`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

|X|  QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE OF
     1934

                  For the quarterly period ended June 30, 2005

|_|  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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 Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)

    200 International Circle, Suite 5100
           Hunt Valley, Maryland                                    21030
--------------------------------------------  ----------------------------------
(Address of Principal Executive Offices)                          (Zip Code)

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

     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 |_|

     As of August 11, 2005,  there were 9,452,944  shares of the issuer's common
equity outstanding.

     Transitional  Small Business  Disclosure Format (Check one): Yes |_| No |X|





                                Table of Contents
                                -----------------

                                                                         Page
                                                                      ----------
PART I     FINANCIAL INFORMATION

  Item 1.  Financial Statements (Unaudited).................................1


           Condensed Balance Sheets - June 30, 2005 and December 31, 2004

           Condensed Statements of Operations for the three months ended
           June 30, 2005 and 2004, for the six months ended June 30, 2005
           and 2004 and for the period from August 11, 1986 (date of
           inception) to June 30, 2005

           Condensed Statement of Changes in Stockholders' (Deficiency)
           Equity for the six months ended June 30, 2005

           Condensed Statements of Cash Flows for the six months ended
           June 30, 2005 and 2004 and for the period from August 11, 1986
           (date of inception) to June 30, 2005

           Notes to Condensed Financial Statements

  Item 2.  Management's Discussion and Analysis or Plan of Operation.......17
  Item 3.  Controls and Procedures.........................................19

PART II    OTHER INFORMATION

  Item 1.  Legal Proceedings...............................................20
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.....20
  Item 4.  Submission of Matters to a Vote of Security Holders.............20
  Item 6.  Exhibits........................................................21


                                        i


                                                            PART I
                                                    FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS.

                                                      CEPTOR CORPORATION
                                                (A DEVELOPMENT STAGE COMPANY)
                                                   CONDENSED BALANCE SHEETS

                                                                                        June 30, 2005       December 31, 2004
                                                                                         (Unaudited)
                                                                                      -----------------   ---------------------

                                     ASSETS

Current Assets:
 Cash and cash equivalents                                                           $      2,281,831         $   1,331,513
 Prepaid expenses and other current assets                                                    235,012               107,729
                                                                                        -------------         -------------
    Total current assets                                                                    2,516,843             1,439,242

Property and equipment, net                                                                    60,999                60,615
Security deposit                                                                               18,511                18,511
                                                                                        -------------         -------------

TOTAL ASSETS                                                                            $   2,596,353         $   1,518,368
                                                                                        =============         =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
 Accounts payable                                                                    $        367,747         $      58,266
 Accrued expenses                                                                             546,178               315,237
 Common stock subject to repurchase under variable shares put right                                 -             1,637,325
                                                                                        -------------         -------------
   Total current liabilities                                                                  913,925             2,010,828

Convertible notes                                                                             157,701                56,821

                                                                                        -------------         -------------
TOTAL LIABILITIES                                                                           1,071,626             2,067,649
                                                                                        -------------         -------------

Commitments and contingencies

Stockholders' (Deficiency) Equity:
 Preferred stock, $0.0001 par value; authorized 20,000,000 shares, issued and
   outstanding - 382.65 and 145.07 shares of Series A Convertible  Preferred
   Stock at June 30, 2005 and December 31, 2004, respectively; liquidation
   preference - $9,566,250 and $3,626,750, respectively                                    9,566,250             3,626,750
 Common stock, $0.0001; authorized 100,000,000 shares, issued and outstanding
   - 9,142,944 at June 30, 2005 and 10,539,161, net of 401,305 shares subject to
   put right at December 31, 2004                                                                914                 1,054
 Subscriptions receivable on common stock                                                        (31)                 (303)
 Deferred compensation                                                                      (630,359)             (624,750)
 Additional paid-in capital                                                               22,128,051            12,294,648
 Treasury stock, 145,070 shares, at December 31, 2004, at cost                                     -              (362,675)
 Deficit accumulated during the development stage                                        (29,540,098)          (15,484,005)
                                                                                       -------------         -------------
   Total stockholders' (deficiency) equity                                                 1,524,727              (549,281)
                                                                                       -------------         -------------

TOTAL LIABILITIES AND STOCKHOLDERS'
   (DEFICIENCY) EQUITY                                                               $     2,596,353         $   1,518,368
                                                                                       =============         =============

(See Notes to Condensed Financial Statements)

                                                              1


                                                         CEPTOR CORPORATION
                                                    (A DEVELOPMENT STAGE COMPANY)
                                                 CONDENSED STATEMENTS OF OPERATIONS


                                                                                                                       Cumulative
                                                                                                                        August 11,
                                                                                                                           1986
                                                            Three Months Ended               Six Months Ended            (Date of
                                                                 June 30,                        June 30,             Inception) to
                                                       ------------    ------------    ------------    ------------      June 30,
                                                           2005           2004            2005            2004             2005
                                                       ------------    ------------    ------------    ------------   -------------

REVENUES:
  Other income                                         $          -      $        -      $        -      $      -       $    75,349

OPERATING EXPENSES:
  Research and development                                2,185,876         204,101       2,814,364         277,061       5,408,220
  In-process research and development                             -               -               -       5,034,309       5,034,309
  General and administrative                                528,684         403,531       1,970,454       2,600,132       8,523,087
  Gain on extinguishment of debt                           (311,281)              -        (311,281)           -          (311,281)
  Non-cash interest expense                                 189,817         257,333         412,161         257,333       1,730,736
  Interest expense, net of interest income                    2,391          21,131           5,895          27,934          41,346
                                                       ------------    ------------    ------------    ------------    ------------
  Total operating expenses                                2,595,487         886,096       4,891,593       8,196,769      20,426,417
                                                       ------------    ------------    ------------    ------------    ------------

NET LOSS                                                 (2,595,487)       (886,096)     (4,891,593)     (8,196,769)    (20,351,068)

  Preferred dividends                                             -               -      (9,164,500)              -     (10,100,616)
                                                       ------------    ------------    ------------    ------------    ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS              $ (2,595,487)   $   (886,096)   $(14,056,093)   $ (8,196,769)   $(30,451,684)
                                                       ============    ============    ============    ============    ============

  Basic and diluted loss per common share              $      (0.22)   $      (0.21)   $      (1.23)   $      (2.02)

  Weighted-average common shares outstanding             11,559,324       4,198,273      11,388,833       4,049,072

(See Notes to Condensed Financial Statements)

                                                                  2


                                                         CEPTOR CORPORATION
                                                    (A DEVELOPMENT STAGE COMPANY)
                                 CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY


                                                              Preferred Stock            Common Stock        Subscrip-    Deferred
                                                             -----------------        -------------------      tion        Compen-
                                                             Shares     Amount        Shares       Amount    Receivable    sation
                                                             ------     ------        ------       ------    ----------    ------

BALANCE, JANUARY 1, 2005                                     145.07   $ 3,626,750   10,539,161    $  1,054   $ (303)     $ (624,750)

Preferred stock and warrants issued pursuant to units sold
  on January 5, 2005 in a private placement ($25,000)         48.35     1,208,750
Deemed dividend of beneficial conversion feature of units
  sold January 5, 2005 in private placement
Acquisition January 5, 2005 of treasury stock under put
  right ($2.50)
Preferred stock and warrants issued pursuant to units sold
  on January 18, 2005 in a private placement ($25,000)        76.25     1,906,250
Deemed dividend of beneficial conversion feature of units
  sold January 18, 2005 in private placement
Acquisition January 18, 2005 of treasury stock under put
  right ($2.50)
Common stock issued January 2005 in connection with
  payment of legal fees ($3.04)                                                         23,000           2
Common stock issued January 2005 pursuant to amendment
  of placement agent agreement ($2.50)                                                 150,000          15
Common stock issued February 2005 to advisors for past
  services ($6.25)                                                                       7,500           1
Preferred stock and warrants issued pursuant to units sold
  on February 3, 2005 in a private placement ($25,000)       224.48     5,612,000
Deemed dividend of beneficial conversion feature of units
  sold February 3, 2005 in private placement
Acquisition February 3, 2005 of treasury stock under put
  right ($2.50)
Preferred stock and warrants issued pursuant to units sold
  on February 11, 2005 in a private placement ($25,000)       17.50       437,500
Deemed dividend of beneficial conversion feature of units
  sold February 11, 2005 in private placement
Acquisition February 11, 2005 of treasury stock under put
  right ($2.50)
Common stock issued February 2005 pursuant to cashless
  exercise of option ($3.05)                                                           100,191          10
Common stock issued March 2005 upon conversion of
  preferred shares ($2.50)                                   (44.00)   (1,100,000)     440,000          44

