit 1 to the Company’s Registration Statement on Form 8-A,dated March  8,2006)                                                             |
|               | 10 | .14 |             |  |  | Manufacture and Supply Agreemententered into as of April 18, 2005 by and among Peninsula LaboratoriesInc., Bachem AG, Bachem Americas and the Company (incorporated byreference herein to Exhibit 10.14 to the Company’s QuarterlyReport on Form 10-QSB for the quarter ended March  31,2005) |
|               | 10 | .15 |             |  |  | Term Sheet, dated May3,  2006, by and between the Company and Margie Chassman(incorporated herein by reference to Exhibit 10.1 to theCompany’s Current Report on Form 8-K, filed May  9,2006)                                                                                                 |
|               | 31 | .1* |             |  |  | Section 302 Certification ofPrincipal Executive Officer                                                                                                                                                                                                                                             |
|               | 31 | .2* |             |  |  | Section302 Certification of Principal FinancialOfficer                                                                                                                                                                                                                                              |
|               | 32 | .1* |             |  |  | Section 906 Certification ofPrincipal Executive Officer                                                                                                                                                                                                                                             |
|               | 32 | .2* |             |  |  | Section906 Certification of Principal FinancialOfficer                                                                                                                                                                                                                                              |
|               |

|  |
|--|
|  |  |
|  |

|   |                |
|---|----------------|
| * | Filedherewith. |

31

----

SIGNATURES

Inaccordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned,thereunto dulyauthorized.

|                         |  |  |                   |  |  |                                                                                                                                                                                                                                               |
|-------------------------|--|--|-------------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |  |  | CEPTORCORPORATION |
| Dated:November 22, 2006 |  |  | By:               |  |  | /s/ William H.Pursley                                     |
|                    |  |  |              |  |  | WilliamH. Pursley Chairman and Chief Executive Officer(PrincipalExecutive Officer and PrincipalFinancial Officer andPrincipalAccountingOfficer)                                                                                               |
|                         |

----

EXHIBITINDEX

|               |   |     |             |  |  |                                                                                                                                                                                                                                                                                                                               |
|---------------|---|-----|-------------|--|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |   |     | Description |
|               | 2 | .1  |             |  |  | Certificateof Ownership and Merger of CepTor Corporation into CepTor Research andDevelopment Company (incorporated by reference herein to Exhibit 2.1 tothe Company’s Current Report on Form 8-K dated January31,  2005 (the ‘‘January 20058-K’’))                                              |
|               | 3 | .1  |             |  |  | Amended andRestated Certificate of Incorporation, dated January  27,2005 (incorporated herein by reference to Exhibit 3.1 to theJanuary  2005 8-K)                                                                                                                                                                            |
|               | 3 | .2  |             |  |  | Certificate ofCorrection to Amended and Restated Certificate of Incorporation(incorporated herein by reference to Exhibit 3.1 to theCompany’s Current Report on Form 8-K, datedFebruary  10,  2005)                                                                                                                     |
|               | 3 | .3  |             |  |  | Amendedand Restated By-laws (incorporated herein by reference to Exhibit 3.2to the January  2005 8-K)                                                                                                                                                                                                                         |
|               | 4 | .1  |             |  |  | Form ofCommon Stock Certificate (incorporated herein by reference to Exhibit4.1 to the Company’s Annual Report on Form 10-KSB for the fiscalyear ended December  31,  2004 (the ‘‘200410-KSB’’))                                                                                                |
|               | 4 | .2  |             |  |  | CepTorAgreement, dated March  31,  2004 (the‘‘CepTor Agreement’’), by and among WilliamPursley, Xechem and the Company (incorporated herein by reference toExhibit 4.1 to the Company’s Current Report on Form 8-K, datedDecember  9,  2004 (the ‘‘2004 Form8-K’’))     |
|               | 4 | .3  |             |  |  | First Amendment toCepTor Agreement effective April  23,  2004, by and amongWilliam Pursley, the Company and Xechem (incorporated herein byreference to Exhibit 4.2 to the 20048-K)                                                                                                                                            |
|               | 4 | .4  |             |  |  | Second Amendment to CepTorAgreement, dated December  9,  2004, by and among WilliamPursley, the Company and Xechem (incorporated by reference to Exhibit4.3 to the 2004 8-K)                                                                                                                                                  |
|               | 4 | .5  |             |  |  | Form of UnitWarrant (incorporated by reference to Exhibit 4.4 to theCompany’s Registration Statement on Form SB-2 as filed with theSEC on February  11,  2005 (the ‘‘FormSB-2’’))                                                                                                               |
|               | 4 | .6  |             |  |  | Form of Amendedand Restated Convertible Promissory Note (incorporated herein byreference to Exhibit 4.7 to the 200410-KSB)                                                                                                                                                                                                    |
|               | 4 | .7  |             |  |  | Form of Subscription Agreement(incorporated herein by reference to Exhibit 4.6 to the FormSB-2)                                                                                                                                                                                                                               |
|               | 4 | .8  |             |  |  | Securities Purchase Agreement,dated June  17,  2005 by and between the Company, Xechemand William Pursley (incorporated herein by reference to Exhibit 99.01to the Company’s Current Report on Form 8-K filed on June20,  2005)                                                                                         |
|               | 4 | .9  |             |  |  | Common Stock PurchaseAgreement, dated October  7,  2005, between the Company andFusion Capital Fund II, LLC (‘‘Fusion’’)(incorporated herein by reference to Exhibit 10.1 to theCompany’s Current Report on Form 8-K, filed October11,  2005 (the ‘‘October 20058-K’’)) |
|               | 4 | .10 |             |  |  | RegistrationRights Agreement, dated October  7,  2005, between theCompany and Fusion (incorporated herein by reference to Exhibit 4.2 tothe October  2005 8-K)                                                                                                                                                                |
|               | 4 | .11 |             |  |  | CommonStock Warrant with Fusion, dated October  7,  2005(incorporated by reference herein to Exhibit 4.1 to the October2005 8-K)                                                                                                                                                                                              |
|               |

