**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-QSB/A**


(MARK
                  ONE)**x**
              **QUARTERLY REPORT UNDER
                  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                  1934****For
                  the quarterly period ended June 30,
                  2006****OR****o**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT****For
                  the transition period from  ______________ to
                  ______________**




Commission
        file number **: 333-105793**


**CEPTOR
      CORPORATION**


**(Name
      of small business issuer in its charter)**




**Delaware**
            **11-2897392**(State
                or other jurisdictionof
              incorporation
                or organization)
            (IRS
                Employer
              Identification
                No.)






**462
                Seventh Avenue, Suite 1200**
              **New
                York, New York**
            **10018**(Address
                of principal executive offices)
            (Zip
                Code)




Issuer’s
        telephone number: **(212) 629-0804**
 Check
          whether the issuer (1) filed all reports required to be filed by Section
          13 or
          15(d) of the Exchange Act during the past 12 months (or for such shorter
          period
          that the registrant was required to file such reports), and (2) has been
          subject
          to such filing requirements for the past 90 days.   Yes x No
          o
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act).    Yes o No
          x
 
 As
          of
          September 1, 2006, there were 15,500,069 shares of the issuer's common
          equity
          outstanding.
  Transitional
          Small Business Disclosure Format (Check
          one):    Yes o No
          x
  Table
              of Contents




**CEPTOR
      CORPORATION**


FORM
      10-QSB/A (Amendment No. 1) QUARTERLY REPORT


FOR
      THE
      QUARTERLY PERIOD ENDED JUNE 30, 2006





**Explanatory
      Note**





CepTor
      Corporation (the “Company”) is filing this amendment to its Quarterly Report on
      Form 10-QSB for the quarter ended June 30, 2006 (the “Amendment”) to reclassify
      certain of the Company’s obligations at June 30, 2006 from non-current liability
      status to current liability status. This reclassification appears on the
      Company’s balance sheet at June 30, 2006. In addition, amended disclosures
      related to this reclassification appear in the following footnotes to the
      Company’s financial statements for the three months ended June 30, 2006: Note 3
      - Liquidity and Financial Condition; Note 8 - Convertible Notes; and Note 9
      -
      Equity Transactions, subsection “Insufficient Authorized but Unissued Shares of
      Common Stock”. Amended disclosures also appear in this Form 10-QSB/A in the
      following sections: Part I, Item 2: Management’s Discussion and Analysis or Plan
      of Operation; and Part II, Item 3: Defaults Upon Senior Securities.





**TABLE
        OFCONTENTS**


Part
                  IFINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements (Unaudited)
              1Condensed
                  Balance Sheet - June 30, 2006
              1Condensed
                  Statements of Operations for the three- and
                  six-month periods ended June 30, 2006 and 2005,
                and
                  for the period from August 11, 1986 (date of inception) to
                  June 30, 2006
              2Condensed
                  Statement of Changes in Stockholders' Deficiency for
                  the six-month period ended June 30, 2006
              3Condensed
                  Statements of Cash Flows for the six-month period
                  ended June 30, 2006 and 2005
                and
                  for the period from August 11, 1986 (date of inception) to
                  June 30, 2006
              4Notes
                  to Condensed Financial Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis or Plan of
                  Operation
              21Item
                  3.
              Controls
                  and Procedures
              38Part
                  IIOTHER
                  INFORMATIONItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              40Item 3.
              Defaults
                Upon Senior Securities
              40Item
                  6.
              Exhibits
              42








i
 Table
            of Contents






**PART
      I**


**FINANCIAL
      INFORMATION**


**Item
      1.  FinancialStatements.**





**CEPTOR
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      BALANCE SHEET**


**(Unaudited)**


**June
                    30, 2006****ASSETS**Current
                    Assets:Cash
                    and cash equivalents
                
                $
                2,846Prepaid
                    expenses and other current assets
                
                
                74,545Total
                    current assets
                
                
                77,391Property
                    and equipment, net
                
                
                45,896Deferred
                    financing costs
                
                
                826,799Security
                    deposit
                
                
                18,511TOTAL
                    ASSETS
                
                $
                968,597**LIABILITIES
                    AND STOCKHOLDERS' DEFICIENCY**Current
                    Liabilities:Accounts
                    payable
                
                $
                4,427,112Accrued
                    expenses
                
                
                813,524Convertible
                    notes, net of discounts of $2,421,177
                
                
                1,853,559Warrant
                    liability
                
                
                3,882,878Conversion
                    option liability
                
                
                2,342,243Total
                    current liabilities
                
                
                13,319,316Commitments
                    and contingenciesStockholders'
                    Deficiency:Preferred
                    stock, $0.0001 par value; authorized 20,000,000 shares, issued
                    and
                    outstanding - 221.40
                  shares
                    of Series A Convertible Preferred Stock; liquidation preference
                    -
                    $5,535,000
                
                
                5,535,000Common
                    stock, $0.0001; authorized 100,000,000 shares, issued and outstanding
                    -
                    15,500,069
                
                
                1,550Deferred
                    compensation
                
                
                (335,318
                )Additional
                    paid-in capital
                
                
                25,745,342Deficit
                    accumulated during the development stage
                
                
                (43,297,293
                )Total
                    stockholders' deficiency
                
                
                (12,350,719
                )TOTAL
                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                
                $
                968,597


(See
      Notes to Unaudited Condensed Financial Statements)




1
 Table
            of Contents


**CEPTOR
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**





**Cumulative****August
                  11, 1986****Three-Month
                  Period Ended**
              **(Date
                  of Inception) to****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006****Revenues:**Other
                  income
              
              $
              -
              
              $
              -
              
              $
              75,349**Expenses:**Research
                  and development
              
              
              472,027
              
              
              2,204,202
              
              
              13,645,257In-process
                  research and development
              
              
              -
              
              
              -
              
              
              5,034,309General
                  and administrative
              
              
              497,239
              
              
              510,357
              
              
              11,874,098Gain
                  on extinguishment of debt
              
              
              (387,362
              )
              
              (311,281
              )
              
              (698,643
              )Change
                  in fair value of derivative financial instruments
              
              
              311,147
              
              
              -
              
              
              (3,276,566
              )Interest
                  expense
              
              
              4,817,154
              
              
              212,299
              
              
              7,657,475Interest
                  income
              
              
              -
              
              
              (20,090
              )
              
              (52,318
              )Total
                  operating expenses
              
              
              5,710,205
              
              
              2,595,487
              
              
              34,183,612**Net
                  loss**
              
              
              (5,710,205
              )
              
              (2,595,487
              )
              
              (34,108,263
              )Deemed
                  preferred stock dividends
              
              
              -
              
              
              -
              
              
              (10,100,616
              )**Net
                  loss available to common stockholders**
              
              $
              (5,710,205
              )
              $
              (2,595,487
              )
              $
              (44,208,879
              )**Loss
                  per share:**Basic
                  and diluted
              
              $
              (0.38
              )
              $
              (0.24
              )**Weighted-average
                  common shares outstanding:**Basic
                  and diluted
              
              
              14,855,983
              
              
              10,962,165







**Six-Month
                  Period Ended****June
                  30,****2006**
              
              **2005****Revenues:**Other
                  income
              
              $
              -
              
              $
              -**Expenses:**Research
                  and development
              
              
              1,043,752
              
              
              2,863,235In-process
                  research and development
              
              
              -
              
              
              -General
                  and administrative
              
              
              1,756,753
              
              
              1,921,582Gain
                  on extinguishment of debt
              
              
              (387,362
              )
              
              (311,281
              )Change
                  in fair value of derivative financial instruments
              
              
              (2,326,585
              )
              
              -Interest
                  expense
              
              
              5,294,640
              
              
              456,877Interest
                  income
              
              
              -
              
              
              (38,820
              )Total
                  operating expenses
              
              
              5,381,198
              
              
              4,891,593**Net
                  loss**
              
              
              (5,381,198
              )
              
              (4,891,593
              )Deemed
                  preferred stock dividends
              
              
              -
              
              
              (9,164,500
              )**Net
                  loss available to common stockholders**
              
              $
              (5,381,198
              )
              $
              (14,056,093
              )**Loss
                  per share:**Basic
                  and diluted
              
              $
              (0.39
              )
              $
              (1.29
              )**Weighted-average
                  common shares outstanding:**Basic
                  and diluted
              
              
              13,785,982
              
              
              10,889,339





(See
      Notes to Unaudited Condensed Financial Statements)




2
 Table
            of Contents










**CEPTOR
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY**


**(Unaudited)**





**Deficit****Accumulated****Deferred**
              
              **Additional**
              
              **During
                  the**
              
              **Total****Compen-**
              
              **Paid-In**
              
              **Development**
              
              **Stockholders'****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **sation**
              
              **Capital**
              
              **Stage**
              
              **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
              )Common
                  stock issued January 2006 upon conversion of preferred   shares
                  ($2.50)
              
              
              (10.00
              )
              
              (250,000
              )
              
              100,000
              
              
              10
              
              
              
              
              
              249,990
              
              
              
              
              
              -Common
                  stock issued January 2006 upon conversion of replacement notes 
                  ($0.375)
              
              
              
              
              
              
              
              
              855,267
              
              
              85
              
              
              
              
              
              320,640
              
              
              
              
              
              320,725Common
                  stock issued February 2006 upon conversion of preferred shares
                  ($2.50)
              
              
              (7.00
              )
              
              (175,000
              )
              
              70,000
              
              
              7
              
              
              
              
              
              174,993
              
              
              
              
              
              -Common
                  stock issued February 2006 upon conversion of 2005 Convertible
                  Debentures
                  ($0.5795)
              
              
              
              
              
              
              
              
              86,281
              
              
              9
              
              
              
              
              
              49,991
              
              
              
              
              
              50,000Common
                  stock issued March 2006 upon conversion of preferred shares ($2.50)
              
              
              (6.75
              )
              
              (168,750
              )
              
              67,500
              
              
              7
              
              
              
              
              
              168,743
              
              
              
              
              
              -Common
                  stock issued March 2006 upon exercise of options ($0.359)
              
              
              
              
              
              
              
              
              557,102
              
              
              56
              
              
              
              
              
              199,944
              
              
              
              
              
              200,000Expenses
                  incurred pursuant to entering into Stock Purchase Agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (38,181
              )
              
              
              
              
              (38,181
              )Common
                  stock issued March 2006 upon conversion of 2005 Convertible Debentures
                  ($0.3373)
              
              
              
              
              
              
              
              
              148,236
              
              
              15
              
              
              
              
              
              49,985
              
              
              
              
              
              50,000Common
                  stock issued April 2006 upon conversion of 2005 Convertible Debentures
                  ($0.1985)
              
              
              
              
              
              
              
              
              755,735
              
              
              76
              
              
              
              
              
              149,924
              
              
              
              
              
              150,000Common
                  stock issued May 2006 upon conversion of preferred shares ($2.50)
              
              
              (3.00
              )
              
              (75,000
              )
              
              30,000
              
              
              3
              
              
              
              
              
              74,997
              
              
              
              
              
              -Common
                  stock issued May 2006 upon conversion of 2005 Convertible Debentures
                  ($0.1615)
              
              
              
              
              
              
              
              
              309,598
              
              
              31
              
              
              
              
              
              49,969
              
              
              
              
              
              50,000Common
                  stock issued May 2006 pursuant to anti-dilution provisions ($0.20)
              
              
              
              
              
              
              
              
              776,230
              
              
              77
              
              
              
              
              
              155,169
              
              
              
              
              
              155,246Incremental
                  fair value of additional common stock issuable upon conversion
                  of
                  preferred shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              502,138
              
              
              
              
              
              502,138Stock
                  option-based compensation for financial consulting services rendered
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (464,466
              )
              
              464,466
              
              
              
              
              
              -Stock
                  option-based compensation for directors
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,360
              )
              
              3,360
              
              
              
              
              
              -Adjustment
                  pursuant to SFAS 123R of stock option based compensation to employees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (199,719
              )
              
              199,719
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              655,057
              
              
              
              
              
              
              
              
              655,057Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (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
              )





(See
      Notes to Unaudited Condensed Financial Statements)








3
 Table
            of Contents







**CEPTOR
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**Cumulative****August
                  11, 1986****(Date
                  of Inception)****For
                  the Six-Month Period Ended**
              
              **to****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006****Cash
                  Flows Used In Operating Activities:**Net
                  loss
              
              $
              (5,381,198
              )
              $
              (4,891,593
              )
              $
              (34,108,263
              )Adjustments
                  to reconcile net income (loss) to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              9,535
              
              
              8,665
              
              
              41,025Write-off
                  of in-process research and development
              
              
              -
              
              
              -
              
              
              5,034,309Charge
                  for stock option issued pursuant to spinoff agreement
              
              
              -
              
              
              -
              
              
              2,082,500Stock-based
                  compensation to employees and directors
              
              
              75,466
              
              
              80,122
              
              
              192,242Stock-based
                  compensation to nonemployees
              
              
              579,591
              
              
              671,875
              
              
              4,802,822Stock-based
                  component of payment of legal fees
              
              
              -
              
              
              70,000
              
              
              70,000Stock-based
                  component of litigation settlement
              
              
              -
              
              
              -
              
              
              422,000Gain
                  on extinguishment of debt
              
              
              (387,362
              )
              
              (311,281
              )
              
              (698,643
              )Change
                  in fair value of derivative financial instruments
              
              
              (2,326,585
              )
              
              -
              
              
              (3,276,566
              )Non-cash
                  interest expense
              
              
              5,170,999
              
              
              412,161
              
              
              7,391,194Changes
                  in assets and liabilities:Prepaid
                  expenses and other current assets
              
              
              101,240
              
              
              (52,283
              )
              
              (74,545
              )Other
                  assets
              
              
              -
              
              
              -
              
              
              (18,511
              )Accounts
                  payable and accrued expenses
              
              
              6,832
              
              
              540,422
              
              
              5,216,402Net
                  cash used in operating activities
              
              
              (2,151,482
              )
              
              (3,471,912
              )
              
              (12,924,034
              )**Cash
                  Flows Used In Investing Activities:**Purchases
                  of property and equipment
              
              
              -
              
              
              (9,049
              )
              
              (86,921
              )**Cash
                  Flows Provided By Financing Activities:**Proceeds
                  from issuances of common stock
              
              
              200,000
              
              
              6,250
              
              
              1,499,516Collections
                  of subscriptions receivable
              
              
              -
              
              
              272
              
              
              303Net
                  proceeds from issuances of preferred stock
              
              
              -
              
              
              7,650,457
              
              
              10,448,629Acquisition
                  of treasury stock under put right
              
              
              -
              
              
              (916,450
              )
              
              (1,279,125
              )Acquisition
                  of treasury stock under purchase agreement
              
              
              -
              
              
              (2,309,250
              )
              
              (2,309,250
              )Distribution
                  to shareholders
              
              
              -
              
              
              -
              
              
              (4,260
              )Capital
                  contributed by Xechem International, Inc.
              
              
              -
              
              
              -
              
              
              350,310Proceeds
                  from issuance of debt
              
              
              1,876,000
              
              
              -
              
              
              5,501,000Expense
                  of issuance of long term debt
              
              
              (355,949
              )
              
              -
              
              
              (843,322
              )Principal
                  payments on bridge loans
              
              
              -
              
              
              -
              
              
              (350,000
              )Net
                  cash provided by financing activities
              
              
              1,720,051
              
              
              4,431,279
              
              
              13,013,801Net
                  increase (decrease) in cash and cash equivalents
              
              
              (431,431
              )
              
              950,318
              
              
              2,846**Cash
                  and cash equivalents at the beginning of period**
              
              
              434,277
              
              
              1,331,513
              
              
              -**Cash
                  and cash equivalents at the end of period**
              
              $
              2,846
              
              $
              2,281,831
              
              $
              2,846







(See
      Notes to Unaudited Condensed Financial Statements)




4
 Table
            of Contents










**CEPTOR
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Cumulative****August
                  11, 1986****(Date
                  of Inception)****For
                  the Six-Month Period Ended**
              
              **to****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006****Supplemental
                  Disclosure of Cash Flow Information:**Deemed
                  dividend of the beneficial conversion feature of units sold in
                  private
                  placement
              
              $
              -
              
              $
              9,164,500
              
              $
              10,100,616Issuance
                  of 2,902,500 shares of common stock upon conversion of preferred
                  shares
              
              $
              668,750
              
              $
              1,100,000
              
              $
              7,256,250Issuance
                  of 100,000 shares of common stock pursuant to stock plan
              
              $
              -
              
              $
              -
              
              $
              270,000Issuance
                  of 7,500 shares of common stock as compensation for past services
              
              $
              -
              
              $
              -
              
              $
              46,875Issuance
                  of 25,000 shares of common stock as compensation for financial
                  planning
              
              $
              -
              
              $
              -
              
              $
              75,000Issuance
                  of 23,000 shares of common stock in payment of accrued legal fees
              
              $
              -
              
              $
              70,000
              
              $
              70,000Capital
                  contribution for repurchase of common stock pursuant to Stock Purchase
                  Agreement
              
              $
              -
              
              $
              -
              
              $
              424,818Issuance
                  of 1,340,267 shares of common stock upon conversion of convertible
                  note
              
              $
              320,725
              
              $
              -
              
              $
              502,600Issuance
                  of 1,299,850 shares of common stock upon conversion of convertible
                  debenture
              
              $
              300,000
              
              $
              -
              
              $
              300,000Issuance
                  of 36,000 shares of common stock as debt issuance costs
              
              $
              -
              
              $
              -
              
              $
              90,000Issuance
                  of 451,597 shares of common stock to bridge loan investors and
                  placement
                  agent
              
              $
              -
              
              $
              -
              
              $
              550,000Issuance
                  of 167,610 shares up on conversion of convertible notes
              
              $
              -
              
              $
              -
              
              $
              209,512Issuance
                  of convertible notes in exchange for bridge loans and long-term
                  debt plus
                  accrued interest
              
              $
              -
              
              $
              -
              
              $
              1,111,240





(See
      Notes to Unaudited Condensed Financial Statements)







5
 Table
            of Contents




**NOTE
      1- BASIS OF INTERIM FINANCIAL STATEMENT
      PRESENTATION**





The
      accompanying unaudited Condensed Financial Statements of CepTor Corporation
      have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States for interim financial information and the instructions to Form
      10-QSB. Accordingly, they do not include all the information and footnotes
      required by accounting principles generally accepted in the United States for
      complete financial statements. In the opinion of management all adjustments
      (which include only normal recurring adjustments) necessary to present fairly
      the financial position, results of operations and cash flows for all periods
      presented have been made. The results of operations for the three- and six-month
      periods ended June 30, 2006 are not necessarily indicative of the operating
      results that may be expected for the entire year ending December 31,
      2006.





**NOTE
      2 - THE COMPANY**





***Organization***





The
      financial statements presented are those of CepTor Corporation (the "Company"),
      incorporated in August 1986 in the State of Delaware.





***Nature
      of Business and Development Stage Operations***





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





The
      Company is a development stage enterprise which has a limited history of
      operations and has not generated any material revenues since its inception.
      The
      Company has received a limited amount of funding through grants and
      collaborative research efforts in connection with developing its products.
      The
      Company does not have any products that are approved for commercial distribution
      at the present time. As a development stage enterprise, the Company is subject
      to all of the risks and uncertainties that are associated with developing a
      new
      business.





**NOTE
      3 - LIQUIDITY AND FINANCIAL CONDITION**





As
      described in Note 8, the Company is in default of substantially all of its
      note
      obligations, which amount to approximately $4,023,736 in aggregate principal.
      These defaults occurred principally as a result of failure to (i) make the
      required payments of principal and interest under certain of these obligations
      (which triggered cross default provisions under the remaining loans) (ii) file
      a
      post-effective amendment to its registration statement on Form SB-2 covering
      shares issuable under the 2005 Convertible Debentures within a specified period,
      and (iii) file a registration statement pursuant to the 2006 6% Convertible
      Notes within a specified period.  The Company is also required to have
      sufficient authorized but unissued shares available to net share settle its
      2005
      convertible notes and all of its derivative financial instruments. The Company
      was attempting to negotiate a restructuring plan with respect to its credit
      obligations, however, no plan to restructure these obligations was finalized
      due
      (in part) to remaining issues that the Company is required to resolve with
      respect to its drug development program that will require the use of substantial
      additional capital resources.