                                                                  3




                                                                                                          Deficit
                                                                                                        Accumulated       Total
                                                                 Additional      Treasury Stock         During the     Stockholders'
                                                                  Paid-in      -------------------      Development    (Deficiency)
                                                                  Capital      Shares      Amount         Stage           Equity
                                                                  -------      ------      ------         -----           ------

BALANCE, JANUARY 1, 2005                                       $ 12,294,648   145,070   $  (362,675)  $  (15,484,005)  $  (549,281)

Preferred stock and warrants issued pursuant to units sold
  on January 5, 2005 in a private placement ($25,000)              (159,359)                                             1,049,391
Deemed dividend of beneficial conversion feature of units
  sold January 5, 2005 in private placement                       1,208,750                              (1,208,750)             -
Acquisition January 5, 2005 of treasury stock under put
  right ($2.50)                                                                48,350      (120,875)                      (120,875)
Preferred stock and warrants issued pursuant to units sold
  on January 18, 2005 in a private placement ($25,000)             (252,624)                                             1,653,626
Deemed dividend of beneficial conversion feature of units
  sold January 18, 2005 in private placement                      1,906,250                              (1,906,250)             -
Acquisition January 18, 2005 of treasury stock under put
  right ($2.50)                                                                76,250      (190,625)                      (190,625)
Common stock issued January 2005 in connection with
  payment of legal fees ($3.04)                                      69,998                                                 70,000
Common stock issued January 2005 pursuant to amendment
  of placement agent agreement ($2.50)                                  (15)                                                     -
Common stock issued February 2005 to advisors for past
  services ($6.25)                                                   46,874                                                 46,875
Preferred stock and warrants issued pursuant to units sold
  on February 3, 2005 in a private placement ($25,000)             (851,447)                                             4,760,553
Deemed dividend of beneficial conversion feature of units
  sold February 3, 2005 in private placement                      5,612,000                              (5,612,000)             -
Acquisition February 3, 2005 of treasury stock under put
  right ($2.50)                                                               224,480      (561,200)                      (561,200)
Preferred stock and warrants issued pursuant to units sold
  on February 11, 2005 in a private placement ($25,000)            (250,613)                                               186,887
Deemed dividend of beneficial conversion feature of units
  sold February 11, 2005 in private placement                       437,500                                (437,500)             -
Acquisition February 11, 2005 of treasury stock under put
  right ($2.50)                                                                17,500       (43,750)                       (43,750)
Common stock issued February 2005 pursuant to cashless
  exercise of option ($3.05)                                            (10)                                                     -
Common stock issued March 2005 upon conversion of
  preferred shares ($2.50)                                        1,099,956                                                      -


(See Notes to Condensed Financial Statements)                                                                            (continued)

                                                                 3A


                                                         CEPTOR CORPORATION
                                                    (A DEVELOPMENT STAGE COMPANY)
                                 CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY





                                                              Preferred Stock            Common Stock        Subscrip-    Deferred
                                                             -----------------        -------------------      tion        Compen-
                                                             Shares     Amount        Shares       Amount    Receivable    sation
                                                             ------     ------        ------       ------    ----------    ------

Payments received for common stock issued December
  2004 pursuant to exercise of options granted under
  spinoff agreement                                                                                             272
Common stock issued March 2005 pursuant to exercise of
  warrants ($1.25)                                                                       5,000           1
Common stock issued April 2005 upon conversion of
  preferred shares ($2.50)                                   (15.00)     (375,000)     150,000          15
Common stock issued May 2005 pursuant to financing letter
  agreement ($3.00)                                                                     25,000           2
Common stock issued May 2005 upon conversion of
  preferred shares ($2.50)                                   (41.00)   (1,025,000)     410,000          41
Common stock issued June 2005 upon conversion of
  preferred shares ($2.50)                                   (29.00)     (725,000)     290,000          29
Capital contribution for repurchase of common stock
  pursuant to Stock Purchase Agreement
Common stock repurchased June 2005 pursuant to Stock
  Repurchase Agreement ($0.80)
Retirement of treasury shares                                                       (3,398,213)       (340)
Reverse common stock subject to repurchase under variable
  shares put right at December 31, 2004                                                401,305          40
Stock option-based compensation for investor relation
  services rendered                                                                                                        (439,900)
Stock option-based compensation for employees and
  directors                                                                                                                (293,231)
Fair value adjustment of stock options previously granted to
    non-employees                                                                                                            22,400
Amortization of deferred compensation                                                                                       705,122
Net loss
                                                             ------   -----------    ---------      ------   ------      ----------
BALANCE, JUNE 30, 2005                                       382.65   $ 9,566,250    9,142,944      $  914   $  (31)     $ (630,359)
                                                             ======   ===========    =========      ======   ======      ==========

                                                                 4


                                                                                                          Deficit
                                                                                                        Accumulated       Total
                                                                 Additional      Treasury Stock         During the     Stockholders'
                                                                  Paid-in      -------------------      Development    (Deficiency)
                                                                  Capital      Shares      Amount         Stage           Equity
                                                                  -------      ------      ------         -----           ------

Payments received for common stock issued December
  2004 pursuant to exercise of options granted under
  spinoff agreement                                                                                                             272
Common stock issued March 2005 pursuant to exercise of
  warrants ($1.25)                                                    6,249                                                   6,250
Common stock issued April 2005 upon conversion of
  preferred shares ($2.50)                                          374,985                                                       -
Common stock issued May 2005 pursuant to financing letter
  agreement ($3.00)                                                  74,998                                                  75,000
Common stock issued May 2005 upon conversion of
  preferred shares ($2.50)                                        1,024,959                                                       -
Common stock issued June 2005 upon conversion of
  preferred shares ($2.50)                                          724,971                                                       -
Capital contribution for repurchase of common stock
  pursuant to Stock Purchase Agreement                              424,818                                                 424,818
Common stock repurchased June 2005 pursuant to Stock
  Repurchase Agreement ($0.80)                                               2,886,563   (2,734,068)                     (2,734,068)
Retirement of treasury shares                                    (4,012,853)(3,398,213)   4,013,193                               -
Reverse common stock subject to repurchase under variable
  shares put right at December 31, 2004                           1,637,285                                              1,637,325
Stock option-based compensation for investor relation
  services rendered                                                 439,900                                                      -
Stock option-based compensation for employees and
  directors                                                         293,231                                                      -
Fair value adjustment of stock options previously granted to
    non-employees                                                   (22,400)                                                     -
Amortization of deferred compensation                                                                                      705,122
Net loss                                                                                                 (4,891,593)    (4,891,593)
                                                               ------------ -----------  ----------   --------------   ------------
BALANCE, JUNE 30, 2005                                         $ 22,128,051           -    $      -   $ (29,540,098)   $ 1,524,727
                                                               ============ ===========  ==========   ==============   ============





(See Notes to Condensed Financial Statements)

                                                                 4A




                                                         CEPTOR CORPORATION
                                                    (A DEVELOPMENT STAGE COMPANY)
                                                  CONDENSED STATEMENT OF CASH FLOWS

                                                                                                                    Cumulative
                                                                                                                  August 11, 1986
                                                                                  For the Six Months Ended      (Date of Inception)
                                                                                           June 30,                    to
                                                                              -----------------------------         June 30,
                                                                                    2005            2004              2005
                                                                              ------------     ------------     ------------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss                                                                      $ (4,891,593)    $ (8,196,769)      $(20,351,068)
Adjustments to reconcile net (loss) to net cash used in operating
activities:
  Depreciation and amortization                                                      8,665            3,867             21,948
  Write-off of in-process research and development                                       -        5,034,309          5,034,309
  Charge for stock option issued pursuant to spinoff agreement                           -        2,082,500          2,082,500
  Stock-based compensation to employees and directors                               80,122                -             80,122
  Stock-based compensation to nonemployees                                         671,875                -          3,584,306
  Stock-based component of payment of legal fees                                    70,000                -             70,000
  Stock-based component of litigation settlement                                         -                -            422,000
  Gain on extinguishment of debt                                                  (311,281)               -           (311,281)
  Non-cash interest expense                                                        412,161          257,333          1,730,736
  Changes in assets and liabilities:
    Prepaid expenses & other current assets                                    (52,283)          (3,251)          (160,012)
    Other assets                                                                         -          (18,511)           (18,511)
    Accounts payable and accrued expenses                                          540,422           34,275            937,583
                                                                              ------------     ------------       ------------
    Net cash used in operating activities                                       (3,471,912)        (806,247)        (6,877,368)
                                                                              ------------     ------------       ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment                                                 (9,049)         (68,769)           (82,947)
                                                                              ------------     ------------       ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuances of common stock                                              6,250               -           1,136,502
Collections of subscriptions receivable                                                272                -                272
Net proceeds from issuances of preferred stock                                   7,650,457                -         10,454,697
Acquisition 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.                                        -          300,310            350,310
Proceeds from issuance of bridge loans                                                   -        1,100,000          1,375,000
Expense of issuance of long term debt                                                    -         (132,000)          (132,000)
Principal payments on bridge loans                                                       -                -           (350,000)
                                                                              ------------     ------------       ------------
      Net cash provided by financing activities                                  4,431,279        1,268,310          9,242,146
                                                                              ------------     ------------       ------------
Net increase in cash and cash equivalents                                          950,318          393,294          2,281,831

