**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-KSB**





(MARK
                ONE)**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the fiscal year ended December 31,
                2006****OR****o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from  ______________ to
                ______________**






**CEPTOR
      CORPORATION**


(Exact
      name of registrant as specified in its charter)








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






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




**(212)
      629-0804**


(Issuer's
      telephone number)








Securities
      registered under Section 12(b) of the Exchange Act:  None




Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $0.0001 per share




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x





The
      issuer had no revenues during the fiscal year ended December 31,
      2006.





The
      aggregate market value of the issuer's common equity held by non-affiliates,
      as
      of April 11, 2007 was $1,001,327.




As
      of
      April 11, 2007, there were 15,550,069 shares of the issuer's common equity
      outstanding.





Documents
      incorporated by reference: None




Transitional
      Small Business Disclosure Format (Check one):  Yes o No x




Table
          of Contents


**TABLE
      OF CONTENTS**








PagePART
                IItem
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            25Item
                3.
            Legal
                Proceedings
            25Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            25PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder Matters and
                Purchase of Equity Securities
            25Item
                6.
            Management's
                Discussion and Analysis or Plan of
                Operation
            28Item
                7.
            Financial
                Statements
            31Item
                8.
            Changes
                In and Disagreements With Accountants on Accounting
                and Financial Disclosure
            32Item
                8A.
            Controls
                and Procedures
            33Item
                8B.
            Other
                Information
            34PART
                IIIItem
                9.
            Directors
                and Executive Officers
            34Item
                10.
            Executive
                Compensation
            35Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            38Item
                12.
            Certain
                Relationships and Related
                Transactions
            41Item
                13.
            Exhibits
            43Item
                14.
            Principal
                Accountant Fees and Services
            46










Table
          of Contents





**PART
      I**








**ITEM
      1. DESCRIPTIONOF BUSINESS**


**Summary
        of Current State of Business Affairs**
 
 Since
        its
        inception, CepTor Corporation (hereinafter “CepTor” or 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. Its two lead compounds
        are MyodurTM, for neuromuscular disease, and NeurodurTM, for neurodegenerative
        diseases. In January 2006, CepTor submitted an Investigational New Drug
        Application (IND) to the Food and Drug Administration (FDA) for MyodurTM with the
        hope and expectation of beginning clinical trials for this compound following
        approval of the IND. Since that time, the IND has remained on “clinical hold”
pending resolution of certain issues raised by the FDA. Most recently, in
        October 2006, the Company was advised that, despite its efforts to resolve
        the
        concerns and issues previously raised by the FDA, the IND would remain on
        hold
        pending further testing and research as directed by the FDA.
 
 We
        believe, but cannot be certain, that the issues raised by the FDA in connection
        with our IND for MyodurTM can be successfully resolved and that an IND will
        ultimately win FDA approval, and we continue to remain optimistic about the
        promise and potential of our neuromuscular and neurodegenerative compounds.
        However, our existing investors have advised us that they were unwilling
        to
        continue to fund either the research and development costs required to fully
        prosecute the IND filing, or the general operating costs necessary to keep
        the
        business afloat as those research and development activities continued. With
        no
        other financial resources available to us, we had no choice but to cease
        all
        efforts related to the research and development of our compounds, terminate
        all
        of our employees, and close down our corporate offices in Maryland. At present,
        we are maintaining our operations as a “virtual” office operated out of New York
        City and have one part-time employee, Howard Becker, our newly appointed
        CEO.
 The
          MyodurTM and NeurodurTM technologies represent substantially all of the focus of
          the Company, and those technologies have been pledged to certain secured
          creditors under a credit facility entered into by the Company in late 2005.
          Based on the currently realizable value of our early stage technologies,
          we do
          not believe that the liquidation of those assets would generate more than
          the
          amount of the debt which is secured by these technologies. However, rather
          than
          merely sell off the assets and terminate all operations, file a bankruptcy
          petition or consent to the foreclosure of the assets by the secured creditors,
          we have instead been focusing on a two-part strategy, in cooperation with
          the
          existing secured creditors, whereby (i) our existing technologies will
          be
          divested from the corporation pursuant to a transaction that will allow
          CepTor
          to retain significant upside should the technologies ultimately fulfill
          their
          promise as marketable and commercially viable products, and (ii) a new
          technology will be acquired by the Company around which we could restructure
          our
          affairs. Any such transaction would have to have the full support of the
          existing secured creditors, as they have a priority position with respect
          to all
          of CepTor’s current assets.
  With
        respect to seeking to identify the best transaction related to the existing
        CepTor technologies, our goal has been to find a transaction which will allow
        the research and development efforts to continue despite the absence of
        immediately available funds, and will give CepTor meaningful financial upside
        should the technologies progress and ultimately achieve commercialization.
        After
        considering a number of potential transactions, including straight licensing
        arrangements that would have resulted in CepTor licensing the technologies
        to a
        large corporation in exchange for a limited future royalty, management has
        concluded that the best available opportunity, and the one most likely to
        result
        in the advancement of the technologies on terms fair to CepTor, would be
        a
        transaction with the original founding scientists, Dr Alfred Stracher and
        Dr.
        Leo Kesner.
  As
          described more fully below (see **“** *DESCRIPTION
          OF BUSINESS—Business--Transfer of Technologies to New Entity to be Controlled by
          Founding Scientists”* ),
          on
          March 29, 2007, we executed a term sheet (which is subject to Board and
          secured
          creditor approval, which is intended to be obtained in the second part
          of April
          2007, after this Form 10-KSB is filed) with Drs. Stracher and Kesner, pursuant
          to which our MyodurTM and NeurodurTM technologies will be assigned to a new
          corporation controlled by them (“Newco”), and these scientists will dedicate
          their efforts to the continued research and development activities for
          these
          products, with the initial goal of getting the FDA process back on track.
          CepTor
          will retain a substantial minority interest in Newco, as well as a substantial
          gross royalty on any product sales should their efforts prove successful.
          CepTor
          will have no direct role in the management of Newco and no obligation to
          fund
          its activities.
 
