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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.20549

FORM 10-QSB

(MarkOne)

|        |                                                                             |
|--------|-----------------------------------------------------------------------------|
|   | QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF1934 |

For the quarterly period ended June30,  2006

    TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For thetransition period 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 5100Hunt Valley,Maryland      |  |  | 21030                               |
| (Address of PrincipalExecutiveOffices)                       |  |  | (ZipCode)                           |
|                                                              |

Issuer’s TelephoneNumber: (410) 527-9998

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.Yes     No 

Indicate bycheck mark whether the registrant is a shell company (as defined inRule 12b-2 of the ExchangeAct).    Yes     No 

Asof September  1,  2006, there were 15,500,069 shares of theissuer’s common equity outstanding.

TransitionalSmall Business Disclosure Format (Checkone):    Yes     No 

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|         |  |  |                                                                                                                                                                                 |  |  |      |  |        |  |
|---------|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------|--|--------|--|
|    |  |  |                                                                                                                                                                            |  |  | Page |
| PartI   |  |  | FINANCIALINFORMATION                                                                                                                                                            |  |  |      |  |   |  |
| Item1.  |  |  | Financial Statements(Unaudited)                                                                                                                                                 |  |  |      |  | 1      |  |
|    |  |  | Condensed BalanceSheet – June 30,2006                                                                                                                                     |  |  |      |  | 1      |  |
|    |  |  | Condensed Statements ofOperations for the three- and six-month periods ended June 30, 2006 and2005, and for the period from August 11, 1986 (date of inception) toJune 30, 2006 |  |  |      |  | 2      |  |
|    |  |  | Condensed Statementof Changes in Stockholders’ Deficiency for the six-month periodended June 30, 2006                                                                     |  |  |      |  | 3      |  |
|    |  |  | CondensedStatements of Cash Flows for the six-month period ended June  30,2006 and 2005 and for the period from August 11, 1986 (date ofinception) to June 30, 2006             |  |  |      |  | 4      |  |
|    |  |  | Notesto Condensed Financial Statements                                                                                                                                          |  |  |      |  | 6      |  |
| Item2.  |  |  | Management’s Discussion and Analysis or Plan ofOperation                                                                                                                  |  |  |      |  | 21     |  |
| Item 3. |  |  | Controls andProcedures                                                                                                                                                          |  |  |      |  | 38     |  |
| PartII  |  |  | OTHERINFORMATION                                                                                                                                                                |  |  |      |  |   |  |
| Item2.  |  |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                                                                                      |  |  |      |  | 40     |  |
| Item6.  |  |  | Exhibits                                                                                                                                                                        |  |  |      |  | 42     |  |
|         |

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PART IFINANCIALINFORMATION

|               |                      |
|---------------|----------------------|
| Item 1.  | FinancialStatements. |

CEPTOR CORPORATION(A DEVELOPMENT STAGECOMPANY)CONDENSED BALANCESHEET(Unaudited)

|                                                                                                                                                                                                |  |  |             |   |             |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------|---|-------------|---|
|                                                                                                                                                                                           |  |  | June30,2006 |
| ASSETS                                                                                                                                                                                         |  |  |             |   |        |   |
| CurrentAssets:                                                                                                                                                                                 |  |  |             |   |        |   |
| Cash and cashequivalents                                                                                                                                                                       |  |  |             | $ | 2,846       |   |
| Prepaid expensesand other current assets                                                                                                                                                       |  |  |             |   | 74,545      |   |
| Total currentassets                                                                                                                                                                            |  |  |             |   | 77,391      |   |
| Property and equipment,net                                                                                                                                                                     |  |  |             |   | 45,896      |   |
| Deferred financingcosts                                                                                                                                                                        |  |  |             |   | 826,799     |   |
| Securitydeposit                                                                                                                                                                                |  |  |             |   | 18,511      |   |
| TOTALASSETS                                                                                                                                                                                    |  |  |             | $ | 968,597     |   |
| LIABILITIESAND STOCKHOLDERS’DEFICIENCY                                                                                                                                                   |  |  |             |   |        |   |
| CurrentLiabilities:                                                                                                                                                                            |  |  |             |   |        |   |
| Accounts payable                                                                                                                                                                               |  |  |             | $ | 4,427,112   |   |
| Accrued expenses                                                                                                                                                                               |  |  |             |   | 813,524     |   |
| Convertible notes, net ofdiscounts of$1,238,743                                                                                                                                                |  |  |             |   | 1,335,993   |   |
| Totalcurrentliabilities                                                                                                                                                                        |  |  |             |   | 6,576,629   |   |
| Convertiblenotes, net of discounts of$1,182,434                                                                                                                                                |  |  |             |   | 517,566     |   |
| Warrantliability                                                                                                                                                                               |  |  |             |   | 3,882,878   |   |
| Conversion optionliability                                                                                                                                                                     |  |  |             |   | 2,342,243   |   |
| TOTALLIABILITIES                                                                                                                                                                               |  |  |             |   | 13,319,316  |   |
| 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;authorized 100,000,000 shares, issued and outstanding –15,500,069                                                                                                  |  |  |             |   | 1,550       |   |
| Deferredcompensation                                                                                                                                                                           |  |  |             |   | (335,318    | ) |
| Additionalpaid-in capital                                                                                                                                                                      |  |  |             |   | 25,745,342  |   |
| Deficitaccumulated during the development stage                                                                                                                                                |  |  |             |   | (43,297,293 | ) |
| Totalstockholders’ deficiency                                                                                                                                                            |  |  |             |   | (12,350,719 | ) |
| TOTALLIABILITIES AND STOCKHOLDERS’DEFICIENCY                                                                                                                                             |  |  |             | $ | 968,597     |   |
|                                                                                                                                                                                                |

(SeeNotes to Unaudited Condensed FinancialStatements)

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

|                                                        |  |  |                                  |   |            |                                                              |  |  |  |   |            |   |  |  |  |   |             |   |
|--------------------------------------------------------|--|--|----------------------------------|---|------------|--------------------------------------------------------------|--|--|--|---|------------|---|--|--|--|---|-------------|---|
|                                                   |  |  | Three-MonthPeriod Ended June 30, |   |            | Cumulative August 11,1986(Date of Inception) to June 30,2006 |
|                                                   |  |  | 2006                             |   |            | 2005                                                         |
| Revenues:                                              |  |  |                                  |   |       |                                                              |  |  |  |   |       |   |  |  |  |   |        |   |
| Otherincome                                            |  |  |                                  | $ | —    |                                                              |  |  |  | $ | —    |   |  |  |  | $ | 75,349      |   |
| Expenses:                                              |  |  |                                  |   |       |                                                              |  |  |  |   |       |   |  |  |  |   |        |   |
| Researchand development                                |  |  |                                  |   | 472,027    |                                                              |  |  |  |   | 2,204,202  |   |  |  |  |   | 13,645,257  |   |
| In-processresearch and development                     |  |  |                                  |   | —    |                                                              |  |  |  |   | —    |   |  |  |  |   | 5,034,309   |   |
| Generaland administrative                              |  |  |                                  |   | 497,239    |                                                              |  |  |  |   | 510,357    |   |  |  |  |   | 11,874,098  |   |
| Gainon extinguishment ofdebt                           |  |  |                                  |   | (387,362   | )                                                            |  |  |  |   | (311,281   | ) |  |  |  |   | (698,643    | ) |
| Changein fair value of derivative financialinstruments |  |  |                                  |   | 311,147    |                                                              |  |  |  |   | —    |   |  |  |  |   | (3,276,566  | ) |
| Interestexpense                                        |  |  |                                  |   | 4,817,154  |                                                              |  |  |  |   | 212,299    |   |  |  |  |   | 7,657,475   |   |
| Interestincome                                         |  |  |                                  |   | —    |                                                              |  |  |  |   | (20,090    | ) |  |  |  |   | (52,318     | ) |
| Totaloperatingexpenses                                 |  |  |                                  |   | 5,710,205  |                                                              |  |  |  |   | 2,595,487  |   |  |  |  |   | 34,183,612  |   |
| Netloss                                                |  |  |                                  |   | (5,710,205 | )                                                            |  |  |  |   | (2,595,487 | ) |  |  |  |   | (34,108,263 | ) |
| Deemedpreferred stock dividends                        |  |  |                                  |   | —    |                                                              |  |  |  |   | —    |   |  |  |  |   | (10,100,616 | ) |
| Netloss available to commonstockholders                |  |  |                                  | $ | (5,710,205 | )                                                            |  |  |  | $ | (2,595,487 | ) |  |  |  | $ | (44,208,879 | ) |
| Losspershare:                                          |  |  |                                  |   |       |                                                              |  |  |  |   |       |   |  |  |  |   |        |   |
| Basicanddiluted                                        |  |  |                                  | $ | (0.38      | )                                                            |  |  |  | $ | (0.24      | ) |  |  |  |   |        |   |
| Weighted-averagecommon sharesoutstanding:              |  |  |                                  |   |       |                                                              |  |  |  |   |       |   |  |  |  |   |        |   |
| Basicanddiluted                                        |  |  |                                  |   | 14,855,983 |                                                              |  |  |  |   | 10,962,165 |   |  |  |  |   |        |   |
|                                                        |

|                                                        |  |  |                                |   |            |      |  |  |  |   |             |   |
|--------------------------------------------------------|--|--|--------------------------------|---|------------|------|--|--|--|---|-------------|---|
|                                                   |  |  | Six-MonthPeriod Ended June 30, |
|                                                   |  |  | 2006                           |   |            | 2005 |
| Revenues:                                              |  |  |                                |   |       |      |  |  |  |   |        |   |
| Otherincome                                            |  |  |                                | $ | —    |      |  |  |  | $ | —     |   |
| Expenses:                                              |  |  |                                |   |       |      |  |  |  |   |        |   |
| Researchand development                                |  |  |                                |   | 1,043,752  |      |  |  |  |   | 2,863,235   |   |
| In-processresearch and development                     |  |  |                                |   | —    |      |  |  |  |   | —     |   |
| General andadministrative                              |  |  |                                |   | 1,756,753  |      |  |  |  |   | 1,921,582   |   |
| Gain onextinguishment ofdebt                           |  |  |                                |   | (387,362   | )    |  |  |  |   | (311,281    | ) |
| Changein fair value of derivative financialinstruments |  |  |                                |   | (2,326,585 | )    |  |  |  |   | —     |   |
| Interestexpense                                        |  |  |                                |   | 5,294,640  |      |  |  |  |   | 456,877     |   |
| Interestincome                                         |  |  |                                |   | —    |      |  |  |  |   | (38,820     | ) |
| Totaloperatingexpenses                                 |  |  |                                |   | 5,381,198  |      |  |  |  |   | 4,891,593   |   |
| Netloss                                                |  |  |                                |   | (5,381,198 | )    |  |  |  |   | (4,891,593  | ) |
| Deemedpreferred stock dividends                        |  |  |                                |   | —    |      |  |  |  |   | (9,164,500  | ) |
| Netloss available to commonstockholders                |  |  |                                | $ | (5,381,198 | )    |  |  |  | $ | (14,056,093 | ) |
| Lossper share:                                         |  |  |                                |   |       |      |  |  |  |   |        |   |
| Basic anddiluted                                       |  |  |                                | $ | (0.39      | )    |  |  |  | $ | (1.29       | ) |
| Weighted-averagecommon sharesoutstanding:              |  |  |                                |   |       |      |  |  |  |   |        |   |
| Basic anddiluted                                       |  |  |                                |   | 13,785,982 |      |  |  |  |   | 10,889,339  |   |
|                                                        |

(SeeNotes to Unaudited Condensed FinancialStatements)

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

|                                                                                             |        |  |                                                                |        |        |             |        |  |                       |        |           |                          |  |  |                                             |  |            |                                    |  |  |  |   |        |  |  |  |  |   |          |   |  |  |  |   |            |   |  |  |  |   |             |   |  |  |  |   |             |   |
|---------------------------------------------------------------------------------------------|--------|--|----------------------------------------------------------------|--------|--------|-------------|--------|--|-----------------------|--------|-----------|--------------------------|--|--|---------------------------------------------|--|------------|------------------------------------|--|--|--|---|--------|--|--|--|--|---|----------|---|--|--|--|---|------------|---|--|--|--|---|-------------|---|--|--|--|---|-------------|---|
|                                                                                        |        |  |         PreferredStock |        |        | CommonStock |        |  | DeferredCompen-sation |        |           | AdditionalPaid-InCapital |  |  | DeficitAccumulatedDuringtheDevelopmentStage |  |            | TotalStockholders’Deficiency |
|                                                                                             | Shares |  |                                                                | Amount |        |             | Shares |  |                       | Amount |
| Balance,January  1,2006                                                                     |        |  |                                                                |        | 248.15 |             |        |  |                       | $      | 6,203,750 |                          |  |  |                                             |  | 11,744,120 |                                    |  |  |  | $ | 1,174  |  |  |  |  | $ | (322,830 | ) |  |  |  | $ | 22,969,495 |   |  |  |  | $ | (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 replacement notes($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 |        |  |                                                                |        |   |             |        |  |                       |        |      |                          |  |  |                                             |  |       |                                    |  |  |  |   |   |  |  |  |  |   |     |   |  |  |  |   | 502,138    |   |  |  |  |   |        |   |  |  |  |   | 502,138     |   |
| Stockoption-based compensation for financial consulting services rendered                   |        |  |                                                                |        |   |             |        |  |                       |        |      |                          |  |  |                                             |  |       |                                    |  |  |  |   |   |  |  |  |  |   | (464,466 | ) |  |  |  |   | 464,466    |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Stockoption-based compensation fordirectors                                                 |        |  |                                                                |        |   |             |        |  |                       |        |      |                          |  |  |                                             |  |       |                                    |  |  |  |   |   |  |  |  |  |   | (3,360   | ) |  |  |  |   | 3,360      |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Adjustmentpursuant to SFAS 123R of stock option based compensation to employees             |        |  |                                                                |        |   |             |        |  |                       |        |      |                          |  |  |                                             |  |       |                                    |  |  |  |   |   |  |  |  |  |   | (199,719 | ) |  |  |  |   | 199,719    |   |  |  |  |   |        |   |  |  |  |   | —     |   |
| Amortizationof deferredcompensation                                                         |        |  |                                                                |        |   |             |        |  |                       |        |      |                          |  |  |                                             |  |       |                                    |  |  |  |   |   |  |  |  |  |   | 655,057  |   |  |  |  |   |       |   |  |  |  |   |        |   |  |  |  |   | 655,057     |   |
| Netloss                                                                                     |        |  |                                                                |        |   |             |        |  |                       |        |      |                          |  |  |                                             |  |       |                                    |  |  |  |   |   |  |  |  |  |   |     |   |  |  |  |   |       |   |  |  |  |   | (5,381,198  | ) |  |  |  |   | (5,381,198  | ) |
| Balance,June  30,2006                                                                       |        |  |                                                                |        | 221.40 |             |        |  |                       | $      | 5,535,000 |                          |  |  |                                             |  | 15,500,069 |                                    |  |  |  | $ | 1,550  |  |  |  |  | $ | (335,318 | ) |  |  |  | $ | 25,745,342 |   |  |  |  | $ | (43,297,293 | ) |  |  |  | $ | (12,350,719 | ) |
|                                                                                             |

(SeeNotes to Unaudited Condensed FinancialStatements)

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

|                                                                                    |  |  |                                                                                       |   |            |                                                             |  |  |  |   |            |   |  |  |  |   |             |   |
|------------------------------------------------------------------------------------|--|--|---------------------------------------------------------------------------------------|---|------------|-------------------------------------------------------------|--|--|--|---|------------|---|--|--|--|---|-------------|---|
|                                                                               |  |  |         Forthe Six-Month Period EndedJune 30, |   |            | CumulativeAugust 11, 1986 (Date of Inception) toJune30,2006 |
|                                                                               |  |  | 2006                                                                                  |   |            | 2005                                                        |
| CashFlows Used In OperatingActivities:                                             |  |  |                                                                                       |   |       |                                                             |  |  |  |   |       |   |  |  |  |   |        |   |
| Net loss                                                                           |  |  |                                                                                       | $ | (5,381,198 | )                                                           |  |  |  | $ | (4,891,593 | ) |  |  |  | $ | (34,108,263 | ) |
| Adjustmentsto reconcile net income (loss) to net cash used in operatingactivities: |  |  |                                                                                       |   |       |                                                             |  |  |  |   |       |   |  |  |  |   |        |   |
| Depreciationandamortization                                                        |  |  |                                                                                       |   | 9,535      |                                                             |  |  |  |   | 8,665      |   |  |  |  |   | 41,025      |   |
| Write-offof in-process research anddevelopment                                     |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | —    |   |  |  |  |   | 5,034,309   |   |
| Chargefor stock option issued pursuant to spinoffagreement                         |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | —    |   |  |  |  |   | 2,082,500   |   |
| Stock-basedcompensation to employees anddirectors                                  |  |  |                                                                                       |   | 75,466     |                                                             |  |  |  |   | 80,122     |   |  |  |  |   | 192,242     |   |
| Stock-basedcompensation tononemployees                                             |  |  |                                                                                       |   | 579,591    |                                                             |  |  |  |   | 671,875    |   |  |  |  |   | 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                             |  |  |                                                                                       |   | (2,326,585 | )                                                           |  |  |  |   | —    |   |  |  |  |   | (3,276,566  | ) |
| Non-cashinterestexpense                                                            |  |  |                                                                                       |   | 5,170,999  |                                                             |  |  |  |   | 412,161    |   |  |  |  |   | 7,391,194   |   |
| Changesin assets andliabilities:                                                   |  |  |                                                                                       |   |       |                                                             |  |  |  |   |       |   |  |  |  |   |        |   |
| Prepaidexpenses and other currentassets                                            |  |  |                                                                                       |   | 101,240    |                                                             |  |  |  |   | (52,283    | ) |  |  |  |   | (74,545     | ) |
| Otherassets                                                                        |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | —    |   |  |  |  |   | (18,511     | ) |
| Accountspayable and accruedexpenses                                                |  |  |                                                                                       |   | 6,832      |                                                             |  |  |  |   | 540,422    |   |  |  |  |   | 5,216,402   |   |
| Netcash used in operatingactivities                                                |  |  |                                                                                       |   | (2,151,482 | )                                                           |  |  |  |   | (3,471,912 | ) |  |  |  |   | (12,924,034 | ) |
| CashFlows Used In InvestingActivities:                                             |  |  |                                                                                       |   |       |                                                             |  |  |  |   |       |   |  |  |  |   |        |   |
| Purchasesof property and equipment                                                 |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | (9,049     | ) |  |  |  |   | (86,921     | ) |
| CashFlows Provided By Financing Activities:                                        |  |  |                                                                                       |   |       |                                                             |  |  |  |   |       |   |  |  |  |   |        |   |
| Proceeds fromissuances of common stock                                             |  |  |                                                                                       |   | 200,000    |                                                             |  |  |  |   | 6,250      |   |  |  |  |   | 1,499,516   |   |
| Collectionsof subscriptions receivable                                             |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | 272        |   |  |  |  |   | 303         |   |
| Net proceedsfrom issuances of preferred stock                                      |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | 7,650,457  |   |  |  |  |   | 10,448,629  |   |
| Acquisitionof treasury stock under put right                                       |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | (916,450   | ) |  |  |  |   | (1,279,125  | ) |
| Acquisitionof treasury stock under purchase agreement                              |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | (2,309,250 | ) |  |  |  |   | (2,309,250  | ) |
| Distributionto shareholders                                                        |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | —    |   |  |  |  |   | (4,260      | ) |
| Capitalcontributed by Xechem International, Inc.                                   |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | —    |   |  |  |  |   | 350,310     |   |
| Proceedsfrom issuance of debt                                                      |  |  |                                                                                       |   | 1,876,000  |                                                             |  |  |  |   | —    |   |  |  |  |   | 5,501,000   |   |
| Expenseof issuance of long term debt                                               |  |  |                                                                                       |   | (355,949   | )                                                           |  |  |  |   | —    |   |  |  |  |   | (843,322    | ) |
| Principalpayments on bridge loans                                                  |  |  |                                                                                       |   | —    |                                                             |  |  |  |   | —    |   |  |  |  |   | (350,000    | ) |
| Netcash provided by financingactivities                                            |  |  |                                                                                       |   | 1,720,051  |                                                             |  |  |  |   | 4,431,279  |   |  |  |  |   | 13,013,801  |   |
| Netincrease (decrease) in cash and cash equivalents                                |  |  |                                                                                       |   | (431,431   | )                                                           |  |  |  |   | 950,318    |   |  |  |  |   | 2,846       |   |
| Cashand cash equivalents at the beginning of period                                |  |  |                                                                                       |   | 434,277    |                                                             |  |  |  |   | 1,331,513  |   |  |  |  |   | —     |   |
| Cashand cash equivalents at the end of period                                      |  |  |                                                                                       | $ | 2,846      |                                                             |  |  |  | $ | 2,281,831  |   |  |  |  | $ | 2,846       |   |
|                                                                                    |