The
      Company has had difficulty securing the necessary capital to fully execute
      its
      business plan and has not been able to remain current with respect to the
      payment terms of all of its operating obligations. In addition, the Company
      has
      substantial convertible debt obligations with terms that require repayment
      during the next twelve months. The Company has exhausted substantially all
      of
      its capital resources, terminated substantially all of its employees except
      for
      its chief executive officer and is currently unable to, and does not believe
      it
      is likely, to pursue further development of its product candidates. The Company
      pursued this course of action as a result of having been informed by the FDA
      that its IND remains in hold pending the resolution of two remaining issues.
      Additional internal research is required to fully resolve the FDA issues and
      complete the Company’s own internal research program, which the Company
      estimates would take an additional twelve to eighteen months to complete. The
      Company lacks the funding that is necessary to resolve these issues and is
      currently unable to secure financing commitments for this purpose. Due to these
      remaining issues and the lack of adequate funding, the Company has halted
      development of its programs and has initiated discussions with its trade
      creditors to settle their remaining outstanding balances. If the Company is
      successful in its efforts to research settlements with its trade creditors,
      it
      may evaluate other research programs as well as its current receptor mediated
      drug-targeting platform and may explore the acquisition of other businesses;
      however, suitable opportunities (if defined) are likely to require additional
      capital that is not currently available to the Company. Accordingly, there
      can
      be no assurance that the Company will ever become operational. If the Company
      is
      not able to settle its remaining outstanding balances, it will be forced to
      file
      for bankruptcy protection. The Company has secured its obligations under the
      Debenture with all of its assets. These matters raise substantial doubt about
      the Company’s ability to continue as a going concern. The financial statements
      do not include any adjustments that may result from the outcome of this
      uncertainty.




6
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During
      the six months ended June 30, 2006, the Company received (i) proceeds from
      exercises of stock options of $200,000, (ii) $1,625,000 from the issuance of
      its
      2006 6% Convertible Notes (see Note 8), and (iii) unsecured advances of
      $251,000. Subsequent to June 30, 2006, the Company received (i) $950,000 from
      the issuance of its 2006 6% Convertible Notes (which includes the rollover
      of
      unsecured advances of $250,000 received prior to June 30, 2006), and (ii)
      unsecured advances of $335,000 (see Note 13).




Primarily
      as the result of recording non-cash interest expense of $5,170,999, offset
      by
      the reduction in the fair values of its derivative financial instruments of
      $2,326,585, the Company recorded a net loss for the  six-month
      period ended June 30, 2006 of $5,381,198. Non-cash interest expense consisted
      primarily of the excess fair values of its derivative securities included in
      its
      financing transactions and amortization of deferred financing costs of those
      financing transactions. The Company used net cash flows in its operating
      activities of $2,151,482 during the six-month period ended June 30, 2006. The
      Company's working capital deficiency amounted to $13,241,925 and its development
      stage accumulated deficit amounted to $43,297,293 at June 30, 2006. The Company
      expects to continue incurring losses for the foreseeable future due to the
      inherent uncertainty that is related to establishing the commercial feasibility
      of pharmaceutical products. The Company will require substantial additional
      funding to support the development of its proposed products and fund its
      operations while it continues its efforts to execute its business
      plan.





At
      June
      30, 2006, the Company had $4,274,736 in principal of convertible notes
      outstanding before discounts. The December 2004 Convertible Note in the
      principal amount of $448,736, was due July 3, 2006. There has not been an
      agreement on amended terms and no assurance that the Company will reach
      agreement with the note holder on amended terms. The terms of the 2004
      Convertible Note do not provide for penalties or other payments upon default,
      and accordingly, the Company has not accrued a penalty as of June 30, 2006.
      Of
      the remaining debt, (i) $251,000 was repaid from proceeds of a closing under
      the
      2006 6% Convertible Note offering subsequent to June 30, 2006, (ii) $250,000
      in
      principal plus accrued interest is due before December 31, 2006, (iii)
      $1,625,000 in principal representing 2006 6% Convertible Notes mature in June
      2007 and (iv) the balance of $1,700,000 mature in December 2008. Currently,
      the
      Company does not have the available cash to repay these obligations as they
      come
      due and if the note holders do not elect to convert their notes at maturity,
      the
      Company will be required to raise additional capital in order to meet these
      obligations. The note holders holding $1,700,000 in principal have a security
      interest in all the assets of the Company.





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





The
      Company is required to have sufficient authorized but unissued shares available
      to net share settle its 2005 convertible notes and all of its derivative
      financial instruments. As of June 30, 2006, the Company, on a fully diluted
      basis, had 86,388,781 shares issued and potentially issuable in connection
      with
      all of ites outstanding common stock convertible instruments, stock options
      and
      derivative financials instruments. The Company does not have sufficient
      authorized but unissued shares of common stock.








**NOTE
      4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Basis
      of Presentation***





The
      Company is a development stage enterprise. Accordingly, the Company has included
      its cumulative statements of operations and cash flows for the period of August
      11, 1986 (date of inception) to June 30, 2006 in accordance with Statement
      of
      Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by
      Development Stage Enterprises."




7
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The
      Company's net loss available to common shareholders as reported in its statement
      of operations for the period of August 11, 1986 (date of inception) to June
      30,
      2006 is $44,208,879 whereas the deficit accumulated during its development
      stage
      as reported on its balance sheet at June 30, 2006 is $43,297,293. The difference
      is a result of the acquisition of the Company by Xechem and the restatement
      of
      its assets and liabilities to fair value, which resulted in the Company's
      accumulated deficit, net of distributions, from inception through December
      31,
      2003 (the date of merger for financial reporting purposes) being reclassified
      to
      additional paid-in capital, net of a deemed dividend to the preferred
      shareholders.





***Accounting
      for Stock-Based Compensation***





Prior
      to
      January 1, 2006, the Company accounted for employee stock transactions in
      accordance with Accounting Principles Board (``APB'') Opinion No. 25 "Accounting
      for Stock Issued to Employees." The Company applied the pro forma disclosure
      requirements of SFAS No. 123 "Accounting for Stock-Based
      Compensation."





Effective
      January 1, 2006, the Company adopted SFAS No. 123R "Share Based Payment." This
      statement is a revision of SFAS Statement No. 123, and supersedes APB Opinion
      No. 25, and its related implementation guidance. SFAS 123R addresses all forms
      of share based payment ("SBP") awards including shares issued under employee
      stock purchase plans, stock options, restricted stock and stock appreciation
      rights. Under SFAS 123R, SBP awards result in a cost that will be measured
      at
      fair value on the awards' grant date, based on the estimated number of awards
      that are expected to vest and that will result in a charge to operations. The
      Company adopted the modified prospective method with respect to accounting
      for
      its transition to SFAS 123(R) and recorded unrecognized compensation cost of
      $407,425 as deferred compensation at January 1, 2006. Accordingly, the Company
      recognized expense on the statement of operations of $37,686 and $75,372 for
      the
      fair value of these stock options which vested during the three- and six-month
      periods ended June 30, 2006, respectively. The fair value of these awards was
      estimated at the date of grant using the Black-Scholes option pricing model
      with
      the following weighted average assumptions: risk fee interest rate: 3.3% to
      3.6%%; expected dividend yield: 0%; expected option life: 10 years; and
      volatility: 108% to 123%.





For
      the
      three- and six-month periods ended June 30, 2005, the Company applied APB
      Opinion No. 25, "Accounting for Stock Issued to Employees." As required under
      SFAS No. 148, "Accounting for Stock-based Compensation - Transition and
      Disclosure," the following table presents pro-forma net loss and basic and
      diluted loss per share as if the fair value-based method had been applied to
      all
      awards during that period.





**Three
                Month**
              **Period
                Ended**
              **June
                30,**
              **2005**
            
            
            **Six
                Month**
              **Period
                Ended**
              **June
                30,**
              **2005**Net
                loss available to common stockholders
            
            
            
            $
            (2,595,487
            )
            
            
            
            $
            (14,056,093
            )Stock-based
                employee compensation cost, under fair value accounting
            
            
            
            
            (15,485
            )
            
            
            
            
            (28,799
            )Pro-forma
                net loss under fair value method
            
            
            
            $
            (2,610,972
            )
            
            
            
            $
            (14,084,892
            )Net
                loss per share - basic and diluted
            
            
            
            $
            (0.22
            )
            
            
            
            $
            (1.23
            )Pro-forma
                net loss per share, basic and diluted
            
            
            
            $
            (0.22
            )
            
            
            
            $
            (1.24
            )





***Net
      Loss per Share***





Net
      loss
      per share is presented under SFAS No. 128 "Earnings Per Share." Under SFAS
      128,
      basic net loss per share is computed by dividing net loss per share available
      to
      common stockholders by the weighted average shares of common stock outstanding
      for the period and excludes any potential dilution. Diluted earnings per share
      reflect the potential dilution that would occur upon the exercise or conversion
      of all dilutive securities into common stock. The computation of loss per share
      for the three- and six-month periods ended June 30, 2006 and 2005 excludes
      potentially dilutive securities because their inclusion would be
      anti-dilutive.




8
 Table
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Shares
      of
      common stock issuable upon the conversion or exercise of potentially dilutive
      securities are as follows:





**June
                30,****2006**
            
            
            **2005**Convertible
                Notes
            
            
            
            
            30,463,204
            
            
            
            
            
            1,269,171Warrants
            
            
            
            
            20,583,232
            
            
            
            
            
            4,239,900Series
                A Preferred Stock
            
            
            
            
            5,504,000
            
            
            
            
            
            3,826,500Options
            
            
            
            
            1,971,029
            
            
            
            
            
            607,695Total
            
            
            
            
            58,521,465
            
            
            
            
            
            9,943,266





***Accounting
      for Conversion Options Embedded in Convertible Notes and Convertible Preferred
      Stock***





The
      Company accounts for conversion options embedded in convertible notes and
      convertible preferred stock in accordance with SFAS No. 133 "Accounting for
      Derivative Instruments and Hedging Activities" and EITF 00-19 "Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock". SFAS 133 generally requires companies to bifurcate
      conversion options embedded in convertible notes and preferred shares from
      their
      host instruments and to account for them as free standing derivative financial
      instruments in accordance with EITF 00-19. SFAS 133 provides for an exception
      to
      this rule when convertible notes and mandatorily redeemable preferred shares,
      as
      host instruments, are deemed to be conventional as that term is described in
      the
      implementation guidance provided in paragraph 61 (k) of Appendix A to SFAS
      133
      and further clarified in EITF 05-2 "The Meaning of `Conventional Convertible
      Debt Instrument' in Issue No. 00-19." SFAS 133 provides for an additional
      exception to this rule when the economic characteristics and risks of the
      embedded derivative instrument are clearly and closely related to the economic
      characteristics and risks of the host instrument.





The
      Company accounts for convertible notes (deemed conventional) in accordance
      with
      the provisions of EITF 98-5 "Accounting for Convertible Securities with
      Beneficial Conversion Features," and EITF 00-27 "Application of EITF 98-5 to
      Certain Convertible Instruments." Accordingly, the Company records, as a
      discount to convertible notes, the intrinsic value of such conversion options
      based upon the differences between the fair value of the underlying common
      stock
      at the commitment date of the note transaction and the effective conversion
      price embedded in the note. Debt discounts under these arrangements are
      amortized over the term of the related debt to their earliest date of
      redemption.





The
      Company issued $3,875,000 in principal of various convertible notes with
      embedded conversion options accounted for as free standing derivative financial
      instruments in accordance with SFAS 133 and EITF 00-19 and on the dates of
      issuance recorded liabilities for conversion options of $2,701,192. The fair
      value of these embedded conversion options were estimated at the date of
      issuance using the Black-Scholes option pricing 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 conversion options are a derivative
      liability and are marked to market for each reporting period. During the three-
      and six-month periods ended June 30, 2006, the Company recognized an expense
      of
      $408,235 for the increase in fair value and a gain of $165,825 for the decrease
      in fair value, respectively, of the derivative financial instruments. The fair
      value of these embedded conversion options were estimated at June 30, 2006
      using
      the Black-Scholes option pricing model with the following assumptions: risk
      fee
      interest rate: 5.1%; expected dividend yield: 0%; expected option life: 3 years;
      and volatility: 184%.





The
      Company also determined that the conversion option embedded in its Series A
      Preferred stock is not a free-standing derivative in accordance with the
      implementation guidance provided in paragraph 61 (l) of Appendix A to SFAS
      133.





***Accounting
      for Warrants and Freestanding Derivative Financial
      Instruments***





The
      Company accounts for the issuance of common stock purchase warrants and other
      freestanding derivative financial instruments in accordance with the provisions
      of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies
      as
      equity any contracts that (i) require physical settlement or net-share
      settlement or (ii) gives the Company a choice of net-cash settlement or
      settlement in its own shares (physical settlement or net-share settlement).
      The
      Company classifies as assets or liabilities any contracts that (i) require
      net-cash settlement (including a requirement to net-cash settle the contract
      if
      an event occurs and if that event is outside the control of the Company) or
      (ii)
      give the counterparty a choice of net-cash settlement or settlement in shares
      (physical settlement or net-share settlement).




9
 Table
            of Contents




The
      terms
      of the Company's December 2005 Convertible Debentures (see Note 8) provide
      for a
      conversion price in certain situations based on a floating conversion price
      which results in an indeterminable number of shares of common stock potentially
      issued upon conversion. Under accounting guidance provided by EITF 00-19, as
      of
      December 31, 2005, the Company had liabilities of $3,130,957 representing the
      fair value of warrants to purchase approximately 6.0 million shares of common
      stock which had been granted to non-employees for services rendered or as
      components of other financing instruments. The Company recorded additional
      liabilities for the fair value of warrants granted during the six-month period
      ended June 30, 2006 in the aggregate of $2,912,681. The fair value of these
      awards was estimated at the date of grant using the Black-Scholes option pricing
      model with the following assumptions: risk fee interest rate: 4.7% to 5.1%;
      expected dividend yield: 0%; expected option life: 2 years to 5 years; and
      volatility: 164% to 184%.





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





***Recently
      Issued Accounting Pronouncements***





In
      February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
      No.
      155, which is an amendment of SFAS No. 133 and 140. This Statement: a) permits
      fair value re-measurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation, b) clarifies
      which
      interest-only strip and principal-only strip are not subject to the requirements
      of SFAS 133, c) establishes a requirement to evaluate interests in securitized
      financial assets to identify interests that are freestanding derivatives or
      that
      are hybrid financial instruments that contain an embedded derivative requiring
      bifurcation, d) clarifies that concentrations of credit risk in the form of
      subordination are not embedded derivatives, e) amends SFAS 140 to eliminate
      the
      prohibition on a qualifying special-purpose entity from holding a derivative
      financial instrument that pertains to a beneficial interest other than another
      derivative financial instrument. This Statement is effective for financial
      statements for fiscal years beginning after September 15, 2006. Earlier adoption
      of this Statement is permitted as of the beginning of an entity's fiscal year,
      provided the entity has not yet issued any financial statements for that fiscal
      year. The Company is evaluating if this Statement will have an impact on the
      financial statements of the Company.





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
      recognized servicing assets and servicing liabilities. This Statement amends
      SFAS 140 to require that all separately recognized servicing assets and
      servicing liabilities be initially measured at fair value, if practicable.
      This
      Statement permits, but does not require, the subsequent measurement of
      separately recognized servicing assets and servicing liabilities at fair value.
      An entity that uses derivative instruments to mitigate the risks inherent in
      servicing assets and servicing liabilities is required to account for those
      derivative instruments at fair value. Under this Statement, an entity can elect
      subsequent fair value measurement to account for its separately recognized
      servicing assets and servicing liabilities. By electing that option, an entity
      may simplify its accounting because this Statement permits income statement
      recognition of the potential offsetting changes in fair value of those servicing
      assets and servicing liabilities and derivative instruments in the same
      accounting period. This Statement is effective for financial statements for
      fiscal years beginning after September 15, 2006. Earlier adoption of this
      Statement is permitted as of the beginning of an entity's fiscal year, provided
      the entity has not yet issued any financial statements for that fiscal year.
      The
      Company believes this Statement will not have an impact on the financial
      statements of the Company once adopted.




**NOTE
        5 - PREPAID EXPENSES**
 
 Prepaid
        expense consists primarily of unamortized premiums paid to carriers for
        insurance policies.
 
 **NOTE
        6 - DEFERRED FINANCING COSTS**
 
 The
        Company capitalizes the costs and expenses incurred in entering into its
        debt
        obligations which is then amortized over the term of the debt. During the
        year
        ended December 31, 2005, the Company incurred $104,408 in deferred financing
        costs associated with its December 2005 Convertible Debentures offering.
        During
        the three-month period ended June 30, 2006, the Company incurred $807,045
        in
        deferred financing costs associated with its 2006 6% Convertible Notes offering.
        During the three- and six-month periods ended June 30, 2006, the Company
        amortized $75,954 and $84,654 of deferred financing costs, respectively,
        to
        non-cash interest expense.




10
 Table
            of Contents




**NOTE
      7 - ACCRUED EXPENSES**





Accrued
      expenses at June 30, 2006 are as follows:





Financial
                investor relations fees
            
            
            
            $
            188,278Interest
                on convertible notes
            
            
            
            
            176,241Clinical
                development expenses
            
            
            
            
            139,521Professional
                advisory fees
            
            
            
            
            135,000Liquidating
                damages
            
            
            
            
            97,500Miscellaneous
            
            
            
            
            76,984Total
            
            
            
            $
            813,524





In
      connection with the sale of Series A Preferred Stock in a private placement,
      pursuant to the placement agent agreement, the Company had agreed to spend
      up to
      3% of the gross proceeds from its private placement on financial investor
      relations activities, all of which was accrued as "Financial Investor Relations
      Fees" and charged to additional paid-in capital upon each closing of the private
      placement.





**NOTE
      8 - CONVERTIBLE NOTES**





***Note
      Obligations in Default***





The
      Company is in default of substantially all of its note obligations, which amount
      to approximately $4,023,736 in aggregate principal. These defaults occurred
      principally as a result of (i) failure to make the required payments of
      principal and interest under certain of these obligations (which triggered
      cross
      default provisions under the remaining loans) (ii) file a post-effective
      amendment to its registration statement on Form SB-2 covering shares issuable
      under the 2005 Convertible Debentures within a specified period, and (iii)
      to
      file a registration statement pursuant to the 2006 6% Convertible Notes within
      a
      specified period. The Company is also required to have sufficient authorized
      but
      unissued shares available to net share settle its 2005 convertible notes and
      all
      of its derivative financial instruments. As of June 30, 2006, the Company,
      on a
      fully diluted basis had 86,388,781 shares issued and potentially issuable in
      connection with all of its outstanding common stock convertible instruments,
      stock options and derivative financial instruments. As a result of closings
      under the 6% Convertible Note offering subsequent to June 30, 2006, the Company
      does not have sufficient authorized but unissued shares of common stock.





Subsequent
      to June 30, 2006, the Company has obtained waivers from investors holding its
      December 2004 Convertible Note with respect to the Company’s non-payment of
      principal on July 3, 2006. The Company was attempting to negotiate a
      restructuring plan with respect to its credit obligations; however, no plan
      to
      restructure these obligations was finalized due (in part) to the notice that
      the
      Company received from the FDA regarding the remaining issues that needed to
      be
      resolved under its drug development program. Although the Company has obtained
      default waivers for certain defaults and is attempting to obtain waivers for
      the
      other default conditions, the Company cannot provide assurance that it will,
      and
      since there are cross default provisions in the debt obligations, the Company
      has classified all liabilities are current.





***Convertible
      Promissory Notes***





Pursuant
      to an offer dated October 22, 2004 as amended November 15, 2004 made to the
      holders of certain convertible notes, the Company issued $901,728 of convertible
      notes due December 8, 2005 in exchange for convertible notes in the principal
      amount of $825,000 plus accrued interest of $76,728 (the "December 2004
      Convertible Notes").





The
      December 2004 Convertible Notes were convertible into shares of the Company's
      common stock at $1.25 per share in amounts equal to the outstanding principal
      cancelled, plus accrued interest at 10% through the date of conversion. In
      April
      2005, the Company renegotiated certain terms of the December 2004 Convertible
      Notes to extend the maturity date until July 3, 2006 and in exchange the Company
      (1) increased the contractual interest rate effective December 8, 2005 to 12%,
      (2) reduced the conversion rate from $1.25 to $0.75 per share and (3) eliminated
      the Company's right to call the December 2004 Convertible Notes (the "Amended
      December 2004 Convertible Notes").