----

|               |   |     |             |  |  |                                                                                                                                                                                                                                                                                                                |
|---------------|---|-----|-------------|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |   |     | Description |
|               | 4 | .12 |             |  |  | Agreement between theCompany and Brown Advisory Securities, LLC, dated May 20, 2005(incorporated herein by reference to Exhibit 4.1 to theCompany’s Registration Statement on Form SB-2 as filed with theSEC on October 17, 2005 (the ‘‘October 2005SB-2’’)) |
|               | 4 | .13 |             |  |  | SecuredConvertible Debenture, dated December 9, 2005, issued by theCompany to Cornell Capital (incorporated herein by reference toExhibit 4.1 to our Current Report on Form 8-K, filedDecember 15, 2005 (‘‘December 20058-K’’))                                         |
|               | 4 | .14 |             |  |  | Warrant issued toCornell Capital, dated December 9, 2005 (incorporated herein byreference to Exhibit 4.2 to the December  20058-K)                                                                                                                                                                   |
|               | 4 | .15 |             |  |  | Form of Redemption Warrant toCornell Capital (incorporated herein by reference to Exhibit 4.3to the December  20058-K)                                                                                                                                                                                    |
|               | 4 | .16 |             |  |  | $250,000 Convertible PromissoryNote, dated December 9, 2005, to Harbor Trust (incorporatedherein by reference to Exhibit 4.4 to the December  20058-K)                                                                                                                                               |
|               | 4 | .17 |             |  |  | $452,991.10 Amended PromissoryNote, dated December 9, 2005, to Harbor Trust (incorporatedherein by reference to Exhibit 4.5 to the December  20058-K)                                                                                                                                                |
|               | 4 | .18 |             |  |  | Secured Convertible Debenture,dated December  28,  2005, issued by the Company to CornellCapital (incorporated herein by reference to Exhibit 4.10 to theCompany’s Registration Statement on Form SB-2, datedDecember  29,  2005 (‘‘December 2005SB-2’’))                        |
|               | 4 | .19 |             |  |  | Non-QualifiedOption Certificate and Addendum thereto, dated March  3,2006, to Little Gem Life Sciences Fund, LLC (incorporated herein byreference to Exhibit 4.18 to the Company’s Annual Report on Form10-KSB for the year ended December  31,  2005(‘‘200510-KSB’’))           |
|               | 4 | .20 |             |  |  | Non-QualifiedOption Certificate and Addendum thereto, dated March  3,2006, to Peter Chung (incorporated herein by reference to Exhibit 4.19to the 2005 10-KSB)                                                                                                                                                 |
|               | 4 | .21 |             |  |  | Placement AgencyAgreement (incorporated herein by reference to Exhibit 1.1 to theCompany’s Current Report on Form 8-K filed with the SEC onJune  2,  2006)                                                                                                                                               |
|               | 4 | .22 |             |  |  | Form ofSubscription Agreement (incorporated herein by reference to Exhibit 4.1to the Company’s Current Report on Form 8-K filed with the SECon June  2,  2006)                                                                                                                                           |
|               | 4 | .23 |             |  |  | Form of6% Convertible Note (incorporated herein by reference to Exhibit4.2 to the Company’s Current Report on Form 8-K filed with theSEC on June  2,  2006)                                                                                                                                              |
|               | 4 | .24 |             |  |  | Formof Common Stock Purchase Warrant (incorporated herein by reference toExhibit 4.3 to the Company’s Current Report on Form 8-K filedwith the SEC on June  2,2006)                                                                                                                                      |
|               | 4 | .25 |             |  |  | Assignment Agreement, datedJune  29,  2006 (incorporated herein by reference toExhibit 4.3 to the Company’s Current Report on Form 8-K filedwith the SEC on July  6,2006)                                                                                                                                |
|               | 4 | .26 |             |  |  | Secured Convertible Debenturewith Longview Fund, LP, dated June  29,  2006 (incorporatedherein by reference to Exhibit 4.3 to the Company’s CurrentReport on Form 8-K filed with the SEC on July6,  2006)                                                                                                |
|               | 4 | .27 |             |  |  | Secured ConvertibleDebenture with Longview Fund, LP, dated June  29,  2006(incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with theSEC on July  6,  2006)                                                                                               |
|               |