(SeeNotes to Unaudited Condensed FinancialStatements)

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

|                                                                                                  |  |  |                                                                                       |   |         |                                                             |  |  |  |   |           |  |  |  |  |   |            |  |
|--------------------------------------------------------------------------------------------------|--|--|---------------------------------------------------------------------------------------|---|---------|-------------------------------------------------------------|--|--|--|---|-----------|--|--|--|--|---|------------|--|
|                                                                                             |  |  |         Forthe Six-Month Period EndedJune 30, |   |         | CumulativeAugust 11, 1986 (Date of Inception) toJune30,2006 |
|                                                                                             |  |  | 2006                                                                                  |   |         | 2005                                                        |
| SupplementalDisclosure of Cash Flow Information:                                                 |  |  |                                                                                       |   |    |                                                             |  |  |  |   |      |  |  |  |  |   |       |  |
| Deemed dividend of thebeneficial 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 |                                                             |  |  |  |   | 1,100,000 |  |  |  |  |   | 7,256,250  |  |
| Issuanceof 100,000 shares of common stock pursuant to stockplan                                  |  |  |                                                                                       |   | — |                                                             |  |  |  |   | —   |  |  |  |  |   | 270,000    |  |
| Issuanceof 7,500 shares of common stock as compensation for pastservices                         |  |  |                                                                                       |   | — |                                                             |  |  |  |   | —   |  |  |  |  |   | 46,875     |  |
| Issuanceof 25,000 shares of common stock as compensation for financialplanning                   |  |  |                                                                                       |   | — |                                                             |  |  |  |   | —   |  |  |  |  |   | 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    |  |
| 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)

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NOTE 1 – BASIS OFINTERIM FINANCIAL STATEMENT PRESENTATION

The accompanyingunaudited Condensed Financial Statements of CepTor Corporation havebeen prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and theinstructions to Form 10-QSB. Accordingly, they do not include all theinformation and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements. In theopinion of management all adjustments (which include only normalrecurring adjustments) necessary to present fairly the financialposition, results of operations and cash flows for all periodspresented have been made. The results of operations for the three- andsix-month periods ended June  30,  2006 are not necessarilyindicative of the operating results that may be expected for the entireyear ending December  31,  2006.

NOTE 2 – THECOMPANY

Organization

The financialstatements presented 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 engaged in the research and development oftherapeutic products for neuromuscular, neurodegenerative and otherdiseases with a focus on orphan diseases (defined as those which affectless than 200,000 people). Since its inception, the Company has devotedits efforts and resources to the development of its receptor mediateddrug-targeting platform for neuromuscular and neurodegenerativediseases, and to raising the funds necessary to continue thisresearch.

The Company is a development stage enterprisewhich has a limited history of operations and has not generated anymaterial revenues since its inception. The Company has received alimited amount of funding through grants and collaborative researchefforts in connection with developing its products. The Company doesnot have any products that are approved for commercial distribution atthe present time. As a development stage enterprise, the Company issubject to all of the risks and uncertainties that are associated withdeveloping a new business.

NOTE 3 – LIQUIDITY ANDFINANCIAL CONDITION

The Company has had difficultysecuring the necessary capital to fully execute its business plan andhas not been able to remain current with respect to the payment termsof all of its operating obligations. In addition, the Company hassubstantial convertible debt obligations with terms that requirerepayment during the next twelve months. During the six months endedJune  30,  2006, the Company received (i) proceeds fromexercises of stock options of $200,000, (ii) $1,625,000 from theissuance of its 2006 6% Convertible Notes (see Note 8), and(iii) unsecured advances of $251,000. Subsequent to June30,  2006, the Company received (i) $950,000 from the issuance ofits 2006 6% Convertible Notes (which includes the rollover ofunsecured advances of $250,000 received prior to June  30,2006), and (ii) unsecured advances of $335,000 (see Note13).

The Company is continuing to seek additional capital,collaborative partners, joint ventures and strategic allianceagreements both within the United States and abroad in an effort tocontinue the development of its proposed products; however, there arecurrently no firm commitments in place for new capital nor for anyprospective joint venture partners or participants with which it wouldenter into a strategic alliance arrangement providing additionalcapital. Absent additional funding from private or public equity ordebt financings, collaborative or other partnering arrangements, orother sources, the Company will be unable to conduct its productdevelopment efforts as planned, and may need to curtail its developmentplans, cease operations or sell 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.

Primarilyas the result of recording non-cash interest expense of $5,170,999,offset by the reduction in the fair values of its derivative financialinstruments of $2,326,585, the Company recorded a net loss for the

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six-month period ended June  30,2006 of $5,381,198. 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 $2,151,482 during the six-month period endedJune  30,  2006. The Company’s working capitaldeficiency amounted to $6,499,238 and its development stage accumulateddeficit amounted to $43,297,293 at June  30,  2006. TheCompany expects to continue incurring losses for the foreseeable futuredue to the inherent uncertainty that is related to establishing thecommercial feasibility of pharmaceutical products. The Company willrequire substantial additional funding to support the development ofits proposed products and fund its operations while it continues itsefforts to execute its business plan.

At June30,  2006, the Company had $4,274,736 in principal of convertiblenotes outstanding before discounts. The December  2004Convertible Note in the principal amount of $448,736, was dueJuly  3,  2006. There has not been an agreement on amendedterms and no assurance that the Company will reach agreement with thenote holder on amended terms. The terms of the 2004 Convertible Note donot provide for penalties or other payments upon default, andaccordingly, the Company has not accrued a penalty as of June30,  2006. Of the remaining debt, (i) $251,000 was repaid fromproceeds of a closing under the 2006 6% Convertible Noteoffering subsequent to June  30,  2006, (ii) $250,000 inprincipal plus accrued interest is due before December31,  2006, (iii) $1,625,000 in principal representing 20066% Convertible Notes mature in June  2007 and (iv) thebalance of $1,700,000 mature in December  2008. Currently, theCompany does not have the available cash to repay these obligations asthey come due and if the note holders do not elect to convert theirnotes at maturity, the Company will be required to raise additionalcapital in order to meet these obligations. The note holders holding$1,700,000 in principal have a security interest in all the assets ofthe Company.

If the Company is able to secure suitablefinancing to continue the development of its technologies, it may incursignificant expenditures as it initiates human clinical trials forMyodur and for the cost to manufacture the Company’s Myodurproduct for use in additional clinical and other testing. For theforeseeable future, the Company’s primary efforts will be onmoving its lead product, Myodur, into clinical trials for Duchennemuscular dystrophy, for which the Company presently expects to initiatea phase I human clinical trial for Myodur during the first quarter of2007. The Company, from time to time, may explore the development ofother technologies. If the Company decides to develop one or more othertechnologies, it may require substantial additional financing which itmay or may not be able to obtain. If it cannot obtain the additionalfinancing, it may have to forego the development of the othertechnologies or decide to halt or delay the development of Myodur infavor of the other technologies. As resources allow, the Company mayalso fund other working capital needs.

The Company doesnot have, and does not intend to establish, its own manufacturingfacilities to produce its product candidates in the foreseeable future.The Company has outsourced the manufacturing of its proposed productsto contract manufacturers. As of June  30,  2006, theCompany had sufficient materials required for the Company’sinitial human clinical trials. Furthermore, if the Company receivesregulatory approval for any of its products in the United States orelsewhere, it will incur substantial expenditures to developmanufacturing, sales, and marketing capabilities and/or to subcontractor joint venture these activities with others. There can be noassurance that the Company will ever recognize revenue or profit fromany such products. In addition, the Company may encounterunanticipated    problems, including developmental, regulatory,manufacturing, or marketing difficulties, some of which may be beyondits ability to resolve. The Company may lack the capacity to produceits products in-house and there can be no assurances that it will beable to locate or retain suitable contract manufacturers or be able tohave them produce products at satisfactory prices.

NOTE 4– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis ofPresentation

The Company is a development stageenterprise. Accordingly, the Company has included its cumulativestatements of operations and cash flows for the period of August11,  1986 (date of inception) to June  30,  2006 inaccordance with Statement of Financial Accounting Standards(‘‘SFAS’’) No. 7 ‘‘Accountingand Reporting by Development StageEnterprises.’’

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The Company’s net lossavailable to common shareholders as reported in its statement ofoperations for the period of August  11,  1986 (date ofinception) to June  30,  2006 is $44,208,879 whereas thedeficit accumulated during its development stage as reported on itsbalance sheet at June  30,  2006 is $43,297,293. 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,the Company accounted for employee stock transactions in accordancewith Accounting 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 January1,  2006, the Company adopted SFAS No. 123R ‘‘ShareBased Payment.’’ This statement is a revision of SFASStatement No. 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 recorded unrecognized compensationcost of $407,425 as deferred compensation at January  1,2006. Accordingly, the Company recognized expense on the statement ofoperations of $37,686 and $75,372 for the fair value of these stockoptions which vested during the three- and six-month periods endedJune  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%%; expecteddividend yield: 0%; expected option life: 10 years; andvolatility: 108% to 123%.

For the three- andsix-month periods ended June  30,  2005, the Companyapplied APB Opinion No. 25, ‘‘Accounting for Stock Issuedto Employees.’’ 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 EndedJune 30,2005 |   |            | SixMonthPeriod EndedJune 30,2005 |
| Netloss available to common stockholders                           |  |  |                                    | $ | (2,595,487 | )                                |  |  |  | $ | (14,056,093 | ) |
| Stock-basedemployee compensation cost, under fair value accounting |  |  |                                    |   | (15,485    | )                                |  |  |  |   | (28,799     | ) |
| Pro-formanet loss under fair valuemethod                           |  |  |                                    | $ | (2,610,972 | )                                |  |  |  | $ | (14,084,892 | ) |
| Netloss per share – basic anddiluted                         |  |  |                                    | $ | (0.22      | )                                |  |  |  | $ | (1.23       | ) |
| Pro-formanet loss per share, basic anddiluted                      |  |  |                                    | $ | (0.22      | )                                |  |  |  | $ | (1.24       | ) |
|                                                                    |

NetLoss per Share

Net loss per share is presented underSFAS No. 128 ‘‘Earnings Per Share.’’ UnderSFAS 128, basic net loss per share is computed by dividing net loss pershare available to common stockholders by the weighted average sharesof common 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 six-month periods ended June  30,  2006 and 2005excludes potentially dilutive securities because their inclusion wouldbe anti-dilutive.

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Shares of common stock issuable uponthe conversion or exercise of potentially dilutive securities are asfollows:

|                        |  |  |         |  |            |      |  |  |  |  |           |  |
|------------------------|--|--|---------|--|------------|------|--|--|--|--|-----------|--|
|                   |  |  | June30, |
|                   |  |  | 2006    |  |            | 2005 |
| ConvertibleNotes       |  |  |         |  | 30,463,204 |      |  |  |  |  | 1,269,171 |  |
| Warrants               |  |  |         |  | 20,583,232 |      |  |  |  |  | 4,239,900 |  |
| SeriesA PreferredStock |  |  |         |  | 5,504,000  |      |  |  |  |  | 3,826,500 |  |
| Options                |  |  |         |  | 1,971,029  |      |  |  |  |  | 607,695   |  |
| Total                  |  |  |         |  | 58,521,465 |      |  |  |  |  | 9,943,266 |  |
|                        |

Accountingfor Conversion Options Embedded in Convertible Notes and ConvertiblePreferred Stock

The Company accounts for conversionoptions embedded in convertible notes and convertible preferred stockin accordance with SFAS No. 133 ‘‘Accounting forDerivative Instruments and Hedging Activities’’ and EITF00-19 ‘‘Accounting for Derivative Financial InstrumentsIndexed to, 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 mandatorily redeemable preferred shares, as host instruments,are deemed to be conventional as that term is described in theimplementation guidance provided in paragraph 61 (k) of Appendix A toSFAS 133 and further clarified in EITF 05-2 ‘‘The Meaningof ‘Conventional Convertible Debt Instrument’ in IssueNo. 00-19.’’ SFAS 133 provides for an additionalexception to this rule when the economic characteristics and risks ofthe embedded derivative instrument are clearly and closely related tothe economic characteristics and risks of the hostinstrument.

The Company accounts for convertible notes(deemed conventional) in accordance with the provisions of EITF 98-5‘‘Accounting for Convertible Securities with BeneficialConversion 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 Companyissued $3,875,000 in principal of various convertible notes withembedded conversion options accounted for as free standing derivativefinancial instruments in accordance with SFAS 133 and EITF 00-19 and onthe dates of issuance recorded liabilities for conversion options of$2,701,192. The fair value of these embedded conversion options wereestimated at the date of issuance using the Black-Scholes optionpricing model with the following assumptions: risk fee interest rate:3.3% to 5.1%; expected dividend yield: 0%;expected option life: one year to 3 years; and volatility: 130%to 173%. The accounting guidance instructs that the conversionoptions are a derivative liability and are marked to market for eachreporting period. During the three- and six-month periods endedJune  30,  2006, the Company recognized an expense of$408,235 for the increase in fair value and a gain of $165,825 for thedecrease in fair value, respectively, of the derivative financialinstruments. The fair value of these embedded conversion options wereestimated at June 30, 2006 using the Black-Scholes option pricing modelwith the following assumptions: risk fee interest rate: 5.1%;expected dividend yield: 0%; expected option life: 3 years; andvolatility: 184%.

The Company also determined thatthe conversion 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 theissuance of common stock purchase warrants and other freestandingderivative financial instruments in accordance with the provisions ofEITF 00-19. Based on the provisions of EITF 00-19, the Companyclassifies as equity any contracts that (i) require physical settlementor 

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net-share settlement or (ii) gives theCompany a choice of net-cash settlement or settlement in its own shares(physical settlement or net-share settlement). The Company classifiesas assets or liabilities any contracts that (i) require net-cashsettlement (including a requirement to net-cash settle the contract ifan event occurs and if that event is outside the control of theCompany) or (ii) give the counterparty a choice of net-cash settlementor settlement in shares (physical settlement or net-sharesettlement).

The terms of the Company’sDecember  2005 Convertible Debentures (see Note 8) provide for aconversion price in certain situations based on a floating conversionprice which results in an indeterminable number of shares of commonstock potentially issued upon conversion. Under accounting guidanceprovided by EITF 00-19, as of December  31,  2005, theCompany had liabilities of $3,130,957 representing the fair value ofwarrants to purchase approximately 6.0  million shares of commonstock which had been granted to non-employees for services rendered oras components of other financing instruments. The Company recordedadditional liabilities for the fair value of warrants granted duringthe six-month period ended June  30,  2006 in the aggregateof $2,912,681. The fair value of these awards was estimated at the dateof grant 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:2 years to 5 years; and volatility: 164% to184%.

The accounting guidance instructs that thewarrants are a derivative liability and are marked to market for eachreporting period. During the three- and six-month periods endedJune  30,  2006, the Company recognized a gain of $97,088and $2,160,760, respectively, for the decrease in fair value of thederivative financial instruments. The fair value of these awards wasestimated at June 30, 2006 using the Black-Scholes option pricing modelwith the following assumptions: risk fee interest rate:5.1%%; expected dividend yield: 0%; expectedoption life: 1.4 years to 4.9 years; and volatility:184%.

Recently Issued AccountingPronouncements

In February  2006, theFinancial Accounting Standards Board(‘‘FASB’’) issued SFAS No. 155, which is anamendment of SFAS No. 133 and 140. This Statement: a) permits fairvalue re-measurement for any hybrid financial instrument that containsan embedded derivative that otherwise would require bifurcation, b)clarifies which interest-only strip and principal-only strip are notsubject to the requirements of SFAS 133, c) establishes a requirementto evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiringbifurcation, d) clarifies that concentrations of credit risk in theform of subordination are not embedded derivatives, e) amends SFAS 140to eliminate the prohibition on a qualifying special-purpose entityfrom holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.This Statement is effective for financial statements for fiscal yearsbeginning after September  15,  2006. Earlier adoption ofthis Statement is permitted as of the beginning of an entity’sfiscal year, provided the entity has not yet issued any financialstatements for that fiscal year. The Company is evaluating if thisStatement will have an impact on the financial statements of theCompany.