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 Table
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On December 9, 2005, the Company amended a portion of the
      convertible promissory note that was payable to Harbor Trust dated December
      9,
      2004, in the principal amount of $452,991 by reducing the conversion price
      to
      $0.375 from $0.75 per share (the "Amended December 2005 Harbor Note"). The
      affect of this modification was insignificant since approximately 50% of the
      note was converted in December 2005 and the remainder was converted in January
      2006. The Amended December 2005 Harbor Note bears interest at the rate of 10%
      per year through December 8, 2005 and 12% per year thereafter. The Amended
      December 2005 Harbor Note was fully converted on January 27,
      2006.


The
      remaining December 2004 Convertible Note in the
      principal amount of $448,736 which was due July 3, 2006, is currently being
      renegotiated to amend the maturity date or conversion terms. There has not
      been
      an agreement on amended terms and no assurance the Company will reach agreement
      with the note holder. The terms of the December 2004 Convertible Note do not
      provide for penalties or other payments upon default, and accordingly, the
      Company has not accrued any as of June 30, 2006. The conversion price 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, the principal amount of $448,736 remains outstanding under the
      December 2004 Convertible Note.





***2005
      Harbor Note***





On
      December 9, 2005, the Company issued a convertible promissory note (the "2005
      Harbor Note") in the principal amount of $250,000 which bears interest at the
      rate of 6% per year. All unpaid principal and interest under the 2005 Harbor
      Note will be due and payable on December 9, 2006. The 2005 Harbor Note is
      convertible, in whole or in part, at any time, into common stock at an adjusted
      conversion price of $0.15 per share (adjusted pursuant to the 2006 6%
      Convertible Note offering commenced on June 1, 2006, see below), subject to
      certain limitations on conversion as set forth in the 2005 Harbor Note,
      including where the resulting number of shares converted on a cumulative basis,
      would exceed 19.99% of the total number of shares of common stock outstanding
      and, subject to a conversion price adjustment in the event the Company offers
      or
      sells an option not pursuant to an approved stock plan to acquire common stock
      at a price per share less than the conversion price. The conversion option
      featured in this note is being accounted for as a free standing derivative
      financial instrument in accordance with SFAS 133 and EITF 00-19. The fair value
      of the conversion option amounted to $182,883 at June 30, 2006.





As
      of
      June 30, 2006, the principal amount of $250,000 remains outstanding under the
      2005 Harbor Note.





***2005
      Convertible Debentures***





On
      December 9, 2005, the Company entered into a securities purchase agreement
      (the
      "Securities Purchase Agreement") with Cornell Capital Partners, LP ("Cornell
      Capital") pursuant to which Cornell Capital has purchased, in a private
      placement, secured convertible debentures in the aggregate principal amount
      of
      $2,000,000 (the "2005 Convertible Debentures"), which bear interest at the
      rate
      of 8% per year. Pursuant to the Securities Purchase Agreement, the Company
      issued a 2005 Convertible Debenture in the principal amount of $1,000,000 on
      each of December 9, 2005 and December 28, 2005. Each 2005 Convertible Debenture
      has a three-year maturity from the date of issuance and was subject to earlier
      conversion or redemption pursuant to its terms.





Cornell
      Capital has the right to convert a portion or all of the outstanding principal
      and interest under the 2005 Convertible Debentures into shares of common stock
      at a conversion price per share equal to the lesser of $0.9765 (105% of the
      closing 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 the twenty
      trading days immediately preceding the conversion date (the "Floating Price"
      and
      together with the Fixed Price, the "Conversion Price"), subject to adjustment
      as
      provided in the 2005 Convertible Debentures; provided, that any such conversion
      based on the Floating Price will generally be limited to $150,000 of principal
      outstanding under the 2005 Convertible Debentures in any thirty day period;
      and
      further provided, that Cornell Capital may not convert the 2005 Convertible
      Debentures into shares of common stock if such conversion would result in
      Cornell Capital, together with its affiliates, beneficially owning in excess
      of
      4.9% of the then issued and outstanding shares of common stock. The Conversion
      Price and number of shares of common stock issuable upon conversion of the
      2005
      Convertible Debentures is subject to certain exceptions and adjustment for
      stock
      splits and combinations and other dilutive events.





Subject
      to the terms and condition of the 2005 Convertible Debentures, the Company
      had
      the right at any time upon three business days notice to redeem the 2005
      Convertible Debentures, in whole or in part. If the closing bid price of the
      common stock, is less than the Fixed Price at the time of the redemption, the
      Company is obligated to pay, in addition to the principal and accrued interest
      being redeemed, a redemption premium of 8% of the principal amount being
      redeemed (the "Redemption Amount"). If the closing bid price is greater than
      the
      Fixed Price, the Company may redeem up to 50% of the principal amount
      at
      the Redemption Amount and the remaining 50% at the greater of the (x) Redemption
      Amount or (y) the market value of the common stock. In addition, Cornell Capital
      will receive a three-year warrant to purchase 25,000 shares of common stock
      for
      every $100,000 redeemed by the Company, on a pro rata basis, at an exercise
      price per share of $0.9765 (the "Redemption Warrant").




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If
      an
      Event of Default (as such term is defined in the 2005 Convertible Debentures)
      occurs, any principal and accrued interest outstanding will become immediately
      due and payable, in cash or common stock, at Cornell Capital's
      election.





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





***Assignment
      of 2005 Convertible Debentures***





On
      June
      29, 2006, the Company entered into an assignment agreement ("Assignment
      Agreement") by and between Cornell Capital, The Longview Fund, LP ("Longview"),
      Alpha Capital Aktiengesellschaft ("Alpha"), Ellis International Ltd. ("Ellis")
      and Momona Capital Corp. ("Momona") (each an "Assignee") which provides for,
      among other things, the assignment of the unpaid and unconverted amounts
      outstanding under each of the 2005 Convertible Debentures to the Assignees
      in
      the amounts listed in the Assignment Agreement. The aggregate unpaid and
      unconverted principal amount of $1,700,000 under the 2005 Convertible Debentures
      was assigned. The aggregate purchase price paid by the Assignees was $1,914,180,
      of which $1,836,000 is being paid for principal (which includes the Redemption
      Amount) and $78,180 represents accrued interest.





The
      Company now owes in 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 2005 Convertible Debentures except that
      the
      Assignment Agreement provides that the Company may not redeem the 2005
      Convertible Debentures, in whole or in part.





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





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





***2006
      6% Convertible Notes***





On
      May
      26, 2006, the Company entered into a placement agency agreement with Brookshire
      Securities 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% Convertible
      Notes'').





The
      Company is offering the 2006 6% Convertible Notes on a "best efforts" basis
      only
      to "accredited investors" (as defined in Rule 501 (a) of Regulation D under
      Section 4(2) of the Securities Act of 1933, as amended) by offer letter dated
      May 25, 2006 (the "Offer Letter"), which sets forth the terms and conditions
      of
      the offering. The Company will offer the 2006 6% Convertible Notes until August
      30, 2006, unless extended.





The
      2006
      6% Convertible Notes are payable one year after the date of funding, or earlier
      upon acceleration following the occurrence of an "Event of Default", as defined
      in the 2006 6% Convertible Notes. Interest on the 2006 6% Convertible Notes
      will
      accrue from the date of issue at 6% per annum, or 12 % per annum upon the
      occurrence of an Event of Default.





The
      Company may repurchase the 2006 6% Convertible Notes for 200% of their principal
      amount, plus accrued interest, on or before September 30, 2006, upon 30 days'
      prior written notice. The Company must repurchase the 2006 6% Convertible Notes
      at 200% of their principal amount, plus accrued interest, if on or before
      September 30, 2006, the Company announces a sale or merger of the company or
      its
      assets, which is completed within six months.




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The
      principal of, and accrued interest on, the 2006 6% Convertible Notes is
      convertible into shares of common stock, at the option of the holders of the
      2006 6% Convertible Notes, at an initial conversion price per share of $0.15,
      subject to adjustment for certain issuances or events that will result in
      dilution (the "Fixed Conversion Price"). If the 2006 6% Convertible Notes have
      not been fully converted or repurchased for 200% of their principal amount
      by
      September 30, 2006, then commencing on October 1, 2006, the conversion price
      will be the lesser of (i) the Fixed Conversion Price and (ii) 90% of the lowest
      closing price (or, if no closing price is available, the average of closing
      bid
      and asked prices) of the Company's common stock for the 20 trading days
      immediately preceding the date on which a notice of conversion is delivered
      (the
      "Floating Conversion Price").





Purchasers
      of 2006 6% Convertible Notes who have not previously purchased shares of the
      Company's Series A Convertible Preferred Stock, par value $0.0001 per share
      (the
      "Preferred Stock") will receive, without additional consideration, five-year
      warrants to purchase a number of additional shares of common stock equal to
      100%
      of the number of shares that the purchaser may initially acquire upon conversion
      of the 2006 6% Convertible Notes, at an initial exercise price of $0.30 per
      share, subject to adjustment for certain issuances and events that will result
      in dilution.





Purchasers
      of 2006 6% Convertible Notes who purchased shares of Preferred Stock, will
      be
      issued a number of additional shares of common stock upon conversion of the
      Preferred Stock, based upon the principal amount of 2006 6% Convertible Notes
      purchased relative to the total purchase price of the shares of Preferred Stock
      purchased, which will effectively reduce the per share conversion price of
      the
      Preferred Stock so that it is the same as the conversion price per share of
      the
      2006 6% Convertible Notes, or to the extent purchasers have converted shares
      of
      Preferred Stock, but not sold the common stock received upon conversion, the
      Company will issue a number of additional shares of common stock that will
      provide equivalent value, in each case without additional consideration. The
      Company will issue warrants to purchase a number of additional shares of common
      stock at $0.15 that will provide equivalent value, to those purchasers of 2006
      6% Convertible Notes who have sold or otherwise disposed of shares of common
      stock received upon conversion of Preferred Stock. If the Company redeems the
      2006 6% Convertible Notes but does not redeem the Preferred Stock by September
      30, 2006, then commencing on October 1, 2006, the conversion price of
      outstanding shares of Preferred Stock of purchasers of the 2006 6% Convertible
      Notes will be reduced to the lesser of the Fixed Conversion Price and the
      Floating Conversion Price, to the extent of the total purchase price paid by
      the
      purchaser for the 2006 6% Convertible Notes bears in relation to the total
      purchase price paid for the Preferred Stock. The Company also will reduce to
      $0.30 the per share exercise price of warrants purchasers of the 2006 6%
      Convertible Notes received with their purchase of Preferred Stock, to the extent
      of the principal amount of 2006 6% Convertible Notes purchased relative to
      the
      total purchase price for the shares of Preferred Stock, subject to the Company's
      right, after the registration statement referred to below has become effective,
      to force the exercise of those warrants on 20 days' notice by offering to
      purchase those warrants for a nominal price if the closing price per share
      of
      the common stock exceeds $0.45 for ten consecutive trading days.





The
      Company has agreed to file a registration statement to register for resale
      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 any additional shares of common stock which may be issued as part of
      the
      offering. If the Company fails to file a registration statement for the resale
      of these shares by August 21, 2006, or the registration statement is not
      effective by the 150th day after the Initial Closing on June 1, 2006, the
      Company will be obligated to pay purchasers of the 2006 6% Convertible Notes
      liquidated damages in an amount equal to 2% of the principal amount of the
      2006
      6% Convertible Notes for each month, or portion of a month, for which the
      Company fails to timely file the registration statement or until the
      registration statement becomes effective, but in no event may the liquidated
      damages exceed 18% of the principal amount of the 2006 6% Convertible Notes.
      At
      June 30, 2006, the Company has accrued $97,500 as estimated liquidated damages,
      which represents the damages which would be due with a potential delay of three
      months in the filing of its registration statement.





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As
      a
      condition to their purchase of the 2006 6% Convertible Notes, purchasers have
      agreed that they will not sell, transfer or otherwise dispose of any securities
      of the Company prior to the 150th day after June 1, 2006, except that the
      restrictive period applicable to shares of common stock that were acquired,
      or
      may be acquired, upon conversion of shares of Preferred Stock held by the
      purchaser, expired on August 20, 2006 to the extent of the total purchase price
      paid by the purchaser for 2006 6% Convertible Notes bears in relation to the
      total purchase price paid for the Preferred Stock.





Pursuant
      to the terms of the subscription agreement for the 2006 6% Convertible Note
      offering, the proceeds of the offering, after payment of sales commissions
      and
      other fees and expenses, are to be disbursed to the Company from escrow for
      use
      as working capital in monthly installments, to the extent available, as follows:
      $540,000 on June 1, 2006, $820,000 by June 10, 2006, $590,000 by July 10, 2006,
      $440,000 by August 10, 2006, $270,000 by September 10, 2006, and up to $500,000
      by the 10th day of each succeeding calendar month until fully
      funded.





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





The
      Harbor Trust, has agreed to a pledge of its 2005 Harbor Note dated December
      9,
      2005 issued in the name of The Harbor Trust in the principal amount of $250,000
      to secure a non-recourse obligation to increase the return to purchasers of
      Preferred Stock to the extent required to protect investors from a loss on
      their
      investment to the extent of such collateral, measured on the earlier of May
      20,
      2007 or the date on which all the 2006 6% Convertible Notes offered have been
      sold or otherwise disposed of, including by conversion. Such protection is
      to be
      available only to 2006 6% Convertible Note purchasers who did not acquire
      Preferred Stock from the Company directly and to persons who acquired Preferred
      Stock directly (or are current holders) and who elect not to have any adjustment
      made with respect to their Preferred Stock holdings as previously described
      (i.e., who elect to receive the benefit of the yield enhancement in lieu of
      the
      conversion adjustments). In consideration for the agreements made by The Harbor
      Trust, at each closing the Company will (i) pay The Harbor Trust a yield
      enhancement incentive fee equal to 10% of the aggregate gross proceeds of the
      2006 6% Convertible Notes receiving the benefit of such protection (the "Yield
      Protected Notes"), plus (ii) issue to The Harbor Trust, for nominal
      consideration, five-year warrants to purchase, for the principal amount thereof,
      (A) 2006 6% Convertible Notes having a principal amount equal to 10% of the
      principal amount of the Yield Protected Notes sold in the Offering, and (B)
      five-year warrants to purchase a number of shares of common stock equal to
      10%
      of the shares of common stock that purchasers of the Yield Protected Notes
      sold
      in the offering may acquire upon exercise of the warrants they received with
      the
      purchase of the Yield Protected Notes, at an exercise price of $0.30 per share.
      In no event will the total yield enhancement incentive fee, plus the placement
      agent fee, paid by the Company exceed 10% of the gross proceeds of the
      offering.





On
      June
      1, 2006 and June 15, 2006, the Company sold an aggregate principal amount of
      $1,500,000, and $125,000 of 2006 6% Convertible Notes. To those purchasers
      who
      had not previously purchased the Company's Preferred Stock, the Company issued
      five-year warrants to purchase an aggregate of 6,500,000 and 833,333 shares
      of
      common stock, respectively, at an initial exercise price of $0.30 per share.
      To
      those purchasers who had previously purchased the Company's Preferred Stock,
      the
      Company will issue upon the conversion of their Preferred Stock, 3,290,000
      additional shares of common stock to those purchasers on June 1, 2006 who had
      previously purchased Preferred Stock and adjust the exercise price on the
      warrants they received when they purchased the Preferred Stock to purchase
      105,000 shares of common stock to $0.30.





Of
      the
      $1,100,000 in principal purchased by those investors who had not previously
      purchased the Company's Preferred Stock, the Company recognized a debt discount
      of $755,237 at date of issuance based on an allocation of the proceeds based
      on
      relative fair values of the 2006 6% Convertible Notes, the warrants and the
      conversion option, as determined by the Black-Scholes option pricing model.
      Since the Company is required to account for its derivative financial
      instruments as liabilities (see Note 4), the Company recorded the full fair
      values of the warrants and the conversion options at date of issuance of the
      2006 6% Convertible Notes of $1,239,700 and $1,169,960, respectively, as
      liabilities and charged non-cash interest expense. The fair value of these
      awards was estimated at the date of grant using the Black-Scholes option pricing
      model with the following assumptions: risk fee interest rate: 5.1%; expected
      dividend yield: 0%; expected option life: 3 years to 5 years; and volatility:
      173%. The Company marks to market these derivative financial instruments at
      each
      reporting date.




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Of
      the
      $525,000 in principal purchased by those investors who had previously purchased
      the Company's Preferred Stock, the Company recognized a debt discount of
      $525,000 at date of issuance based on the (i) fair values of the conversion
      option, (ii) the incremental increase in fair value of the additional shares
      of
      common stock to be issued upon conversion of the Preferred Stock and (iii)
      the
      change in fair value of the underlying warrants associated with the Preferred
      Stock due to the change in exercise price, as determined by the Black-Scholes
      option pricing model. Since the Company is required to account for its
      derivative financial instruments as liabilities (see Note 4), the Company
      recorded the incremental fair value of the Preferred Stock warrants and the
      full
      fair value conversion options at date of issuance of the 2006 6% Convertible
      Notes of $4,872 and $558,390, respectively, as liabilities and charged the
      excess to non-cash interest expense. The fair value of these awards was
      estimated at the date of grant using the Black-Scholes option pricing model
      with
      the following assumptions: risk fee interest rate: 5.1%; expected dividend
      yield: 0%; expected option life: 2 years to 3 years; and volatility: 173%.
      The
      Company marks to market these derivative financial instruments at each reporting
      date. In addition, the Company charged non-cash interest expense and credited
      equity for the incremental increase in fair value of the additional shares
      of
      common stock issuable upon conversion of the Preferred Stock.





***Adjustments
      to Outstanding Convertible Securities and Other Rights to Purchase Common Stock
      Resulting from 2006 6% Convertible Notes Offering***





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





The
      December 2004 Convertible Note and the 2005 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 Company
      anticipates that it will issue an additional 2,794,804 and 1,501,667 shares,
      respectively, assuming conversion at maturity.





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





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




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





Certain
      options granted pursuant to our 2004 Incentive Stock Plan and certain shares
      of
      common stock issued upon exercise of those options, contain anti-dilution
      provisions which provide for a reduction of the exercise price if the Company
      sells common stock or issues convertible securities 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 the anti-dilution provision, the Company issued an additional
      776,231 shares of common stock and increased the remaining unexercised option
      by
      an additional 776,230 shares of common stock issuable upon exercise to the
      optionees.





**NOTE
      9 - EQUITY TRANSACTIONS**





During
      the six-month period ended June 30, 2006, the Company issued the following
      securities.





***Common
      Stock Issued Upon Conversion of Series A Preferred
      Stock***





During
      the six-month period ended June 30, 2006, the Company issued 267,500 shares
      of
      common stock upon conversion of 26.75 shares of Series A Preferred
      Stock.





***Shares
      Issued Upon Exercise of Options Pursuant to 2004 Incentive Stock
      Plan***





In
      March
      2006, the Company issued fully-vested, five-year options to purchase an
      aggregate of 1,114,206 shares of its common stock at $0.359 per share pursuant
      to the 2004 Incentive Stock Plan, to two financial consultants for services
      previously provided, of which options were exercised as to an aggregate of
      557,102 shares of common stock for proceeds to the Company of $200,000. Pursuant
      to anti-dilution provisions contained in the option agreements, the Company
      issued an additional 776,230 shares of common stock during May 2006 in
      connection with executing the term sheet for the 2006 6% Convertible Note
      offering.





***Conversion
      of Amended December 2004 Convertible Note***





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





***Conversion
      of December 2005 Convertible Debenture***





During
      the six-month period ended June 30, 2006, a holder of the Company's December
      2005 Convertible Debentures elected to convert a portion of its aggregate
      principal balance of $300,000 into 1,299,850 shares of common stock at a
      conversion price pursuant to the terms of the December 2005 Convertible
      Debentures.