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD                             1,331,513           68,374
                                                                              ------------     ------------       ------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD                                $  2,281,831     $    461,668       $  2,281,831
                                                                              ============     ============       ============


(See Notes to Condensed Financial Statements)



                                                                  5







                                                                 CEPTOR CORPORATION
                                                           (A DEVELOPMENT STAGE COMPANY)
                                                         CONDENSED STATEMENTS OF CASH FLOWS


                                                                                                                    Cumulative
                                                                                                                  August 11, 1986
                                                                                  For the Six Months Ended      (Date of Inception)
                                                                                           June 30,                    to
                                                                              -----------------------------         June 30,
                                                                                    2005            2004              2005
                                                                              ------------     ------------     ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Deemed dividend of the beneficial conversion feature
    of units sold in private placement                                         $ 9,164,500     $        -        $ 10,100,616
  Issuance of 1,290,000 shares of common stock upon
    conversion of preferred shares                                               3,225,000              -           3,225,000
  Issuance of 7,500 shares of common stock as compensation
    for past services                                                               46,875              -              46,875
  Issuance of 25,000 shares of common stock as compensation
    for financial planning                                                          75,000              -              75,000
  Issuance of 23,000 shares of common stock in payment of
    accrued legal fees                                                              70,000              -              70,000
  Capital contribution for repurchase of common stock
    pursuant to Stock Purchase Agreement                                           424,818              -             424,818
  Issuance of 36,000 shares of common stock as debt
    issuance costs                                                                       -              -              90,000
  Issuance of 451,597 shares of common stock to bridge loan
    investors and placement agent                                                        -              -             550,000
  Issuance of 167,610 shares up on conversion of
    convertible notes                                                                    -              -             209,512
  Issuance of convertible notes in exchange for bridge
    loans and long-term debt plus accrued interest                                       -              -           1,111,240


(See Notes to Condensed Financial Statements)




                                                                  6


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 six-month  period
ended June 30, 2005 are not necessarily indicative of the operating results that
may be expected for the entire year ending December 31, 2005.

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.  CepTor
Corporation  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.

MERGER OF XECHEM INTERNATIONAL, INC. AND CEPTOR CORPORATION
On January 27, 2004, the former  shareholders of the Company  received shares of
preferred stock of Xechem International,  Inc. ("Xechem") in connection with the
merger of the Company into a  wholly-owned  subsidiary of Xechem.  For financial
reporting  purposes,  the effective date of the merger was designated January 1,
2004.  The  results of  operations  from  January 1 to January 27, 2004 were not
significant.  The merger was accomplished  through a reverse  triangular  merger
whereby  CepTor  Acquisition,  Inc., a  wholly-owned  subsidiary of Xechem,  was
merged into the Company and the Company was the surviving entity.

Following the  acquisition  of the Company by Xechem,  the board of directors of
Xechem determined that Xechem lacked the resources to fully fund the development
and regulatory approval of the Company's  technology.  As a result, the board of
directors  of Xechem  determined  that is was in the best  interest  of Xechem's
stockholders  to effect a spin-off of the Company  from  Xechem,  providing  the
Company  with an  independent  platform  to obtain  financing  and  develop  its
technology.  As a result the Company, Xechem, and William Pursley,  Chairman and
CEO of the Company, entered into an agreement dated March 31, 2004, amended July
23, 2004 and November 17, 2004,  (the "Spinoff  Agreement"),  to provide for the
separation of the Company from Xechem.  The Spinoff  Agreement  provided for the
Company's  separation from Xechem under a transaction  structured to include (i)
the  Company's  redemption  of a portion of it shares  held by Xechem out of the
proceeds of future financing under the Redemption  Obligations  described below,
(ii) the issuance and  allocation  of  additional  shares of common stock to Mr.
Pursley under the Founders' Plan described below and (iii) the Company's reverse
merger into a public shell.  The spin-off of the Company from Xechem  concurrent
with Mr. Pursley's exercise of his stock option and the Company's reverse merger
into Medallion was completed on December 8, 2004.

MERGER OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION
Medallion Crest Management,  Inc., a Florida corporation  ("Medallion") acquired
all of the common  stock of the Company on December  8, 2004.  Medallion  was an
inactive  public shell at the time of  acquisition.  The Company's  shareholders
prior to the merger  became the majority  shareholders  of  Medallion  after the
merger; accordingly the transaction was accounted for as a recapitalization. The
accompanying  financial  statements  preceding the date of the acquisition  have
been retroactively restated to give effect to this transaction.

                                       7


NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION

The Company's net loss for the six-month  period ended June 30, 2005 amounted to
$4,891,593,  which  includes  $922,877 of  non-cash  special  charges  primarily
associated  with the  Company's  issuance  of stock and  common  stock  purchase
warrants and options to non-employees for services,  gain on the  extinguishment
of debt, and non-cash interest  expense.  The Company used net cash flows in its
operating  activities of $3,471,912  during the six-month period ending June 30,
2005.  The  Company's   development  stage   accumulated   deficit  amounted  to
$29,540,098 at June 30, 2005. 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. The Company estimates that it currently does not have
sufficient liquidity to sustain operations beyond December 31, 2005.

The Company's  working  capital at June 30, 2005 amounted to $1,602,918.  During
the six-month  period ended June 30, 2005, the Company  received net proceeds of
$4,431,279 from financing  activities,  including (i) $7,650,457 (gross proceeds
of  $9,164,500  net of  transaction  expenses  of  $1,514,043)  from the sale of
preferred  stock and  common  stock  purchase  warrants  ("Units")  in a private
placement  transaction (see Note 10), (ii) $6,250 from the exercise of warrants,
and (iii) $272 from subscriptions  receivable  pursuant to the restricted shares
issued under the Company's  Founders' Plan during  December  2004.  From the net
proceeds of the sale of the Units, the Company  repurchased  3,253,143 shares of
its  common  stock,  par value  $0.0001  per share from  Xechem  for  $3,225,700
comprised of (i) $916,450 for 366,580 shares of its common stock pursuant to the
terms  of a  redemption  obligation  (see  Note 7) and (ii)  $2,309,250  and the
forfeiture of an option held by the Company's CEO to purchase 43 million  shares
of common  stock of Xechem  with a fair  value of  $424,818,  for an  additional
2,886,563  shares  of its  common  stock.  The  Company  is  continuing  to seek
additional   capital   through   equity   and  debt   offerings,   collaborative
partnerships,  joint  ventures and  strategic  alliances  both within the United
States and abroad in an effort to  accelerate  the  development  of its proposed
products.  There are currently no firm  commitments in place for new capital nor
has  the  Company   identified  any  prospective   joint  venture   partners  or
participants  with  which  it  could  enter  into  any  new  strategic  alliance
arrangement.

For the foreseeable  future, the Company's primary efforts will be on moving its
lead product,  Myodur,  into phase I/II clinical trials for Duchenne's  muscular
dystrophy. The Company plans to use its available cash resources to continue the
pre-clinical  development  of its  technologies,  which  primarily  includes the
manufacture of Myodur,  conducting  pre-clinical  tests and toxicology  studies,
compiling,  drafting and  submitting  an  investigational  new drug  application
("IND") for Myodur,  and initiating phase I/II human clinical trials, if allowed
by the Food and Drug Administration ("FDA"). As resources allow, the Company may
also fund other working capital needs. The Company presently expects to file its
IND for Myodur in 2005, and initiate human clinical trials for Myodur during the
quarter ending March 31, 2006.