In March  2006, the FASB issued SFAS No.156, which amends FASB Statement No. 140. This Statement establishes,among other things, the accounting for all separately recognizedservicing assets and servicing liabilities. This Statement amends SFAS140 to require that all separately recognized servicing assets andservicing liabilities be initially measured at fair value, ifpracticable. This Statement permits, but does not require, thesubsequent measurement of separately recognized servicing assets andservicing liabilities at fair value. An entity that uses derivativeinstruments to mitigate the risks inherent in servicing assets andservicing liabilities is required to account for those derivativeinstruments at fair value. Under this Statement, an entity can electsubsequent fair value measurement to account for its separatelyrecognized servicing assets and servicing liabilities. By electing thatoption, an entity may simplify its accounting because this Statementpermits income statement recognition of the potential offsettingchanges in fair value of those servicing assets and servicingliabilities and derivative instruments in the same accounting period.This Statement is effective for financial statements for fiscal yearsbeginning after September  15,  2006. Earlier adoption ofthis Statement is permitted as of the beginning of an entity’sfiscal year, provided the entity has not yet issued any financialstatements for that fiscal year. The Company believes this Statementwill not have an impact on the financial statements of the Company onceadopted.

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NOTE 5 – PREPAIDEXPENSES

Prepaid expense consists primarily ofunamortized premiums paid to carriers for insurancepolicies.

NOTE 6 – DEFERRED FINANCINGCOSTS

The Company capitalizes the costs and expensesincurred in entering into its debt obligations which is 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-month period ended June  30,2006, the Company incurred $807,045 in deferred financing costsassociated with its 2006 6% Convertible Notes offering. Duringthe three- and six-month periods ended June  30,  2006, theCompany amortized $75,954 and $84,654 of deferred financing costs,respectively, to non-cash interest expense.

NOTE 7 –ACCRUED EXPENSES

Accrued expenses at June30,  2006 are asfollows:

|                                  |  |  |  |   |         |  |
|----------------------------------|--|--|--|---|---------|--|
| Financialinvestor relations fees |  |  |  | $ | 188,278 |  |
| Interest onconvertible notes     |  |  |  |   | 176,241 |  |
| Clinicaldevelopment expenses     |  |  |  |   | 139,521 |  |
| Professionaladvisory fees        |  |  |  |   | 135,000 |  |
| Liquidatingdamages               |  |  |  |   | 97,500  |  |
| Miscellaneous                    |  |  |  |   | 76,984  |  |
| Total                            |  |  |  | $ | 813,524 |  |
|                                  |

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

Convertible PromissoryNotes

Pursuant to an offer dated October22,  2004 as amended November  15,  2004 made to theholders of certain convertible notes, the Company issued $901,728 ofconvertible notes due December  8,  2005 in exchange forconvertible notes in the principal amount of $825,000 plus accruedinterest 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,the Company amended a portion of the convertible promissory note thatwas payable to Harbor Trust dated December  9,  2004, inthe principal amount of $452,991 by reducing the conversion price to$0.375 from $0.75 per share (the ‘‘AmendedDecember  2005 Harbor Note’’). The affect of thismodification was insignificant since approximately 50% of thenote was converted in 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 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 

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not been an agreement on amended terms and noassurance the Company will reach agreement with the note holder. Theterms of the December 2004 Convertible Note do not provide forpenalties or other payments upon default, and accordingly, the Companyhas not accrued any as of June  30,  2006. The conversionprice was adjusted to $0.15 from $0.75 pursuant to the 2006 6%Convertible Note offering which commenced June  1,  2006(see below).

As of June  30,  2006, theprincipal amount of $448,736 remains outstanding under theDecember  2004 Convertible Note.

2005 HarborNote

On December  9,  2005, the Companyissued a convertible promissory note (the ‘‘2005 HarborNote’’) in the principal amount of $250,000 which bearsinterest at the rate of 6% per year. All unpaid principal andinterest under the 2005 Harbor Note will be due and payable onDecember  9,  2006. The 2005 Harbor Note is convertible, inwhole or in part, at any time, into common stock at an adjustedconversion price of $0.15 per share (adjusted pursuant to the 20066% Convertible Note offering commenced on June  1,2006, see below), subject to certain limitations on conversion as setforth in the 2005 Harbor Note, including where the resulting number ofshares converted on a cumulative basis, would exceed 19.99% ofthe total number of shares of common stock outstanding and, subject toa conversion price adjustment in the event the Company offers or sellsan option not pursuant to an approved stock plan to acquire commonstock at a price per share less than the conversion price. Theconversion option featured in this note is being accounted for as afree standing derivative financial instrument in accordance withSFAS  133 and EITF  00-19. The fair value of the conversionoption amounted to $182,883 at June  30, 2006.

As ofJune  30,  2006, the principal amount of $250,000 remainsoutstanding under the 2005 Harbor Note.

2005 ConvertibleDebentures

On December  9,  2005, theCompany entered 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 year. 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 portionor all of the outstanding principal and interest under the 2005Convertible Debentures into shares of common stock at a conversionprice per share equal to the lesser of $0.9765 (105% of theclosing bid price of the common stock on December  8,2005) (the ‘‘Fixed Price’’) or (ii)95% of the lowest closing bid price of the common stock for thetwenty trading days immediately preceding the conversion date (the‘‘Floating Price’’ and together with theFixed Price, the ‘‘Conversion Price’’),subject to adjustment as provided in the 2005 Convertible Debentures;provided, that any such conversion based on the Floating Price willgenerally be limited to $150,000 of principal outstanding under the2005 Convertible Debentures in any thirty day period; and furtherprovided, that Cornell Capital may not convert the 2005 ConvertibleDebentures into shares of common stock if such conversion would resultin Cornell Capital, together with its affiliates, beneficially owningin excess of 4.9% of the then issued and outstanding shares ofcommon stock. The Conversion Price and number of shares of common stockissuable upon conversion of the 2005 Convertible Debentures is subjectto certain exceptions and adjustment for stock splits and combinationsand other dilutive events.

Subject to the terms andcondition of the 2005 Convertible Debentures, the Company had the rightat any time upon three business days notice to redeem the 2005Convertible Debentures, in whole or in part. If the closing bid priceof the common stock, is less than the Fixed Price at the time of theredemption, the Company is obligated to pay, in addition to theprincipal and accrued interest being redeemed, a redemption premium of8% of the principal amount being redeemed (the‘‘Redemption Amount’’). If the closing bidprice is greater than the Fixed Price, the Company may redeem up to50% of the principal 

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amount at the Redemption Amount and theremaining 50% at the greater of the (x) Redemption Amount or (y)the market value of the common stock. In addition, Cornell Capital willreceive a three-year warrant to purchase 25,000 shares of common stockfor every $100,000 redeemed by the Company, on a pro rata basis, at anexercise price per share of $0.9765 (the ‘‘RedemptionWarrant’’).

If an Event of Default (as suchterm is defined in the 2005 Convertible Debentures) occurs, anyprincipal and accrued interest outstanding will become immediately dueand payable, in cash or common stock, at Cornell Capital’selection.

Pursuant to the Securities Purchase Agreement,on December  9,  2005, the Company issued to CornellCapital a warrant to purchase 1,000,000 shares of common stock at anexercise price per share of $1.023 (110% of the closing bidprice of the common stock on December  8,  2005) and (ii)268,817 shares of common stock, and (iii) on each of December9,  2005 and December  28,  2005, the Company made acash payment to an affiliate of Cornell Capital of $80,000 for expensesincurred in connection with the transaction.

Assignment of2005 Convertible Debentures

On June29,  2006, the Company 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 purchaseprice paid by the Assignees was $1,914,180, of which $1,836,000 isbeing paid for principal (which includes the Redemption Amount) and$78,180 represents accrued interest.

The Company now owesin the principal amounts of $700,000 and $400,000 to Longview and$300,000, $200,000 and $100,000 to Alpha, Ellis and Momona,respectively, in proportion to their assignment from Cornell Capital.All of the terms and conditions remain unchanged in the 2005Convertible Debentures except that the Assignment Agreement providesthat the Company may not redeem the 2005 Convertible Debentures, inwhole or in part.

Pursuant to the Securities PurchaseAgreement, the Company granted a security interest in all of its assetsto Cornell Capital to secure its obligations under the 2005 ConvertibleDebentures, which security interest will be transferred to theAssignees pursuant to the Assignment Agreement.

As ofJune  30,  2006, $1,700,000 of principal of the 2005Convertible Debentures remains outstanding.

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 is offering the 20066% Convertible Notes on a ‘‘bestefforts’’ basis only to ‘‘accreditedinvestors’’ (as defined in Rule 501 (a) of Regulation Dunder Section 4(2) of the Securities Act of 1933, as amended) by offerletter dated May  25,  2006 (the ‘‘OfferLetter’’), which sets forth the terms and conditions ofthe offering. The Company will offer the 2006 6% ConvertibleNotes until August  30,  2006, unlessextended.

The 2006 6% Convertible Notes are payableone year after the date of funding, or earlier upon accelerationfollowing the occurrence of an ‘‘Event ofDefault’’, as defined in the 2006 6% ConvertibleNotes. Interest on the 2006 6% Convertible Notes will accruefrom the date of issue at 6% per annum, or 12 % per annumupon the occurrence of an Event of Default.

The Companymay repurchase the 2006 6% Convertible Notes for 200% oftheir principal amount, plus accrued interest, on or beforeSeptember  30,  2006, upon 30 days’ prior writtennotice. The Company must 

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repurchase the 2006 6% ConvertibleNotes at 200% of their principal amount, plus accrued interest,if on or before September  30,  2006, the Company announcesa sale or merger of the company or its assets, which is completedwithin six months.

The principal of, and accrued intereston, the 2006 6% Convertible Notes is convertible into shares ofcommon stock, at the option of the holders of the 2006 6%Convertible Notes, at an initial conversion price per share of $0.15,subject to adjustment for certain issuances or events that will resultin dilution (the ‘‘Fixed ConversionPrice’’). If the 2006 6% Convertible Notes havenot been fully converted or repurchased for 200% of theirprincipal amount by September  30,  2006, then commencingon October  1,  2006, the conversion price will be thelesser of (i) the Fixed Conversion Price and (ii) 90% of thelowest closing price (or, if no closing price is available, the averageof closing bid and asked prices) of the Company’s common stockfor the 20 trading days immediately preceding the date on which anotice of conversion is delivered (the ‘‘FloatingConversion Price’’).

Purchasers of 20066% Convertible Notes who have not previously purchased shares ofthe Company’s Series A Convertible Preferred Stock, par value$0.0001 per share (the ‘‘Preferred Stock’’)will receive, without additional consideration, five-year warrants topurchase a number of additional shares of common stock equal to100% of the number of shares that the purchaser may initiallyacquire upon conversion of the 2006 6% Convertible Notes, at aninitial exercise price of $0.30 per share, subject to adjustment forcertain issuances and events that will result indilution.

Purchasers of 2006 6% Convertible Noteswho purchased shares of Preferred Stock, will be issued a number ofadditional 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 the common stock received upon conversion, the Company willissue a number of additional shares of common stock that will provideequivalent value, in each case without additional consideration. TheCompany will issue warrants to purchase a number of additional sharesof common stock at $0.15 that will provide equivalent value, to thosepurchasers of 2006 6% Convertible Notes who have sold orotherwise disposed of shares of common stock received upon conversionof Preferred Stock. If the Company redeems the 2006 6%Convertible Notes but does not redeem the Preferred Stock bySeptember  30,  2006, then commencing on October1,  2006, the conversion price of outstanding shares of PreferredStock of purchasers of the 2006 6% Convertible Notes will bereduced to the lesser of the Fixed Conversion Price and the FloatingConversion Price, to the extent of the total purchase price paid by thepurchaser for the 2006 6% Convertible Notes bears in relation tothe total purchase price paid for the Preferred Stock. The Company alsowill reduce to $0.30 the per share exercise price of warrantspurchasers of the 2006 6% Convertible Notes received with theirpurchase of Preferred Stock, to the extent of the principal amount of2006 6% Convertible Notes purchased relative to the totalpurchase price for the shares of Preferred Stock, subject to theCompany’s right, after the registration statement referred tobelow has become effective, to force the exercise of those warrants on20 days’ notice by offering to purchase those warrants for anominal price if the closing price per share of the common stockexceeds $0.45 for ten consecutive trading days.

TheCompany has agreed to file a registration statement to register forresale the shares of common stock that purchasers of 2006 6%Convertible Notes may acquire upon conversion of the 2006 6%Convertible Notes or exercise of the warrants, as well as anyadditional shares of common stock which may be issued as part of theoffering. If the Company fails to file a registration statement for theresale of these shares by August  21,  2006, or theregistration statement is not effective by the 150th day after theInitial Closing on June  1,  2006, the Company will beobligated to pay purchasers of the 2006 6% Convertible Notesliquidated damages in an amount equal to 2% of the principalamount of the 2006 6% Convertible Notes for each month, orportion of a month, for which the Company fails to timely file theregistration statement or until the registration statement becomeseffective, but in no event may the liquidated damages exceed 18%of the principal amount of the 2006 6% Convertible Notes. AtJune  30,  2006, the Company has accrued $97,500 asestimated liquidated damages, which represents the damages which wouldbe due with a potential delay of three months in the filing of itsregistration statement.

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As a condition to their purchaseof the 2006 6% Convertible Notes, purchasers have agreed thatthey will not sell, transfer or otherwise dispose of any securities ofthe Company prior to the 150th day after June  1,  2006,except that the restrictive period applicable to shares of common stockthat were acquired, or may be acquired, upon conversion of shares ofPreferred Stock held by the purchaser, expired on August20,  2006 to the extent of the total purchase price paid by thepurchaser for 2006 6% Convertible Notes bears in relation to thetotal purchase price paid for the PreferredStock.

Pursuant to the terms of the subscription agreementfor the 2006 6% Convertible Note offering, the proceeds of theoffering, after payment of sales commissions and other fees andexpenses, are to be disbursed to the Company from escrow for use asworking capital in monthly installments, to the extent available, asfollows: $540,000 on June  1,  2006, $820,000 byJune  10,  2006, $590,000 by July  10,  2006,$440,000 by August  10,  2006, $270,000 by September10,  2006, and up to $500,000 by the 10th day of each succeedingcalendar month until fully funded.

The Company will pay acash fee equal to 10% of the gross proceeds from the sale of the2006 6% Convertible Notes for purchasers obtained through theassistance of the placement agent, a portion of which may bereallocated to other registered broker-dealers participating in theoffering, and reimburse the placement agent for $15,000 of its legalexpenses. The Company also will issue to the placement agent, or itsdesignee(s), at each closing, a five-year warrant to purchase suchnumber of shares of common stock at an exercise price of $0.15 pershare equal to 10% of such number of shares of common stock intowhich the 2006 6% Convertible Notes sold through the placementagent at such closing are convertible. In addition, the Company hasagreed to reduce to $0.30 the per share exercise price of warrants topurchase shares of common stock issued to the placement agentpreviously, as placement agent for our PreferredStock.

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. Such protection is to beavailable only to 2006 6% Convertible Note purchasers who didnot acquire Preferred Stock from the Company directly and to personswho acquired Preferred Stock directly (or are current holders) and whoelect not to have any adjustment made with respect to their PreferredStock holdings as previously described (i.e., who elect to receive thebenefit of the yield enhancement in lieu of the conversionadjustments). In consideration for the agreements made by The HarborTrust, at each closing the Company will (i) pay The Harbor Trust ayield enhancement incentive fee equal to 10% of the aggregategross proceeds of the 2006 6% Convertible Notes receiving thebenefit of such protection (the ‘‘Yield ProtectedNotes’’), plus (ii) issue to The Harbor Trust, fornominal consideration, five-year warrants to purchase, for theprincipal amount thereof, (A) 2006 6% Convertible Notes having aprincipal amount equal to 10% of the principal amount of theYield Protected Notes sold in the Offering, and (B) five-year warrantsto purchase a number of shares of common stock equal to 10% ofthe shares 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.

OnJune  1,  2006 and June  15,  2006, the Companysold an aggregate principal amount of $1,500,000, and $125,000 of 20066% Convertible Notes. To those purchasers who had not previouslypurchased the Company’s Preferred Stock, the Company issuedfive-year warrants to purchase an aggregate of 6,500,000 and 833,333shares of common stock, respectively, at an initial exercise price of$0.30 per share. To those purchasers who had previously purchased theCompany's Preferred Stock, the Company will issue upon theconversion of their Preferred Stock, 3,290,000 additional shares ofcommon stock to those purchasers on June  1,  2006 who hadpreviously purchased Preferred Stock and adjust the exercise price onthe warrants they received when they purchased the Preferred Stock topurchase 105,000 shares of common stock to $0.30.

Of the$1,100,000 in principal purchased by those investors who had notpreviously purchased the Company’s Preferred Stock, the Companyrecognized a debt discount of $755,237 at date of issuance

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based on an allocation of the proceeds basedon relative fair values of the 2006 6% Convertible Notes, thewarrants and the conversion option, as determined by the Black-Scholesoption pricing model. Since the Company is required to account for itsderivative financial instruments as liabilities (see Note 4), theCompany recorded the full fair values of the warrants and theconversion options at date of issuance of the 2006 6%Convertible Notes of $1,239,700 and $1,169,960, respectively, asliabilities and charged non-cash interest expense. The fair value ofthese awards was estimated at the date of grant using the Black-Scholesoption pricing model with the following assumptions: risk fee interestrate: 5.1%; expected dividend yield: 0%; expected optionlife: 3 years to 5 years; and volatility: 173%. The Companymarks to market these derivative financial instruments at eachreporting date.

Of the $525,000 in principal purchased bythose investors who had previously purchased the Company’sPreferred Stock, the Company recognized a debt discount of $525,000 atdate of issuance based on the (i)  fair values of the conversionoption, (ii)  the incremental increase in fair value of theadditional shares of common stock to be issued upon conversion of thePreferred 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 conversion options at date of issuanceof the 2006 6% Convertible Notes of $4,872 and $558,390,respectively, as liabilities and charged the excess to non-cashinterest expense. The fair value of these awards was estimated at thedate of grant using the Black-Scholes option pricing model with thefollowing assumptions: risk fee interest rate: 5.1%; expecteddividend yield: 0%; expected option life: 2 years to 3 years;and volatility: 173%. The Company marks to market thesederivative financial instruments at each reporting date. In addition,the Company charged non-cash interest expense and credited equity forthe incremental increase in fair value of the additional shares ofcommon stock issuable upon conversion of the PreferredStock.