***Insufficient
      Authorized but Unissued Shares of Common Stock***





On
      May 9,
      2006, the Board of Directors authorized an amendment to the Company's Amended
      and Restated Certificate of Incorporation to increase the number of authorized
      shares 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 and 20,000,000 shares
      would be designated as Series A Preferred Stock. Unless the proposed amendment
      is approved by the stockholders, the Company will not be able to satisfy its
      obligations in the agreements relating to those securities. If the stockholders
      do not approve the amendment, the Company will be in default of its obligations
      under those agreements, and the holders of those securities may accelerate
      payment of the Company's obligations, obtain liquidated damages under certain
      of
      those agreements and pursue other legal remedies against the Company that would
      have a material adverse affect on the Company’s ability to remain in
      existence.





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**NOTE
      10 - STOCK BASED COMPENSATION**





The
      Company, since its inception has granted non-qualified stock options to various
      employees and non-employees at the discretion of the Board of Directors under
      its 2004 Incentive Stock Plan and its 2006 Incentive Stock Plan (the "Plans").
      Both Plans have substantially the same terms. Substantially all options granted
      to date have exercise prices equal to the fair value of the underlying common
      stock at the date of grant and terms ranging from three to ten years. Vesting
      periods range from fully vested at the date of grant to four years.





The
      fair
      value of all awards is estimated at the date of grant using the Black-Scholes
      option pricing model. Assumptions relating to the estimated fair value of stock
      options that the Company granted prior to January 1, 2006 that were previously
      accounted for and recorded under the intrinsic value method prescribed under
      APB
      25 are described in Note 3. Pursuant to SFAS 123R, the Company recognized
      expense on the statement of operations of $37,686 and $75,372 for the fair
      value
      of those stock options granted prior to January 1, 2006 and which vested during
      the three- and six-month periods ended June 30, 2006, respectively.





During
      March 2006, the Company granted stock options to acquire an aggregate of
      1,514,206 shares of common stock to three consultants. The option agreements
      for
      two of the consultants contained anti-dilution protection of the exercise price
      and the number of shares issuable upon conversion in the event the Company
      issued common stock at a price less then the exercise price contained 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 of these options were fully vested and
      non forfeitable on their date of issuance. The Company charged the estimated
      fair value of $579,591 to compensation expense during the six-month period
      ended
      June 30, 2006 with respect to these options. Assumptions relating to the
      estimated fair value of these stock options (as determined by the Black-Scholes
      option pricing model), which the Company accounted for in accordance with SFAS
      123(R) and EITF 96-18, are as follows: risk-free interest rate of 4.7%; expected
      dividend yield zero percent; expected option life of 5 years; and current
      volatility of 129.6%.





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





During
      June 2006, the Company granted stock options to acquire an aggregate of 16,000
      shares of common stock to three directors of the Company. Each option was
      exercisable at a price of $0.21 per share for a period of up to ten years from
      issuance. All of these options vest over three years and were non forfeitable
      on
      their date of issuance. The fair value of these options (as determined by the
      Black-Scholes option pricing model) was $3,360 and the Company amortized $94
      to
      compensation expense during the six-month period ended June 30, 2006 with
      respect to these options. Assumptions relating to the estimated fair value
      of
      these stock options, which the Company accounted for in accordance with SFAS
      123(R) and EITF 96-18 are as follows: risk-free interest rate of 5.1%; expected
      dividend yield zero percent; expected option life of 10 years; and current
      volatility of 220.3%.





The
      risk-free rate is based on the U.S. Treasury yield curve in effect at the time
      of grant. The Company has not paid dividends to date and does note expect to
      pay
      dividends in the foreseeable future due to its substantial accumulated deficit
      and limited capital resources. Accordingly, expected dividends yields are zero.
      Historical cancellations and forfeitures of stock options are insignificant.
      The
      Company will adjust its assumptions relating to its expectations of future
      vesting and terms of options at such times that additional data indicates that
      changes in these assumptions are necessary. Expected volatility is
      principally based on the historical volatility of the Company's
      stock.





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A
      summary
      of option activity for the six months ended June 30, 2006 is as
      follows:





**Options**
            
            
            **Shares**
            
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
            
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                at January 1, 2006
            
            
            
            
            646,695
            
            
            
            
            $
            3.08Granted
            
            
            
            
            3,082,666
            
            
            
            
            $
            0.18Exercised
            
            
            
            
            1,333,332
            
            
            
            
            $
            0.15Forfeited
                or expired
            
            
            
            
            425,000
            
            
            
            
            $
            2.45Outstanding
                at June 30, 2006
            
            
            
            
            1,971,029
            
            
            
            
            $
            0.66
            
            
            
            4.6
                years
            
            
            
            $
            66,667Exercisable
                at June 30, 2006
            
            
            
            
            1,864,883
            
            
            
            
            $
            0.54
            
            
            
            4.4
                years
            
            
            
            $
            66,667





The
      weighted-average grant-date fair value of options granted during the six-month
      period ended 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 to non-vested share-based compensation arrangements, which represents
      the fair value of stock options that the Company accounted for under APB 25
      through December 31, 2005. These costs are expected to be recognized over a
      weighted-average period of 3.3 years.





**NOTE
      11 - ADOPTION OF SHAREHOLDER RIGHTS PLAN**





At
      its
      February 2006 board meeting, the directors of the Company unanimously approved
      the adoption of a shareholder rights plan pursuant to which the Company issued
      one preferred share purchase right for each share of the Company's common stock
      held by shareholders of record as of the close of business on March 7, 2006.
      Each right will entitle the holder to purchase one one-hundredth of a share
      of
      Series B Preferred Stock at an exercise price of $168. These preferred shares
      are structured so that the value of one one-hundredth of a preferred share
      will
      approximate the value of one share of the Company's common stock. The purpose
      of
      the plan is to protect the long-term value of the Company for its shareholders
      and to protect shareholders from various abusive takeover tactics, including
      attempts to acquire control of the Company at an inadequate price. The plan
      is
      designed to give the Company's Board of Directors sufficient time to study
      and
      respond to an unsolicited takeover attempt. Adoption of the plan was unanimously
      approved by the Company's directors





The
      terms
      of the plan provide for the Company's shareholders of record at the close of
      business on March 7, 2006 to receive one right for each outstanding common
      share
      held. In general, the rights will become exercisable if a person or group
      acquires 15% or more of the Company's common stock or announces a tender offer
      or exchange offer for 15% or more of the Company's common stock. Depending
      on
      the circumstances, the effect of the exercise of rights will vary. When the
      rights initially become exercisable, as described above, each holder of a right
      will be allowed to purchase one one-hundredth of a share of a newly created
      series of the Company's preferred shares at an exercise price of $168. However,
      if a person acquires 15% or more of the Company's common stock in a transaction
      that was not approved by the Board of Directors, each right would instead
      entitle the holder (other than such an acquiring person) to purchase common
      stock at 50% of the market price of the Company's common stock at that
      time.





The
      rights will expire on March 6, 2016. The Company may redeem the rights for
      $0.0001 each at any time until the tenth business day following public
      announcement that a person or group has acquired 15% or more of its outstanding
      common stock.




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**NOTE
        12 - ADOPTION OF 2006 INCENTIVE STOCK PLAN**
 
 The
        2006
        Incentive Stock Plan was approved by the Company's Board of Directors at
        its
        February 2006 meeting. The Company intends to submit the 2006 Incentive Stock
        Plan for approval of its stockholders within 12 months of the effective date
        of
        the Plan. The purpose of the 2006 Incentive Stock Plan is to provide
        an incentive to retain in the employ of and as directors, officers, consultants,
        advisors and employees of the Company, persons of training, experience and
        ability, to attract new directors, officers, consultants, advisors and employees
        whose services are considered valuable, to encourage the sense of proprietorship
        and to stimulate the active interest of such persons into the development
        and
        financial success of the Company. Under the 2006 Incentive Stock Plan, the
        Company is authorized to issue incentive stock options intended to qualify
        under
        Section 422 of the Code, non-qualified stock options, and restricted stock.
        The
        2006 Incentive Stock Plan is administered by the Board of Directors or the
        Compensation Committee. The Company reserved 2,730,090 shares of common stock
        for issuance under the 2006 Incentive Stock Plan. Options to acquire 776,230
        shares of common stock at $0.15 per share were issued to two financial
        consultants upon initiation of the 2006 6% Convertible Note offering pursuant
        to
        anti-dilution provisions contained in the initial grant of options to these
        two
        consultants (see Note 10).





**NOTE
      13 - SUBSEQUENT EVENTS**





***Offering
      of 2006 6% Convertible Notes***





On
      July
      18, 2006, the Company sold an aggregate principal amount of $950,000 of 2006
      6%
      Convertible Notes and issued five-year warrants to purchase an aggregate of
      4,833,333 shares of common stock at an initial exercise price of $0.30 per
      share. Pursuant to the terms of the 2006 6% Convertible Notes, the Company
      will
      issue 1,410,000 additional shares of common stock to those purchasers who had
      previously purchased Preferred Stock and adjust the exercise price on the
      warrants they received when they purchased the Preferred Stock to purchase
      45,000 shares of common stock to $0.30.





***Unsecured
      Advances***





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 repaid out
      of
      the next closing under the 2006 6% Convertible Note offering.




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**Item
      2.  Management'sDiscussion and Analysis or Plan of
      Operation.**





The
      following discussion of our plan of operations should be read in conjunction
      with our financial statements and notes thereto appearing elsewhere in this
      document.





***Overview***





We
      are a
      development-stage biopharmaceutical company focusing on the development of
      proprietary, cell-targeted therapeutic products for the treatment of
      neuromuscular and neurodegenerative diseases. Our goal is to increase the
      quality and quantity of life of people suffering with these diseases. Primary
      efforts are currently being focused on moving our lead product into phase I
      clinical trials for Duchenne muscular dystrophy.





***Capital
      Resources and Cash Requirements***





We
      have
      had difficulty in securing the necessary capital to fully execute our business
      plan and have not been able to remain current with respect to the payment terms
      of all of our operating obligations. In addition, we have substantial
      convertible debt obligations with terms that require repayment during the next
      twelve months. Subsequent to June 30, 2006, we have exhausted substantially
      all
      of our capital resources, terminated substantially all of our employees (except
      for our chief executive officer) and we are currently unable to, and do not
      believe it is likely, to pursue further development of our product candidates.
      We have pursued this course of action as a result of having been informed by
      the
      FDA that our IND remains on hold pending the resolution of two remaining issues.
      Additional internal research is required to fully resolve the FDA issues and
      complete out own internal research program, which we estimate would take an
      additional twelve to eighteen months to complete. We lack the funding that
      is
      necessary to resolve these issues and are currently unable to secure financing
      commitments for this purpose. Due to these remaining issues and the lack of
      adequate funding, we have halted development of our programs and have initiated
      discussion with our trade creditors to settle their remaining outstanding
      balances. If we are successful in our efforts to reach settlements with our
      trade creditors, we may evaluate other research programs as well as our current
      receptor mediated drug-targeting platform and may explore the acquisition of
      other businesses; however, suitable opportunities (if identified) are likely
      to
      require additional capital that is not currently available to us. Accordingly,
      there can be no assurance that we will ever become operational. If we are not
      able to settle our remaining outstanding balances , we will be forced to file
      for bankruptcy protection. We have secured our obligations under the Debentures
      with all of our assets. These matters raise substantial doubt about our ability
      to continue as a going concern. The financial statements do not include any
      adjustments that may result from the outcome of this uncertainty.





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 to June 30, 2006, we received (i) $950,000 from the issuance of
      2006
      6% Convertible Notes (which includes the rollover of the unsecured advances
      of
      $250,000 received prior to June 30, 2006), and (ii) unsecured advances of
      $335,000 (see Note 13).





Primarily
      as the result of recording non-cash interest expense of $5,170,999, offset
      by
      the reduction in the fair values of derivative financial instruments of
      $2,326,585, we recorded a net loss for the six-month period ended June 30,
      2006
      of $5,381,198. Non-cash interest expense consisted primarily of the excess
      fair
      values of derivative securities included in our financing transactions and
      amortization of deferred financing costs of those financing transactions. We
      used net cash flows in operating activities of $2,151,482 during the six-month
      period ended June 30, 2006. Our working capital deficiency amounted to
      $13,241,925 and our development stage accumulated deficit amounted to
      $43,297,293 at June 30, 2006.




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At
      June 30, 2006, we had $4,274,736 in principal of
      convertible notes outstanding before discounts. The December 2004 Convertible
      Note in the principal amount of $448,736, was due July 3, 2006. There has not
      been an agreement on amended terms and no assurance that we will reach agreement
      with the note holder on amended terms. The terms of the 2004 Convertible Note
      do
      not provide for penalties or other payments upon default, and accordingly,
      we
      have not accrued a penalty as of June 30, 2006. Of the remaining debt, (i)
      $251,000 was repaid from proceeds of a closing under the 2006 6% Convertible
      Note offering subsequent to June 30, 2006, (ii) $250,000 in principal plus
      accrued interest is due before December 31, 2006, (iii) $1,625,000 in principal
      representing 2006 6% Convertible Notes mature in June
      2007
      and (iv) the balance of $1,700,000 mature in December 2008. Currently, we do
      not
      have the available cash to repay these obligations as they come due and if
      the
      note holders do not elect to convert their notes at maturity, we will be
      required to raise additional capital in order to meet these obligations. The
      note holders holding $1,700,000 in principal have a security interest in all
      of
      our assets.





As
      of the
      date hereof, we are in default in our payment obligations, as of June 30, 2006,
      under (i) the December 2004 Convertible Note which was due on July 3, 2006
      in
      the principal amount plus accrued interest of $523,583, (ii) the Debentures
      and
      the 2006 6% Convertible Notes (which each contain certain cross default
      provisions), as a result of the December 2004 Convertible Note default, in
      the
      principal amounts plus accrued interest of $1,780,134 and $1,632,459,
      respectively; and (iii) the Harbor Trust Note of principal and accrued interest
      of $258,342 . In addition , we are in default under the Debentures for failure
      to file a post-effective registration statement by July 10, 2006 as required
      by
      the Debentures. We are also in default under the 2006 6% Convertible Notes
      for
      failure to file a registration statement within the 20-day grace period after
      the August 21,2006 filing deadline.





If
      we are
      able to secure suitable financing we may continue the development of our
      technologies, explore the development of other technologies or we may acquire
      or
      merge into other businesses. If we decide to pursue any of these options, we
      will require substantial additional financing which may of may not be able
      to
      obtain.





***Research,
      Development and Manufacturing***





Currently,
      our primary efforts are raising capital and moving our lead product into phase
      I
      clinical trials for Duchenne muscular dystrophy. During the three- and six-month
      periods ended June 30, 2006 we have been focusing our efforts on responding
      to
      the FDA questions received after submission of our investigational drug
      application in January 2006. Subsequent to June 30, 2006, we have continued
      this
      response preparation and currently anticipate submitting our response to the
      FDA
      before the end of the third quarter of 2006.





***Off
      Balance Sheet Arrangements***





Currently,
      we do not have any off balance sheet arrangements which would require disclosure
      in our financial statements.





***Employees***





As
      of
      September 1, 2006, we had seven employees, all of whom are full-time employees,
      one of whom focuses on and coordinates our research program, four that focus
      on
      and coordinate clinical and regulatory strategy and operations, and two in
      management, finance, and administration. Three of our employees have doctorate
      and/or M.D. degrees. As our current business strategy is primarily to coordinate
      research, clinical development, and manufacturing activities by third parties,
      we do not anticipate hiring a significant number of additional employees over
      the next twelve months.





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***Properties***





We
      currently lease our executive offices in Hunt Valley, Maryland consisting of
      approximately 5,200 square feet for approximately $7,200 per month. This lease
      expires on December 31, 2006 and we are currently negotiating a twelve-month
      extension. We believe this should provide sufficient space for our clinical,
      regulatory and other administrative functions during the remaining term of
      the
      lease. We are currently evaluating our needs for laboratory space. If financing
      is available, we may secure laboratory facilities for our own internal research
      activities. We are currently conducting research in various third party
      commercial and academic settings, and we plan to continue this practice and
      expand our use of third-party research organizations and facilities to meet
      specific needs.





**CAUTIONARY
      STATEMENTS AND RISK FACTORS**





The
      risks
      noted below and elsewhere in this report and in other documents e file with
      the
      SEC are risks and uncertainties that could cause our actual results to differ
      materially from the results contemplated by the forward-looking statements
      contained in this report and other public statements we make.





**Risks
      Related to Our Company**





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





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





WE
      HAVE A
      LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE
      FOR THE FORESEEABLE FUTURE.





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





Our
      ability to obtain additional funding will determine our ability to continue
      as a
      going concern. Our financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.





EVEN
      WITH
      THE PROCEEDS FROM THE 2006 6% CONVERTIBLE NOTES, WE WILL REQUIRE ADDITIONAL
      FUNDING WHICH WILL BE SIGNIFICANT AND WE MAY HAVE DIFFICULTY RAISING NEEDED
      CAPITAL IN THE FUTURE BECAUSE OF OUR LIMITED OPERATING HISTORY AND BUSINESS
      RISKS ASSOCIATED WITH OUR COMPANY.





We
      currently do not generate any revenue from our proposed products and revenue
      from grants and collaborative agreements may not be sufficient to meet our
      future capital requirements. We do not know when, or if, this will
      change.




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We
      have expended substantial funds in research,
      development and contract manufacturing and will continue to expend substantial
      funds in contract manufacturing, research, development and pre-clinical testing
      and clinical trials of our drug delivery technology and compounds. We will
      require substantial additional funds to conduct research and development,
      establish and conduct clinical and pre-clinical trials, obtain required
      regulatory approvals and clearances, establish clinical and, if our products
      are
      subsequently considered candidates for FDA approval, commercial scale
      manufacturing arrangements, and
      provide for the marketing and distribution of our products. Additional funds
      may
      not be available on acceptable terms, if at all. If adequate funds are
      unavailable or are not available on terms deemed acceptable by management,
      we
      may have to delay, reduce the scope of or eliminate one or more of our research
      or development programs or product or marketing efforts which may materially
      harm our business, financial condition, and results of operations. Our long
      term
      capital requirements are expected to depend on many factors,
      including:





·
            the
                number of potential products and technologies in
                development;


·
            continued
                progress and cost of our research and development
                programs;


·
            progress
                with pre-clinical studies and clinical
                trials;


·
            the
                time and costs involved in obtaining regulatory
                clearance;


·
            costs
                involved in preparing, filing, prosecuting, maintaining and enforcing
                patent claims;


·
            costs
                of developing sales, marketing and distribution channels and our
                ability
                to sell our drugs;


·
            costs
                involved in establishing manufacturing capabilities for clinical
                trial and
                commercial quantities of our drugs;


·
            competing
                technological and market
                developments;


·
            market
                acceptance of our products;


·
            costs
                for recruiting and retaining management, employees, and consultants;
                and


·
            costs
                for training physicians.





We
      may
      consume available resources more rapidly than currently anticipated, resulting
      in the need for additional funding. We may seek to raise any necessary
      additional funds through 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 and debt financing,
      if
      available, may involve restrictive covenants that would limit how we conduct
      our
      business or finance our operations, or otherwise have a material effect on
      our
      current or future business prospects. In addition, in the event that additional
      funds are obtained through arrangements with collaborative partners or other
      sources, we may have to relinquish economic and/or proprietary rights to some
      of
      our technologies or products under development that we would otherwise seek
      to
      develop or commercialize by ourselves. If adequate funds are not available,
      we
      may be required to significantly reduce, refocus, or delay our development
      efforts with regard to our drug delivery technology, compounds, and
      drugs.





OUR
      FINANCIAL CONDITION AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR OUTSTANDING
      DEBT MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR TO RAISE ADDITIONAL
      EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE OPERATIONS.





The
      terms
      of our outstanding notes may limit our ability, without the note holders'
      consent, to, among other things:





·
            enter
                into certain transactions;


·
            create
                additional liens on our assets;


·
            issue
                preferred stock or common stock at certain discounts below market
                prices;
                or


·
            merge
                or consolidate with other entities, and could adversely affect our
                liquidity and our ability to attract additional funding as
                required.






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WE
        MAY
        NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS MAY BE SEIZED
        AS A RESULT.