----

|               |               |     |             |  |  |                                                                                                                                                                                                                                |
|---------------|---------------|-----|-------------|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |               |     | Description |
|               |   4 | .28 |             |  |  | SecuredConvertible Debenture with Alpha Capital, Aktiengesellschaft, datedJune  29,  2006 (incorporated herein by reference toExhibit 4.3 to the Company’s Current Report on Form 8-K filedwith the SEC on July  6,2006) |
|               |   4 | .29 |             |  |  | Secured ConvertibleDebenture with Ellis International Ltd., dated June  29,2006 (incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with theSEC on July  6,2006)           |
|               |   4 | .30 |             |  |  | Secured ConvertibleDebenture with Momona Capital, dated June  29,  2006(incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,2006)                    |
|               |   4 | .31 |             |  |  | Warrant, dated June29,  2006 (incorporated herein by reference to Exhibit 4.3 to theCompany’s Current Report on Form 8-K filed with the SEC onJuly  6,2006)                                                              |
|               |   4 | .32 |             |  |  | Securities PurchaseAgreement, dated August  14,  2006, by and between theCompany and the signatories thereto (incorporated herein by referenceto Exhibit 4.32 to the June  30,  200610-QSB)                                    |
|               | 10            | .1  |             |  |  | Employment Agreement, datedMarch  31,  2004, by and between William H. Pursley and theCompany (incorporated herein by reference to Exhibit 10.1 to the FormSB-2)                                                               |
|               | 10            | .2  |             |  |  | Founders’ Plan(incorporated herein by reference to Exhibit 10.5 to the FormSB-2)                                                                                                                                         |
|               | 10            | .3  |             |  |  | 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.6 to theForm SB-2)                                                                                                                                    |
|               | 10            | .4  |             |  |  | Deferred StockPlan for Non-Employee Directors under the 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200410-KSB)                                                                          |
|               | 10            | .5  |             |  |  | 2006 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200510-KSB)                                                                                                                                  |
|               | 10            | .6  |             |  |  | Sublease Agreement, datedMarch  4,  2004, by and between the Company and MillenniumInorganic Chemicals, Inc. (incorporated herein by reference to Exhibit10.7 to the FormSB-2)                                                 |
|               | 10            | .7  |             |  |  | Exclusive License Agreement,dated September  15,  2004, between the Company and JCRPharmaceuticals Company, Ltd. (incorporated herein by reference toExhibit 10.8 to the FormSB-2)                                             |
|               | 10            | .8  |             |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between William H. Pursley andthe Company (incorporated herein by reference to Exhibit 10.9 to theOctober  2005 SB-2)                                                |
|               | 10            | .9  |             |  |  | SecuritiesPurchase Agreement, dated December 9, 2005, between the Companyand Cornell Capital (incorporated herein by reference toExhibit 10.1 to the December  20058-K)                                              |
|               | 10            | .10 |             |  |  | Side Letter, datedDecember 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.2 to theDecember  2005 8-K)                                                               |
|               | 10            | .11 |             |  |  | InvestorRegistration Rights Agreement, dated December 9, 2005, betweenthe Company and Cornell Capital (incorporated herein by reference toExhibit 10.3 to the December  20058-K)                                     |
|               | 10            | .12 |             |  |  | Security Agreement, datedDecember 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.4 to theDecember  2005 8-K)                                                        |
|               |

----

|               |    |     |             |  |  |                                                                                                                                                                                                                                                                                                           |
|---------------|----|-----|-------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |    |     | Description |
|               | 10 | .13 |             |  |  | Rights Agreement, datedMarch  7,  2006, between the Company and American StockTransfer & Trust Company (incorporated herein by reference toExhibit 1 to the Company’s Registration Statement on Form 8-A,dated March  8,2006)                                                                   |
|               | 10 | .14 |             |  |  | Manufacture and Supply Agreemententered into as of April 18, 2005 by and among PeninsulaLaboratories Inc., Bachem AG, Bachem Americas and the Company(incorporated by reference herein to Exhibit 10.14 to theCompany’s Quarterly Report on Form 10-QSB for the quarter endedMarch  31,  2005) |
|               | 10 | .15 |             |  |  | TermSheet, dated May  3,  2006, by and between the Company andMargie Chassman (incorporated herein by reference to Exhibit 10.1 tothe Company’s Current Report on Form 8-K, filed May9,  2006)                                                                                                      |
|               | 31 | .1* |             |  |  | Section 302Certification of Principal ExecutiveOfficer                                                                                                                                                                                                                                                    |
|               | 31 | .2* |             |  |  | Section 302 Certification ofPrincipal Financial Officer                                                                                                                                                                                                                                                   |
|               | 32 | .1* |             |  |  | Section906 Certification of Principal ExecutiveOfficer                                                                                                                                                                                                                                                    |
|               | 32 | .2* |             |  |  | Section 906 Certification ofPrincipal FinancialOfficer                                                                                                                                                                                                                                                    |
|               |

|  |
|--|
|  |  |
|  |

|   |                |
|---|----------------|
| * | Filedherewith. |

----