Adjustments to Outstanding ConvertibleSecurities and Other Rights to Purchase Common Stock Resulting from2006 6% Convertible Notes Offering

Pursuantto the terms of the 2006 6% Convertible Note offering, theconversion prices on certain convertible securities were adjusted tothe conversion price of the 2006 6% ConvertibleNotes.

The December  2004 Convertible Note and the2005 Harbor Note in the principal amount of $448,736 and $250,000,respectively and with adjusted conversion prices of $0.75 per share and$0.375 per share, respectively, will adjust their conversion prices to$0.15 per share. As a result of this adjustment, the Companyanticipates that it will issue an additional 2,794,804 and 1,501,667shares, respectively, assuming conversion at maturity.

TheCompany evaluated the revision in the December  2004 ConvertibleNote to determine whether the reduction in the conversion priceresulted in the issuance of a substantially different debt instrument.The Company determined that after giving effect to the substantialincrease in the fair value of the beneficial conversion feature thatresulted from reducing the conversion price, it had issued asubstantially different debt instrument which resulted in aconstructive extinguishment of the original debt instrument.Accordingly, the Company recorded a gain on the extinguishment of debtin the amounts of $387,362 for the December  2005 ConvertibleNote that is included in the accompanying statement of operations forthe three- and six-month periods ended June  30,2006.

Since the incremental fair value of theCompany's common stock which would be issued upon conversion, asdetermined by the Black-Scholes option pricing model, was in theaggregate greater than the principal balance of individual notes, theCompany recorded an original issuance discount equal to the fair valueof this beneficial conversion feature, limited to the principal balanceof the notes. This debt discount is being amortized as non-cashinterest expense over the remaining term of the December  2004Convertible Note. During the three- and six-month periods endedJune  30,  2006, the Company amortized an aggregate of$426,667 of the debt discount which is included in interest expense inthe accompanying statement of operations. Assumptions relating to theestimated fair value of the beneficial conversion features, are asfollows: risk-free interest rate of 5.1%; expected dividendyield zero percent; expected option life of 1.5 years; and currentvolatility of 165.4%.

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The 2005 Convertible Debentures inthe principal of $1,700,000 plus accrued interest, with a FixedConversion Price (as that term is defined in the 2005 ConvertibleDebentures) of $0.9765, adjusted to a Fixed Conversion Price of $0.15.In addition, the exercise price of the warrants issued to CornellCapital, for the purchase of 1,000,000 shares of common stock at $1.023per share has been reduced to $0.15 per share. As the terms of 2005Convertible Debentures provide for a lower of Fixed Conversion Price orFloating Conversion Price (as both terms are defined in the 2005Convertible Debentures) at conversion, the number of shares of CommonStock issuable upon conversion is indeterminate.

Certainoptions granted pursuant to our 2004 Incentive Stock Plan and certainshares of common stock issued upon exercise of those options, containanti-dilution provisions which provide for a reduction of the exerciseprice if the Company sells common stock or issues convertiblesecurities at a per share price less than their exercise price of$0.359 (fair market value on the date of grant). As a result of theanti-dilution provision, the Company issued an additional 776,231shares of common stock and increased the remaining unexercised optionby an additional 776,230 shares of common stock issuable upon exerciseto the optionees.

NOTE 9 – EQUITYTRANSACTIONS

During the six-month period endedJune  30,  2006, the Company issued the followingsecurities.

Common Stock Issued Upon Conversion of Series APreferred Stock

During the six-month period endedJune  30,  2006, the Company issued 267,500 shares ofcommon stock upon conversion of 26.75 shares of Series A PreferredStock.

Shares Issued Upon Exercise of Options Pursuant to2004 Incentive Stock Plan

In March  2006, theCompany issued fully-vested, five-year options to purchase an aggregateof 1,114,206 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 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 holderof the Company’s Amended December  2004 Convertible Noteelected to convert the remaining principal balance plus accruedinterest of $320,725 into 855,267 shares of common stock at aconversion price of $0.375 per share.

Conversion ofDecember  2005 Convertible Debenture

Duringthe six-month period ended June  30,  2006, a holder of theCompany’s December  2005 Convertible Debentures elected toconvert a portion of its aggregate principal balance of $300,000 into1,299,850 shares of common stock at a conversion price pursuant to theterms of the December  2005 ConvertibleDebentures.

Insufficient Authorized but Unissued Shares ofCommon Stock

On May 9, 2006, the Board of Directorsauthorized an amendment to the Company's Amended and RestatedCertificate of Incorporation to increase the number of authorizedshares of capital stock from 120,000,000 shares to 270,000,000 shares,of which 250,000,000 shares would be designated as common stock and20,000,000 shares would be designated as Series A Preferred Stock.Unless the proposed amendment is approved by the stockholders, theCompany will not be able to satisfy its obligations in the agreementsrelating to those securities. If the stockholders do not approve theamendment, the Company will be in default of its obligations underthose agreements, and the holders of those securities may acceleratepayment of the Company's obligations, obtain liquidated damagesunder certain of those agreements and pursue other legal remediesagainst the Company that could severely limit its ability to continueoperations.

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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 thedate of grant 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 $75,372 for the fair value of those stock options granted prior toJanuary  1,  2006 and which vested during the three- andsix-month periods ended June  30,  2006,respectively.

During March  2006, the Companygranted stock options to acquire an aggregate of 1,514,206 shares ofcommon stock to three consultants. The option agreements for two of theconsultants contained anti-dilution protection of the exercise priceand the number of shares issuable upon conversion in the event theCompany issued common stock at a price less then the exercise pricecontained in their option. Each option was exercisable at a price of$0.359 per share for a period of up to five years from issuance. All ofthese options were fully vested and non forfeitable on their date ofissuance. The Company charged the estimated fair value of $579,591 tocompensation expense during the six-month period ended June30,  2006 with respect to these options. Assumptions relating tothe estimated fair value of these stock options (as determined by theBlack-Scholes option pricing model), which the Company accounted for inaccordance with SFAS 123(R) and EITF 96-18, are as follows: risk-freeinterest rate of 4.7%; expected dividend yield zero percent;expected option life of 5 years; and current volatility of129.6%.

Pursuant to the 2006 6% ConvertibleNote offering 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,the Company granted stock options to acquire an aggregate of 16,000shares of common stock to three directors of the Company. Each optionwas exercisable 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 $94 to compensation expense during thesix-month period ended June  30,  2006 with respect tothese options. Assumptions relating to the estimated fair value ofthese stock options, which the Company accounted for in accordance withSFAS 123(R) and EITF 96-18 are as follows: risk-free interest rate of5.1%; expected dividend yield zero percent; expected option lifeof 10 years; and current volatility of 220.3%.

Therisk-free rate is based on the U.S. Treasury yield curve in effect atthe time of grant. The Company has not paid dividends to date and doesnote expect to pay dividends in the foreseeable future due to itssubstantial accumulated deficit and limited capital resources.Accordingly, expected dividends yields are zero. Historicalcancellations and forfeitures of stock options are insignificant. TheCompany will adjust its assumptions relating to its expectations offuture vesting and terms of options at such times that 

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additional data indicates that changes inthese assumptions are necessary. Expected volatility isprincipally based on the historical volatility of the Company’sstock.

A summary of option activity for the six monthsended June  30,  2006 is asfollows:

|                               |  |  |        |  |           |                                |  |  |                                           |   |      |                         |  |  |          |  |  |  |   |        |  |
|-------------------------------|--|--|--------|--|-----------|--------------------------------|--|--|-------------------------------------------|---|------|-------------------------|--|--|----------|--|--|--|---|--------|--|
| Options                       |  |  | Shares |  |           | Weighted-AverageExercise Price |  |  | Weighted-Average RemainingContractualTerm |   |      | 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 June  30,2006   |  |  |        |  | 1,971,029 |                                |  |  |                                           | $ | 0.66 |                         |  |  | 4.6years |  |  |  | $ | 66,667 |  |
| Exercisable at June30,  2006  |  |  |        |  | 1,864,883 |                                |  |  |                                           | $ | 0.54 |                         |  |  | 4.4years |  |  |  | $ | 66,667 |  |
|                               |

The weighted-averagegrant-date fair value of options granted during the six-month periodended June  30,  2006 and 2005 amounted to $0.25 and $4.67,respectively. 

As of June  30,  2006,the Company has $332,052 of unrecognized compensation cost related tonon-vested share-based compensation arrangements, which represents thefair value of stock options that the Company accounted for under APB 25through December  31,  2005. These costs are expected to berecognized over a weighted-average period of 3.3years. 

NOTE 11 – ADOPTION OF SHAREHOLDER RIGHTSPLAN

At its February  2006 board meeting, thedirectors of the Company unanimously approved the adoption of ashareholder rights plan pursuant to which the Company issued onepreferred share purchase right for each share of the Company’scommon stock held by shareholders of record as of the close of businesson March  7,  2006. Each right will entitle the holder topurchase one one-hundredth of a share of Series B Preferred Stock at anexercise price of $168. These preferred shares are structured so thatthe value of one one-hundredth of a preferred share will approximatethe value of one share of the Company’s common stock. Thepurpose of the plan is to protect the long-term value of the Companyfor its shareholders and to protect shareholders from various abusivetakeover tactics, including attempts to acquire control of the Companyat an inadequate price. The plan is designed to give theCompany’s Board of Directors sufficient time to study andrespond to an unsolicited takeover attempt. Adoption of the plan wasunanimously approved by the Company’s directors

Theterms of the plan provide for the Company’s shareholders ofrecord at the close of business on March  7,  2006 toreceive one right for each outstanding common share held. In general,the rights will become exercisable if a person or group acquires15% or more of the Company’s common stock or announces atender offer or exchange offer for 15% or more of theCompany’s common stock. Depending on the circumstances, theeffect of the exercise of rights will vary. When the rights initiallybecome exercisable, as described above, each holder of a right will beallowed to purchase one one-hundredth of a share of a newly createdseries of the Company’s preferred shares at an exercise price of$168. However, if a person acquires 15% or more of theCompany’s common stock in a transaction that was not approved bythe Board of Directors, each right would instead entitle the holder(other than such an acquiring person) to purchase common stock at50% of the market price of the Company’s common stock atthat time.

The rights will expire on March6,  2016. The Company may redeem the rights for $0.0001 each atany time until the tenth business day following public announcementthat a person or group has acquired 15% or more of itsoutstanding common stock.

NOTE 12 – ADOPTION OF 2006INCENTIVE STOCK PLAN

The 2006 Incentive Stock Plan wasapproved by the Company’s Board of Directors at itsFebruary  2006 meeting. The Company intends to submit the 2006Incentive Stock Plan for approval of its stockholders within 12 monthsof the effective date of the Plan. The purpose of the 2006 IncentiveStock Plan is to 

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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

On July18,  2006, the Company sold an aggregate principal amount of$950,000 of 2006 6% Convertible Notes and issued five-yearwarrants to purchase an aggregate of 4,833,333 shares of common stockat an initial exercise price of $0.30 per share. Pursuant to the termsof the 2006 6% Convertible Notes, the Company will issue1,410,000 additional shares of common stock to those purchasers who hadpreviously purchased Preferred Stock and adjust the exercise price onthe warrants they received when they purchased the Preferred Stock topurchase 45,000 shares of common stock to $0.30.

UnsecuredAdvances

Subsequent to June  30,  2006,the Company received in the aggregate, $335,000 in unsecured advances.These advances carry an interest rate of 6% and will be repaidout of the next closing under the 2006 6% Convertible Noteoffering.

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

The following discussion of our planof operations should be read in conjunction with our financialstatements and notes thereto appearing elsewhere in thisdocument.

Overview

We are adevelopment-stage biopharmaceutical company focusing on the developmentof proprietary, 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 are currently being focused on moving ourlead product into phase I clinical trials for Duchenne musculardystrophy. Even though our broad platform technology may include thedevelopment of products for multiple sclerosis, amyotrophic lateralsclerosis and chronic inflammatory demyelinating polyneuropathy, fromtime to time we may explore the development of othertechnologies.

Capital Resources and CashRequirements

We have had difficulty in securing thenecessary capital to fully execute our business plan and have not beenable to remain current with respect to the payment terms of all of ouroperating obligations. In addition, we have substantial convertibledebt obligations with terms that require repayment during the nexttwelve months. During the six months ended June  30,  2006,we received (i) proceeds from exercises of stock options of $200,000,(ii) $1,625,000 from the issuance of 2006 6% Convertible Notes(see Note 8), and (iii) unsecured advances of $251,000. Subsequent toJune  30,  2006, we received (i) $950,000 from the issuanceof 2006 6% Convertible Notes (which includes the rollover of theunsecured advances of $250,000 received prior to June  30,2006), and (ii) unsecured advances of $335,000 (see Note13).

We are continuing to seek additional capital,collaborative partners, joint ventures and strategic allianceagreements both within the United States and abroad in an effort tocontinue the development of our proposed products; however, there arecurrently no firm commitments in place for new capital nor for anyprospective joint venture partners or participants with which we wouldenter into a strategic alliance arrangement providing additionalcapital. Absent additional funding from private or public equity ordebt financings, collaborative or other partnering arrangements, orother sources, we will be unable to conduct our product developmentefforts as planned, and may need to curtail our development plans,cease operations or sell assets. These matters raise substantial doubtabout our ability to continue as a going concern. The financialstatements do not include any adjustments that may result from theoutcome of this uncertainty.

Primarily as the result ofrecording non-cash interest expense of $5,170,999, offset by thereduction in the fair values of derivative financial instruments of$2,326,585, we recorded a net loss for the six-month period endedJune  30,  2006 of $5,381,198. Non-cash interest expenseconsisted primarily of the excess fair values of derivative securitiesincluded in our financing transactions and amortization of deferredfinancing costs of those financing transactions. We used net cash flowsin operating activities of $2,151,482 during the six-month period endedJune  30,  2006. Our working capital deficiency amounted to$6,499,238 and our development stage accumulated deficit amounted to$43,297,293 at June  30,  2006. We expect to continueincurring losses for the foreseeable future due to the inherentuncertainty that is related to establishing the commercial feasibilityof pharmaceutical products. We will require substantial additionalfunding to support the development of our proposed products and fundour operations while we continue our efforts to execute our businessplan.

At June  30,  2006, we had $4,274,736 inprincipal of convertible notes outstanding before discounts. 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 ofJune  30,  2006. Of the remaining debt, (i) $251,000 wasrepaid from proceeds of a closing under the 2006 6% ConvertibleNote offering subsequent to June  30,  2006, (ii) $250,000in principal plus accrued interest is due before December31,  2006, (iii) $1,625,000 in principal representing 20066% Convertible Notes mature in 

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June  2007 and (iv) the balance of$1,700,000 mature in December  2008. Currently, we do not havethe available cash to repay these obligations as they come due and ifthe note holders do not elect to convert their notes at maturity, wewill be required to raise additional capital in order to meet theseobligations. The note holders holding $1,700,000 in principal have asecurity interest in all of our assets.

If we are able tosecure suitable financing to continue the development of ourtechnologies, we may incur significant expenditures as we initiatehuman clinical trials for Myodur and for the cost to manufacture ourMyodur product for use in additional clinical and other testing. Forthe foreseeable future, our primary efforts will be on moving our leadproduct, Myodur, into clinical trials for Duchenne muscular dystrophyas we presently expect to initiate a phase I human clinical trial forMyodur during the first quarter of 2007. From time to time, we mayexplore the development of other technologies. If we decide to developone or more other technologies, we may require substantial additionalfinancing which we may or may not be able to obtain. If we cannotobtain additional financing, we may have to forego the development ofthe other technologies or may decide to halt or delay development ofMyodur in favor of the other technologies. As resources allow, we mayalso fund other working capital needs.

We do not have, anddo not intend to establish, our own manufacturing facilities to produceour product candidates in the foreseeable future. We have outsourcedthe manufacturing of our proposed products to contract manufacturers.As of June  30,  2006, we had sufficient materials requiredfor the initial human clinical trials. Further, if we receiveregulatory approval for any of our products in the United States orelsewhere, we will incur substantial expenditures to developmanufacturing, sales, and marketing capabilities and/or to subcontractor joint venture these activities with others. There can be noassurance that we will ever recognize revenue or profit from any suchproducts. In addition, we may encounter unanticipated problems,including developmental, regulatory, manufacturing, or marketingdifficulties, some of which may be beyond our ability to resolve. Wemay lack the capacity to produce our products in-house and there can beno assurances that we will be able to locate or retain suitablecontract manufacturers or be able to have them produce products atsatisfactory prices.

Research, Development andManufacturing

Currently, our primary efforts areraising capital and moving our lead product into phase I clinicaltrials for Duchenne muscular dystrophy. During the three- and six-monthperiods ended June  30,  2006 we have been focusing ourefforts on responding to the FDA questions received after submission ofour investigational drug application in January  2006. Subsequentto June  30,  2006, we have continued this responsepreparation and currently anticipate submitting our response to the FDAbefore the end of the third quarter of 2006.

If we aresuccessful in raising capital, we plan to use any available cash tocontinue the development of our technologies, which currently isprimarily focused on preparing for and executing our phase I humanclinical trial for Myodur, if approved by the FDA. As resources permit,we may also fund other development of Myodur or any of our othertechnologies. We presently expect to initiate human clinical trials inearly 2007.

We currently rely on third party contractresearch organizations, service providers, and suppliers for support inresearch and development and pre-clinical, toxicology and clinicaltesting. In addition, we do not have, and do not intend to establish,our own manufacturing facilities to produce our product candidates inthe near or mid-term. We outsource the manufacturing of our proposedproduct, Myodur, to contract manufacturers. As of June30,  2006, we had sufficient materials required for our initialhuman clinical trials. We do not have sufficient capital to purchaseall the materials necessary to complete our long-term toxicologystudies or to complete all of our human clinical trials in order tofile for approval to market our proposed product,Myodur.

Off Balance SheetArrangements

Currently, we do not have any offbalance sheet arrangements which would require disclosure in ourfinancial statements.

Employees

As ofSeptember  1, 2006, we had seven employees, all of whom arefull-time employees, one of whom focuses on and coordinates ourresearch program, four that focus on and coordinate clinical and

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regulatory strategy and operations, and twoin management, finance, and administration. Three of our employees havedoctorate and/or M.D. degrees. As our current business strategy isprimarily to coordinate research, clinical development, andmanufacturing activities by third parties, we do not anticipate hiringa significant number of additional employees over the next twelvemonths.