The Company  expects to incur  significant  expenditures  during the next twelve
months  for the cost to  manufacture  the  Company's  product  Myodur for use in
clinical and other  testing.  The Company does not have,  and does not intend to
establish, its own manufacturing facilities to produce its product candidates in
the foreseeable  future. The Company plans to outsource the manufacturing of its
proposed products to contract  manufacturers.  Following placement of an initial
purchase  order  for its  proposed  product  in  2004,  the  Company  has  since
determined  that the  quantity and  delivery  time of the clinical  materials it
requires would cause the actual  manufacturing  costs of its proposed product to
exceed its initial  estimates.  Accordingly,  the Company modified its estimated
liquidity needs to include the additional  capital that will be required to fund
its  manufacturing  effort.  On April 18,  2005,  the  Company  entered  into an
exclusive  manufacture  and supply  agreement with Bachem AG ("Bachem")  whereby
Bachem is entitled to receive royalty payments in the amount of the lesser of 5%
of "net sales" (as defined in the agreement) or $10 million,  $15 million or $25
million in the first,  second and third (and thereafter) years of the agreement,
respectively.  During the six-month period ended June 30, 2005, the Company paid
approximately $1.1 million for the proposed product and related materials. As of
June 30, 2005, the Company has purchase commitments over the next nine months of
an additional $2.8 million for the manufacture and delivery of product materials
required for the  Company's  pre-clinical  and  toxicology  programs and initial
clinical trials.

Further,  if the Company receives regulatory approval for any of its products in
the United  States or  elsewhere,  it will  incur  substantial  expenditures  to
develop  manufacturing,  sales, and marketing capabilities and/or to subcontract


                                       8


or joint venture these  activities  with others.  There can be no assurance that
the Company will ever  recognize  revenue or profit from any such  products.  In
addition,   the  Company  may  encounter   unanticipated   problems,   including
developmental,  regulatory,  manufacturing,  or marketing difficulties,  some of
which may be beyond its ability to resolve. The Company may lack the capacity to
produce its  products  in-house and there can be no  assurances  that it will be
able to locate or retain suitable contract manufacturers or be able to have them
produce products at satisfactory prices.

As  described  in Note  10,  the  Company  entered  into a  Securities  Purchase
Agreement  with  Xechem  on June  17,  2005  pursuant  to which  it  elected  to
repurchase  2,886,563  shares of its common  stock from  Xechem,  for a purchase
price of $2,309,250  effectively reducing the total outstanding shares of common
stock of the Company.  As  additional  consideration  for the  transaction,  the
Company's  CEO  agreed to  forfeit an option to  purchase  43 million  shares of
Xechem,  which the Company has recorded as a contribution  of capital and a cost
of the treasury  shares.  Xechem retained  500,000 shares of common stock of the
Company  but agreed  that it would only sell such  shares  subject to the volume
restrictions of Rule 144,  regardless of whether or not such volume  limitations
are applicable at the time of such sale.  Additionally,  the Securities Purchase
Agreement terminated the Spinoff Agreement.  Due to the substantial amounts that
the Company has expended  for the  manufacture  of its proposed  product and the
repurchase  of shares of its  common  stock on June 17,  2005 from  Xechem,  the
Company has determined that its available  capital  resources are not sufficient
to sustain its planned  operations beyond December 31, 2005. 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.

There can be no assurance that management's plans to obtain additional financing
to fund operations will be successful or that the successful  implementation  of
the business plan will actually improve the Company's operating results.

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,  2005 in  accordance  with
Statement of Financial  Accounting  Standards  ("SFAS")  No. 7  "Accounting  and
Reporting by Development Stage Enterprises."

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,  2005 is  $30,451,684  whereas  the  deficit  accumulated  during  its
development  stage  as  reported  on its  balance  sheet  at  June  30,  2005 is
$29,540,098.  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
As permitted  under SFAS No. 148  "Accounting  for  Stock-Based  Compensation  -
Transition  and  Disclosure,"   which  amended  SFAS  No.  123  "Accounting  for
Stock-Based  Compensation,"  the Company has elected to use the intrinsic  value
method of accounting for its stock-based compensation arrangements as defined by
Accounting  Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to  Employees,"  and  related  interpretations  including  Financial  Accounting
Standards  Board  ("FASB")   Interpretation   No.  44  "Accounting  for  Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25.

The cost of stock-based compensation awards issued to non-employees for services
are  recorded  at  either  the fair  value of the  services  rendered  or of the
instruments  issued in exchange  for such  services,  whichever  is more readily
determinable,  using the  measurement  date  guidelines  enumerated  in Emerging
Issues Task Force ("EITF") Issue No. 96-18,  "Accounting for Equity  Instruments
That Are Issued to Other Than  Employees for Acquiring,  or in Conjunction  with
Selling, Goods or Services."

                                       9


The following table  summarizes the pro forma  operating  results of the Company
had compensation  expense for stock options granted to employees been determined
in  accordance  with the fair market value based method  prescribed  by SFAS No.
123. The Company has presented the following disclosures in accordance with SFAS
No. 148.

                                                                      For the Three-Month Period Ended
                                                                                  June 30,
                                                                     ---------------------------------
                                                                            2005               2004
                                                                     -------------        ------------
Net loss available to common stockholders                            $  (2,595,487)       $   (886,096)
Adjust: Stock-based employee compensation
        determined under the fair value method                             (15,485)                  -
                                                                     -------------        ------------
        Pro forma net loss                                           $  (2,610,972)       $   (886,096)
                                                                     =============        ============
Net loss per share available to common stockholders:
        Basic and diluted, as reported                               $       (0.22)       $      (0.21)
        Basic and diluted, pro forma                                 $       (0.23)       $      (0.21)



                                                                      For the Six-Month Period Ended
                                                                                  June 30,
                                                                     ---------------------------------
                                                                            2005               2004
                                                                     -------------        ------------
Net loss available to common stockholders                            $ (14,056,093)       $ (8,196,769)
Adjust: Stock-based employee compensation
        determined under the fair value method
                                                                           (28,799)         (5,497,358)
                                                                     --------------       ------------
        Pro forma net loss                                           $ (14,084,892)       $(13,694,127)
                                                                     ==============       ============


Net loss per share available to common stockholders:
        Basic and diluted, as reported                               $       (1.23)       $      (2.02)
        Basic and diluted, pro forma                                 $       (1.24)       $      (3.38)




The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the  portion  of the  estimated  fair value of awards  that were  earned for the
three-month and six-month periods ended June 30, 2005.

ACCOUNTING FOR WARRANTS ISSUED IN CONNECTION WITH SALE OF UNITS
The Company  accounts for the issuance of common stock purchase  warrants issued
in connection  with sales of its Units in accordance with the provisions of EITF
Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially  Settled in, a Company's Own Stock." Based on the provisions of EITF
Issue No. 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).

NET (LOSS) PER SHARE
Net loss per share is presented  under SFAS No. 128  "Earnings Per Share." Under
SFAS No. 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-month  and six-month  periods ended
June 30, 2005 excludes  potentially  dilutive securities because their inclusion
would be anti-dilutive.

                                       10


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

                                                  June 30,
                                         --------------------------
                                              2005           2004
                                         -----------    -----------
      Series A Preferred Stock             3,826,500              -
      Warrants                             4,239,900              -
      Options                                607,695      3,031,943
      Convertible Notes                    1,269,171              -
                                         -----------    -----------
      Total                                9,943,266      3,031,943
                                         ===========    ===========




RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable  Interest  Entities"  ("FIN 46").  This  interpretation  of  Accounting
Research Bulletin ("ARB") No. 51, "Consolidated  Financial Statements," provides
guidance for  identifying a controlling  interest in a variable  interest entity
("VIE")  established by means other than voting  interest.  FIN 46 also required
consolidation of a VIE by an enterprise that holds such controlling interest. In
December  2003,  the FASB  completed  its  deliberations  regarding the proposed
modifications to FIN 46 and issued Interpretation Number 46R,  "Consolidation of
Variable  Interest  Entities - an  Interpretation  of ARB 51" ("FIN  46R").  The
decisions  reached  included a deferral of the effective date and provisions for
additional scope exceptions for certain types of variable interests. Application
of FIN 46R is required in  financial  statements  of public  entities  that have
interests  in VIEs or potential  VIEs  commonly  referred to as  special-purpose
entities for periods ending after December 15, 2003. Application by public small
business  issuers'  entities is  required  in all  interim and annual  financial
statements for periods ending after December 15, 2004.

The  adoption  of this  pronouncement  did not have an effect  on the  Company's
financial statements.

In December  2004,  the FASB issued SFAS No. 123R,  "Share Based  Payment." This
statement is a revision of SFAS Statement No. 123,  "Accounting  for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS No. 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 No. 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 will  result  in a charge to
operations for stock-based  compensation expense. SFAS No. 123R is effective for
public  entities that file as small business  issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.

The  Company is  currently  in the  process of  evaluating  the effect  that the
adoption of this pronouncement will have on its financial statements.