At
      June 30, 2006, we had $4,274,736 in principal of
      convertible notes outstanding before discounts. The December 2004 Convertible
      Note in the principal amount of $448,736, was due July 3, 2006. There has not
      been an agreement on amended terms and no assurance that we will reach agreement
      with the note holder on
      amended terms. The terms of the 2004 Convertible Note do not provide for
      penalties or other payments upon default, and accordingly, we have not accrued
      a
      penalty as of June 30, 2006. Of the remaining debt, (i) $251,000 was repaid
      from
      proceeds of a closing under the 2006 6% Convertible Note offering subsequent
      to
      June 30, 2006, (ii) $250,000 in principal plus accrued interest is due before
      December 31, 2006, (iii) $1,625,000 in principal representing 2006 6%
      Convertible Notes, mature in June 2007 and (iv) the balance of $1,700,000 mature
      in December 2008. Currently, we do not have the available cash to repay these
      obligations as they come due and if the note holders do not elect to convert
      their notes at maturity, we will be required to raise additional capital in
      order to meet these obligations, which we may not be able to do. If we raise
      additional funds to repay the notes by selling equity securities, the relative
      equity ownership of our existing investors could be diluted and new investors
      could obtain terms more favorable than previous investors.





The
      note
      holders holding $1,700,000 in principal have a security interest in all of
      our
      assets.





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





Our
      obligations under the 2005 Convertible Debentures are secured by all of our
      assets. As a result, if we default under the terms of the 2005 Convertible
      Debentures or related agreements, including our failure to issue shares of
      common stock upon conversion by the debenture holder, our failure to timely
      file
      a registration statement or have such registration statement declared effective,
      our breach of any covenant, representation or warranty in the Securities
      Purchase Agreement or 2005 Convertible Debentures or the commencement of a
      bankruptcy, insolvency, reorganization or liquidation proceeding against us
      could require the early repayment of the 2005 Convertible Debentures, if the
      default is not cured within the specified grace period. In addition, the
      debenture holders could foreclose their security interest and liquidate some
      or
      all of our assets and we could cease to operate. Any such issuance of shares
      upon conversion could cause a significant drop in the price of our stock and
      significant dilution to our stockholders.





THE
      FAILURE TO COMPLETE DEVELOPMENT OF OUR TECHNOLOGY, OBTAIN GOVERNMENT APPROVALS,
      INCLUDING REQUIRED FDA APPROVALS, OR TO COMPLY WITH ONGOING GOVERNMENTAL
      REGULATIONS COULD DELAY OR LIMIT INTRODUCTION OF PROPOSEDPRODUCTS AND RESULT
      IN
      FAILURE TO ACHIEVE REVENUES OR MAINTAIN OUR ONGOING BUSINESS.





Our
      research and development activities and the manufacture and marketing of our
      intended products are subject to extensive regulation for safety, efficacy,
      and
      quality by numerous government authorities in the United States and abroad.
      Before receiving FDA clearance to market our proposed products, we will have
      to
      demonstrate that our products are safe and effective on the patient population
      and for the diseases that are to be treated. Clinical trials, manufacturing
      and
      marketing of drugs are subject to the rigorous testing and approval process
      of
      the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug
      and Cosmetic Act ("FDC Act") and other federal, state, and foreign statutes
      and
      regulations govern and influence 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
      or
      longer to accomplish and require the expenditure of substantial financial,
      managerial, and other resources.





In
      order
      to be commercially viable, we must successfully research, develop, obtain
      regulatory approval for, manufacture, introduce, market, and distribute our
      technologies. For each drug utilized with our drug delivery technology, and
      for
      Myodur and Neurodur, we must successfully meet a number of critical
      developmental milestones, including:





·
            demonstrate
                benefit from delivery of each specific drug through our drug delivery
                technology;


·
            demonstrate
                through pre-clinical and clinical trials that our drug delivery technology
                and patient specific therapy is safe and
                effective;


·
            establish
                a viable Good Manufacturing Process capable of potential
                scale-up.








The
      time
      frame necessary to achieve these developmental milestones may be long and
      uncertain, and we may not successfully complete these milestones for any of
      our
      intended products in development.




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In
      addition to the risks previously discussed, our technology is subject to
      additional developmental risks which include the following:





·
            the
                uncertainties arising from the rapidly growing scientific aspects
                of drug
                delivery, therapies, and potential
                treatments;


·
            uncertainties
                arising as a result of the broad array of potential treatments related
                to
                nerve and muscle injury and disease;
                and


·
            anticipated
                expense and time believed to be associated with the development and
                regulatory approval of treatments for nerve and muscle injury and
                disease.





In
      order
      to conduct clinical trials that are necessary to obtain approval by the FDA
      to
      market a product it is necessary to receive clearance from the FDA to conduct
      such clinical trials. The FDA can halt clinical trials at any time for safety
      reasons or because our clinical investigators do not follow the FDA's
      requirements for conducting clinical trials. If we are unable to receive
      clearance to conduct clinical trials or the trials are halted by the FDA, we
      would not be able to achieve any revenue from such product, as it is illegal
      to
      sell any drug or medical device in the United States for human consumption
      without FDA approval, and many foreign countries are influenced in granting
      their own required approvals by the FDA.





DATA
      OBTAINED FROM CLINICAL TRIALS IS SUSCEPTIBLE TO VARYING INTERPRETATIONS, WHICH
      COULD DELAY, LIMIT OR PREVENT REGULATORY CLEARANCES.





Data
      already obtained, or in the future obtained, from pre-clinical studies and
      clinical trials (as of the date of this Report no clinical trials of our
      technology have been undertaken) do not necessarily predict the results that
      will be obtained from later pre-clinical studies and clinical trials. Moreover,
      pre-clinical and clinical data is susceptible to varying interpretations, which
      could delay, limit or prevent regulatory approval. A number of companies in
      the
      pharmaceutical industry have suffered significant setbacks in advanced clinical
      trials, even after promising results in earlier trials. The failure to
      adequately demonstrate the safety and effectiveness of an intended product
      under
      development could delay or prevent regulatory clearance of a potential drug,
      resulting in delays to commercialization, and could materially harm our
      business. Our clinical trials may not demonstrate sufficient levels of safety
      and efficacy necessary to obtain the requisite regulatory approvals for our
      drugs, and thus our proposed drugs may not be approved for marketing. Even
      after
      approval, further studies could result in withdrawal of FDA and other regulatory
      approvals and voluntary or involuntary withdrawal of products from the
      market.





We
      may
      encounter delays or rejections based upon additional government regulation
      from
      future legislation or administrative action or changes in FDA policy during
      the
      period of development, clinical trials and FDA regulatory review. We may
      encounter similar delays in foreign countries. Sales of our products outside
      the
      U.S. would be subject to foreign regulatory approvals that vary from country
      to
      country. The time required to obtain approvals from foreign countries may be
      shorter or longer than that required for FDA approval, and requirements for
      foreign licensing may differ from FDA requirements. We may be unable to obtain
      requisite approvals from the FDA and foreign regulatory authorities, and even
      if
      obtained, such approvals may not be on a timely basis, or they may not cover
      the
      uses that we request.





In
      the
      future, we may select drugs for "molecular binding" using our drug delivery
      technology which may contain controlled substances which are subject to state,
      federal and foreign laws and regulations regarding their manufacture, use,
      sale,
      importation and distribution. For such drugs containing controlled substances,
      we and any suppliers, manufacturers, contractors, customers and distributors
      may
      be required to obtain and maintain applicable registrations from state, federal
      and foreign 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. These regulations are
      extensive and include regulations governing manufacturing, labeling, packaging,
      testing, dispensing, prescription, and procurement quotas, record keeping,
      reporting, handling, shipment, and disposal. Failure to obtain and maintain
      required registrations or comply with any applicable regulations could delay
      or
      preclude us from developing and commercializing our drugs containing controlled
      substances and subject us to enforcement action. In addition, because of their
      restrictive nature, these regulations could limit our commercialization of
      drugs
      containing controlled substances.




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OUR
      DRUGS
      OR TECHNOLOGY MAY NOT GAIN FDA APPROVAL IN CLINICAL TRIALS OR BE EFFECTIVE
      AS A
      THERAPEUTIC AGENT WHICH COULD AFFECT OUR FUTURE PROFITABILITYAND
      PROSPECTS.





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





We
      may
      not be able to demonstrate that any potential drug or technology, including
      Myodur or Neurodur, although appearing promising in pre-clinical and animal
      observations, is safe or effective in advanced clinical trials that involve
      human patients. We are also not able to assure that the results of the tests
      already conducted and which we intend to repeat will be consistent with our
      prior observations or support our applications for regulatory approval. As
      a
      result, our drug and technology research program may be curtailed, redirected
      or
      eliminated at any time.





The
      diseases and illnesses to which our drugs and technologies are directed are
      very
      complex and may be prone to genetic mutations. These mutations may prove
      resistant to currently approved therapeutics or our drugs or technologies.
      Even
      if we gain regulatory approval there may develop resistance to our treatment.
      This could have a material adverse effect on our business, financial condition,
      and results of operations.





WE
      HAVE
      ACCUMULATED DEFICITS IN THE RESEARCH AND DEVELOPMENT OF OUR TECHNOLOGY AND
      THERE
      IS NO GUARANTEE THAT WE WILL EVER GENERATE REVENUE OR BECOME PROFITABLE EVEN
      IF
      ONE OR MORE OF OUR DRUGS ARE APPROVED FOR COMMERCIALIZATION.





Since
      our
      inception in 1986, we have incurred operating losses. As of June 30, 2006,
      our
      accumulated deficit amounted to $43,297,293. In addition, we expect to continue
      incurring operating losses for the foreseeable future as we continue to develop
      our products which will cause us to incur substantial research and development
      and clinical trials costs. Our ability to generate revenue and achieve
      profitability depends upon our ability, alone or with others, to complete the
      development of our proposed products, obtain the required regulatory approvals
      and manufacture, market, and sell our proposed products. Development, including
      the cost of contract manufacturing of our proposed products for pre-clinical
      testing and human clinical trials is extremely costly and requires significant
      investment. In the absence of additional financing we may not be able to
      continue our development activities. In addition, we may choose to license
      the
      rights to particular drugs or other technology. License fees may increase our
      costs.





We
      have
      not generated any revenue from the commercial sale of our proposed products
      or
      any drugs and do not expect to receive such revenue in the near future. Our
      primary activity to date has been research and development of our technology.
      All revenues to date are from grants, both public and private, and collaborative
      agreements. We cannot be certain as to when or whether to anticipate
      commercializing and marketing our proposed products in development, and do
      not
      expect to generate sufficient revenues from proposed product sales to cover
      our
      expenses or achieve profitability in the foreseeable future.





WE
      HAVE
      RELIED SOLELY ON THIRD-PARTY RESEARCH INSTITUTIONS FOR ALL OF OUR RESEARCH
      AND
      DEVELOPMENT, WHICH COULD BE MATERIALLY DELAYED SHOULD WE LOSE ACCESS TO THOSE
      FACILITIES.





We
      currently have no research and development facilities of our own. We are
      entirely dependent on third parties to use their facilities to conduct research
      and development. To date, we have primarily relied on third-party research
      institutions for this purpose including the Health Science Center at Downstate
      Medical Center and Stony Brook University. Our inability to have continued
      access to these facilities to conduct research and development may delay or
      impair our ability to gain FDA approval and commercialization of our drug
      delivery technology and products.




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We
      currently maintain a good working relationship with our third-party research
      institutions. Although we are evaluating various facilities in which to
      establish our laboratories, should we be required to relocate on short notice,
      we do not currently have an alternate facility where we could relocate our
      research activities. The cost and time to establish or locate an alternative
      research and development facility to develop our technology will be substantial
      and may delay gaining FDA approval and commercializing our
      products.





WE
      ARE
      DEPENDENT ON OUR COLLABORATIVE AGREEMENTS FOR THE DEVELOPMENT OF OUR
      TECHNOLOGIES AND BUSINESS DEVELOPMENT WHICH EXPOSES US TO THE RISK OF RELIANCE
      ON THE VIABILITY OF THIRD PARTIES.





In
      conducting our research and development activities, we rely and expect in the
      future to rely upon numerous collaborative agreements with universities,
      governmental agencies, charitable foundations, manufacturers, contract research
      organizations, and corporate partners. The loss of or failure to perform under
      any of these arrangements, by any of these entities, may substantially disrupt
      or delay our research and development activities including our anticipated
      clinical trials.





WE
      ARE
      EXPOSED TO PRODUCT LIABILITY, CLINICAL AND PRE-CLINICAL LIABILITY RISKS WHICH
      COULD PLACE A SUBSTANTIAL FINANCIAL BURDEN UPON US SHOULD WE BE SUED, BECAUSE
      WE
      DO NOT CURRENTLY HAVE PRODUCT LIABILITY INSURANCE ABOVE AND BEYOND OUR GENERAL
      INSURANCE COVERAGE.





Our
      business exposes us to potential product liability and other liability risks
      that are inherent in the testing, manufacturing, marketing and sale of
      pharmaceutical products. We cannot assure that such potential claims will not
      be
      asserted against us. In addition, the use in our clinical trials of
      pharmaceutical products that we may develop and the subsequent sale of these
      products by us or our potential collaborators may cause us to bear a portion
      of
      or all product liability risks. A successful liability claim or series of claims
      brought against us could have a material adverse effect on our business,
      financial condition, and results of operations.





All
      of
      our pre-clinical trials have been and all of our proposed clinical and
      pre-clinical trials are anticipated to be conducted by collaborators and third
      party contractors. We do not currently have any product liability insurance
      or
      other liability insurance relating to clinical trials or any products or
      compounds. We intend to seek insurance against such risks before we initiate
      clinical trials or before our product sales are commenced. We cannot assure
      that
      we will be able to obtain or maintain adequate product liability insurance
      on
      acceptable terms, if at all, or that such insurance will provide adequate
      coverage against our potential liabilities. An inability to obtain sufficient
      insurance coverage at an acceptable cost or otherwise to protect against
      potential product liability claims could prevent or inhibit the
      commercialization of our drug delivery technology. A product liability claim
      could also significantly harm our reputation and delay market acceptance of
      our
      intended products. Furthermore, our current and potential partners with whom
      we
      have collaborative agreements or our future licensees may not be willing to
      indemnify us against these types of liabilities and may not themselves be
      sufficiently insured or have a net worth sufficient to satisfy any product
      liability claims. Product liability claims or other claims related to our
      intended products, regardless of their outcome, could require us to spend
      significant time and money in litigation or to pay significant settlement
      amounts or judgments. Any successful product liability or other claim may
      prevent us from obtaining adequate liability insurance in the future on
      commercially desirable or reasonable terms. Claims or losses in excess of any
      product liability insurance coverage that may be obtained by us could have
      a
      material adverse effect on our business, financial condition, and results of
      operations.




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OUR
        LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS MORE DIFFICULT, AND
        THEREFORE, INVESTORS HAVE LIMITED INFORMATION UPON WHICH TO RELY.
 
 An
        investor can only evaluate our business based on a limited operating history.
        While we were organized in 1986, our current level of activity and operations
        only recently began following our acquisition by Xechem
        and subsequent closing on our financing during the period December 2004 through
        February 2005. Our operations will continue to change and our costs will
        increase dramatically as we evolve from primarily a technology holding company
        to a capitalized company with employees and internal operations. Since
        inception, we have engaged primarily in research and development, relied
        to a
        great extent on third-party efforts, sought avenues for licensing technology,
        sought grants, raised capital, and recruited scientific and management personnel
        external to us. We have not generated any meaningful revenue to date, and
        have
        no royalty revenue or products ready for use and in the marketplace. This
        limited history may not be adequate to enable an investor to fully assess
        our
        ability to develop our technologies and proposed products, obtain FDA approval,
        and achieve market acceptance of our proposed products, and respond to
        competition, or conduct such affairs as are presently
        contemplated.





FUTURE
      SALES OF OUR COMMON STOCK RECEIVED UPON CONVERSION BY OUR NOTE HOLDERS MAY
      ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK
      OFFERINGS.





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





ACCEPTANCE
      OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN AND FAILURE TO ACHIEVE MARKET
      ACCEPTANCE WILL PREVENT OR DELAY OUR ABILITY TO GENERATE REVENUES.





Our
      future financial performance will depend, in part, upon the introduction and
      customer acceptance of our proposed products. Even if approved for marketing
      by
      the necessary regulatory authorities, our products may not achieve market
      acceptance. The degree of market acceptance will depend upon a number of
      factors, including:





·
            the
                receipt of regulatory clearance of marketing claims for the uses
                that we
                are developing;


·
            the
                establishment and demonstration of the advantages, safety and efficacy
                of
                our technologies;


·
            pricing
                and reimbursement policies of government and third party payors such
                as
                insurance companies, health maintenance organizations and other health
                plan administrators;


·
            our
                ability to attract corporate partners, including pharmaceutical companies,
                to assist in commercializing our intended products;
                and


·
            our
                ability to market our products.





Physicians,
      patients, payors or the medical community in general may be unwilling to accept,
      utilize, or recommend any of our products. If we are unable to obtain regulatory
      approval, commercialize, and market our proposed products when planned, we
      may
      not achieve any market acceptance or generate revenue.




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WE
      MAY FACE LITIGATION FROM THIRD PARTIES THAT CLAIM OUR
      PRODUCTS INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE
      THERE IS SUBSTANTIAL UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL
      PATENTS.




We
      may be exposed to future litigation by third parties
      based on claims that our technologies, products, or activities infringe the
      intellectual property rights of others or that we have the trade secrets of
      others. This risk is exacerbated by the fact that the validity and breadth
      of
      claims covered in medical technology patents and the breadth and scope of trade
      secret protection involve complex legal and factual questions for which
      important legal principles are unresolved. Any litigation or claims against
      us,
      whether or not valid,
      could result in substantial costs, could place a significant strain on our
      financial and managerial resources, and could harm our reputation. Most of
      our
      license agreements would likely require that we pay the costs associated with
      defending this type of litigation. In addition, intellectual property litigation
      or claims could force us to do one or more of the following:





·
            cease
                selling, incorporating or using any of our technologies and/or products
                that incorporate the challenged intellectual property, which would
                adversely affect our future
                revenue;


·
            obtain
                a license from the holder of the infringed intellectual property
                right,
                which license may be costly or may not be available on reasonable
                terms,
                if at all; or


·
            redesign
                our products, which would be costly and time
                consuming.





We
      have
      not engaged in discussions, received any communications, nor do we have any
      reason to believe that any third party is challenging or has the proper legal
      authority to challenge our intellectual property rights or those of the actual
      patent holders, other than a letter received during August 2004 from counsel
      to
      a company named Ceptyr Corporation alleging infringement of trademarks issued
      to
      Ceptyr with respect to our name CepTor. In light of our formation and use of
      the
      name CepTor in commerce many years prior to the formation of Ceptyr and issuance
      of their trademark, we believe the demand to cease and desist from future
      infringement to be substantially without merit. No further communication has
      been received since mid-2004.





IF
      WE ARE
      UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR RIGHTS TO INTELLECTUAL PROPERTY
      OR
      SECURE RIGHTS TO THIRD PARTY PATENTS, WE MAY LOSE VALUABLE RIGHTS, EXPERIENCE
      REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLY LITIGATION TO PROTECT SUCH
      RIGHTS.





Our
      ability to obtain licenses to third-party patents, maintain trade secret
      protection, and operate without infringing the proprietary rights of others
      will
      be important to our commercialization of any products under development.
      Therefore, any disruption in access to the technology could substantially delay
      the development of our technology.





The
      patent positions of biotechnology and pharmaceutical companies, including ours,
      which also involve licensing agreements, are frequently uncertain and involve
      complex legal and factual questions. In addition, the coverage claimed in a
      patent application can be significantly reduced before the patent is issued.
      Consequently, our patent applications and any issued and licensed patents may
      not provide protection against competitive technologies or may be held invalid
      if challenged or circumvented. Our competitors may also independently develop
      drug delivery technologies or products similar to ours or design around or
      otherwise circumvent patents issued or licensed to us. In addition, the laws
      of
      some foreign countries may not protect our proprietary rights to the same extent
      as U.S. law.