Properties

We currently lease ourexecutive offices in Hunt Valley, Maryland consisting of approximately5,200 square feet for approximately $7,200 per month. This leaseexpires on December  31,  2006 and we are currentlynegotiating a twelve-month extension. We believe this should providesufficient space for our clinical, regulatory and other administrativefunctions during the remaining term of the lease. We are currentlyevaluating our needs for laboratory space. If financing is available,we may secure laboratory facilities for our own internal researchactivities. We are currently conducting research in various third partycommercial and academic settings, and we plan to continue this practiceand expand our use of third-party research organizations and facilitiesto meet specific needs.

CAUTIONARY STATEMENTS AND RISKFACTORS

The risks noted below and elsewhere in thisreport and in other documents e file with the SEC are risks anduncertainties that could cause our actual results to differ materiallyfrom the results contemplated by the forward-looking statementscontained in this report and other public statements wemake.

Risks Related to Our Company

IF WECANNOT OBTAIN ADDITIONAL FUNDS WHEN NEEDED, OR ACHIEVE PROFITABILITY WEMAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.

Absentadditional funding from private or public equity or debt financings,collaborative or other partnering arrangements, or other sources, wewill be unable to conduct our product development efforts as planned,and we may need to curtail our development plans, cease operations orsell assets.

WE HAVE A LIMITED OPERATING HISTORY WITHSIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR THE FORESEEABLEFUTURE.

We have yet to establish any history of profitableoperations. At June  30,  2006, we had an accumulateddeficit of $43,297,293. Our revenues have not been sufficient tosustain our operations. We expect that our revenues will not besufficient to sustain our operations for the foreseeable future. Ourprofitability will require the successful commercialization of ourproposed products. No assurances can be given when, or if, this willoccur or that we will ever be profitable.

Our ability toobtain additional funding will determine our ability to continue as agoing concern. Our financial statements do not include any adjustmentsthat might result from the outcome of thisuncertainty.

EVEN WITH THE PROCEEDS FROM THE 20066% CONVERTIBLE NOTES, WE WILL REQUIRE ADDITIONAL FUNDING WHICHWILL BE SIGNIFICANT AND WE MAY HAVE DIFFICULTY RAISING NEEDED CAPITALIN THE FUTURE BECAUSE OF OUR LIMITED OPERATING HISTORY AND BUSINESSRISKS ASSOCIATED WITH OUR COMPANY.

We currently do notgenerate any revenue from our proposed products and revenue from grantsand collaborative agreements may not be sufficient to meet our futurecapital requirements. We do not know when, or if, this willchange.

We have expended substantial funds in research,development and contract manufacturing and will continue to expendsubstantial funds in contract manufacturing, research, development andpre-clinical testing and clinical trials of our drug deliverytechnology and compounds. We will require substantial additional fundsto conduct research and development, establish and conduct clinical andpre-clinical trials, obtain required regulatory approvals andclearances, establish clinical and, if our products are subsequentlyconsidered candidates for FDA approval, commercial scale manufacturingarrangements, 

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and provide for the marketing anddistribution of our products. Additional funds may not be available onacceptable terms, if at all. If adequate funds are unavailable or arenot available on terms deemed acceptable by management, we may have todelay, reduce the scope of or eliminate one or more of our research ordevelopment programs or product or marketing effortswhich maymaterially harm our business, financial condition, and results ofoperations. Our long term capital requirements are expected to dependon many factors,including:

|  |              |                                                                 |
|--|--------------|-----------------------------------------------------------------|
|  | •  | the number ofpotential products and technologies indevelopment; |

|  |              |                                                                     |
|--|--------------|---------------------------------------------------------------------|
|  | •  | continuedprogress and cost of our research and developmentprograms; |

|  |              |                                                       |
|--|--------------|-------------------------------------------------------|
|  | •  | progress withpre-clinical studies and clinicaltrials; |

|  |              |                                                              |
|--|--------------|--------------------------------------------------------------|
|  | •  | the time and costsinvolved in obtaining regulatoryclearance; |

|  |              |                                                                                          |
|--|--------------|------------------------------------------------------------------------------------------|
|  | •  | costs involved inpreparing, filing, prosecuting, maintaining and enforcing patentclaims; |

|  |              |                                                                                                 |
|--|--------------|-------------------------------------------------------------------------------------------------|
|  | •  | costs of developingsales, marketing and distribution channels and our ability to sell ourdrugs; |

|  |              |                                                                                                                   |
|--|--------------|-------------------------------------------------------------------------------------------------------------------|
|  | •  | costs involved inestablishing manufacturing capabilities for clinical trial andcommercial quantities of ourdrugs; |

|  |              |                                                |
|--|--------------|------------------------------------------------|
|  | •  | competingtechnological and marketdevelopments; |

|  |              |                                  |
|--|--------------|----------------------------------|
|  | •  | marketacceptance of ourproducts; |

|  |              |                                                                              |
|--|--------------|------------------------------------------------------------------------------|
|  | •  | costs forrecruiting and retaining management, employees, and consultants;and |

|  |              |                               |
|--|--------------|-------------------------------|
|  | •  | costs for trainingphysicians. |

We may consume available resources morerapidly than currently anticipated, resulting in the need foradditional funding. We may seek to raise any necessary additional fundsthrough the exercise of warrants, equity, or debt financings,collaborative arrangements with corporate partners, or other sources.Any such equity financing may be dilutive to existing stockholders anddebt financing, if available, may involve restrictive covenants thatwould limit how we conduct our business or finance our operations, orotherwise have a material effect on our current or future businessprospects. In addition, in the event that additional funds are obtainedthrough arrangements with collaborative partners or other sources, wemay have to relinquish economic and/or proprietary rights to some ofour technologies or products under development that we would otherwiseseek to develop or commercialize by ourselves. If adequate funds arenot available, we may be required to significantly reduce, refocus, ordelay our development efforts with regard to our drug deliverytechnology, compounds, and drugs.

OUR FINANCIAL CONDITIONAND THE RESTRICTIVE COVENANTS CONTAINED IN OUR OUTSTANDING DEBT MAYLIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR TO RAISE ADDITIONALEQUITY AS MAY BE REQUIRED TO FUND OUR FUTUREOPERATIONS.

The terms of our outstanding notes may limitour ability, without the note holders’ consent, to, among otherthings:

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | enter into certaintransactions; |

|  |              |                                       |
|--|--------------|---------------------------------------|
|  | •  | create additional liens onour assets; |

|  |              |                                                                                  |
|--|--------------|----------------------------------------------------------------------------------|
|  | •  | issue preferred stock orcommon stock at certain discounts below market prices;or |

|  |              |                                                                                                                                            |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | merge or consolidate with otherentities.and could adversely affect our liquidity and our ability toattract additional funding as required. |

WE MAY NOT BEABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS MAY BE SEIZEDAS A RESULT.

At June  30,  2006, we had$4,274,736 in principal of convertible notes outstanding beforediscounts. The December  2004 Convertible Note in the principalamount of $448,736, was due July  3,  2006. There has notbeen an agreement on amended terms and no assurance that we will reachagreement with the note holder 

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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 ofJune  30,  2006. Of the remaining debt, (i) $251,000 wasrepaid from proceeds of a closing under the 2006 6% ConvertibleNote offering subsequent to June  30,  2006, (ii) $250,000in principal plus accrued interest is due before December31,  2006, (iii) $1,625,000 in principal representing 20066% Convertible Notes, mature in June  2007 and (iv) thebalance of $1,700,000 mature in December  2008. Currently, we donot have the available cash to repay these obligations as they come dueand if the note holders do not elect to convert their notes atmaturity, we will be required to raise additional capital in order tomeet these obligations, which we may not be able to do. If we raiseadditional funds to repay the notes by selling equity securities, therelative equity ownership of our existing investors could be dilutedand new investors could obtain terms more favorable than previousinvestors.

The note holders holding $1,700,000 inprincipal have a security interest in all of ourassets.

OUR OBLIGATIONS UNDER THE 2005 CONVERTIBLEDEBENTURES ARE SECURED BY ALL OF OUR ASSETS.

Ourobligations under the 2005 Convertible Debentures are secured by all ofour assets. As a result, if we default under the terms of the 2005Convertible Debentures or related agreements, including our failure toissue shares of common stock upon conversion by the debenture holder,our failure to timely file a registration statement or have suchregistration statement declared effective, our breach of any covenant,representation or warranty in the Securities Purchase Agreement or 2005Convertible Debentures or the commencement of a bankruptcy, insolvency,reorganization or liquidation proceeding against us could require theearly repayment of the 2005 Convertible Debentures, if the default isnot cured within the specified grace period. In addition, the debentureholders could foreclose their security interest and liquidatesome orall of our assets and we could cease to operate. Any such issuance ofshares upon conversion could cause a significant drop in the price ofour stock and significant dilution to ourstockholders.

THE FAILURE TO COMPLETE DEVELOPMENTOF OUR TECHNOLOGY, OBTAIN GOVERNMENT APPROVALS, INCLUDING REQUIRED FDAAPPROVALS, OR TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS COULDDELAY OR LIMIT INTRODUCTION OF PROPOSEDPRODUCTS AND RESULT IN FAILURETO ACHIEVE REVENUES OR MAINTAIN OUR ONGOING BUSINESS.

Ourresearch and development activities and the manufacture and marketingof our intended products are subject to extensive regulation forsafety, efficacy, and quality by numerous government authorities in theUnited States and abroad. Before receiving FDA clearance to market ourproposed products, we will have to demonstrate that our products aresafe and effective on the patient population and for the diseases thatare to be treated. Clinical trials, manufacturing and marketing ofdrugs are subject to the rigorous testingand approval process of theFDA and equivalent foreign regulatory authorities.The Federal Food,Drug and Cosmetic Act (‘‘FDC Act’’) andother federal, state, and foreign statutes and regulations govern andinfluence the testing, manufacture, labeling, advertising,distribution, and promotion of drugs and medical devices. As a result,clinical trials and regulatory approval can take a number of years orlonger to accomplish and require the expenditure of substantialfinancial, managerial, and other resources.

In order to becommercially viable, we must successfully research, develop, obtainregulatory approval for, manufacture, introduce, market, and distributeour technologies. For each drug utilized with our drug deliverytechnology, and for Myodur and Neurodur, we must successfully meet anumber of critical developmental milestones,including:

|  |              |                                                                                             |
|--|--------------|---------------------------------------------------------------------------------------------|
|  | •  | demonstratebenefit from delivery of each specific drug through our drug deliverytechnology; |

|  |              |                                                                                                                                         |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | demonstrate throughpre-clinical and clinical trials that our drug delivery technology andpatient specific therapy is safe andeffective; |

|  |              |                                                                             |
|--|--------------|-----------------------------------------------------------------------------|
|  | •  | establish a viable GoodManufacturing Process capable of potential scale-up. |

Thetime frame necessary to achieve these developmental milestones may belong and uncertain, and we may not successfully complete thesemilestones for any of our intended products indevelopment.

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In addition to the risks previouslydiscussed, our technology is subject to additional developmental riskswhich include thefollowing:

|  |              |                                                                                                                           |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------|
|  | •  | the uncertaintiesarising from the rapidly growing scientific aspects of drug delivery,therapies, and potentialtreatments; |

|  |              |                                                                                                                               |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------|
|  | •  | uncertainties arising as aresult of the broad array of potential treatments related to nerve andmuscle injury and disease;and |

|  |              |                                                                                                                                                          |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | anticipated expense and timebelieved to be associated with the development and regulatory approvalof treatments for nerve and muscle injury and disease. |

Inorder to conduct clinical trials that are necessary to obtain approvalby the FDA to market a product it is necessary to receive clearancefrom the FDA to conduct such clinical trials. The FDA can halt clinicaltrials at any time for safety reasons or because our clinicalinvestigators do not follow the FDA's requirements for conductingclinical trials. If we are unable to receive clearance to conductclinical trials or the trials are halted by the FDA, we would not beable to achieve any revenue from such product, as it is illegal to sellany drug or medical device in the United States for human consumptionwithout FDA approval, and many foreign countries are influenced ingranting their own required approvals by the FDA.

DATAOBTAINED FROM CLINICAL TRIALS IS SUSCEPTIBLE TO VARYINGINTERPRETATIONS, WHICH COULD DELAY, LIMIT OR PREVENT REGULATORYCLEARANCES.

Data already obtained, or in the futureobtained, from pre-clinical studies and clinical trials (as of the dateof this Report no clinical trials of our technology have beenundertaken) do not necessarily predict the results that will beobtained from later pre-clinical studies and clinical trials. Moreover,pre-clinical and clinical data is susceptible to varyinginterpretations, which could delay, limit or prevent regulatoryapproval. A number of companies in the pharmaceutical industry havesuffered significant setbacks in advanced clinical trials, even afterpromising results in earlier trials. The failure to adequatelydemonstrate the safety and effectiveness of an intended product underdevelopment could delay or prevent regulatory clearance of a potentialdrug, resulting in delays to commercialization, and could materiallyharm our business. Our clinical trials may not demonstrate sufficientlevels of safety and efficacy necessary to obtain the requisiteregulatory approvals for our drugs, and thus our proposed drugs may notbe approved for marketing. Even after approval, further studies couldresult in withdrawal of FDA and other regulatory approvals andvoluntary or involuntary withdrawal of products from themarket.

We may encounter delays or rejections based uponadditional government regulation from future legislation oradministrative action or changes in FDA policy during the period ofdevelopment, clinical trials and FDA regulatory review. We mayencounter similar delays in foreign countries. Sales of our productsoutside the U.S. would be subject to foreign regulatory approvals thatvary from country to country. The time required to obtain approvalsfrom foreign countries may be shorter or longer than that required forFDA approval, and requirements for foreign licensing may differ fromFDA requirements. We may be unable to obtain requisite approvals fromthe FDA and foreign regulatory authorities, and even if obtained, suchapprovals may not be on a timely basis, or they may not cover the usesthat we request.

In the future, we may select drugs for‘‘molecular binding’’ using our drugdelivery technology which may contain controlled substances which aresubject to state, federal and foreign laws and regulations regardingtheir manufacture, use, sale, importation and distribution. For suchdrugs containing controlled substances, we and any suppliers,manufacturers, contractors, customers and distributors may be requiredto obtain and maintain applicable registrations from state, federal andforeign law enforcement and regulatory agencies and comply with state,federal and foreign laws and regulations regarding the manufacture,use, sale, importation and distribution of controlled substances. Theseregulations are extensive and include regulations governingmanufacturing, labeling, packaging, testing, dispensing, prescription,and procurement quotas, record keeping, reporting, handling, shipment,and disposal. Failure to obtain and maintain required registrations orcomply with any applicable regulations could delay or preclude us fromdeveloping and commercializing our drugs containing controlledsubstances and 

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subject us to enforcement action. Inaddition, because of their restrictive nature, these regulations couldlimit our commercialization of drugs containing controlledsubstances.

OUR DRUGS OR TECHNOLOGY MAY NOT GAIN FDAAPPROVAL IN CLINICAL TRIALS OR BE EFFECTIVE AS A THERAPEUTIC AGENTWHICH COULD AFFECT OUR FUTURE PROFITABILITYANDPROSPECTS.

In order to obtain regulatory approvals, wemust demonstrate that the procedure is safe and effective for use inhumans and functions as a therapeutic against the effects of injury ordisease. To date, we have not conducted any human pilot study pursuantto Institutional Review Board oversight in anticipation of our initialFDA submission for patient-specific or other therapy. Further, we haveconducted only sporadic and limited animal studies to observe theeffects of our drugs and have not subjected our drugs or technologiesto all of the rigorous testing standards that would be acceptable forpublication in scientific peer review journals.

We may notbe able to demonstrate that any potential drug or technology, includingMyodur or Neurodur, although appearing promising in pre-clinical andanimal observations, is safe or effective in advanced clinical trialsthat involve human patients. We are also not able to assure that theresults of the tests already conducted and which we intend to repeatwill be consistent with our prior observations or support ourapplications for regulatory approval. As a result, our drug andtechnology research program may be curtailed, redirected or eliminatedat any time.

The diseases and illnesses to which our drugsand technologies aredirected are very complex and may be prone togenetic mutations. These mutations may prove resistant to currentlyapproved therapeutics or our drugs or technologies. Even if we gainregulatory approval there may develop resistance to our treatment. Thiscould have a material adverse effect on our business, financialcondition, and results of operations.

WE HAVE ACCUMULATEDDEFICITS IN THE RESEARCH AND DEVELOPMENT OF OUR TECHNOLOGY AND THERE ISNO GUARANTEE THAT WE WILL EVER GENERATE REVENUE OR BECOME PROFITABLEEVEN IF ONE OR MORE OF OUR DRUGS ARE APPROVED FORCOMMERCIALIZATION.

Since our inception in 1986, we haveincurred operating losses. As of June  30,  2006, ouraccumulated deficit amounted to $43,297,293. In addition, we expect tocontinue incurring operating losses for the foreseeable future as wecontinue to develop our products which will cause us to incursubstantial research and development and clinical trials costs. Ourability to generate revenue and achieve profitability depends upon ourability, alone or with others, to complete the development of ourproposed products, obtain the required regulatory approvals andmanufacture, market, and sell our proposed products. Development,including the cost of contract manufacturing of our proposed productsfor pre-clinical testing and human clinical trials is extremely costlyand requires significant investment. In the absence of additionalfinancing we may not be able to continue our development activities. Inaddition, we may choose to license the rights to particular drugs orother technology. License fees may increase our costs.

Wehave not generated any revenue from the commercial sale of our proposedproducts or any drugs and do not expect to receive such revenue in thenear future. Our primary activity to date has been research anddevelopment of our technology. All revenues to date are from grants,both public and private, and collaborative agreements. We cannot becertain as to when or whether to anticipate commercializing andmarketing our proposed products in development, and do not expect togenerate sufficient revenues from proposed product sales to cover ourexpenses or achieve profitability in the foreseeablefuture.

WE HAVE RELIED SOLELY ON THIRD-PARTY RESEARCHINSTITUTIONS FOR ALL OF OUR RESEARCH AND DEVELOPMENT, WHICH COULD BEMATERIALLY DELAYED SHOULD WE LOSE ACCESS TO THOSEFACILITIES.

We currently have no research and developmentfacilities of our own. We are entirely dependent on third parties touse their facilities to conduct research and development. To date, wehave primarily relied on third-party research institutions for thispurpose including the Health Science Center at Downstate Medical Centerand Stony Brook University. Our inability to have continued access tothese facilities to 

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conduct research and development may delay orimpair our ability to gain FDA approval and commercialization of ourdrug delivery technology and products.