In  December  2004,  the FASB issued SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets."  SFAS No. 153 amends APB Opinion No. 29 to eliminate  the exception for
nonmonetary  exchanges  of  similar  productive  assets and  replaces  it with a
general  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have
commercial  substance.  A nonmonetary  exchange has commercial  substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange.  The  provisions of SFAS No. 153 are effective for  nonmonetary
asset  exchanges  occurring  in fiscal  periods  beginning  after June 15, 2005.
Earlier  application is permitted for nonmonetary  asset exchanges  occurring in
fiscal periods beginning after December 16, 2004. The provisions of SFAS No. 153
should be applied prospectively.

The  adoption  of this  pronouncement  did not have an effect  on the  Company's
financial statements.

In EITF Issue No. 04-8, "The Effect of Contingently  Convertible  Instruments on
Diluted  Earnings  Per Share," the EITF  reached a consensus  that  contingently
convertible  instruments,  such as contingently  convertible debt,  contingently
convertible  preferred  stock,  and other such securities  should be included in
diluted earnings per share (if dilutive)  regardless of whether the market price
trigger has been met. The consensus is effective for  reporting  periods  ending
after December 15, 2004.

                                       11


The  Company's  adoption  of this  pronouncement  did not have an  effect on the
Company's financial statements.

NOTE 5 - PREPAID EXPENSES AND GRANT RECEIVABLE

Prepaid expenses and grant receivable  principally  consists of amounts due from
the National  Institutes of Health for amounts  expended by the Company for work
on its grant of approximately $82,000, unamortized premiums paid to carriers for
insurance  policies,  and the  fair  value of  common  stock  and  nonrefundable
retainer paid as compensation for ongoing financial consulting.

NOTE 6 - ACCRUED EXPENSES

Accrued expenses at June 30, 2005 are as follows:

       Financial investor relations fees          $ 288,278
       Research expenses, miscellaneous              48,281
       Clinical development expenses                116,593
       Legal fees                                    42,875
       Interest on convertible notes                 50,151
                                                  ---------
       Total                                      $ 546,178
                                                  =========



In  connection  with the sale of Units 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  and  investor  relations
activities,  all of which was accrued and charged to additional  paid-in capital
upon each closing of the private placement.

NOTE 7 - COMMON  STOCK  REPURCHASED  UNDER  VARIABLE  SHARES PUT RIGHT AND SHARE
PURCHASE AGREEMENT

On January 27, 2004, the former  shareholders of the Company  received shares of
preferred  stock of Xechem in  connection  with the merger of the Company into a
wholly-owned  subsidiary of Xechem.  Following the acquisition of the Company by
Xechem,  the board of  directors  of Xechem  determined  that Xechem  lacked the
resources to fully fund the development and regulatory  approval  process of the
Company's  technology.  As a result, the board of directors of Xechem determined
that it was in the best interest of Xechem's  stockholders  to effect a spin-off
of the Company from Xechem,  providing the Company with an independent  platform
to obtain financing and develop its technology. As a result the Company, Xechem,
and William Pursley,  Chairman and CEO of the Company, entered into an agreement
dated March 31, 2004,  as amended  July 23, 2004 and  November  17,  2004,  (the
"Spinoff Agreement"), to provide for the separation of the Company from Xechem.

The Spinoff  Agreement,  as amended,  provides for the Company to redeem, out of
the proceeds of future  financing  transactions,  an aggregate of  $2,000,000 of
shares of common stock of the Company held by Xechem (the  "Variable  Shares Put
Right").  Pursuant to the terms of the Variable Shares Put Right, the Company is
obligated  to use the  first  25%  (adjusted  to 10% of the  proceeds  from  the
Company's private placement initiated in December 2004 and concluded in February
2005) of the gross proceeds received in such financing transactions to redeem an
equivalent  number of shares of common stock held by Xechem,  that is derived by
dividing  such proceeds by the price per share of common stock of the Company at
which such  financing  transaction  is  consummated.  If there is any  remaining
Variable  Shares Put Right on March 31, 2006,  Xechem will have the right to put
the  remaining  portion of the shares held for sale back to the Company at $2.50
per share to cover any  deficiency.  Through  February  11,  2005,  the  Company
redeemed 511,650 shares of its common stock for $1,279,125, which represents 10%
of the gross  proceeds  that the Company  received from the sale of Units in the
private  placement  transactions  that  were  initiated  in  December  2004  and
completed February 11, 2005.

On June 17, 2005, the Company entered into a Securities  Purchase Agreement with
Xechem  pursuant to which the  Company  repurchased  2,886,563  shares of common
stock  from  Xechem,   for  a  purchase  price  of  $2,309,250.   As  additional
consideration,  William  Pursley,  the  Company's  Chairman and Chief  Executive
Officer,  agreed to surrender  options to purchase  43,000,000  shares of common
stock of Xechem for which the Company  recorded as a contribution to capital and


                                       12


which was included in the cost of the treasury stock.  Xechem  retained  500,000
shares of common  stock of the  Company  but agreed that it would only sell such
shares subject to the volume  restrictions of Rule 144, regardless of whether or
not  such  volume   limitations  are  applicable  at  the  time  of  such  sale.
Additionally,   the  Securities   Purchase  Agreement   terminated  the  Spinoff
Agreement.

The  Company  accounted  for its  redemptions  of the  aforementioned  shares as
treasury  stock  transactions,  at cost.  Effective  June 17, 2005,  the Company
retired  the  shares  of common  stock it held in  treasury  acquired  under the
Variable  Shares Put Right and  purchased  pursuant to the  Securities  Purchase
Agreement.

NOTE 8 - CONVERTIBLE NOTES

Pursuant to an offer dated October 22, 2004 as amended  November 15, 2004,  made
to the holders of the Company's convertible notes, the Company issued $1,111,240
of its convertible  notes due December 8, 2005 which are convertible into shares
of the  Company's  common  stock at $1.25  per  share  in  amounts  equal to the
outstanding  principal under the notes  cancelled,  plus accrued interest at 10%
through the date of conversion (the "Convertible  Notes").  Since the fair value
of the Company's  common stock on the date of exchange was $2.50 per share,  the
Company recorded an original issuance discount equal to the principal balance of
the notes,  which  represents the intrinsic value of this beneficial  conversion
feature.  The intrinsic  value of the  beneficial  conversion  feature was being
amortized as non-cash  interest  expense over the term of the Convertible  Notes
through  December 8, 2005.  During the three-month  and six-month  periods ended
June 30, 2005, the Company amortized $32,116 and $254,460,  respectively, of the
intrinsic  value of the  beneficial  conversion  feature  which is  included  in
non-cash interest expense in the accompanying statement of operations.

In April 2005, the Company  renegotiated  certain terms of the Convertible Notes
(the  "Amended  Notes") to extend  the  maturity  date  until  July 3, 2006.  In
exchange the Company (1) increased the contractual  interest rate on the Amended
Notes  effective  December 8, 2005 to 12% and (2) reduced the conversion rate to
$0.75 from $1.25 per share. In addition, the Company's right to call the Amended
Notes was  eliminated.  The Company  accounted  for the  issuance of the Amended
Notes in  accordance  with the  guidelines  enumerated  in EITF Issue No.  96-19
"Debtor's  Accounting for a Modification or Exchange of Debt  Instruments." EITF
96-19  provides  that a  substantial  modification  of terms in an existing debt
instrument  should be accounted for like, and reported in the same manner as, an
extinguishment of debt. Further, EITF 96-19 indicates that the modification of a
debt  instrument by a debtor and a creditor in a non-troubled  debt situation is
deemed to have been  accomplished  with debt instruments that are  substantially
different if the present value of the cash flows under the terms of the new debt
instrument  is at least 10  percent  different  from  the  present  value of the
remaining  cash flows under the terms of the original  instrument at the date of
the modification.

The Company evaluated its issuance of the Amended Notes to determine whether the
increase in interest rate,  extension of the maturity date, and reduction in the
conversion  price  resulted in the issuance of a  substantially  different  debt
instrument.  The Company  determined  that after giving effect to the changes in
these features, including the substantial increase in the intrinsic value of the
beneficial  conversion  feature that resulted from reducing the conversion price
that it had issued a substantially  different debt instrument that resulted in a
constructive  extinguishment of the original debt instrument.  Accordingly,  the
Company recorded a gain on the  extinguishment of debt in the amount of $311,281
that  is  included  in  the  accompanying   statements  of  operations  for  the
three-month and six-month periods ended June 30, 2005.

Since the fair value of the Company's  common stock on the date of amendment was
$4.00 per share, the Company recorded an original issuance discount equal to the
intrinsic value of this beneficial conversion feature,  limited to the principal
balance of the Amended Notes.  The intrinsic value of the beneficial  conversion
feature is being  amortized  as non-cash  interest  expense over the term of the
Amended Notes through July 3, 2006. During the three-month and six-month periods
ended June 30, 2005, the Company  amortized  $157,701 of the intrinsic  value of
the beneficial conversion feature which is included in non-cash interest expense
in the accompanying statement of operations.