We
      also
      rely upon trade secrets, technical know how, and continuing technological
      innovation to develop and maintain our competitive position. We generally
      require our employees, consultants, advisors and collaborators to execute
      appropriate confidentiality and assignment of inventions agreements. These
      agreements typically provide that all materials and confidential information
      developed or made known to the individual during the course of the individual's
      relationship with us is to be kept confidential and not disclosed to third
      parties except in specific circumstances, and that all inventions arising out
      of
      the individual's relationship with us shall be our exclusive property. These
      agreements may be breached and we may not have an appropriate remedy available
      for breach of the agreements. Furthermore, our competitors may independently
      develop substantially equivalent proprietary information and techniques, reverse
      engineer our information and techniques, or otherwise gain access to our
      proprietary technology. We may be unable to meaningfully protect our rights
      in
      trade secrets, technical know how, and other non patented
      technology.




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Although
      our trade secrets and technical know how are
      important, our continued access to the patents is a significant factor in the
      development and commercialization of our drug delivery technology. Aside from
      the general body of scientific knowledge from other drug delivery processes
      and
      technology, we believe these patents, based upon our current scientific data,
      are the only intellectual property necessary to develop our short-term plans
      for
      our current drug delivery system using our proposed Myodur, Neurodur and
      other
      drugs. We do not believe that we are or will be violating any other patents
      in
      developing our technology although we anticipate seeking a license from
      Sigma-Tau in order to employ a manufacturing method useful for large scale
      manufacturing of Myodur.





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





We
      currently depend and will continue to depend heavily on third parties for
      support in research and development and clinical and pre-clinical testing.
      Under
      certain circumstances, others may acquire certain rights in newly developed
      intellectual property developed in conjunction with us.





Research
      and development and clinical trials involve a complex process, and these third
      parties' facilities may not be sufficient. Inadequate facilities could delay
      clinical trials of our drugs and result in delays in regulatory approval and
      commercialization of our drugs, either of which would materially harm our
      business. We may, if adequate funding is obtained, decide to establish an
      independent facility to replace or supplement those facilities. To date, we
      have
      not identified the location, negotiated leases or equipment purchases, and,
      accordingly, we are subject to various uncertainties and risks that may be
      associated with the potential establishment of a new facility.





We
      may
      rely on third party contract research organizations, service providers, and
      suppliers to support development and clinical testing of our products. Failure
      of any of these contractors to provide the required services in a timely manner
      or on reasonable commercial terms could materially delay the development and
      approval of our products, increase our expenses, and materially harm our
      business, financial condition, and results of operations.





KEY
      COMPONENTS OF OUR TECHNOLOGIES MAY BE PROVIDED BY SOLE OR LIMITED NUMBERS OF
      SUPPLIERS, AND SUPPLY SHORTAGES OR LOSS OF THESE SUPPLIERS COULD RESULT IN
      INTERRUPTIONS IN SUPPLY OR INCREASED COSTS.





Certain
      components used in our research and development activities such as leupeptin,
      carnitine and taurine compounds, are currently purchased or manufactured for
      us
      from a single or a limited number of outside sources. The reliance on a sole
      or
      limited number of suppliers could result in:





·
            potential
                delays associated with research and development and clinical and
                pre-clinical trials due to an inability to timely obtain a single
                or
                limited source component;


·
            potential
                inability to timely obtain an adequate supply of required components;
                and


·
            potential
                of reduced control over pricing, quality, and timely
                delivery.





We
      do not
      have long-term agreements with any of our suppliers, and therefore the supply
      of
      a particular component could be terminated without penalty to the supplier.
      Any
      interruption in the supply of components could cause us to seek alternative
      sources of supply or manufacture these components internally. If the supply
      of
      any components is interrupted, components from alternative suppliers may not
      be
      available in sufficient volumes within required timeframes, if at all, to meet
      our needs. This could delay our ability to complete clinical trials, obtain
      approval for commercialization or commence marketing, or cause us to lose sales,
      incur additional costs, delay new product introductions, or harm our reputation.
      Further, components from a new supplier may not be identical to those provided
      by the original supplier. Such differences if they exist could affect product
      formulations or the safety and effect of our products that are being developed
      and delay regulatory approvals.





WE
      HAVE
      LIMITED MANUFACTURING EXPERIENCE AND ONCE OUR PRODUCTS ARE APPROVED, IF AT
      ALL,
      WE MAY NOT BE ABLE TO MANUFACTURE SUFFICIENT QUANTITIES AT AN ACCEPTABLE
      COST.





Our
      products remain in the research and development and pre-clinical trial phase
      of
      commercialization. Once our products are approved for commercial sale, if at
      all, we will need to establish the capability to commercially manufacture our
      products in accordance with FDA and other regulatory requirements. We have
      limited experience in establishing, supervising, and conducting commercial
      manufacturing. If we fail to adequately establish, supervise, and conduct all
      aspects of the manufacturing processes, we may not be able to commercialize
      our
      products. We do not presently own manufacturing facilities necessary to provide
      clinical or commercial quantities of our intended products.




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We
      presently plan to rely on third party contractors to manufacture part or all
      of
      our products. This may expose us to the risk of not being able to directly
      oversee the production and quality of the manufacturing process. Furthermore,
      these contractors, whether foreign or domestic, may experience regulatory
      compliance difficulty, mechanic shut downs, employee strikes, or any other
      unforeseeable acts that may delay production.





DUE
      TO
      OUR LIMITED MARKETING, SALES, AND DISTRIBUTION EXPERIENCE, WE MAY BE
      UNSUCCESSFUL IN OUR EFFORTS TO SELL OUR PRODUCTS, ENTER INTO RELATIONSHIPS
      WITH
      THIRD PARTIES, OR DEVELOP A DIRECT SALES ORGANIZATION.





We
      have
      yet had to establish any marketing, sales, or distribution capabilities for
      our
      proposed products. Until such time as our products are further along in the
      regulatory process, we will not devote any meaningful time or resources to
      this
      effort. At the appropriate time, we intend to enter into agreements with third
      parties to sell our products or we may develop our own sales and marketing
      force. We may be unable to establish or maintain third party relationships
      on a
      commercially reasonable basis, if at all. In addition, these third parties
      may
      have similar or more established relationships with our competitors who may
      exist after our introduction of products, if any.





If
      we do
      not enter into relationships with third parties for the sales and marketing
      of
      our products, we will need to develop our own sales and marketing capabilities.
      We have limited experience in developing, training, or managing a sales force.
      If we choose to establish a direct sales force, we may incur substantial
      additional expenses in developing, training, and managing such an organization.
      We may be unable to build a sales force on a cost effective basis or at all.
      Any
      such direct marketing and sales efforts may prove to be unsuccessful. In
      addition, we will compete with many other companies that currently have
      extensive marketing and sales operations. Our marketing and sales efforts may
      be
      unable to compete against these other companies. We may be unable to establish
      a
      sufficient sales and marketing organization on a timely basis, if at all, and
      may be unable to engage qualified distributors. Even if engaged, these
      distributors may:





·
            fail
                to satisfy financial or contractual obligations to
                us;


·
            fail
                to adequately market our products;


·
            cease
                operations with little or no notice;
                or


·
            offer,
                design, manufacture, or promote competing
                products.





If
      we
      fail to develop sales, marketing, and distribution channels, we would experience
      delays in product sales and incur increased costs, which would harm our
      financial results.





IF
      WE ARE
      UNABLE TO CONVINCE PHYSICIANS AS TO THE BENEFITS OF OUR INTENDED PRODUCTS,
      WE
      MAY INCUR DELAYS OR ADDITIONAL EXPENSE IN OUR ATTEMPT TO ESTABLISH MARKET
      ACCEPTANCE.





Broad
      use
      of our drug delivery technology may require physicians to be informed regarding
      our intended products and the intended benefits. The time and cost of such
      an
      educational process may be substantial. Inability to successfully carry out
      this
      physician education process may adversely affect market acceptance of our
      products. We may be unable to timely educate physicians regarding our intended
      products in sufficient numbers to achieve our marketing plans or to achieve
      product acceptance. Any delay in physician education may materially delay or
      reduce demand for our products. In addition, we may expend significant funds
      towards physician education before any acceptance or demand for our products
      is
      created, if at all.





THE
      MARKET FOR OUR PRODUCTS IS RAPIDLY CHANGING AND COMPETITIVE, AND NEW MECHANISMS,
      TECHNOLOGIES, NEW THERAPEUTICS, NEW DRUGS, AND NEW TREATMENTS WHICH MAY BE
      DEVELOPED BY OTHERS COULD IMPAIR OUR ABILITY TO MAINTAIN AND GROW OUR BUSINESS
      AND REMAIN COMPETITIVE.


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The
      pharmaceutical and biotechnology industries are subject to rapid and substantial
      technological change. Developments by others may render our technologies and
      intended products noncompetitive or obsolete, or we may be unable to keep pace
      with technological developments or other market factors. Technological
      competition from pharmaceutical and biotechnology companies, universities,
      governmental entities and others diversifying into the field is intense and
      is
      expected to increase. Many of these entities have significantly greater research
      and development capabilities and budgets than we do, as well as substantially
      more marketing, manufacturing, financial and managerial resources. These
      entities represent significant competition for us. Acquisitions of, or
      investments in, competing pharmaceutical or biotechnology companies by large
      corporations could increase such competitors' financial, marketing,
      manufacturing, and other resources.





We
      are a
      start-up development stage enterprise that prior to early 2005 has operated
      in
      all material respects only as a virtual company with no day-to-day business
      management, operating as a vehicle to hold certain technology for possible
      future exploration, and have been and will continue to be engaged in the
      development of novel 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 and novel technologies.
      Other companies, which may become competitors, have developed or are in the
      process of developing technologies that could now be, or in the future become,
      the basis for competition. Some of these technologies may have an entirely
      different approach or means of accomplishing similar therapeutic effects
      compared to our technology. Our competitors may develop drug delivery
      technologies and drugs that are safer, more effective, or less costly than
      our
      intended products and, therefore, present a serious competitive threat to us.
      The potential widespread acceptance of therapies that are alternatives to ours
      may limit market acceptance of our products even if commercialized. Many of
      our
      targeted diseases and conditions can also be treated by other medication or
      drug
      delivery technologies. These treatments may be widely accepted in medical
      communities and have a longer history of use. The established use of these
      competitive drugs may limit the potential for our technologies and products
      to
      receive widespread acceptance if commercialized.





WE
      MAY
      NOT BE SUCCESSFUL IN OBTAINING ORPHAN DRUG STATUS FOR CERTAIN OF OUR PRODUCTS
      OR, IF THAT STATUS IS OBTAINED, FULLY ENJOYING THE BENEFITS OF ORPHAN DRUG
      STATUS.





Under
      the
      Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended
      to
      treat a rare disease or condition generally affecting fewer than 200,000 people
      in the United States. We may not be successful in receiving orphan drug status
      for certain of our products. Orphan drug designation must be requested before
      submitting a NDA. After the FDA grants orphan drug designation, the generic
      identity of the therapeutic agent and its potential orphan use are publicized
      by
      the FDA. Under current law, orphan drug status is conferred upon the first
      company to receive FDA approval to market the designated drug for the designated
      indication. Orphan drug status also grants marketing exclusivity in the United
      States for a period of seven years following approval of the NDA, subject to
      limitations. Orphan drug designation does not provide any advantage in, or
      shorten the duration of, the FDA regulatory approval process. Although obtaining
      FDA approval to market a product with orphan drug status can be advantageous,
      the scope of protection or the level of marketing exclusivity that is currently
      afforded by orphan drug status and marketing approval may not remain in effect
      in the future.





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




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NDA
      approval for a drug with an orphan drug designation does not prevent the FDA
      from approving the same drug for a different indication, or a molecular
      variation of the same drug for the same indication. Because doctors are not
      restricted by the FDA from prescribing an approved drug for uses not approved
      by
      the FDA, it is also possible that another company's drug could be prescribed
      for
      indications for which products developed by us have received orphan drug
      designation and NDA approval. The prescribing of approved drugs for alternative
      uses, commonly referred to as "off label" sales, could adversely affect the
      marketing potential of products that have received an orphan drug designation
      and NDA approval. In addition, NDA approval of a drug with an orphan drug
      designation does not provide any marketing exclusivity in foreign
      markets.





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





IF
      USERS
      OF OUR PRODUCTS ARE UNABLE TO OBTAIN ADEQUATE REIMBURSEMENT FROM THIRD PARTY
      PAYORS, OR IF NEW RESTRICTIVE LEGISLATION IS ADOPTED, MARKET ACCEPTANCE OF
      OUR
      PRODUCTS MAY BE LIMITED AND WE MAY NOT ACHIEVE ANTICIPATED
      REVENUES.





The
      continuing efforts of government and insurance companies, health maintenance
      organizations, and other payors of healthcare costs to contain or reduce costs
      of health care may affect our future revenues and profitability, and the future
      revenues and profitability of our potential customers, suppliers and
      collaborative partners, and the availability of capital. For example, in certain
      foreign markets, pricing or profitability of prescription pharmaceuticals is
      subject to government control. In the United States, given recent federal and
      state government initiatives directed at lowering the total cost of health
      care,
      the U.S. Congress and state legislatures will likely continue to focus on health
      care reform, the cost of prescription pharmaceuticals, and on the reform of
      the
      Medicare and Medicaid systems. While we cannot predict whether any such
      legislative or regulatory proposals will be adopted, the announcement or
      adoption of such proposals could materially harm our business, financial
      condition, and results of operations.





Our
      ability to commercialize our products will depend in part on the extent to
      which
      appropriate reimbursement levels for the cost of our products and related
      treatment are obtained by governmental authorities, private health insurers
      and
      other organizations, such as HMOs. Third party payors are increasingly
      challenging the prices charged for medical drugs and services. Also, the trend
      toward managed health care in the United States and the concurrent growth of
      organizations such as HMOs, which could control or significantly influence
      the
      purchase of health care services and drugs, as well as legislative proposals
      to
      reform health care or reduce government insurance programs, may all result
      in
      lower prices for or rejection of our drugs. The cost containment measures that
      health care payors and providers are instituting and the effect of any health
      care reform could materially harm our ability to operate
      profitably.





OUR
      BUSINESS INVOLVES ENVIRONMENTAL RISKS RELATED TO HANDLING REGULATED SUBSTANCES
      THAT COULD SEVERELY AFFECT OUR ABILITY TO CONDUCT RESEARCH AND DEVELOPMENT
      OF
      OUR DRUG DELIVERY TECHNOLOGY.





In
      connection with our research and development activities and manufacture of
      materials and drugs, we are subject to federal, states and local laws, rules,
      regulations, and policies governing the use, generation, manufacture, storage,
      air emission, effluent discharge, handling, and disposal of certain materials,
      biological specimens, and wastes. Although we believe that we have complied
      with
      the applicable laws, regulations, and policies in all material respects and
      have
      not been required to correct any material noncompliance, we may be required
      to
      incur significant costs to comply with environmental and health and safety
      regulations in the future. Our research and development may in the future
      involve the controlled use of hazardous materials, including but not limited
      to
      certain hazardous chemicals and narcotics. Although we believe that our safety
      procedures for storing, handling, and disposing of such materials will comply
      with the standards prescribed by state and federal regulations, we cannot
      completely eliminate the risk of accidental contamination or injury from these
      materials. In the event of such an occurrence, we could be held liable for
      any
      damages that result and any such liability could exceed our
      resources.




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WE
      DEPEND
      UPON KEY PERSONNEL WHO MAY TERMINATE THEIR EMPLOYMENT WITH US AT ANY TIME,
      AND
      WE WILL NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL WHICH MAY BE UNAVAILABLE
      DUE
      TO THE NECESSITY OF UNIQUE SKILLS AND RESOURCES.





Our
      success will depend to a significant degree upon the continued services of
      key
      management, including William H. Pursley (age 52) and Norman W. Barton (age
      58).
      We maintain directors and officers insurance for our directors and executive
      officers. Our success will depend on the ability to attract and retain highly
      skilled personnel. Competition for qualified personnel is intense, and the
      process of hiring and integrating such qualified personnel is often lengthy.
      We
      may be unable to recruit such personnel on a timely basis, if at all. Management
      and other employees may voluntarily terminate their employment at any time.
      The
      loss of the services of key personnel, or the inability to attract and retain
      additional qualified personnel, could result in delays to development or
      approval, loss of sales and diversion of management resources. Additionally,
      failure to attract and retain highly qualified management personnel would damage
      our business prospects.





**Risks
      Related to Our Common Stock**





INSUFFICIENT
      AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK





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





We
      do not
      have sufficient authorized but unissued shares to reserve shares that we may
      be
      required to issue upon conversion of the convertible notes, the Series A
      Preferred Stock and the warrants and other securities issued or modified in
      connection with the offering of the 2006 6% Convertible Notes.





On
      May 9,
      2006, the Board of Directors authorized an amendment to our Amended and Restated
      Certificate of Incorporation to increase the number of authorized shares of
      the
      Company's capital stock from 120,000,000 shares to 270,000,000 shares, of which
      250,000,000 shares would be designated as Common Stock and 20,000,000 shares
      would be designated as Series A Preferred Stock. Unless the proposed amendment
      is approved by our stockholders, we will not be able to satisfy our obligations
      in the agreements relating to those securities. If stockholders do not approve
      the amendment, we will be in default of our obligations under those agreements,
      and the holders of those securities may accelerate payment of our obligations,
      obtain liquidated damages under certain of those agreements and pursue other
      legal remedies against us that could severely limit our ability to continue
      operations.





Our
      Board
      of Directors believes that it is advisable and in the best interests of our
      company to have available additional authorized but unissued shares of Common
      Stock in an amount adequate to provide for our present and future needs. The
      increase in authorized common stock will provide us with a sufficient number
      of
      shares to fulfill our obligations under existing contractual commitments under
      the financing agreements. The issuance of these shares will dilute the equity
      interests of existing stockholders and may have a negative effect on the market
      price of our common stock. Additional shares also will be available for issuance
      from time to time by us in the discretion of the Board of Directors without
      further stockholder 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 shares of common stock;
      entering into collaborative arrangements with other companies in which common
      stock or the right to acquire common stock are part of the consideration;
      facilitation of broader ownership of common stock by effecting a stock split
      or
      issuing a stock dividend; raising capital through the sale of common stock
      or
      securities convertible into, or exercisable or exchangeable for, shares of
      common stock; and attracting and retaining valuable employees by the issuance
      of
      additional stock options or restricted stock.





The
      issuance of the additional shares of common stock could have the effect of
      diluting earnings per share and book value per share, which could adversely
      affect our existing stockholders. Issuing additional shares of common stock
      may
      also have the effect of delaying or preventing a change of control of our
      company. Our authorized but unissued common stock could be issued in one or
      more
      transactions that would make more difficult or costly, a takeover of our
      Company.




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





The
      securities offered in such private placements were not registered under the
      Securities 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 inadvertently failed to comply with the requirements of any of such exemptive
      provisions, investors would have the right to rescind their purchase of our
      securities or sue for damages. If one or more investors were to successfully
      seek such rescission or prevail in any such suit, we could face severe financial
      demands that could materially and adversely affect our financial position.
      Financings that may be available to us under current market conditions
      frequently involve sales at prices below the prices at which our Common Stock
      currently is reported on the OTC Bulletin Board or exchange on which our Common
      Stock may in the future, be listed, as well as the issuance of warrants or
      convertible securities at a discount to market price.





INVESTORS
      IN OUR SECURITIES MAY SUFFER DILUTION.





The
      issuance of shares of our common stock, or shares of our common stock underlying
      warrants, options or preferred stock or convertible debentures or notes will
      dilute the equity interest of existing stockholders who do not have
      anti-dilution rights and could have a significant adverse effect on the market
      price of our common stock. The sale of our common stock acquired at a discount
      could have a negative impact on the market price of our common stock and could
      increase the volatility in the market price of our common stock. In addition,
      we
      may seek additional financing which may result in the issuance of additional
      shares of our common stock and/or rights to acquire additional shares of our
      common stock. The issuance of our common stock in connection with such financing
      may result in substantial dilution to the existing holders of our common stock
      who do not have anti-dilution rights. Those additional issuances of our common
      stock would result in a reduction of an existing holder's percentage interest
      in
      our company.





OUR
      COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR NEAR ASK
      PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR OTHERWISE
      DESIRE TO LIQUIDATE YOUR SHARES.