We currentlymaintain a good working relationship with our third-party researchinstitutions. Although we are evaluating various facilities in which toestablish our laboratories, should we be required to relocate on shortnotice, we do not currently have an alternate facility where we couldrelocate our research activities. The cost and time to establish orlocate an alternative research and development facility to develop ourtechnology will be substantial and may delay gaining FDA approval andcommercializing our products.

WE ARE DEPENDENT ON OURCOLLABORATIVE AGREEMENTS FOR THE DEVELOPMENT OF OUR TECHNOLOGIES ANDBUSINESS DEVELOPMENT WHICH EXPOSES US TO THE RISK OF RELIANCE ON THEVIABILITY OF THIRD PARTIES.

In conducting our research anddevelopment activities, we rely and expect in the future to rely uponnumerous collaborative agreements with universities, governmentalagencies, charitable foundations, manufacturers, contract researchorganizations, and corporate partners. The loss of or failure toperform under any of these arrangements, by any of these entities, maysubstantially disrupt or delay our research and development activitiesincluding our anticipated clinical trials.

WE AREEXPOSED TO PRODUCT LIABILITY, CLINICAL AND PRE-CLINICAL LIABILITY RISKSWHICH COULD PLACE A SUBSTANTIAL FINANCIAL BURDEN UPON US SHOULD WE BESUED, BECAUSE WE DO NOT CURRENTLY HAVE PRODUCT LIABILITY INSURANCEABOVE AND BEYOND OUR GENERAL INSURANCE COVERAGE.

Ourbusiness exposes us to potential product liability and other liabilityrisks that are inherent in the testing, manufacturing, marketing andsale of pharmaceutical products. We cannot assure that such potentialclaims will not be asserted against us. In addition, the use in ourclinical trials of pharmaceutical products that we may develop and thesubsequent sale of these products by us or our potential collaboratorsmay cause us to bear a portion of or all product liability risks. Asuccessful liability claim or series of claims brought against us couldhave a material adverse effect on our business, financial condition,and results of operations.

All of our pre-clinical trialshave been and all of our proposed clinical and pre-clinical trials areanticipated to be conducted by collaborators and third partycontractors. We do not currently have any product liability insuranceor other liability insurance relating to clinical trials or anyproducts or compounds. We intend to seek insurance against such risksbefore we initiate clinical trials or before our product sales arecommenced. We cannot assure that we will be able to obtain or maintainadequate product liability insurance on acceptable terms, if at all, orthat such insurance will provide adequate coverage against ourpotential liabilities. An inability to obtain sufficient insurancecoverage at an acceptable cost or otherwise to protect againstpotential product liability claims could prevent or inhibit thecommercialization of our drug delivery technology. A product liabilityclaim could also significantly harm our reputation and delay marketacceptance of our intended products. Furthermore, our current andpotential partners with whom we have collaborative agreements or ourfuture licensees may not be willing to indemnify us against these typesof liabilities and may not themselves be sufficiently insured or have anet worth sufficient to satisfy any product liability claims. Productliability claims or other claims related to our intended products,regardless of their outcome, could require us to spend significant timeand money in litigation or to pay significant settlement amounts orjudgments. Any successful product liability or other claim may preventus from obtaining adequate liability insurance in the future oncommercially desirable or reasonable terms. Claims or losses in excessof any product liability insurance coverage that may be obtained by uscould have a material adverse effect on our business, financialcondition, and results of operations.

OUR LIMITEDOPERATING HISTORY MAKES EVALUATING OUR BUSINESS MORE DIFFICULT, ANDTHEREFORE, INVESTORS HAVE LIMITED INFORMATION UPON WHICH TORELY.

An investor can only evaluate our business based ona limited operating history. While we were organized in 1986, ourcurrent level of activity and operations only recently began followingour acquisition by 

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Xechem and subsequent closing on ourfinancing during the period December 2004 through February 2005. Ouroperations will continue to change and our costs will increasedramatically as we evolve from primarily a technology holding companyto a capitalized company with employees and internal operations. Sinceinception, we have engaged primarily in research and development,relied to a great extent on third-party efforts, sought avenues forlicensing technology, sought grants, raised capital, and recruitedscientific and management personnel external to us. We have notgenerated any meaningful revenue to date, and have no royalty revenueor products ready for use and in the marketplace. This limited historymay not be adequate to enable an investor to fully assess our abilityto develop our technologies and proposed products, obtain FDA approval,and achieve market acceptance of our proposed products, and respond tocompetition, or conduct such affairs as are presentlycontemplated.

FUTURE SALES OF OUR COMMON STOCK RECEIVEDUPON CONVERSION BY OUR NOTE HOLDERS MAY ADVERSELY AFFECT OUR STOCKPRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCKOFFERINGS.

The sale of shares issued upon conversion ofour convertible notes by the note holders will have a dilutive impacton our stockholders. Currently, all convertible debt is convertibleinto common stock at $0.15 per share. Substantially all of this debthas anti-dilution provisions that in the event we issue shares ofcommon stock at less than $0.15 per share, the conversion price willadjust to the lower price. Therefore, the number of shares issuable tothe note holders upon conversion may be substantially greater. The noteholders may sell such shares in the market immediately, which couldcause our stock price to decline. In addition, the interest on theconvertible notes may be payable, at the option of the note holder, inshares of our common stock in lieu of cash, which could have a furtherdilutive impact on our stockholders and could cause our stock price todecline.

ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE ISUNCERTAIN AND FAILURE TO ACHIEVE MARKET ACCEPTANCE WILL PREVENT ORDELAY OUR ABILITY TO GENERATE REVENUES.

Our futurefinancial performance will depend, in part, upon the introduction andcustomer acceptance of our proposed products. Even if approved formarketing by the necessary regulatory authorities, our products may notachieve market acceptance. The degree of market acceptance will dependupon a number of factors,including:

|  |              |                                                                                            |
|--|--------------|--------------------------------------------------------------------------------------------|
|  | •  | the receipt ofregulatory clearance of marketing claims for the uses that we aredeveloping; |

|  |              |                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------|
|  | •  | the establishment anddemonstration of the advantages, safety and efficacy of ourtechnologies; |

|  |              |                                                                                                                                                                          |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | pricing and reimbursementpolicies of government and third party payors such as insurancecompanies, health maintenance organizations and other health planadministrators; |

|  |              |                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our ability to attractcorporate partners, including pharmaceutical companies, to assist incommercializing our intended products;and |

|  |              |                                    |
|--|--------------|------------------------------------|
|  | •  | our ability to market ourproducts. |

Physicians, patients, payors or the medicalcommunity in general may be unwilling to accept, utilize, or recommendany of our products. If we are unable to obtain regulatory approval,commercialize, and market our proposed products when planned, we maynot achieve any market acceptance or generate revenue.

WEMAY FACE LITIGATION FROM THIRD PARTIES THAT CLAIM OUR PRODUCTS INFRINGEON THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE ISSUBSTANTIAL UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICALPATENTS.

We may be exposed to future litigation by thirdparties based on claims that our technologies, products, or activitiesinfringe the intellectual property rights of others or that we have thetrade secrets of others. This risk is exacerbated by the fact that thevalidity and breadth of claims covered in medical technology patentsand the breadth and scope of trade secret protection involve complexlegal and factual questions for which important legal principles areunresolved. Any litigation or claims against us, whether or not

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valid, could result in substantial costs,could place a significant strain on our financial and managerialresources, and could harm our reputation. Most of our licenseagreements would likely require that we pay the costs associated withdefendingthis type of litigation. In addition, intellectual propertylitigation or claims could force us to do one or more of thefollowing:

|  |              |                                                                                                                                                                                   |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | cease selling,incorporating or using any of our technologies and/or products thatincorporate the challenged intellectual property, which would adverselyaffect our futurerevenue; |

|  |              |                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | obtain a licensefrom the holder of the infringed intellectual property right, whichlicense may be costly or may not be available on reasonable terms, ifat all; or |

|  |              |                                                                 |
|--|--------------|-----------------------------------------------------------------|
|  | •  | redesign ourproducts, which would be costly and time consuming. |

Wehave not engaged in discussions, received any communications, nor do wehave any reason to believe that any third party is challenging or hasthe proper legal authority to challenge our intellectual propertyrights or those of the actual patent holders, other than a letterreceived during August 2004 from counsel to a company named CeptyrCorporation alleging infringement of trademarks issued to Ceptyr withrespect to our name CepTor. In light of our formation and use of thename CepTor in commerce many years prior to the formation of Ceptyr andissuance of their trademark, we believe the demand to cease and desistfrom future infringement to be substantially without merit. No furthercommunication has been received since mid-2004.

IF WE AREUNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO INTELLECTUALPROPERTY OR SECURE RIGHTS TO THIRD PARTY PATENTS, WE MAY LOSE VALUABLERIGHTS, EXPERIENCE REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLYLITIGATION TO PROTECT SUCH RIGHTS.

Our ability to obtainlicenses to third-party patents, maintain trade secret protection, andoperate without infringing the proprietary rights of others will beimportant to our commercialization of any products under development.Therefore, any disruption in access to the technology couldsubstantially delay the development of our technology.

Thepatent positions of biotechnology and pharmaceutical companies,including ours, which also involve licensing agreements, are frequentlyuncertain and involve complex legal and factual questions. In addition,the coverage claimed in a patent application can be significantlyreduced before the patent is issued. Consequently, our patentapplications and any issued and licensed patents may not provideprotection against competitive technologies or may be held invalid ifchallenged or circumvented. Our competitors may also independentlydevelop drug delivery technologies or products similar to ours ordesign around or otherwise circumvent patents issued or licensed to us.In addition, the laws of some foreign countries may not protect ourproprietary rights to the same extent as U.S. law.

We alsorely upon trade secrets, technical know how, and continuingtechnological innovation to develop and maintain our competitiveposition. We generally require our employees, consultants, advisors andcollaborators to execute appropriate confidentiality and assignment ofinventions agreements. These agreements typically provide that allmaterials and confidential information developed or made known to theindividual during the course of the individual's relationshipwith us is to be kept confidential and not disclosed to third partiesexcept in specific circumstances, and that all inventions arising outof the individual's relationship with us shall be our exclusiveproperty. These agreements may be breached and we may not have anappropriate remedy available for breach of the agreements. Furthermore,our competitors may independently develop substantially equivalentproprietary information and techniques, reverse engineer ourinformation and techniques, or otherwise gain access to our proprietarytechnology. We may be unable to meaningfully protect our rights intrade secrets, technical know how, and other non patentedtechnology.

Although our trade secrets and technical knowhow are important, our continued access to the patents is a significantfactor in the development and commercialization of our drug deliverytechnology. Aside from the general body of scientific knowledge fromother drug delivery processes and technology, we believe these patents,based upon our current scientific data, are the only intellectualproperty necessary to develop our short-term plans for our current drugdelivery system using our proposed Myodur, Neurodur 

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and other drugs. We do not believe that weare or will be violating any other patents in developing our technologyalthough we anticipate seeking a license from Sigma-Tau in order toemploy a manufacturing method useful for large scale manufacturing ofMyodur.

We may have to resort to litigation to protect ourrights for certain intellectual property, or to determine their scope,validity, or enforceability. Enforcing or defending our rights isexpensive, could cause diversion of our resources, and may not provesuccessful. Any failure to enforce or protect our rights could cause usto lose the ability to exclude others from using our technology todevelop or sell competing products.

We currently dependand will continue to depend heavily on third parties for support inresearch and development and clinical and pre-clinical testing. Undercertain circumstances, others may acquire certain rights in newlydeveloped intellectual property developed in conjunction withus.

Research and development and clinical trials involve acomplex process, and these third parties' facilities may not besufficient. Inadequate facilities could delay clinical trials of ourdrugs and result in delays in regulatory approval and commercializationof our drugs, either of which would materially harm our business. Wemay, if adequate funding is obtained, decide to establish anindependent facility to replace or supplement those facilities. Todate, we have not identified the location, negotiated leases orequipment purchases, and, accordingly, we are subject to variousuncertainties and risks that may be associated with the potentialestablishment of a new facility.

We may rely on thirdparty contract research organizations, service providers, and suppliersto support development and clinical testing of our products. Failure ofany of these contractors to provide the required services in a timelymanner or on reasonable commercial terms could materially delay thedevelopment and approval of our products, increase our expenses, andmaterially harm our business, financial condition, and results ofoperations.

KEY COMPONENTS OF OUR TECHNOLOGIES MAY BEPROVIDED BY SOLE OR LIMITED NUMBERS OF SUPPLIERS, AND SUPPLY SHORTAGESOR LOSS OF THESE SUPPLIERS COULD RESULT IN INTERRUPTIONS IN SUPPLY ORINCREASED COSTS.

Certain components used in our researchand development activities such as leupeptin, carnitine and taurinecompounds, are currently purchased or manufactured for us from a singleor a limited number of outside sources. The reliance on a sole orlimited number of suppliers could resultin:

|  |              |                                                                                                                                                                        |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | potential delays associated withresearch and development and clinical and pre-clinical trials due to aninability to timely obtain a single or limited sourcecomponent; |

|  |              |                                                                                   |
|--|--------------|-----------------------------------------------------------------------------------|
|  | •  | potential inability to timelyobtain an adequate supply of required components;and |

|  |              |                                                                         |
|--|--------------|-------------------------------------------------------------------------|
|  | •  | potential of reduced control overpricing, quality, and timely delivery. |

We do not havelong-term agreements with any of our suppliers, and therefore thesupply of a particular component could be terminated without penalty tothe supplier. Any interruption in the supply of components could causeus to seek alternative sources of supply or manufacture thesecomponents internally. If the supply of any components is interrupted,components from alternative suppliers may not be available insufficient volumes within required timeframes, if at all, to meet ourneeds. This could delay our ability to complete clinical trials, obtainapproval for commercialization or commence marketing, or cause us tolose sales, incur additional costs, delay new product introductions, orharm our reputation. Further, components from a new supplier may not beidentical to those provided by the original supplier. Such differencesif they exist could affect product formulations or the safety andeffect of our products that are being developed and delay regulatoryapprovals.

WE HAVE LIMITED MANUFACTURING EXPERIENCE ANDONCE OUR PRODUCTS ARE APPROVED, IF AT ALL, WE MAY NOT BE ABLE TOMANUFACTURE SUFFICIENT QUANTITIES AT AN ACCEPTABLECOST.

Our products remain in the research and developmentand pre-clinical trial phase of commercialization. Once our productsare approved for commercial sale, if at all, we will need to establishthe capability to commercially manufacture our products in accordancewith FDA and other regulatory requirements. We 

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have limited experience in establishing,supervising, and conducting commercial manufacturing. If we fail toadequately establish, supervise, and conduct all aspects of themanufacturing processes, we may not be able to commercialize ourproducts. We do not presently own manufacturing facilities necessary toprovide clinical or commercial quantities of our intendedproducts.

We presently plan to rely on third partycontractors to manufacture part or all of our products. This may exposeus to the risk of not being able to directly oversee the production andquality of the manufacturing process. Furthermore, these contractors,whether foreign or domestic, may experience regulatory compliancedifficulty, mechanic shut downs, employee strikes, or any otherunforeseeable acts that may delay production.

DUE TO OURLIMITED MARKETING, SALES, AND DISTRIBUTION EXPERIENCE, WE MAY BEUNSUCCESSFUL IN OUR EFFORTS TO SELL OUR PRODUCTS, ENTER INTORELATIONSHIPS WITH THIRD PARTIES, OR DEVELOP A DIRECT SALESORGANIZATION.

We have yet had to establish any marketing,sales, or distribution capabilities for our proposed products. Untilsuch time as our products are further along in the regulatory process,we will not devote any meaningful time or resources to this effort. Atthe appropriate time, we intend to enter into agreements with thirdparties to sell our products or we may develop our own sales andmarketing force. We may be unable to establish or maintain third partyrelationships on a commercially reasonable basis, if at all. Inaddition, these third parties may have similar or more establishedrelationships with our competitors who may exist after our introductionof products, if any.

If we do not enter into relationshipswith third parties for the sales and marketing of our products, we willneed to develop our own sales and marketing capabilities. We havelimited experience in developing, training, or managing a sales force.If we choose to establish a direct sales force, we may incursubstantial additional expenses in developing, training, and managingsuch an organization. We may be unable to build a sales force on a costeffective basis or at all. Any such direct marketing and sales effortsmay prove to be unsuccessful. In addition, we will compete with manyother companies that currently have extensive marketing and salesoperations. Our marketing and sales efforts may be unable to competeagainst these other companies. We may be unable to establish asufficient sales and marketing organization on a timely basis, if atall, and may be unable to engage qualified distributors. Even ifengaged, these distributorsmay:

|  |              |                                                           |
|--|--------------|-----------------------------------------------------------|
|  | •  | fail to satisfyfinancial or contractual obligations tous; |

|  |              |                                        |
|--|--------------|----------------------------------------|
|  | •  | fail to adequatelymarket our products; |

|  |              |                                             |
|--|--------------|---------------------------------------------|
|  | •  | ceaseoperations with little or no notice;or |

|  |              |                                                           |
|--|--------------|-----------------------------------------------------------|
|  | •  | offer, design,manufacture, or promote competing products. |

If we fail todevelop sales, marketing, and distribution channels, we wouldexperience delays in product sales and incur increased costs, whichwould harm our financial results.

IF WE ARE UNABLE TOCONVINCE PHYSICIANS AS TO THE BENEFITS OF OUR INTENDED PRODUCTS, WE MAYINCUR DELAYS OR ADDITIONAL EXPENSE IN OUR ATTEMPT TO ESTABLISH MARKETACCEPTANCE.

Broad use of our drug delivery technology mayrequire physicians to be informed regarding our intended products andthe intended benefits. The time and cost of such an educational processmay be substantial. Inability to successfully carry out this physicianeducation process may adversely affect market acceptance of ourproducts. We may be unable to timely educate physicians regarding ourintended products in sufficient numbers to achieve our marketing plansor to achieve product acceptance. Any delay in physician education maymaterially delay or reduce demand for our products. In addition, we mayexpend significant funds towards physician education before anyacceptance or demand for our products is created, if atall.

THE MARKET FOR OUR PRODUCTS IS RAPIDLY CHANGING ANDCOMPETITIVE, AND NEW MECHANISMS, TECHNOLOGIES, NEW THERAPEUTICS, NEWDRUGS, AND NEW TREATMENTS WHICH MAY BE DEVELOPED BY OTHERS COULD IMPAIROUR ABILITY TO MAINTAIN AND GROW OUR BUSINESS AND REMAINCOMPETITIVE.