                                       13


NOTE 9 - COMMITMENTS AND CONTINGENCIES

MANUFACTURING AND SUPPLY AGREEMENT
Effective April 11, 2005, the Company entered into an exclusive  manufacture and
supply agreement to purchase its product  requirements from Bachem.  The Company
intends  to use  these  clinical  materials  to  conduct  pre-clinical  studies,
toxicology  tests and initial human clinical trials during the next nine months.
The  estimated  cost of  producing  all of the  materials  that the Company will
require under the manufacture and supply agreement is approximately  $7,000,000.
The agreement also provides for Bachem to receive royalty payments in the amount
of the lesser of 5% of "net sales" (as defined in the agreement) or $10 million,
$15  million or $25  million,  in the first,  second and third (and  thereafter)
years of the agreement, respectively.

To  date,  the  Company  has  made  payments  to  Bachem  in  the  aggregate  of
approximately  $1.9  million to fund the  production  of certain  compounds  for
initial  pre-clinical  and  toxicology  studies that are  required  steps in the
Company's  drug  validation  process.  The Company  charged  the  aforementioned
payments to research and development expenses during the year ended December 31,
2004  (approximately  $0.8 million) and the six-month period ended June 30, 2005
(approximately  $1.1 million).  Balances  remaining on the purchase  commitments
made through June 30, 2005 are approximately $2.8 million with terms calling for
payment through the quarter ending March 31, 2006.

NOTE 10 - EQUITY TRANSACTIONS

During  the  six-month  period  ended  June 30,  2005,  the  Company  issued the
following unregistered securities.

PRIVATE PLACEMENT
On January 5, 2005 and January 18, 2005 the Company  held  closings  pursuant to
the terms of a Confidential Private Placement Memorandum dated October 22, 2004,
as supplemented  November 16, 2004 and received gross proceeds of $1,208,750 and
$1,906,250,  respectively,  from the sale of 48.35 and 76.25  Units to 75 and 34
investors,  respectively.  On January 31, 2005 and  February 3, 2005 the Company
held  additional  closings under the Private  Placement and sold an aggregate of
224.48 Units to 86 investors and received gross  proceeds of $5,612,000,  and on
February 11, 2005 sold 17.50 Units to 4 investors and received gross proceeds of
$437,500.  Each Unit  consists  of one share of Series A  Preferred  Stock and a
three-year  warrant to purchase common stock, par value $0.0001 per share of the
Company  at  $2.50  per  share.  Each  share  of  Series  A  Preferred  Stock is
convertible  into 10,000  shares of common stock and each  warrant  entitles the
holder to purchase 5,000 shares of common stock.

The Company issued  warrants to purchase  1,832,900  shares of common stock as a
component of the Unit. The Company determined that the 366.58 shares of Series A
Preferred  Stock issued during the quarter ended March 31, 2005, was issued with
an  effective  beneficial  conversion  feature  for  which  it  recorded  deemed
dividends of $9,164,500 based upon an allocation of the proceeds to the relative
fair  values of the  Series A  Preferred  Stock and the  warrants.  The  Company
calculated the fair value of the warrants using an option pricing model.

Pursuant to the placement agent agreement,  the Company issued 150,000 shares of
common stock and  warrants to purchase up to an  aggregate of 366,580  shares of
common stock to the  placement  agent in connection  with the private  placement
transactions  closed  during the quarter  ended  March 31,  2005.  Each  warrant
entitles the  placement  agent to purchase the stated number of shares of common
stock at an  exercise  price of $1.25 per share and will expire five years after
its issue date.

The Company  accounts for the issuance of common stock purchase  warrants issued
in connection  with sales of its Units in accordance with the provisions of EITF
Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".

The Company issued the  aforementioned  warrants with registration  rights which
provide, among other things, that the Company will file a registration statement
under the  Securities  Act on or  before a date  which is sixty  days  after the
closing  time.  The Company  filed a "resale"  registration  statement  with the
Securities  and Exchange  Commission  on February 11, 2005,  within the required
timeframe.  Substantially  all of the Company's  warrants are exercisable by the
holders at any time irrespective of whether the registration  statement has been


                                       14


declared  effective.  In addition,  the Company is not (and never is)  precluded
from delivering  unregistered stock to any warrant holder who elects to exercise
their  warrants  in the event that the  Company's  registration  statement  with
respect to the stock  issuable  pursuant to such  warrants has not been declared
effective.

Since the Company (i) is not precluded from issuing  unregistered  shares in the
event of its failure to cause a registration statement to be declared effective,
(ii) is  permitted  to net share  settle its  warrants  by issuing  unregistered
shares,  and (iii) has met all of the other  criteria for equity  classification
under  EITF  Issue  No.  00-19,   it  has  classified  its  warrants  as  equity
instruments.

COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
During the six month  period  ended June 30,  2005,  1,290,000  shares of common
stock were issued upon conversion of 129 shares of Series A Preferred Stock.

ISSUANCES OF WARRANTS
On March 16,  2005,  as a result of an  amendment  to the private  placement  to
increase the maximum  offering  amount to $12.0 million from $6.0  million,  the
Company granted the original  shareholders of Medallion Crest  Management,  Inc.
five-year  warrants  to  purchase  925,000  shares of common  stock at $1.25 per
share.

OPTIONS AND WARRANTS GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN
During  November 2004, the Company  granted an option to an employee to purchase
shares  of  common  stock  in an  amount  equal  to  1/2%  of its  common  stock
outstanding upon the closing of the Company's private placement. Pursuant to the
terms of the 2004  Incentive  Stock Plan under which these options were granted,
the options have an exercise price of $2.50 per share,  the fair market value on
the date of grant and such options vest over four years.  Upon completion of the
Company's  private  placement on February 11, 2005, the Company  determined that
78,195 shares of common stock were subject to this option. The Company accounted
for this option using  variable plan  accounting  in accordance  with APB No. 25
since the number of shares of common stock  subject to this option was not known
at the date of grant. Accordingly, the Company recorded deferred compensation of
$293,231  for the excess of the fair value of the common stock over the exercise
price of which $48,872 was amortized through June 30, 2005.

On  February  10,  2005,  the  Company  issued a  fully-vested,  non-forfeitable
five-year  warrant to purchase  37,500  shares of its common  stock at $6.50 per
share for 12,500  shares,  $8.00 per share for 12,500 shares and $9.50 per share
for 12,500 shares,  to an investor  relations firm for services  provided during
the  three-month  period ended March 31, 2005.  The Company's  common stock must
trade at or above  $8.00  per share  for ten  consecutive  days in order for the
holder to exercise their right to purchase the shares underlying the warrant. In
addition, if the Company's common stock trades at less than $0.67 per share, the
holder  of the  warrants  may  request  a buyout  of the  warrant  for a $10,000
payment. The Company recorded a $172,750 charge to operations for the fair value
of these warrants.

On February 11, 2005, the Company issued an option to purchase  12,000 shares of
its common  stock for $6.25 per share to one of its  directors  pursuant  to its
2004 Incentive  Stock Plan. The right to exercise this option vests as to 25% on
the six-month  anniversary  of award,  as to 25% on the one-year  anniversary of
award and as to 25% on each of the  two-year  and  three-year  anniversaries  of
award.

On March 7, 2005,  the Company  issued a three-year  warrant to purchase  50,000
shares of its common stock at $4.75 per share to a financial  relations firm for
services  provided during March 2005. The Company  recorded a $205,500 charge to
operations for the fair value of this warrant.

On March 7, 2005,  the Company  issued a three-year  warrant to purchase  15,000
shares of its common stock at $5.00 per share to a financial  relations firm for
services  provided  during March 2005. The Company  recorded a $61,650 charge to
operations for the fair value of this warrant.

COMMON STOCK ISSUED UPON CASHLESS EXERCISE OF WARRANTS
On February 15, 2005, a warrant holder exercised their right to purchase 187,500
shares of the  Company's  common  stock at $3.05 per  share  through a  cashless
exercise  whereby in exchange  for the exercise  price of $571,875,  the Company


                                       15


withheld from issuing  87,309  shares of common stock  issuable upon exercise of
this  warrant  based upon a fair market  value of $6.55 per share on the date of
exercise. Consequently, the Company issued 100,191 shares of common stock to the
warrant holder.

COMMON STOCK ISSUED IN PAYMENT OF LEGAL FEES
On January 10, 2005,  as payment for $70,000 of certain legal fees in connection
with its private placement,  the Company issued 23,000 shares of common stock to
its law firm.