Our
      common stock historically been sporadically or "thinly-traded" on the OTC
      Bulletin Board, meaning that the number of persons interested in purchasing
      our
      common stock at or near ask prices at any given time may be relatively small
      or
      non-existent. As of August 25, 2006, our average trading volume per day for
      the
      past three months was approximately 55,697 shares a day with a high of 668,700
      shares traded and a low of no shares traded. This situation is attributable
      to a
      number of factors, including the fact that we are a small company which is
      relatively unknown to stock analysts, stock brokers, institutional investors
      and
      others in the investment community that generate or influence sales volume,
      and
      that even if we came to the attention of such persons, they may tend to be
      risk-averse and may be reluctant to follow an unproven company such as ours
      or
      purchase or recommend the purchase of our shares until such time as we became
      more seasoned and viable. As a consequence, there may be periods of several
      days
      or more when trading activity in our shares is minimal or non-existent, as
      compared to a seasoned issuer which has a large and steady volume of trading
      activity that will generally support continuous sales without an adverse effect
      on share price. There can be no assurance that a broader or more active public
      trading market for our common stock will develop or be sustained, or that
      current trading levels will be sustained.





HISTORICALLY,
      OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT PRICE FLUCTUATIONS.





There
      can
      be no assurance that the market price for our common stock will remain at its
      current level and a decrease in the market price could result in substantial
      losses for investors. The market price of our common stock may be significantly
      affected by one or more of the following factors:




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·
            announcements
                or press releases relating to the bio-pharmaceutical sector or to
                our own
                business or prospects;


·
            regulatory,
                legislative, or other developments affecting us or the healthcare
                industry
                generally;


·
            conversion
                of our preferred stock and convertible debt into common stock at
                conversion rates based on then current market prices or discounts
                to
                market prices of our Common Stock, and exercise of options and warrants
                at
                below current market prices;


·
            sales
                by those financing our company through convertible securities of
                the
                underlying common stock of which have been registered with the SEC
                and may
                be sold into the public market immediately upon conversion;
                and


·
            market
                conditions specific to bio-pharmaceutical companies, the healthcare
                industry and general market
                conditions.





IN
      ADDITION, IN RECENT YEARS THE STOCK MARKET HAS EXPERIENCED SIGNIFICANT PRICE
      AND
      VOLUME FLUCTUATIONS.





These
      fluctuations, which are often unrelated to the operating performance of specific
      companies, have had a substantial effect on the market price for many healthcare
      and life science related technology companies. Factors such as those cited
      above, as well as other factors that may be unrelated to our operating
      performance, may adversely affect the price of our common stock.





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





We
      do not
      anticipate paying any cash dividends on our common stock or Series A Preferred
      Stock in the foreseeable future despite the recent reduction of the federal
      income tax rate on dividends. Any payment of cash dividends on our common stock
      or Series A Preferred Stock in the future will be dependent upon our financial
      condition, results of operations, current and anticipated cash requirements,
      preferred rights of holders of preferred stock, restrictive covenants in debt
      or
      other instruments or agreements, plans for expansion, as well as other factors
      that our board of directors deems relevant. We anticipate that any future
      financing agreements may restrict or prohibit the payment of dividends without
      prior consent.





CERTAIN
      PROVISIONS OF DELAWARE CORPORATE LAWS AND OTHER PROVISIONS THAT MAY HAVE CERTAIN
      ANTI-TAKEOVER EFFECTS.





The
      anti-takeover provisions of the Delaware General Corporation Law ("DGCL") may
      have the effect of discouraging a future takeover attempt which individual
      common stockholders or Series A Preferred stockholders may deem to be in their
      best interests or in which stockholders may receive a substantial premium for
      their shares over then-current market prices. We are subject to such
      anti-takeover provisions which could prohibit or delay a merger or other
      takeover or change of control and may discourage attempts by other companies
      to
      acquire us. Stockholders who might desire to participate in such a transaction
      may not have an opportunity to do so.





Following
      the reincorporation merger, which became effective on January 31, 2005, our
      certificate of incorporation and by-laws were amended and provide additional
      provisions applicable to a Delaware corporation, including Section 203 of the
      DGCL "Business Combinations With Interested Stockholders" which, in general,
      restricts a corporation organized under the laws of Delaware from certain
      business combinations for a period of three years with an "interested"
      stockholder (generally, 15% ownership) without approval of the board of
      directors. In addition, our by-laws contain provisions providing for advance
      notice of certain stockholder actions, such as the nomination of directors
      and
      stockholder proposals.





OUR
      BOARD
      OF DIRECTORS HAS ADOPTED A STOCKHOLDER RIGHTS PLAN.





Our
      stockholder rights plan may prevent a change in control or sale of our company
      in a manner or on terms not previously approved by our board of
      directors.





A
      stockholder rights plan, in general, is a right granted as a dividend to
      existing stockholders as of a record date as a defensive mechanism to prevent
      unwanted takeovers and are triggered upon the announcement that a party has
      acquired a specified percentage or more of the outstanding voting stock of
      a
      company without approval by the company's board of directors.




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THERE
      MAY
      BE A LIMITED PUBLIC MARKET FOR OUR SECURITIES; WE MAY FAIL TO QUALIFY FOR
      LISTING.





Although
      we intend to apply for listing of our common stock on either the AMEX, NASDAQ
      or
      other registered stock exchange, there can be no assurance if and when initial
      listing criteria could be met or if such application would be granted, or that
      the trading of our common stock will be sustained. In the event that our common
      stock fails to qualify for initial or continued listing on a registered stock
      exchange or for initial or continued inclusion in the NASDAQ system, trading,
      if
      any, in our common stock, would then continue to be conducted on the NASD's
      "Electronic Bulletin Board" in the over-the-counter market and in what are
      commonly referred to as "pink sheets." As a result, an investor may find it
      more
      difficult to dispose of, or to obtain accurate quotations as to the market
      value
      of our common stock, and our common stock would become substantially less
      attractive for margin loans, for investment by financial institutions, as
      consideration in future capital raising transactions or other purposes. We
      do
      not presently satisfy the listing criteria for the NASDAQ or AMEX
      markets.





Trading
      of our common Stock may be subject to penny stock rules under the Exchange
      Act.
      Unless exempt, for any transaction involving a penny stock, the regulations
      require broker-dealers making a market in our common stock to provide risk
      disclosure to their customers including regarding the risks associated with
      our
      common stock, the suitability for the customer of an investment in our common
      stock, the duties of the broker-dealer to the customer, information regarding
      prices for our common stock and any compensation the broker-dealer would
      receive. The application of these rules may result in fewer market makers in
      our
      common stock. Our common stock is presently subject to the rules on penny
      stocks, and the liquidity of the common stock could be materially adversely
      affected so long as we remain subject to such rule.





COMPLIANCE
      WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY
      RESULT IN ADDITIONAL EXPENSES.





Keeping
      abreast of, and in compliance with, changing laws, regulations and standards
      relating to corporate governance and public disclosure, including the
      Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we are
      approved for listing on either NASDAQ or a registered exchange, NASDAQ and
      stock
      exchange rules, will require an increased amount of management attention and
      external resources. We intend to continue to invest all reasonably necessary
      resources to comply with evolving standards, which may result in increased
      general and administrative expenses and a diversion of management time and
      attention from revenue-generating activities to compliance
      activities.




Item
      3.  Controlsand
      Procedures




**EVALUATION
      OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS**





As
      of the
      end of the period covered by this Report, we carried out an evaluation of the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Securities Exchange Act of 1934 Rule 13-d-15 (e)
      and
      15d-15(e)). Based upon that evaluation and management's assessment of the
      potential effects of the material weakness described below, our Chief Executive
      Officer and Chief Financial Officer, concluded that as of the end of the period
      covered by this Report, our disclosure controls and procedures were effective
      to
      enable us to record, process, summarize and report information required to
      be
      included in our periodic SEC filings within the required time
      period.





**DISCLOSURE
      CONTROLS AND INTERNAL CONTROLS**





Disclosure
      controls are procedures that are designed with the objective of ensuring that
      information required to be disclosed in our reports filed under the Securities
      Exchange Act of 1934, as amended, such as this Report, is recorded, processed,
      summarized, and reported within the time periods specified in the SEC's rules
      and forms. Disclosure controls are also designed with the objective of ensuring
      that such information is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required disclosure. Internal
      controls are procedures which are designed with the objective of providing
      reasonable assurance that our transactions are properly authorized, recorded,
      and reported and our assets are safeguarded against unauthorized or improper
      use, and to permit the preparation of our financial statements in conformity
      with generally accepted accounting principles.





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Our
      company is not an "accelerated filer" (as defined in the Exchange Act) and
      is
      not required to deliver management's report on control over our financial
      reporting until our fiscal year ended December 31, 2006. Nevertheless, we
      consider the effectiveness of our internal controls over financial reporting
      as
      part of the quarterly evaluations of our procedures. In connection therewith,
      we
      reported, for the year ended December 31, 2005, that we identified certain
      matters that we believed constituted material weaknesses (as such term is
      defined under the Public Company Accounting Oversight Board Auditing Standard
      No. 2) in our internal controls over financial reporting. The first such
      material weakness related to our ability to ensure that the accounting for
      our
      equity-based transactions is accurate and complete and the second related to
      our
      limited segregation of duties.





With
      respect to the first material weakness, during the year ended December 31,
      2005,
      we adopted a policy of having our Chief Financial Officer review all of our
      agreements to ensure that we identify the applicable accounting treatments
      to
      evaluate any areas that may involve the application of highly specialized
      accounting principles including, but not necessarily limited to, complex equity
      transactions. In circumstances where we may become (or contemplate becoming)
      a
      party to transactions that would involve the application of accounting
      principles in which our expertise is limited, we would engage the services
      of
      outside specialists, if necessary. At the current time however, we believe
      that
      we have gained substantially greater experience in these areas and that our
      procedures would enable us to resolve such issues within time frames needed
      to
      comply with our reporting obligations.





With
      respect to the second material weakness, which relates to our segregation of
      duties, we have re-evaluated our procedures and believe that due to our small
      number of employees (most of whom have limited or no access to Company assets
      and/or records that would affect our financial reporting) that our risks of
      either material misstatement or misappropriation of assets is minimal. In
      addition, substantially all of our general and administrative expenses and
      scientific research expenditures are reviewed and approved by employees who
      are
      knowledgeable of those matters. To date our procedures have also enabled us
      to
      comply with our financial reporting obligations within the time frames required
      by the SEC. Although we believe our risks with respect to this matter are
      minimal, we still acknowledge that it would be beneficial for the Company to
      segregate certain procedures to a greater number of employees. We believe that
      our limited segregation of duties still constitutes a material deficiency in
      our
      system. However, we currently have limited financial resources and do not
      believe that at this time, it would be prudent for us to further constrain
      our
      liquidity by allocating resources to hiring additional employees as a corrective
      measure. We believe that the costs we would incur to increase our staff (solely
      for this purpose) exceed the potential reduction in risk. Our senior management
      team is monitoring this situation to determine if these circumstances change.
      If
      the situation changes and sufficient capital is secured, it is our intention
      to
      increase staffing within our general accounting and financial
      functions.





Other
      than our adoption of a policy of having our Chief Financial Officer evaluate
      all
      proposed agreements for the purpose of identifying any applicable accounting
      matters, particularly those that may involve accounting for equity transactions,
      there have been no changes in our internal controls over financial reporting
      during our most recent fiscal year that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.




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**PART
      II**


**OTHER
      INFORMATION**





**Item
      2.  UnregisteredSales of Equity Securities and Use
      of Proceeds**





During
      the period covered by this Report, we have not issued unregistered securities
      which have not been "previously reported" as defined in Rule 12b-2 of the
      Exchange Act, except;





On
      May 3,
      2006, we issued additional options to purchase 388,115 shares of our common
      stock at $0.15 per share to and we issued an additional 388,115 shares of our
      common stock to each of two consultants pursuant to the anti-dilution provisions
      contained in their option agreements.





On
      June
      1, 2006, we issued 2006 6% Convertible Notes in the aggregate principal amount
      of $1,500,000 under a private placement. Pursuant to this transaction, certain
      note holders who did not previously participate in our Preferred Stock offering
      received warrants to purchase in the aggregate 6,500,000 shares of our common
      stock at $0.30 per share. Certain note holders who did participate in our
      Preferred Stock offering received adjustments to the conversion price of their
      Preferred Stock of equivalent value to what they invested in the 2006 6%
      Convertible Note offering, to $0.15 per share which will require us to issue
      in
      the aggregate an additional 3,290,000 shares of common stock upon conversion
      of
      their Preferred Stock and an adjustment to the warrants to purchase 105,000
      shares of common stock originally issued with the Preferred Stock ,to $.0.30
      per
      share.





On
      June
      1, 2006, the Company issued a warrant to purchase 50,000 shares of common stock
      at $0.15 per share as a broker's fee under the 2006 6% Convertible Note
      offering. In addition, the Company issued a warrant to purchase a 2006 6%
      Convertible Note in the principal amount of $142,500 and a warrant to purchase
      650,000 shares of common stock at $0.15 per share as yield enhancement fees
      under the 2006 6% Convertible Note offering.





On
      June
      15, 2006, we issued a 2006 6% Convertible Note in the principal amount of
      $125,000 under a private placement. Pursuant to this transaction, the note
      holder who did 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, the Company issued a warrant to purchase a 2006 6% Convertible Note
      in
      the principal amount of $12,500 and a warrant to purchase 83,333 shares of
      common stock at $0.15 per share as yield enhancement fees under the 2006 6%
      Convertible Note offering.





On
      June
      26, 2006, we issued ten-year options to purchase in the aggregate 16,000 shares
      of our common stock at $0.21 per share to our three outside directors as
      compensation for preparing for and participating in our board of directors'
      meeting.





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





**Item
      3. DefaultsUpon Senior Securities**




As
      of the
      date hereof, we are in default in our payment obligations, as of June 30, 2006,
      under (i) the December 2004 Convertible Note which was due on July 3, 2006
      in
      the principal amount plus accrued interest of $523,583, (ii) the Debentures
      and
      the 2006 6% Convertible Notes (which each contain certain cross default
      provisions), as a result of the December 2004 Convertible Note default, in
      the
      principal amounts plus accrued interest of $1,780,134 and $1,632,459,
      respectively; and (iii) the Harbor Trust Note of principal and accrued interest
      of $258,342 . In addition , we are in default under the Debentures for failure
      to file a post-effective registration statement by July 10, 2006 as required
      by
      the Debentures. We are also in default under the 2006 6% Convertible Notes
      for
      failure to file a registration statement within the 20-day grace period after
      the August 21, 2006 filing deadline.




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**FORWARD-LOOKING
        STATEMENTS**
 
 This
        Quarterly Report on Form 10-QSB/A contains forward-looking statements (as
        defined in Section 27A of the Securities Act and Section 21E of the Securities
        Exchange Act of 1934 (the "Exchange Act"). To the extent that any statements
        made in this Report contain information that is not historical, these statements
        are essentially forward-looking. Forward-looking statements can be identified
        by
        the use of words such as "expects," "plans" "will," "may," "anticipates,"
        "believes," "should," "intends," "estimates," and other words of similar
        meaning. These statements are subject to risks and uncertainties that cannot
        be
        predicted or quantified and consequently, actual results may differ materially
        from those expressed or implied by such forward-looking statements. Such
        risks
        and uncertainties include, without limitation, our ability to raise capital
        to
        finance the development of our products, the effectiveness, profitability
        and
        the marketability of those products, our ability to protect our proprietary
        information, general economic and business conditions, the impact of
        technological developments and competition, including entry of newly-developed
        alternative drug technologies, our expectations and estimates concerning
        future financial
        performance and financing plans, adverse results of any legal proceedings,
        the
        impact of current, pending or future legislation and regulation on the
        healthcare industry, our ability to satisfy government and commercial customers
        using our technology, our ability to develop manufacturing capabilities or
        the
        inability to enter into acceptable relationships with one or more contract
        manufacturers for our products and key components and the ability of such
        contract manufacturers to manufacture products or components of an acceptable
        quality on a cost-effective basis, the volatility of our operating results
        and
        financial condition, our ability to attract or retain qualified senior
        management personnel, including sales and marketing and scientific personnel
        and
        other risks detailed from time to time in our filings with the SEC. We do
        not
        undertake any obligation to publicly update any forward-looking statements.
        As a
        result, you should not place undue reliance on these forward-looking
        statements.





We
      also
      use market data and industry forecasts and projections throughout this
      prospectus, which we have obtained from market research, publicly available
      information and industry publications. These sources generally state that the
      information they provide has been obtained from sources believed to be reliable,
      but that the accuracy and completeness of the information are not guaranteed.
      The forecasts and projections are based on industry surveys and the preparers'
      experience in the industry, and the projected amounts may not be achieved.
      Similarly, although we believe that the surveys and market research others
      have
      performed are reliable, we have not independently verified this information.
      Forecasts and other forward-looking information obtained from these sources
      are
      subject to the same qualifications and the additional uncertainties accompanying
      any estimates of future market size, revenue and market acceptance of products
      and services.




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**Item
      6.  Exhibits**





**Exhibit****Number**
            
            
            **Description**2.1
            
            
            Certificate
                of Ownership and Merger of CepTor Corporation into CepTor Research
                and
                Development Company (incorporated by reference herein to Exhibit
                2.1 to
                the Company's Current Report on Form 8-K dated January 31, 2005 (the
                "January 2005 8-K"))3.1
            
            
            Amended
                and Restated Certificate of Incorporation, dated January 27, 2005
                (incorporated herein by reference to Exhibit 3.1 to the January 2005
                8-K)3.2
            
            
            Certificate
                of Correction to Amended and Restated Certificate of Incorporation
                (incorporated herein by reference to Exhibit 3.1 to the Company's
                Current
                Report on Form 8-K, dated February 10, 2005)3.3
            
            
            Amended
                and Restated By-laws (incorporated herein by reference to Exhibit
                3.2 to
                the January 2005 8-K)4.1
            
            
            Form
                of Common Stock Certificate (incorporated herein by reference to
                Exhibit
                4.1 to the Company's Annual Report on Form 10-KSB for the fiscal
                year
                ended December 31, 2004 (the "2004 10-KSB"))4.2
            
            
            CepTor
                Agreement, dated March 31, 2004 (the "CepTor Agreement"), by and
                among
                William Pursley, Xechem and the Company (incorporated herein by reference
                to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
                December
                9, 2004 (the "2004 Form 8-K"))4.3
            
            
            First
                Amendment to CepTor Agreement effective April 23, 2004, by and among
                William Pursley, the Company and Xechem (incorporated herein by reference
                to Exhibit 4.2 to the 2004 8-K)4.4
            
            
            Second
                Amendment to CepTor Agreement, dated December 9, 2004, by and among
                William Pursley, the Company and Xechem (incorporated by reference
                to
                Exhibit 4.3 to the 2004 8-K)4.5
            
            
            Form
                of Unit Warrant (incorporated by reference to Exhibit 4.4 to the
                Company's
                Registration Statement on Form SB-2 as filed with the SEC on February
                11,
                2005 (the "Form SB-2"))4.6
            
            
            Form
                of Amended and Restated Convertible Promissory Note (incorporated
                herein
                by reference to Exhibit 4.7 to the 2004 10-KSB)4.7
            
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                4.6
                to the Form SB-2)4.8
            
            
            Securities
                Purchase Agreement, dated June 17, 2005 by and between the Company,
                Xechem
                and William Pursley (incorporated herein by reference to Exhibit
                99.01 to
                the Company's Current Report on Form 8-K filed on June 20,
                2005)4.9
            
            
            Common
                Stock Purchase Agreement, dated October 7, 2005, between the Company
                and
                Fusion Capital Fund II, LLC ("Fusion") (incorporated herein by reference
                to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed
                October
                11, 2005 (the "October 2005 8-K"))4.10
            
            
            Registration
                Rights Agreement, dated October 7, 2005, between the Company and
                Fusion
                (incorporated herein by reference to Exhibit 4.2 to the October 2005
                8-K)4.11
            
            
            Common
                Stock Warrant with Fusion, dated October 7, 2005 (incorporated by
                reference herein to Exhibit 4.1 to the October 2005
                8-K)4.12
            
            
            Agreement
                between the Company and Brown Advisory Securities, LLC, dated May 20,
                2005 (incorporated herein by reference to Exhibit 4.1 to the
                Company's Registration Statement on Form SB-2 as filed with the SEC
                on
                October 17, 2005 (the "October 2005 SB-2"))4.13
            