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The pharmaceutical andbiotechnology industries are subject to rapid and substantialtechnological change. Developments by others may render ourtechnologies and intended products noncompetitive or obsolete, or wemay be unable to keep pace with technological developments or othermarket factors. Technological competition from pharmaceutical andbiotechnology companies, universities, governmental entities and othersdiversifying into the field is intense and is expected to increase.Many of these entities have significantly greater research anddevelopment capabilities and budgets than we do, as well assubstantially more marketing, manufacturing, financial and managerialresources. These entities represent significant competition for us.Acquisitions of, or investments in, competing pharmaceutical orbiotechnology companies by large corporations could increasesuchcompetitors' financial, marketing, manufacturing, and otherresources.

We are a start-up development stage enterprisethat prior to early 2005 has operated in all material respects only asa virtual company with no day-to-day business management, operating asa vehicle to hold certain technology for possible future exploration,and have been and will continue to be engaged in the development ofnovel untested drug delivery and therapeutic technologies. As a result,our resources are limited and we may experience management,operational, or technical challenges inherent in such activities andnovel technologies. Other companies, which may become competitors, havedeveloped or are in the process of developing technologies that couldnow be, or in the future become, the basis for competition. Some ofthese technologies may have an entirely different approach or means ofaccomplishing similar therapeutic effects compared to our technology.Our competitors may develop drug delivery technologies and drugs thatare safer, more effective, or less costly than our intended productsand, therefore, present a serious competitive threat to us. Thepotential widespread acceptance of therapies that are alternatives toours may limit market acceptance of our products even ifcommercialized. Many of our targeted diseases and conditions can alsobe treated by other medication or drug delivery technologies. Thesetreatments may be widely accepted in medical communities and have alonger history of use. The established use of these competitive drugsmay limit the potential for our technologies and products to receivewidespread acceptance if commercialized.

WE MAY NOT BESUCCESSFUL IN OBTAINING ORPHAN DRUG STATUS FOR CERTAIN OF OUR PRODUCTSOR, IF THAT STATUS IS OBTAINED, FULLY ENJOYING THE BENEFITS OF ORPHANDRUG STATUS.

Under the Orphan Drug Act, the FDA may grantorphan drug designation to drugs intended to treat a rare disease orcondition generally affecting fewer than 200,000 people in the UnitedStates. We may not be successful in receiving orphan drug status forcertain of our products. Orphan drug designation must be requestedbefore submitting a NDA. After the FDA grants orphan drug designation,the generic identity of the therapeutic agent and its potential orphanuse are publicized by the FDA. Under current law, orphan drug status isconferred upon the first company to receive FDA approval to market thedesignated drug for the designated indication. Orphan drug status alsogrants marketing exclusivity in the United States for a period of sevenyears following approval of the NDA, subject to limitations. Orphandrug designation does not provide any advantage in, or shorten theduration of, the FDA regulatory approval process. Although obtainingFDA approval to market a product with orphan drug status can beadvantageous, the scope of protection or the level of marketingexclusivity that is currently afforded by orphan drug status andmarketing approval may not remain in effect in thefuture.

Our business strategy involves obtaining orphandrug designation for certain of the products we have under development.We have been granted orphan drug designation for our proposed productfor muscular dystrophy. We do not know whether any of our otherproducts will receive an orphan drug designation. Orphan drugdesignation does not prevent other manufacturers from attempting todevelop similar drugs for the designated indication or from obtainingthe approval of an NDA for their drug prior to the approval of our NDAapplication. If another sponsor's NDA for a competing drug in thesame indication is approved first, that sponsor is entitled toexclusive marketing rights if that sponsor has received orphan drugdesignation for its drug. In that case, the FDA would refrain fromapproving an application by us to market our competing product forseven years, subject to limitations. Competing products may receiveorphan drug designations and FDA marketing approval before the productsunder development by us may receive orphan drugdesignation.

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NDA approval for a drug with anorphan drug designation does not prevent the FDA from approving thesame drug for a different indication, or a molecular variation of thesame drug for the same indication. Because doctors are not restrictedby the FDA from prescribing an approved drug for uses not approved bythe FDA, it is also possible that another company's drug could beprescribed for indications for which products developed by us havereceived orphan drug designation and NDA approval. The prescribing ofapproved drugs for alternative uses, commonly referred to as‘‘off label’’ sales, could adversely affectthe marketing potential of products that have received an orphan drugdesignation and NDA approval. In addition, NDA approval of a drug withan orphan drug designation does not provide any marketing exclusivityin foreign markets.

The possible amendment of the OrphanDrug Act by the U.S. Congress has been the subject of frequentdiscussion. Although no significant changes to the Orphan Drug Act havebeen made for a number of years, members of Congress have from time totime proposed legislation that would limit the application of theOrphan Drug Act. The precise scope of protection that may be affordedby orphan drug designation and marketing approval may be subject tochange in the future.

IF USERS OF OUR PRODUCTS ARE UNABLETO OBTAIN ADEQUATE REIMBURSEMENT FROM THIRD PARTY PAYORS, OR IF NEWRESTRICTIVE LEGISLATION IS ADOPTED, MARKET ACCEPTANCE OF OUR PRODUCTSMAY BE LIMITED AND WE MAY NOT ACHIEVE ANTICIPATEDREVENUES.

The continuing efforts of government andinsurance companies, health maintenance organizations, and other payorsof healthcare costs to contain or reduce costs of health care mayaffect our future revenues and profitability, and the future revenuesand profitability of our potential customers, suppliers andcollaborative partners, and the availability of capital. For example,in certain foreign markets, pricing or profitability of prescriptionpharmaceuticals is subject to government control. In the United States,given recent federal and state government initiatives directed atlowering the total cost of health care, the U.S. Congress and statelegislatures will likely continue to focus on health care reform, thecost of prescription pharmaceuticals, and on the reform of the Medicareand Medicaid systems. While we cannot predict whether any suchlegislative or regulatory proposals will be adopted, the announcementor adoption of such proposals could materially harm our business,financial condition, and results of operations.

Ourability to commercialize our products will depend in part on the extentto which appropriate reimbursement levels for the cost of our productsand related treatment are obtained by governmental authorities, privatehealth insurers and other organizations, such as HMOs. Third partypayors are increasingly challenging the prices charged for medicaldrugs and services. Also, the trend toward managed health care in theUnited States and the concurrent growth of organizations such as HMOs,which could control or significantly influence the purchase of healthcare services and drugs, as well as legislative proposals to reformhealth care or reduce government insurance programs, may all result inlower prices for or rejection of our drugs. The cost containmentmeasures that health care payors and providers are instituting and theeffect of any health care reform could materially harm our ability tooperate profitably.

OUR BUSINESS INVOLVES ENVIRONMENTALRISKS RELATED TO HANDLING REGULATED SUBSTANCES THAT COULD SEVERELYAFFECT OUR ABILITY TO CONDUCT RESEARCH AND DEVELOPMENT OF OUR DRUGDELIVERY TECHNOLOGY.

In connection with our research anddevelopment activities and manufacture of materials and drugs, we aresubject to federal, states and local laws, rules, regulations, andpolicies governing the use, generation, manufacture, storage, airemission, effluent discharge, handling, and disposal of certainmaterials, biological specimens, and wastes. Although we believe thatwe have complied with the applicable laws, regulations, and policies inall material respects and have not been required to correct anymaterial noncompliance, we may be required to incur significant coststo comply with environmental and health and safety regulations in thefuture. Our research and development may in the future involve thecontrolled use of hazardous materials, including but not limited tocertain hazardous chemicals and narcotics. Although we believe that oursafety procedures for storing, handling, and disposing of suchmaterials will comply with the standards prescribed by state andfederal regulations, we cannot completely 

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eliminate the risk of accidentalcontamination or injury from these materials. In the event of such anoccurrence, we could be held liable for any damages that result and anysuch liability could xceed our resources.

WE DEPEND UPONKEY PERSONNEL WHO MAY TERMINATE THEIR EMPLOYMENT WITH US AT ANY TIME,AND WE WILL NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL WHICH MAY BEUNAVAILABLE DUE TO THE NECESSITY OF UNIQUE SKILLS ANDRESOURCES.

Our success will depend to a significant degreeupon the continued services of key management, including William H.Pursley (age 52) and Norman W. Barton (age 58). We maintain directorsand officers insurance for our directors and executive officers. Oursuccess will depend on the ability to attract and retain highly skilledpersonnel. Competition for qualified personnel is intense, and theprocess of hiring and integrating such qualified personnel is oftenlengthy. We may be unable to recruit such personnel on a timely basis,if at all. Management and other employees may voluntarily terminatetheir employment at any time. The loss of the services of keypersonnel, or the inability to attract and retain additional qualifiedpersonnel, could result in delays to development or approval, loss ofsales and diversion of management resources. Additionally, failure toattract and retain highly qualified management personnel would damageour business prospects.

Risks Related to Our CommonStock

INSUFFICIENT AUTHORIZED BUT UNISSUED SHARESOF COMMON STOCK 

As of September  1,2006, we had outstanding 15,500,069 shares of common stock. We areauthorized to issue 100,000,000 shares of Common Stock.

Wedo not have sufficient authorized but unissued shares to reserve sharesthat we may be required to issue upon conversion of the convertiblenotes, the Series A Preferred Stock and the warrants and othersecurities issued or modified in connection with the offering of the2006 6% Convertible Notes.

On May  9,2006, the Board of Directors authorized an amendment to our Amended andRestated Certificate of Incorporation to increase the number ofauthorized shares of the Company’s capital stock from120,000,000 shares to 270,000,000 shares, of which 250,000,000 shareswould be designated as Common Stock and 20,000,000 shares would bedesignated as Series A Preferred Stock. Unless the proposed amendmentis approved by our stockholders, we will not be able to satisfy ourobligations in the agreements relating to those securities. Ifstockholders do not approve the amendment, we will be in default of ourobligations under those agreements, and the holders of those securitiesmay accelerate payment of our obligations, obtain liquidated damagesunder certain of those agreements and pursue other legal remediesagainst us that could severely limit our ability to continueoperations.

Our Board of Directors believes that it isadvisable and in the best interests of our company to have availableadditional authorized but unissued shares of Common Stock in an amountadequate to provide for our present and future needs. The increase inauthorized common stock will provide us with a sufficient number ofshares to fulfill our obligations under existing contractualcommitments under the financing agreements. The issuance of theseshares will dilute the equity interests of existing stockholders andmay have a negative effect on the market price of our common stock.Additional shares also will be available for issuance from time to timeby us in the discretion of the Board of Directors without furtherstockholder action, except as may be required under applicable law.These shares may be issued for any proper corporate purpose including,without limitation: acquiring other businesses in exchange for sharesof common stock; entering into collaborative arrangements with othercompanies in which common stock or the right to acquire common stockare part of the consideration; facilitation of broader ownership ofcommon stock by effecting a stock split or issuing a stock dividend;raising capital through the sale of common stock or securitiesconvertible into, or exercisable or exchangeable for, shares of commonstock; and attracting and retaining valuable employees by the issuanceof additional stock options or restricted stock.

Theissuance of the additional shares of common stock could have the effectof diluting earnings per share and book value per share, which couldadversely affect our existing stockholders. Issuing additional shares

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of common stock may also have the effect ofdelaying or preventing a change of control of our company. Ourauthorized but unissued common stock could be issued in one or moretransactions that would make more difficult or costly, a takeover ofour Company.

WE HAVE RAISED SUBSTANTIAL AMOUNTS OF CAPITALIN PRIVATE PLACEMENTS FROM TIME TO TIME.

The securitiesoffered in such private placements were not registered under theSecurities Act or any state ‘‘blue sky’’law in reliance upon exemptions from such registration requirements.Such exemptions are highly technical in nature and if we inadvertentlyfailed to comply with the requirements of any of such exemptiveprovisions, investors would have the right to rescind their purchase ofour securities or sue for damages. If one or more investors were tosuccessfully seek such rescission or prevail in any such suit, we couldface severe financial demands that could materially and adverselyaffect our financial position. Financings that may be available to usunder current market conditions frequently involve sales at pricesbelow the prices at which our Common Stock currently is reported on theOTC Bulletin Board or exchange on which our Common Stock may in thefuture, be listed, as well as the issuance of warrants or convertiblesecurities at a discount to market price.

INVESTORS IN OURSECURITIES MAY SUFFER DILUTION.

The issuance of shares ofour common stock, or shares of our common stock underlying warrants,options or preferred stock or convertible debentures or notes willdilute the equity interest of existing stockholders who do not haveanti-dilution rights and could have a significant adverse effect on themarket price of our common stock. The sale of our common stock acquiredat a discount could have a negative impact on the market price of ourcommon stock and could increase the volatility in the market price ofour common stock. In addition, we may seek additional financing whichmay result in the issuance of additional shares of our common stockand/or rights to acquire additional shares of our common stock. Theissuance of our common stock in connection with such financing mayresult in substantial dilution to the existing holders of our commonstock who do not have anti-dilution rights. Those additional issuancesof our common stock would result in a reduction of an existingholder's percentage interest in our company.

OURCOMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR NEARASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OROTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.

Our commonstock historically been sporadically or‘‘thinly-traded’’ on the OTC BulletinBoard, meaning that the number of persons interested in purchasing ourcommon stock at or near ask prices at any given time may be relativelysmall or non-existent. As of August  25,  2006, our averagetrading volume per day for the past three months was approximately55,697 shares a day with a high of 668,700 shares traded and a low ofno shares traded. This situation is attributable to a number offactors, including the fact that we are a small company which isrelatively unknown to stock analysts, stock brokers, institutionalinvestors and others in the investment community that generate orinfluence sales volume, and that even if we came to the attention ofsuch persons, they may tend to be risk-averse and may be reluctant tofollow an unproven company such as ours or purchase or recommend thepurchase of our shares until such time as we became more seasoned andviable. As a consequence, there may be periods of several days or morewhen trading activity in our shares is minimal or non-existent, ascompared to a seasoned issuer which has a large and steady volume oftrading activity that will generally support continuous sales withoutan adverse effect on share price. There can be no assurance that abroader or more active public trading market for our common stock willdevelop or be sustained, or that current trading levels will besustained.

HISTORICALLY, OUR COMMON STOCK HAS EXPERIENCEDSIGNIFICANT PRICE FLUCTUATIONS.

There can be no assurancethat the market price for our common stock will remain at its currentlevel and a decrease in the market price could result in substantiallosses for investors. The market price of our common stock may besignificantly affected by one or more of the followingfactors:

|  |              |                                                                                                              |
|--|--------------|--------------------------------------------------------------------------------------------------------------|
|  | •  | announcements orpress releases relating to the bio-pharmaceutical sector or to our ownbusiness or prospects; |

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|  |              |                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------|
|  | •  | regulatory,legislative, or other developments affecting us or the healthcareindustrygenerally; |

|  |              |                                                                                                                                                                                                                                                      |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | conversion of ourpreferred stock and convertible debt into common stock at conversionrates based on then current market prices or discounts to market pricesof our Common Stock, and exercise of options and warrants at belowcurrent market prices; |

|  |              |                                                                                                                                                                                                                    |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | salesby those financing our company through convertible securities of theunderlying common stock of which have been registered with the SEC andmay be sold into the public market immediately upon conversion; and |

|  |              |                                                                                                                  |
|--|--------------|------------------------------------------------------------------------------------------------------------------|
|  | •  | market conditions specific tobio-pharmaceutical companies, the healthcare industry and generalmarket conditions. |

IN ADDITION, IN RECENT YEARS THESTOCK MARKET HAS EXPERIENCED SIGNIFICANT PRICE AND VOLUMEFLUCTUATIONS.

These fluctuations, which are oftenunrelated to the operating performance of specific companies, have hada substantial effect on the market price for many healthcare and lifescience related technology companies. Factors such as those citedabove, as well as other factors that may be unrelated to our operatingperformance, may adversely affect the price of our commonstock.

WE HAVE NOT HAD EARNINGS, BUT IF EARNINGS WEREAVAILABLE, IT IS OUR GENERAL POLICY TO RETAIN ANY EARNINGS FOR USE INOUR OPERATIONS.

We do not anticipate paying any cashdividends on our common stock or Series A Preferred Stock in theforeseeable future despite the recent reduction of the federal incometax rate on dividends. Any payment of cash dividends on our commonstock or Series A Preferred Stock in the future will be dependent uponour financial condition, results of operations, current and anticipatedcash requirements, preferred rights of holders of preferred stock,restrictive covenants in debt or other instruments or agreements, plansfor expansion, as well as other factors that our board of directorsdeems relevant. We anticipate that any future financing agreements mayrestrict or prohibit the payment of dividends without priorconsent.

CERTAIN PROVISIONS OF DELAWARE CORPORATE LAWS ANDOTHER PROVISIONS THAT MAY HAVE CERTAIN ANTI-TAKEOVEREFFECTS.

The anti-takeover provisions of the DelawareGeneral Corporation Law (‘‘DGCL’’) may havethe effect of discouraging a future takeover attempt which individualcommon stockholders or Series A Preferred stockholders may deem to bein their best interests or in which stockholders may receive asubstantial premium for their shares over then-current market prices.We are subject to such anti-takeover provisions which could prohibit ordelay a merger or other takeover or change of control and maydiscourage attempts by other companies to acquire us. Stockholders whomight desire to participate in such a transaction may not have anopportunity to do so.

Following the reincorporationmerger, which became effective on January  31,  2005, ourcertificate of incorporation and by-laws were amended and provideadditional provisions applicable to a Delaware corporation, includingSection 203 of the DGCL ‘‘Business Combinations WithInterested Stockholders’’ which, in general, restricts acorporation organized under the laws of Delaware from certain businesscombinations for a period of three years with an‘‘interested’’ stockholder (generally,15% ownership) without approval of the board of directors. Inaddition, our by-laws contain provisions providing for advance noticeof certain stockholder actions, such as the nomination of directors andstockholder proposals.

OUR BOARD OF DIRECTORS HAS ADOPTEDA STOCKHOLDER RIGHTS PLAN.

Our stockholder rights plan mayprevent a change in control or sale of our company in a manner or onterms not previously approved by our board of directors.

Astockholder rights plan, in general, is a right granted as a dividendto existing stockholders as of a record date as a defensive mechanismto prevent unwanted takeovers and are triggered upon the announcementthat a party has acquired a specified percentage or more of theoutstanding voting stock of a company without approval by thecompany's board of directors.

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THERE MAY BE A LIMITED PUBLICMARKET FOR OUR SECURITIES; WE MAY FAIL TO QUALIFY FORLISTING.