COMMON STOCK ISSUED TO ADVISORS FOR PAST SERVICES
On February 11, 2005 the Company issued 2,500 shares of restricted  common stock
to a former  director and 5,000 shares of restricted  common stock to a director
of the Company as  compensation  for past  services to the Company.  The Company
recorded  a  $46,875  charge  to  operations  for the  intrinsic  value of these
restricted  shares of common stock. The  restrictions  lapse six months from the
date of issuance.

COMMON STOCK ISSUED UPON EXERCISE OF WARRANTS
On March 15, 2005, the Company issued 5,000 shares of common stock upon exercise
of a warrant at an exercise price of $1.25 per share.

COMMON STOCK ISSUED FOR FINANCIAL SERVICES
Pursuant to a letter  agreement  dated May 20, 2005,  the Company  issued 25,000
shares of common stock as initial compensation for financial consulting services
to be provided the Company.  The fair value of these  shares,  which  amounts to
$75,000  at date of  issuance,  is  characterized  as a prepaid  expense  in the
accompanying balance sheet at June 30, 2005.

TREASURY SHARES ACQUIRED AND RETIRED
Pursuant to the Variable  Shares Put Right  obligation  contained in the Spinoff
Agreement  with Xechem,  the Company  repurchased  366,580  shares of its common
stock from  Xechem  during the  three-month  period  ended  March 31,  2005.  In
addition,  pursuant to a Securities  Purchase Agreement entered into with Xechem
effective June 17, 2005, the Company repurchased  2,886,563 shares of its common
stock from Xechem. The Company accounted for these share repurchases as treasury
stock  transactions,  at cost. Xechem retained 500,000 shares of common stock of
the Company but agreed that it would only sell such shares subject to the volume
restrictions of Rule 144,  regardless of whether or not such volume  limitations
are applicable at the time of such sale.  Additionally,  the Securities Purchase
Agreement terminated the Spinoff Agreement.

Effective June 17, 2005, the Company retired all 3,398,213  shares of its common
stock held in treasury.

CONTINGENT CONSIDERATION
Pursuant to the terms of the acquisition of the Company by Xechem, Xechem agreed
to the future payment of additional  consideration  in shares of stock of Xechem
to the  original  shareholders  of the Company  upon the  attainment  of certain
defined  development  milestones.  In  connection  with the  Spinoff  Agreement,
substantially  all of the  obligations  for the issuance of shares as additional
consideration  to the original  shareholders of the Company have been assumed by
the Company, and Xechem has been released therefrom.

During the  three-month  period ended June 30, 2005,  the Company  obtained from
substantially  all of the  original  shareholders  a waiver of their rights with
respect to the  contingent  consideration  and release of the  Company  from its
obligations  there  under.  The Company  agreed to the issuance of up to 100,000
shares of its common stock at fair market value to certain original shareholders
in connection with their releases.

NOTE 11 - SUBSEQUENT EVENTS

COMMON STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK
Subsequent to June 30, 2005,  the Company  issued 210,000 shares of common stock
upon conversion of 21 shares of Series A Preferred Stock.

                                       16


LEGAL PROCEEDINGS
On July 26, 2005 Xmark  Opportunity  Fund, L.P. and Xmark Opportunity Fund, Ltd.
filed an action in the United States District Court for the Southern District of
New York (No. 05-CV-6696) against the Company and William Pursley, the Company's
Chief  Executive  Officer,  alleging  breach of contract,  breach of the implied
covenant  of good faith and fair  dealing,  detrimental  reliance,  and  quantum
meruit/unjust  enrichment related to the Company's  registration of Common Stock
to be  offered  for  sale  by the  plaintiffs  and  seeking  damages  under  the
Securities   Exchange  Act  of  1934,   specific   performance   of  plaintiff's
subscription  agreement  entered into in connection  with the Company's  private
placement  of  securities   completed  on  February  11,  2005,  damages  in  an
unspecified amount, punitive damages, interest, costs, and expenses. The Company
believes that the claims are without merit and intends to move for dismissal.

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following  discussion of our plan of operation 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 engaged in the discovery,
development,  and  commercialization of proprietary,  cell-targeted  therapeutic
products for the treatment of neuromuscular and neurodegenerative  diseases with
a focus on orphan diseases. An orphan disease is defined in the United States as
a serious or life-threatening  disease that affects less than 200,000 people and
for which no definitive  therapy  currently  exists. We are seeking to create an
efficient   orphan  drug  platform  by  taking  advantage  of  the  legislative,
regulatory and commercial  opportunities common to these rare diseases. Our plan
of operation is to focus on developing and commercializing  domestic orphan drug
candidates   internally,   while   working   to  partner   product   development
opportunities  for non-orphan  drug  candidates and foreign  opportunities  with
third parties.  Presently our  activities  primarily  include three  proprietary
products,  Myodur,  Neurodur  and  C-301.  In  pre-clinical  studies  Myodur has
demonstrated efficacy in muscular dystrophy,  Neurodur has demonstrated efficacy
in multiple sclerosis, and C-301 has demonstrated efficacy in epilepsy.

CAPITAL RESOURCES AND CASH REQUIREMENTS

In  February  2005,  we  completed  our private  placement  of an  aggregate  of
approximately  $12.8  million of  securities  (approximately  $9.2 million after
expenses of approximately $2.3 million and following the required  repurchase of
common stock for  approximately  $1.3 million from our former parent as required
by our spinoff  agreement) through the sale of 511.65 Units at $25,000 per unit,
with  each  Unit  consisting  of one  share of  Series A  Preferred  Stock and a
detachable transferable,  three-year warrant to purchase shares of common stock.
Each share of Series A  Preferred  Stock is  convertible  initially  into 10,000
shares of common  stock at any time.  The Unit  warrants  entitled the holder to
purchase  5,000 shares of common stock  during the  three-year  period after the
date of issuance, at an exercise price of $2.50 per share.

In addition to 511,650 shares of Common Stock  repurchased  from Xechem pursuant
to our spinoff  agreement for  approximately  $1.3 million,  on June 17, 2005 we
elected  to  repurchase  an   additional   2,886,563   shares  from  Xechem  for
approximately  $2.3  million  which  reduced  the  number of shares  issued  and
outstanding at a per share price significantly below market value.

In April 2005 we entered  into a  manufacture  and supply  agreement  to provide
materials for both our pre-clinical  and toxicology  studies and to initiate our
human  clinical  trials for our  proposed  product,  Myodur,  to treat  muscular
dystrophy. We do not anticipate that we will have sufficient capital to purchase
materials necessary to continue our long-term  toxicology studies or to complete
our initial human clinical trials for Myodur  currently  expected to commence in
2006.  In  addition,  our planned  activities  for the  foreseeable  future will
require us to engage additional  consultants and contract research organizations
to  support  our  clinical  development  programs,   and  additional  personnel,
including  management,  with  expertise  in areas such as  preclinical  testing,
clinical trial design and  management,  regulatory  affairs,  manufacturing  and
marketing.  We will  need to raise  substantial  additional  capital  for  these
purposes  and to  continue  funding  the  development  of  Myodur  and our other


                                       17


products.  In the absence of the availability of financing from additional sales
of our securities on a timely basis,  we could be forced to materially  curtail,
limit, or cease our operations.

After giving effect to our  repurchase of shares of Common Stock from Xechem and
the additional commitments  associated with our planned activities,  our current
capital  resources  are not  sufficient  to allow us to execute our  development
plans  without  raising  substantial   additional  funds.  These  matters  raise
substantial doubt about our ability to continue as a going concern.

RESEARCH, DEVELOPMENT, AND MANUFACTURING

Currently our primary  efforts are moving our lead product,  Myodur,  into phase
I/II  clinical  trials for  Duchenne's  muscular  dystrophy.  We plan to use our
available cash to continue the  pre-clinical  development  of our  technologies,
which  primarily  includes the  manufacture of Myodur,  conducting  pre-clinical
tests and  toxicology  studies,  compiling,  drafting and  submitting an IND for
Myodur,  and preparing for  initiation  of Phase I/II human  clinical  trials in
2006,  if approved by the Food and Drug  Administration  ("FDA").  As  resources
permit,  we may also fund other working  capital needs.  We presently  expect to
file our  investigational new drug application ("IND") for Myodur before the end
of 2005,  and initiate our human  clinical  trials  during the first  quarter of
2006.