            
            Secured
                Convertible Debenture, dated December 9, 2005, issued by the Company
                to Cornell Capital (incorporated herein by reference to Exhibit 4.1
                to our Current Report on Form 8-K, filed December 15, 2005 ("December
                2005 8-K"))










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**Exhibit****Number**
            
            
            **Description**4.14
            
            
            Warrant
                issued to Cornell Capital, dated December 9, 2005 (incorporated
                herein by reference to Exhibit 4.2 to the December 2005
                8-K)4.15
            
            
            Form
                of Redemption Warrant to Cornell Capital (incorporated herein by
                reference
                to Exhibit 4.3 to the December 2005 8-K)4.16
            
            
            $250,000
                Convertible Promissory Note, dated December 9, 2005, to Harbor Trust
                (incorporated herein by reference to Exhibit 4.4 to the December 2005
                8-K)4.17
            
            
            $452,991.10
                Amended Promissory Note, dated December 9, 2005, to Harbor Trust
                (incorporated herein by reference to Exhibit 4.5 to the December 2005
                8-K)4.18
            
            
            Secured
                Convertible Debenture, dated December 28, 2005, issued by the Company
                to
                Cornell Capital (incorporated herein by reference to Exhibit 4.10
                to the
                Company's Registration Statement on Form SB-2, dated December 29,
                2005
                ("December 2005 SB-2"))4.19
            
            
            Non-Qualified
                Option Certificate and Addendum thereto, dated March 3, 2006, to
                Little
                Gem Life Sciences Fund, LLC (incorporated herein by reference to
                Exhibit
                4.18 to the Company's Annual Report on Form 10-KSB for the year ended
                December 31, 2005 ("2005 10-KSB"))4.20
            
            
            Non-Qualified
                Option Certificate and Addendum thereto, dated March 3, 2006, to
                Peter
                Chung (incorporated herein by reference to Exhibit 4.19 to the 2005
                10-KSB)4.21
            
            
            Placement
                Agency Agreement (incorporated herein by reference to Exhibit 1.1
                to the
                Company's Current Report on Form 8-K filed with the SEC on June 2,
                2006)4.22
            
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                4.1
                to the Company's Current Report on Form 8-K filed with the SEC on
                June 2,
                2006)4.23
            
            
            Form
                of 6% Convertible Note (incorporated herein by reference to Exhibit
                4.2 to
                the Company's Current Report on Form 8-K filed with the SEC on June
                2,
                2006)4.24
            
            
            Form
                of Common Stock Purchase Warrant (incorporated herein by reference
                to
                Exhibit 4.3 to the Company's Current Report on Form 8-K filed with
                the SEC
                on June 2, 2006)4.25
            
            
            Assignment
                Agreement, dated June 29, 2006 (incorporated herein by reference
                to
                Exhibit 4.3 to the Company's Current Report on Form 8-K filed with
                the SEC
                on July 6, 2006)4.26
            
            
            Secured
                Convertible Debenture with Longview Fund, LP, dated June 29, 2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.27
            
            
            Secured
                Convertible Debenture with Longview Fund, LP, dated June 29, 2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.28
            
            
            Secured
                Convertible Debenture with Alpha Capital, Aktiengesellschaft, dated
                June
                29, 2006 (incorporated herein by reference to Exhibit 4.3 to the
                Company's
                Current Report on Form 8-K filed with the SEC on July 6,
                2006)4.29
            
            
            Secured
                Convertible Debenture with Ellis International Ltd., dated June 29,
                2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.30
            
            
            Secured
                Convertible Debenture with Momona Capital, dated June 29, 2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.31
            
            
            Warrant,
                dated June 29, 2006 (incorporated herein by reference to Exhibit
                4.3 to
                the Company's Current Report on Form 8-K filed with the SEC on July
                6,
                2006)4.32
            
            
            Securities
                Purchase Agreement, dated August 14, 2006 (incorporated herein by
                reference to Exhibit 4.32 to the Company’s Form 10-QSB file with the SEC
                on September 5, 2006), by and between the Company and certain sellers
                and
                purchasers of Series A Preferred Stock










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**Exhibit****Number**
            
            
            **Description**10.1
            
            
            Employment
                Agreement, dated March 31, 2004, by and between William H. Pursley
                and the
                Company (incorporated herein by reference to Exhibit 10.1 to the
                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 to Exhibit
                10.2 to
                the Form SB-2)10.3
            
            
            Employment
                Agreement, dated March 31, 2004, by and between Donald W. Fallon
                and the
                Company (incorporated herein by reference to Exhibit 10.3 to the
                Form
                SB-2)10.4
            
            
            Founders'
                Plan (incorporated herein by reference to Exhibit 10.5 to the Form
                SB-2)10.5
            
            
            2004
                Incentive Stock Plan (incorporated herein by reference to Exhibit
                10.6 to
                the Form SB-2)10.6
            
            
            Deferred
                Stock Plan for Non-Employee Directors under the 2004 Incentive Stock
                Plan
                (incorporated herein by reference to Exhibit 10.7 to the 2004
                10-KSB)10.7
            
            
            2006
                Incentive Stock Plan (incorporated herein by reference to Exhibit
                10.7 to
                the 2005 10-KSB)10.8
            
            
            Sublease
                Agreement, dated March 4, 2004, by and between the Company and Millennium
                Inorganic Chemicals, Inc. (incorporated herein by reference to Exhibit
                10.7 to the Form SB-2)10.9
            
            
            Exclusive
                License Agreement, dated September 15, 2004, between the Company
                and JCR
                Pharmaceuticals Company, Ltd. (incorporated herein by reference to
                Exhibit
                10.8 to the Form SB-2)10.10
            
            
            Indemnification
                Agreement, dated October 6, 2005, by and between William H. Pursley
                and
                the Company (incorporated herein by reference to Exhibit 10.9 to
                the
                October 2005 SB-2)10.11
            
            
            Indemnification
                Agreement, dated October 6, 2005, by and between Norman W. Barton
                and the
                Company (incorporated herein by reference to Exhibit 10.10 to the
                October
                2005 SB-2)10.12
            
            
            Indemnification
                Agreement, dated October 6, 2005, by and between Donald W. Fallon
                and the
                Company (incorporated herein by reference to Exhibit 10.11 to the
                October
                2005 SB-2)10.13
            
            
            Indemnification
                Agreement, dated June 1, 2004, by and between Leonard A. Mudry and
                the
                Company (incorporated herein by reference to Exhibit 10.12 to the
                October
                2005 SB-2)10.14
            
            
            Securities
                Purchase Agreement, dated December 9, 2005, between the Company and
                Cornell Capital (incorporated herein by reference to Exhibit 10.1 to
                the December 2005 8-K)10.15
            
            
            Side
                Letter, dated December 9, 2005, between the Company and Cornell
                Capital (incorporated herein by reference to Exhibit 10.2 to the
                December 2005 8-K)10.16
            
            
            Investor
                Registration Rights Agreement, dated December 9, 2005, between the
                Company and Cornell Capital (incorporated herein by reference to
                Exhibit 10.3 to the December 2005 8-K)10.17
            
            
            Security
                Agreement, dated December 9, 2005, between the Company and Cornell
                Capital (incorporated herein by reference to Exhibit 10.4 to the
                December 2005 8-K)10.18
            
            
            Rights
                Agreement, dated March 7, 2006, between the Company and American
                Stock
                Transfer & Trust Company (incorporated herein by reference to Exhibit
                1 to the Company's Registration Statement on Form 8-A, dated March
                8,
                2006)10.19
            
            
            Manufacture
                and Supply Agreement entered into as of April 18, 2005 by and among
                Peninsula Laboratories Inc., Bachem AG, Bachem Americas and the Company
                (incorporated by reference herein to Exhibit 10.14 to the Company's
                Quarterly Report on Form 10-QSB for the quarter ended March 31,
                2005)










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**Exhibit****Number**
            
            
            **Description**10.20
            
            
            Term
                Sheet, dated May 3, 2006, by and between the Company and Margie Chassman
                (incorporated herein by reference to Exhibit 10.1 to the Company's
                Current
                Report on Form 8-K, filed May 9, 2006)31.1*
            
            
            Section
                302 Certification of Principal Executive Officer and Principal Financial
                Officer32.1*
            
            
            Section
                906 Certification of Principal Executive Officer and Principal Financial
                Officer*
            Filed
                herewith.







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**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**CEPTOR
              CORPORATION**Date: May
              17,
              2007
            By:
            /s/ Howard
              BeckerHoward
                BeckerChief
                Executive Officer and Director
              (Principal
                  Executive Officer  and
                Principal
                  Financial Officer)







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**EXHIBIT
      INDEX**





**Exhibit****Number**
            
            
            **Description**2.1
            
            
            Certificate
                of Ownership and Merger of CepTor Corporation into CepTor Research
                and
                Development Company (incorporated by reference herein to Exhibit
                2.1 to
                the Company's Current Report on Form 8-K dated January 31, 2005 (the
                "January 2005 8-K"))3.1
            
            
            Amended
                and Restated Certificate of Incorporation, dated January 27, 2005
                (incorporated herein by reference to Exhibit 3.1 to the January 2005
                8-K)3.2
            
            
            Certificate
                of Correction to Amended and Restated Certificate of Incorporation
                (incorporated herein by reference to Exhibit 3.1 to the Company's
                Current
                Report on Form 8-K, dated February 10, 2005)3.3
            
            
            Amended
                and Restated By-laws (incorporated herein by reference to Exhibit
                3.2 to
                the January 2005 8-K)4.1
            
            
            Form
                of Common Stock Certificate (incorporated herein by reference to
                Exhibit
                4.1 to the Company's Annual Report on Form 10-KSB for the fiscal
                year
                ended December 31, 2004 (the "2004 10-KSB"))4.2
            
            
            CepTor
                Agreement, dated March 31, 2004 (the "CepTor Agreement"), by and
                among
                William Pursley, Xechem and the Company (incorporated herein by reference
                to Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
                December
                9, 2004 (the "2004 Form 8-K"))4.3
            
            
            First
                Amendment to CepTor Agreement effective April 23, 2004, by and among
                William Pursley, the Company and Xechem (incorporated herein by reference
                to Exhibit 4.2 to the 2004 8-K)4.4
            
            
            Second
                Amendment to CepTor Agreement, dated December 9, 2004, by and among
                William Pursley, the Company and Xechem (incorporated by reference
                to
                Exhibit 4.3 to the 2004 8-K)4.5
            
            
            Form
                of Unit Warrant (incorporated by reference to Exhibit 4.4 to the
                Company's
                Registration Statement on Form SB-2 as filed with the SEC on February
                11,
                2005 (the "Form SB-2"))4.6
            
            
            Form
                of Amended and Restated Convertible Promissory Note (incorporated
                herein
                by reference to Exhibit 4.7 to the 2004 10-KSB)4.7
            
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                4.6
                to the Form SB-2)4.8
            
            
            Securities
                Purchase Agreement, dated June 17, 2005 by and between the Company,
                Xechem
                and William Pursley (incorporated herein by reference to Exhibit
                99.01 to
                the Company's Current Report on Form 8-K filed on June 20,
                2005)4.9
            
            
            Common
                Stock Purchase Agreement, dated October 7, 2005, between the Company
                and
                Fusion Capital Fund II, LLC ("Fusion") (incorporated herein by reference
                to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed
                October
                11, 2005 (the "October 2005 8-K"))4.10
            
            
            Registration
                Rights Agreement, dated October 7, 2005, between the Company and
                Fusion
                (incorporated herein by reference to Exhibit 4.2 to the October 2005
                8-K)4.11
            
            
            Common
                Stock Warrant with Fusion, dated October 7, 2005 (incorporated by
                reference herein to Exhibit 4.1 to the October 2005
                8-K)4.12
            
            
            Agreement
                between the Company and Brown Advisory Securities, LLC, dated May 20,
                2005 (incorporated herein by reference to Exhibit 4.1 to the
                Company's Registration Statement on Form SB-2 as filed with the SEC
                on
                October 17, 2005 (the "October 2005 SB-2"))4.13
            
            
            Secured
                Convertible Debenture, dated December 9, 2005, issued by the Company
                to Cornell Capital (incorporated herein by reference to Exhibit 4.1
                to our Current Report on Form 8-K, filed December 15, 2005 ("December
                2005 8-K"))










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**Exhibit****Number**
            
            
            **Description**4.14
            
            
            Warrant
                issued to Cornell Capital, dated December 9, 2005 (incorporated
                herein by reference to Exhibit 4.2 to the December 2005
                8-K)4.15
            
            
            Form
                of Redemption Warrant to Cornell Capital (incorporated herein by
                reference
                to Exhibit 4.3 to the December 2005 8-K)4.16
            
            
            $250,000
                Convertible Promissory Note, dated December 9, 2005, to Harbor Trust
                (incorporated herein by reference to Exhibit 4.4 to the December 2005
                8-K)4.17
            
            
            $452,991.10
                Amended Promissory Note, dated December 9, 2005, to Harbor Trust
                (incorporated herein by reference to Exhibit 4.5 to the December 2005
                8-K)4.18
            
            
            Secured
                Convertible Debenture, dated December 28, 2005, issued by the Company
                to
                Cornell Capital (incorporated herein by reference to Exhibit 4.10
                to the
                Company's Registration Statement on Form SB-2, dated December 29,
                2005
                ("December 2005 SB-2"))4.19
            
            
            Non-Qualified
                Option Certificate and Addendum thereto, dated March 3, 2006, to
                Little
                Gem Life Sciences Fund, LLC (incorporated herein by reference to
                Exhibit
                4.18 to the Company's Annual Report on Form 10-KSB for the year ended
                December 31, 2005 ("2005 10-KSB"))4.20
            
            
            Non-Qualified
                Option Certificate and Addendum thereto, dated March 3, 2006, to
                Peter
                Chung (incorporated herein by reference to Exhibit 4.19 to the 2005
                10-KSB)4.21
            
            
            Placement
                Agency Agreement (incorporated herein by reference to Exhibit 1.1
                to the
                Company's Current Report on Form 8-K filed with the SEC on June 2,
                2006)4.22
            
            
            Form
                of Subscription Agreement (incorporated herein by reference to Exhibit
                4.1
                to the Company's Current Report on Form 8-K filed with the SEC on
                June 2,
                2006)4.23
            
            
            Form
                of 6% Convertible Note (incorporated herein by reference to Exhibit
                4.2 to
                the Company's Current Report on Form 8-K filed with the SEC on June
                2,
                2006)4.24
            
            
            Form
                of Common Stock Purchase Warrant (incorporated herein by reference
                to
                Exhibit 4.3 to the Company's Current Report on Form 8-K filed with
                the SEC
                on June 2, 2006)4.25
            
            
            Assignment
                Agreement, dated June 29, 2006 (incorporated herein by reference
                to
                Exhibit 4.3 to the Company's Current Report on Form 8-K filed with
                the SEC
                on July 6, 2006)4.26
            
            
            Secured
                Convertible Debenture with Longview Fund, LP, dated June 29, 2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.27
            
            
            Secured
                Convertible Debenture with Longview Fund, LP, dated June 29, 2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.28
            
            
            Secured
                Convertible Debenture with Alpha Capital, Aktiengesellschaft, dated
                June
                29, 2006 (incorporated herein by reference to Exhibit 4.3 to the
                Company's
                Current Report on Form 8-K filed with the SEC on July 6,
                2006)4.29
            
            
            Secured
                Convertible Debenture with Ellis International Ltd., dated June 29,
                2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.30
            
            
            Secured
                Convertible Debenture with Momona Capital, dated June 29, 2006
                (incorporated herein by reference to Exhibit 4.3 to the Company's
                Current
                Report on Form 8-K filed with the SEC on July 6, 2006)4.31
            
            
            Warrant,
                dated June 29, 2006 (incorporated herein by reference to Exhibit
                4.3 to
                the Company's Current Report on Form 8-K filed with the SEC on July
                6,
                2006)4.32
            
            
            Securities
                Purchase Agreement, dated August 14, 2006 (incorporated herein by
                reference to Exhibit 4.32 to the Company’s Form 10-QSB file with the SEC
                on September 5, 2006), by and between the Company and certain sellers
                and
                purchasers of Series A Preferred Stock







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**Exhibit****Number**
            
            
            **Description**10.1
            
            
            Employment
                Agreement, dated March 31, 2004, by and between William H. Pursley
                and the
                Company (incorporated herein by reference to Exhibit 10.1 to the
                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 to Exhibit
                10.2 to
                the Form SB-2)10.3
            
            
            Employment
                Agreement, dated March 31, 2004, by and between Donald W. Fallon
                and the
                Company (incorporated herein by reference to Exhibit 10.3 to the
                Form
                SB-2)10.4
            
            
            Founders'
                Plan (incorporated herein by reference to Exhibit 10.5 to the Form
                SB-2)10.5
            
            
            2004
                Incentive Stock Plan (incorporated herein by reference to Exhibit
                10.6 to
                the Form SB-2)10.6
            
            
            Deferred
                Stock Plan for Non-Employee Directors under the 2004 Incentive Stock
                Plan
                (incorporated herein by reference to Exhibit 10.7 to the 2004
                10-KSB)10.7
            
            
            2006
                Incentive Stock Plan (incorporated herein by reference to Exhibit
                10.7 to
                the 2005 10-KSB)10.8
            
            
            Sublease
                Agreement, dated March 4, 2004, by and between the Company and Millennium
                Inorganic Chemicals, Inc. (incorporated herein by reference to Exhibit
                10.7 to the Form SB-2)10.9
            
            
            Exclusive
                License Agreement, dated September 15, 2004, between the Company
                and JCR
                Pharmaceuticals Company, Ltd. (incorporated herein by reference to
                Exhibit
                10.8 to the Form SB-2)10.10
            
            
            Indemnification
                Agreement, dated October 6, 2005, by and between William H. Pursley
                and
                the Company (incorporated herein by reference to Exhibit 10.9 to
                the
                October 2005 SB-2)10.11
            
            
            Indemnification
                Agreement, dated October 6, 2005, by and between Norman W. Barton
                and the
                Company (incorporated herein by reference to Exhibit 10.10 to the
                October
                2005 SB-2)10.12
            
            
            Indemnification
                Agreement, dated October 6, 2005, by and between Donald W. Fallon
                and the
                Company (incorporated herein by reference to Exhibit 10.11 to the
                October
                2005 SB-2)10.13
            
            
            Indemnification
                Agreement, dated June 1, 2004, by and between Leonard A. Mudry and
                the
                Company (incorporated herein by reference to Exhibit 10.12 to the
                October
                2005 SB-2)10.14
            
            
            Securities
                Purchase Agreement, dated December 9, 2005, between the Company and
                Cornell Capital (incorporated herein by reference to Exhibit 10.1 to
                the December 2005 8-K)10.15
            
            
            Side
                Letter, dated December 9, 2005, between the Company and Cornell
                Capital (incorporated herein by reference to Exhibit 10.2 to the
                December 2005 8-K)10.16
            
            
            Investor
                Registration Rights Agreement, dated December 9, 2005, between the
                Company and Cornell Capital (incorporated herein by reference to
                Exhibit 10.3 to the December 2005 8-K)10.17
            
            
            Security
                Agreement, dated December 9, 2005, between the Company and Cornell
                Capital (incorporated herein by reference to Exhibit 10.4 to the
                December 2005 8-K)10.18
            
            
            Rights
                Agreement, dated March 7, 2006, between the Company and American
                Stock
                Transfer & Trust Company (incorporated herein by reference to Exhibit
                1 to the Company's Registration Statement on Form 8-A, dated March
                8,
                2006)10.19
            
            
            Manufacture
                and Supply Agreement entered into as of April 18, 2005 by and among
                Peninsula Laboratories Inc., Bachem AG, Bachem Americas and the Company
                (incorporated by reference herein to Exhibit 10.14 to the Company's
                Quarterly Report on Form 10-QSB for the quarter ended March 31,
                2005)













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**Exhibit****Number**
            
            
            **Description**10.20
            
            
            Term
                Sheet, dated May 3, 2006, by and between the Company and Margie Chassman
                (incorporated herein by reference to Exhibit 10.1 to the Company's
                Current
                Report on Form 8-K, filed May 9, 2006)31.1*
            
            
            Section
                302 Certification of Principal Executive Officer and
                Principal Financial Officer32.1*
            
            
            Section
                906 Certification of Principal Executive Officer and
                Principal Financial Officer*
            Filed
                herewith.








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