Although we intend to apply for listing of ourcommon stock on either the AMEX, NASDAQ or other registered stockexchange, there can be no assurance if and when initial listingcriteria could be met or if such application would be granted, or thatthe trading of our common stock will be sustained. In the event thatour common stock fails to qualify for initial or continued listing on aregistered stock exchange or for initial or continued inclusion in theNASDAQ system, trading, if any, in our common stock, would thencontinue to be conducted on the NASD's ‘‘ElectronicBulletin Board’’ in the over-the-counter market and inwhat are commonly referred to as ‘‘pinksheets.’’ As a result, an investor may find it moredifficult to dispose of, or to obtain accurate quotations as to themarket value of our common stock, and our common stock would becomesubstantially less attractive for margin loans, for investment byfinancial institutions, as consideration in future capital raisingtransactions or other purposes. We do not presently satisfy the listingcriteria for the NASDAQ or AMEX markets.

Trading of ourcommon Stock may be subject to penny stock rules under the ExchangeAct. Unless exempt, for any transaction involving a penny stock, theregulations require broker-dealers making a market in our common stockto provide risk disclosure to their customers including regarding therisks associated with our common stock, the suitability for thecustomer of an investment in our common stock, the duties of thebroker-dealer to the customer, information regarding prices for ourcommon stock and any compensation the broker-dealer would receive. Theapplication of these rules may result in fewer market makers in ourcommon stock. Our common stock is presently subject to the rules onpenny stocks, and the liquidity of the common stock could be materiallyadversely affected so long as we remain subject to suchrule.

COMPLIANCE WITH CHANGING REGULATION OF CORPORATEGOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONALEXPENSES.

Keeping abreast of, and in compliance with,changing laws, regulations and standards relating to corporategovernance and public disclosure, including the Sarbanes-Oxley Act of2002, new SEC regulations and, in the event we are approved for listingon either NASDAQ or a registered exchange, NASDAQ and stock exchangerules, will require an increased amount of management attention andexternal resources. We intend to continue to invest all reasonablynecessary resources to comply with evolving standards, which may resultin increased general and administrative expenses and a diversion ofmanagement time and attention from revenue-generating activities tocompliance activities.

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

EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNALCONTROLS

As of the end of the period covered by thisReport, we carried out an evaluation of the effectiveness of the designand operation 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 ChiefExecutive Officer and Chief Financial Officer, concluded that as of theend of the period covered by this Report, our disclosure controls andprocedures were effective to enable us to record, process, summarizeand report information required to be included in our periodic SECfilings within the required time period.

DISCLOSURE CONTROLS ANDINTERNAL CONTROLS

Disclosure controls are procedures thatare designed with the objective of ensuring that information requiredto be disclosed in our reports filed under the Securities Exchange Actof 1934, as amended, such as this Report, is recorded, processed,summarized, and reported within the time periods specified in theSEC’s rules and forms. Disclosure controls are also designedwith the objective of ensuring that such information is accumulated andcommunicated to our management, including our Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. Internal controls are procedures whichare designed with the objective of providing reasonable assurance

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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.

Our company is not an‘‘accelerated filer’’ (as defined in theExchange Act) and is not required to deliver management’s reporton control over our financial reporting until our fiscal year endedDecember  31,  2006. Nevertheless, we consider theeffectiveness of our internal controls over financial reporting as partof the quarterly evaluations of our procedures. In connectiontherewith, we reported, for the year ended December  31,2005, that we identified certain matters that we believed constitutedmaterial weaknesses (as such term is defined under the Public CompanyAccounting Oversight Board Auditing Standard No. 2) in our internalcontrols over financial reporting. The first such material weaknessrelated to our ability to ensure that the accounting for ourequity-based transactions is accurate and complete and the secondrelated to our limited segregation of duties.

With respectto the first material weakness, during the year ended December31,  2005, we adopted a policy of having our Chief FinancialOfficer review all of our agreements to ensure that we identify theapplicable accounting treatments to evaluate any areas that may involvethe application of highly specialized accounting principles including,but not necessarily limited to, complex equity transactions. Incircumstances where we may become (or contemplate becoming) a party totransactions that would involve the application of accountingprinciples in which our expertise is limited, we would engage theservices of outside specialists, if necessary. At the current timehowever, we believe that we have gained substantially greaterexperience in these areas and that our procedures would enable us toresolve such issues within time frames needed to comply with ourreporting obligations.

With respect to the second materialweakness, which relates to our segregation of duties, we havere-evaluated our procedures and believe that due to our small number ofemployees (most of whom have limited or no access to Company assetsand/or records that would affect our financial reporting) that ourrisks of either material misstatement or misappropriation of assets isminimal. In addition, substantially all of our general andadministrative expenses and scientific research expenditures arereviewed and approved by employees who are knowledgeable of thosematters. To date our procedures have also enabled us to comply with ourfinancial reporting obligations within the time frames required by theSEC. Although we believe our risks with respect to this matter areminimal, we still acknowledge that it would be beneficial for theCompany to segregate certain procedures to a greater number ofemployees. We believe that our limited segregation of duties stillconstitutes a material deficiency in our system. However, we currentlyhave limited financial resources and do not believe that at this time,it would be prudent for us to further constrain our liquidity byallocating resources to hiring additional employees as a correctivemeasure. We believe that the costs we would incur to increase our staff(solely for this purpose) exceed the potential reduction in risk. Oursenior management team is monitoring this situation to determine ifthese circumstances change. If the situation changes and sufficientcapital is secured, it is our intention to increase staffing within ourgeneral accounting and financial functions.

Other than ouradoption of a policy of having our Chief Financial Officer evaluate allproposed agreements for the purpose of identifying any applicableaccounting matters, particularly those that may involve accounting forequity transactions, there have been no changes in our internalcontrols over financial reporting during our most recent fiscal yearthat has materially affected, or is reasonably likely to materiallyaffect, our internal control over financialreporting.

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PART IIOTHERINFORMATION

|               |                                                            |
|---------------|------------------------------------------------------------|
| Item 2.  | Unregistered Sales ofEquity Securities and Use of Proceeds |

During the periodcovered by this Report, we have not issued unregistered securitieswhich have not been ‘‘previously reported’’as defined in Rule 12b-2 of the Exchange Act, except;

OnMay  3,  2006, we issued additional options to purchase388,115 shares of our common stock at $0.15 per share to and we issuedan additional 388,115 shares of our common stock to each of twoconsultants pursuant to the anti-dilution provisions contained in theiroption agreements.

On June  1,  2006, weissued 2006 6% Convertible Notes in the aggregate principalamount of $1,500,000 under a private placement. Pursuant to thistransaction, certain note holders who did not previously participate inour Preferred Stock offering received warrants to purchase in theaggregate 6,500,000 shares of our common stock at $0.30 per share.Certain note holders who did participate in our Preferred Stockoffering received adjustments to the conversion price of theirPreferred Stock of equivalent value to what they invested in the 20066% Convertible Note offering, to $0.15 per share which willrequire us to issue in the aggregate an additional 3,290,000 shares ofcommon stock upon conversion of their Preferred Stock and an adjustmentto the warrants to purchase 105,000 shares of common stock originallyissued with the Preferred Stock ,to $.0.30 per share.

OnJune  1,  2006, the Company issued a warrant to purchase50,000 shares of common stock at $0.15 per share as a broker’sfee under the 2006 6% Convertible Note offering. In addition,the Company issued a warrant to purchase a 2006 6% ConvertibleNote in the principal amount of $142,500 and a warrant to purchase650,000 shares of common stock at $0.15 per share as yield enhancementfees under the 2006 6% Convertible Noteoffering.

On June  15,  2006, we issued a 20066% Convertible Note in the principal amount of $125,000 under aprivate placement. Pursuant to this transaction, the note holder whodid not previously participate in our Preferred Stock offering,received a warrant to purchase 833,333 shares of our common stock at$0.30 per share.

On June  15,  2006, theCompany issued a warrant to purchase a 2006 6% Convertible Notein the principal amount of $12,500 and a warrant to purchase 83,333shares of common stock at $0.15 per share as yield enhancement feesunder the 2006 6% Convertible Note offering.

OnJune  26,  2006, we issued ten-year options to purchase inthe aggregate 16,000 shares of our common stock at $0.21 per share toour three outside directors as compensation for preparing for andparticipating in our board of directors’meeting.

On June  29,  2006, we issued athree-year warrant to Cornell Capital to purchase 5,000,000 shares ofour common stock at an initial exercise price of $0.25 per share, toinduce them to assign their rights and obligations under the 2005Convertible Debentures.

FORWARD-LOOKINGSTATEMENTS

This Quarterly Report on Form 10-QSB containsforward-looking statements (as defined in Section 27A of the SecuritiesAct and Section 21E of the Securities Exchange Act of 1934 (the‘‘Exchange Act’’). To the extent that anystatements made in this Report contain information that is nothistorical, these statements are essentially forward-looking.Forward-looking statements can be identified by the use of words suchas ‘‘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 

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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 andindustry forecasts and projections throughout this prospectus, which wehave obtained 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 andservices.

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|              |          |
|--------------|----------|
| 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 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)                                                                                                                                                                                              |
| 4.12          |  |  | Agreement between the Companyand 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’’))                                                        |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                      |
|---------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                                                                                                                          |
| 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 July  6,2006)                                                                                      |
| 4.27          |  |  | 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 July  6,2006)                                                                                      |
| 4.28          |  |  | Secured Convertible Debenturewith Alpha Capital, Aktiengesellschaft, 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)                                                                      |
| 4.29          |  |  | SecuredConvertible Debenture with Ellis International Ltd., 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)                                                                               |
| 4.30          |  |  | SecuredConvertible Debenture 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 June  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)                                                                                                                                   |
| 4.32*         |  |  | Securities Purchase Agreement,dated August  14,  2006, by and between the Company andcertain sellers and purchasers of Series A PreferredStock                                                                                                                                                       |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                           |
|---------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                                                                                                                               |
| 10.1          |  |  | Employment Agreement,dated March  31,  2004, by and between William H. Pursleyand the Company (incorporated herein by reference to Exhibit 10.1 tothe Form SB-2)                                                                                                                                          |
| 10.2          |  |  | Employment Agreement,dated April  26,  2004, by and between Norman A. Barton,M.D., Ph.D. and the Company (incorporated herein by reference toExhibit 10.2 to the FormSB-2)                                                                                                                                |
| 10.3          |  |  | Employment Agreement, datedMarch  31,  2004, by and between Donald W. Fallon and theCompany (incorporated herein by reference to Exhibit 10.3 to the FormSB-2)                                                                                                                                            |
| 10.4          |  |  | Founders’ Plan(incorporated herein by reference to Exhibit 10.5 to the FormSB-2)                                                                                                                                                                                                                    |
| 10.5          |  |  | 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.6 to the FormSB-2)                                                                                                                                                                                                               |
| 10.6          |  |  | Deferred Stock Plan forNon-Employee Directors under the 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200410-KSB)                                                                                                                                                     |
| 10.7          |  |  | 2006 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200510-KSB)                                                                                                                                                                                                             |
| 10.8          |  |  | 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)                                                                                                                           |
| 10.9          |  |  | ExclusiveLicense Agreement, dated September  15,  2004, between theCompany and JCR Pharmaceuticals Company, Ltd. (incorporated herein byreference to Exhibit 10.8 to the FormSB-2)                                                                                                                        |
| 10.10         |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between William H. Pursley andthe Company (incorporated herein by reference to Exhibit 10.9 to theOctober  2005SB-2)                                                                                                                            |
| 10.11         |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between Norman W. Barton and theCompany (incorporated herein by reference to Exhibit 10.10 to theOctober  2005SB-2)                                                                                                                             |
| 10.12         |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between Donald W. Fallon and theCompany (incorporated herein by reference to Exhibit 10.11 to theOctober  2005SB-2)                                                                                                                             |
| 10.13         |  |  | Indemnification Agreement, datedJune  1,  2004, by and between Leonard A. Mudry and theCompany (incorporated herein by reference to Exhibit 10.12 to theOctober  2005 SB-2)                                                                                                                               |
| 10.14         |  |  | SecuritiesPurchase Agreement, dated December 9, 2005, between the Companyand Cornell Capital (incorporated herein by reference toExhibit 10.1 to the December  20058-K)                                                                                                                         |
| 10.15         |  |  | Side Letter, datedDecember 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.2 to theDecember  2005 8-K)                                                                                                                                          |
| 10.16         |  |  | InvestorRegistration Rights Agreement, dated December 9, 2005, betweenthe Company and Cornell Capital (incorporated herein by reference toExhibit 10.3 to the December  20058-K)                                                                                                                |
| 10.17         |  |  | Security Agreement, datedDecember 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.4 to theDecember  2005 8-K)                                                                                                                                   |
| 10.18         |  |  | RightsAgreement, dated March  7,  2006, between the Company andAmerican Stock Transfer & Trust Company (incorporated herein byreference to Exhibit 1 to the Company’s Registration Statementon Form 8-A, dated March  8,2006)                                                                   |
| 10.19         |  |  | 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) |
|               |

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|               |  |  |                                                                                                                                                                                                      |
|---------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                          |
| 10.20         |  |  | Term Sheet, datedMay  3,  2006, by and between the Company and MargieChassman (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                                                                                                                                               |
|               |

|  |
|--|
|  |  |
|  |

|   |                 |
|---|-----------------|
| * | Filed herewith. |

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Table of Contents

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: September5, 2006 |  |  | By:               |  |  | /s/ William H.Pursley                                                                                                                                               |
|                    |  |  |              |  |  | William H.PursleyChairman and Chief Executive Officer(Principal ExecutiveOfficer)                                                                                   |
| Dated: September 5,2006 |  |  | By:               |  |  | /s/ Donald W.Fallon                                                                                                                                                 |
|                    |  |  |              |  |  | Donald W. FallonChiefFinancial Officer, Senior VicePresident, Finance and Administrationand Secretary (Principal Financial Officer and PrincipalAccounting Officer) |
|                         |

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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, 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 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)                                                                                                                                                                                              |
| 4.12          |  |  | Agreement between the Companyand 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’’))                                                        |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                      |
|---------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                                                                                                                          |
| 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 July  6,2006)                                                                                      |
| 4.27          |  |  | 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 July  6,2006)                                                                                      |
| 4.28          |  |  | Secured Convertible Debenturewith Alpha Capital, Aktiengesellschaft, 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)                                                                      |
| 4.29          |  |  | SecuredConvertible Debenture with Ellis International Ltd., 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)                                                                               |
| 4.30          |  |  | SecuredConvertible Debenture 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 June  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)                                                                                                                                   |
| 4.32*         |  |  | Securities Purchase Agreement,dated August  14,  2006, by and between the Company andcertain sellers and purchasers of Series A PreferredStock                                                                                                                                                       |
|               |

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|               |  |  |                                                                                                                                                                                                                                                                                                           |
|---------------|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                                                                                                                               |
| 10.1          |  |  | Employment Agreement,dated March  31,  2004, by and between William H. Pursleyand the Company (incorporated herein by reference to Exhibit 10.1 tothe Form SB-2)                                                                                                                                          |
| 10.2          |  |  | Employment Agreement,dated April  26,  2004, by and between Norman A. Barton,M.D., Ph.D. and the Company (incorporated herein by reference toExhibit 10.2 to the FormSB-2)                                                                                                                                |
| 10.3          |  |  | Employment Agreement, datedMarch  31,  2004, by and between Donald W. Fallon and theCompany (incorporated herein by reference to Exhibit 10.3 to the FormSB-2)                                                                                                                                            |
| 10.4          |  |  | Founders’ Plan(incorporated herein by reference to Exhibit 10.5 to the FormSB-2)                                                                                                                                                                                                                    |
| 10.5          |  |  | 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.6 to the FormSB-2)                                                                                                                                                                                                               |
| 10.6          |  |  | Deferred Stock Plan forNon-Employee Directors under the 2004 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200410-KSB)                                                                                                                                                     |
| 10.7          |  |  | 2006 Incentive Stock Plan(incorporated herein by reference to Exhibit 10.7 to the 200510-KSB)                                                                                                                                                                                                             |
| 10.8          |  |  | 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)                                                                                                                           |
| 10.9          |  |  | ExclusiveLicense Agreement, dated September  15,  2004, between theCompany and JCR Pharmaceuticals Company, Ltd. (incorporated herein byreference to Exhibit 10.8 to the FormSB-2)                                                                                                                        |
| 10.10         |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between William H. Pursley andthe Company (incorporated herein by reference to Exhibit 10.9 to theOctober  2005SB-2)                                                                                                                            |
| 10.11         |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between Norman W. Barton and theCompany (incorporated herein by reference to Exhibit 10.10 to theOctober  2005SB-2)                                                                                                                             |
| 10.12         |  |  | Indemnification Agreement, datedOctober  6,  2005, by and between Donald W. Fallon and theCompany (incorporated herein by reference to Exhibit 10.11 to theOctober  2005SB-2)                                                                                                                             |
| 10.13         |  |  | Indemnification Agreement, datedJune  1,  2004, by and between Leonard A. Mudry and theCompany (incorporated herein by reference to Exhibit 10.12 to theOctober  2005 SB-2)                                                                                                                               |
| 10.14         |  |  | SecuritiesPurchase Agreement, dated December 9, 2005, between the Companyand Cornell Capital (incorporated herein by reference toExhibit 10.1 to the December  20058-K)                                                                                                                         |
| 10.15         |  |  | Side Letter, datedDecember 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.2 to theDecember  2005 8-K)                                                                                                                                          |
| 10.16         |  |  | InvestorRegistration Rights Agreement, dated December 9, 2005, betweenthe Company and Cornell Capital (incorporated herein by reference toExhibit 10.3 to the December  20058-K)                                                                                                                |
| 10.17         |  |  | Security Agreement, datedDecember 9, 2005, between the Company and Cornell Capital(incorporated herein by reference to Exhibit 10.4 to theDecember  2005 8-K)                                                                                                                                   |
| 10.18         |  |  | RightsAgreement, dated March  7,  2006, between the Company andAmerican Stock Transfer & Trust Company (incorporated herein byreference to Exhibit 1 to the Company’s Registration Statementon Form 8-A, dated March  8,2006)                                                                   |
| 10.19         |  |  | 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) |
|               |

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|               |  |  |                                                                                                                                                                                                      |
|---------------|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber |  |  | Description                                                                                                                                                                                          |
| 10.20         |  |  | Term Sheet, datedMay  3,  2006, by and between the Company and MargieChassman (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. |

50

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