We do not have, and do not intend to establish, our own manufacturing facilities
to produce ours product  candidates in the near or mid-term.  We outsourced  the
manufacturing  of our  proposed  product,  Myodur,  to  contract  manufacturers.
Following  placement of an initial  purchase order for product during the end of
2004,  the Company  learned  that the  quantity  and  delivery  time of clinical
materials  required would cause the manufacturing  costs of its proposed product
to exceed initial  estimates.  As a result of discussions  with its manufacturer
during the latter part of the first  quarter of 2005,  the Company has increased
its  anticipated   capital   requirements  that  will  need  to  be  devoted  to
manufacturing  of its proposed  product.  On April 18, 2005,  we entered into an
exclusive  manufacture  and supply  agreement with Bachem AG ("Bachem")  whereby
Bachem is, in addition to cash payments, entitled to receive royalty payments in
the amount of the lesser of 5% of "net sales" (as defined in the  agreement)  or
$10  million,  $15  million or $25  million in the first,  second and third (and
thereafter)  years of the agreement,  respectively.  During the six month period
ended June 30, 2005, we paid approximately $1.1 million to Bachem and others for
the proposed  product and related  materials  and as of June 30,  2005,  we have
purchase commitments over the next nine months of an additional $3.8 million for
the manufacturer and delivery of product materials required for our pre-clinical
and toxicology  programs and initial clinical  trials.  We expect to continue to
incur  significant  expenditures  for the foreseeable  future to manufacture our
proposed product Myodur.

We have also  incurred  expenses to  initiate  and expand our  pre-clinical  and
toxicology  programs.  We  anticipate  spending an  additional  $3.1 million for
ongoing and  additional  pre-clinical  and  toxicology  studies  and  consulting
support through 2005.

EMPLOYEES

As of August 11, 2005, we had ten full-time employees, all of whom are full-time
employees,  one of whom focuses on and  coordinates our research  program,  five
that focus on and coordinate  clinical and regulatory  strategy and  operations,
one in business and corporate development, and three 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
developments,   and  manufacturing  activities  by  third  parties,  we  do  not
anticipate  hiring a significant  number of additional  employees  over the next
twelve months.

PROPERTIES

We currently lease our executive offices in Hunt Valley,  Maryland consisting of
approximately 5,200 square feet for approximately $6,500 per month, subject to a
3% annual rent escalation clause. This lease expires on December 31, 2006 and we
believe it should provide  sufficient  space for our clinical,  regulatory,  and
other administrative functions during the remaining term of the lease.

                                       18


We plan to expand and secure laboratory facilities for our own internal research
activities.  Suitable laboratory facilities have been identified and efforts are
underway to negotiate the lease and purchase of research equipment  necessary to
continue our internal research activities.  We are currently conducting research
in various academic  settings,  primarily at the State University of New York at
Stony Brook and the Health Science Center at Downstate Medical Center. Our plans
include continuing this practice in addition to expanding the use of third-party
research organizations and facilities to meet specific needs.

ITEM 3.   CONTROLS AND 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 Senior Vice President, Finance and Administration, concluded that as
of the end of the period  covered by this Report,  our  disclosure  controls and
procedures were adequate 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 Senior Vice President,
Finance and Administration,  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.

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
identified certain matters that would constitute material weakness (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 material weakness we identified relates to our limited  segregation of
duties.  Segregation  of duties  within our  company is limited due to the small
number of employees  that are assigned to positions  that involve the processing
of financial information.  This condition constitutes a material weakness in our
financial reporting system.

We believe any such risks are partially  mitigated by the fact that our research
and development expenditures (which are significant to the business) and certain
other general and administrative-related  expenditures are reviewed and approved
by employees who are  knowledgeable  of those matters.  However,  we acknowledge
that   additional   control   procedures  are  necessary  with  respect  to  all
expenditures  in order to ensure that our  transactions  are properly  recorded.
Accordingly,  we are currently  evaluating  what  additional  procedures  may be
instituted to mitigate the risks associated with having a limited segregation of
duties. Such additional  procedures may include,  but not necessarily be limited
to, requiring dual approval of all expenditures by our Chief Executive  Officer,
Senior Vice President, Finance and Administration,  and/or applicable department
heads,  and two authorized  signatures with respect to expenditures in excess of
defined dollar amounts.

Although we are aware that  segregation of duties within our company is limited,
we  believe  (based on our  current  roster of  employees  and  certain  control
mechanisms we do have in place),  that the risks  associated with having limited


                                       19


segregation of duties are currently insignificant.  Under these circumstances we
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  because the costs of increasing  our staff (solely for
this  purpose)  exceeds the potential  reduction in risk.  We will  periodically
reevaluate  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 administrative and financial functions.

The second material  weakness we identified is in our ability to ensure that the
accounting for our  equity-based  transactions is accurate and complete.  During
the year ended  December  31, 2004 and the  quarter  ended  March 31,  2005,  we
consummated a series of complex equity transactions involving the application of
highly specialized accounting principles.  The equity-based transactions that we
consummated during those periods specifically related to unique events including
our spin-off from Xechem,  reverse merger with Medallion,  settlement of certain
litigation,  exchanges and conversions of notes for stock, and private placement
of preferred stock with detachable common stock purchase  warrants.  Although we
believe that these events are unique and that our  equity-based  transactions in
the future are likely to be  substantially  reduced,  we are evaluating  certain
corrective  measures we may take including the  possibility of hiring an outside
consultant  to  provide us with the  guidance  we need at such times that we may
engage in equity-based transactions.

We believe that, for the reasons described above, we will be able to improve our
disclosure controls and procedures and remedy the material weaknesses identified
above.

There have been no changes in our internal  controls  over  financial  reporting
during our most  recent  fiscal  quarter  that has  materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

                                     PART II
                                OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

On July 26, 2005 Xmark  Opportunity  Fund, L.P. and Xmark Opportunity Fund, Ltd.
filed an action in the United States District Court for the Southern District of
New York (No.  05-CV-6696)  against our company and William  Pursley,  our Chief
Executive Officer,  alleging breach of contract,  breach of the implied covenant
of good faith and fair dealing,  detrimental reliance, and quantum meruit/unjust
enrichment related to our registration of Common Stock to be offered for sale by
the  plaintiffs and seeking  damages under the Securities  Exchange Act of 1934,
specific  performance  of  plaintiff's  subscription  agreement  entered into in
connection  with our private  placement of securities  completed on February 11,
2005, damages in an unspecified amount, punitive damages,  interest,  costs, and
expenses.  We believe  that the claims are without  merit and intend to move for
dismissal.

ITEM 2.     UNREGISTERED SALES 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.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

                           FORWARD-LOOKING STATEMENTS

This Quarterly  Report on Form 10-QSB  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


                                       20


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.

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)

4.6            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"))

                                       21


4.7            Form  of  Amended  and  Restated   Convertible   Promissory  Note
               (incorporated  herein by  reference  to  Exhibit  4.7 to the 2004
               10-KSB)

4.9            Form of Subscription Agreement  (incorporated herein by reference
               to Exhibit 4.6 to the Form SB-2)

4.10           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)

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)

10.5           Amended  and  Restated  Founders'  Plan  (incorporated  herein by
               reference to Exhibit 10.5 to the 2004 10-KSB)

10.6           2004 Incentive  Stock Plan  (incorporated  herein by reference to
               Exhibit 10.6 to Form SB-2)

10.7           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)

10.8           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 June 1, 2004,  by and  between
               William Pursley and the Company (incorporated herein by reference
               to Exhibit 10.9 to the Form SB-2)

10.11          Indemnification  Agreement,  dated June 1, 2004,  by and  between
               Norman  W.  Barton  and  the  Company   (incorporated  herein  by
               reference to Exhibit 10.10 to the Form SB-2)

10.12          Indemnification  Agreement,  dated June 1, 2004,  by and  between
               Donald  W.  Fallon  and  the  Company   (incorporated  herein  by
               reference to Exhibit 10.11 to the Form SB-2)

10.13          Indemnification  Agreement,  dated June 1, 2004,  by and  between
               Leonard Mudry and the Company  (incorporated  herein by reference
               to Exhibit 10.12 to the Form SB-2)

10.14          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)

31.1*          Section 302 Certification of Principal Executive Officer

31.2*          Section 302 Certification of Principal Financial Officer

32.1*          Section 906 Certification of Principal Executive Officer

32.2*          Section 906 Certification of Principal Financial Officer

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



                                       22




                                   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



Dated: August 12, 2005              By: /s/ William H. Pursley
                                       -----------------------------------------
                                    William H. Pursley
                                    Chairman and Chief Executive Officer
                                    (Principal Executive Officer)



Dated: August 12, 2005              By: /s/ Donald W. Fallon
                                       -----------------------------------------
                                    Donald W. Fallon
                                    Chief Financial Officer, Senior Vice
                                    President, Finance and Administration
                                    and Secretary (Principal Financial Officer
                                    and Principal Accounting Officer)


                                       23`