 1
 Table
            of Contents
  Drs.
        Stracher and Kesner intend to focus initially on pursuing the availability
        of
        grant funding to move the projects forward, while at the same time seeking
        to
        attract outside investment or an appropriate third-party transaction that
        will
        ensure the project garners adequate funding to move through the FDA process.
        Should Newco succeed in its efforts to advance the technologies, CepTor will
        benefit through its significant equity stake and, should the projects prove
        commercially viable, through its gross royalty on eventual product sales.
        Upon
        consummation of the transaction with Drs. Stracher and Kesner, CepTor will
        have
        no material remaining assets (other than its minority interest in Newco and
        its
        royalty rights granted as part of that transaction). CepTor’s existing secured
        creditors will retain a security interest in CepTor’s ownership interest in the
        newly formed entity and income streams from the royalty interest.
 
 To
        return
        to economic viability, CepTor has been focusing its attentions and efforts
        toward identifying a transaction which, if consummated, will result in a
        new technology being acquired by CepTor which has better prospects for
        attracting investment and more quickly achieving commercial viability. Although
        no final agreement has yet been entered into, we are currently in advanced
        negotiations with a private biotech company that would result in CepTor
        acquiring, continuing to develop and seeking to commercialize a new technology
        platform. Details regarding that potential transaction will be reported if
        and
        when the final terms of a transaction are mutually agreed to. Should our
        efforts
        regarding the transaction currently being negotiated fail to be successfully
        concluded, we will continue to seek an alternative transaction that will
        result
        in our acquiring a new technology around which to restructure our
        affairs
 
 Regardless
        of what transaction may ultimately materialize, it is clear that in order
        to
        consummate the acquisition of any new technology, we will first have to
        consensually restructure our approximately $4 million in trade debt. In that
        regard, in December 2006, CepTor offered a ten (10%) percent cash payment
        to its
        existing trade creditors in exchange for a release of their claims. The funding
        of any such settlement would be provided by current investors. The offer
        was
        predicated on the acceptance of the holders of not less than 90% of the total
        trade debt. Although a large majority of the Company’s creditors accepted the
        proposal, the Company failed to reach the minimum threshold level of
        acceptances, and the offer has not been consummated. As CepTor works to finalize
        an arrangement for the acquisition of a new technology, we expect to circulate
        a
        revised offer to our creditors that we hope will be accepted. Without such
        acceptance, we do not believe that we will be able to successfully close
        any
        transaction for a new technology, which would likely leave us with no choice
        but
        to further wind down our affairs.
 
 Given
        our
        present financial circumstances, we believe that our two-part strategy of
        divesting CepTor of its existing technologies, thereby enabling those
        technologies to continue their development with appropriate upside for CepTor,
        and seeking to finalize a transaction to acquire a commercially viable new
        technology around which to reorganize CepTor’s affairs, offers the best and
        perhaps only chance of realizing value for all of our shareholders, creditors
        and other stakeholders. However, there is no assurance that these efforts
        will
        prove to be successful, or that CepTor will not be forced to cease
        operations.





**Corporate
      History**




We
        were
        incorporated in Delaware in 1986 under the name Aloe Scientific Corporation.
        In
        1988 our name was changed to CepTor Corporation. Until December 2003 our
        stock
        was held by ten persons and our operations were privately funded by loans
        from
        our owners, through research grants, and by testing and development agreements
        with third parties. In January 2004 we were acquired by Xechem International,
        Inc. ("Xechem") in a stock-for-stock transaction. Thereafter, Xechem determined
        that it would be in its
        and
        our best interest to spin-off our company to permit us to seek separate
        financing in order to pursue further development of our products. As a result,
        on December 8, 2004, we completed a merger (the "Merger") with Medallion
        Crest
        Management, Inc., a Florida corporation ("Medallion ") ,
        a
        public company. Medallion acquired all of our outstanding capital stock in
        exchange for 5,278,068 shares of Medallion common stock and assumption of
        certain obligations.




On
      December 8, 2004 we also filed an amendment to our Articles of Incorporation
      in
      order to adopt the name CepTor Corporation and to authorize our Series A
      Convertible Preferred Stock, par value $0.0001 per share ("Series A Preferred
      Stock"). As a result of these transactions, we succeeded to the type of business
      conducted by CepTor Corporation since 1986 as our sole line of business under
      the direction of a management team appointed by Xechem in 2004, and relocated
      our principal executive offices to Hunt Valley, Maryland.




2
 Table
          of Contents




On
      January 31, 2005, we merged with our wholly-owned subsidiary to change our
      domicile to Delaware from Florida and to collapse the parent-subsidiary
      relationship resulting from the December 8, 2004 transactions.


In
        the
        fourth quarter of 2006, all of CepTor’s then-remaining employees either resigned
        or were terminated because of an absence of sufficient funds to both continue
        with the research and development efforts related to the Company’s existing
        technologies and to cover the costs of ongoing operations. In December 2006,
        Howard Becker was appointed as the Chief Executive Officer of the Company,
        and
        was also appointed as a director. He is currently our only employee and is
        working on a part time basis for CepTor. The Company’s offices were relocated
        from Maryland to New York City effective January 1, 2007, and the Company
        is
        currently being run as a “virtual company” pending the consummation of the
        transaction with Drs. Stracher and Kesner designed to enable the existing
        technologies to continue to be developed, and the finalization of a transaction
        for the acquisition of a new technology that would give CepTor the
        chance to become a viable, commercially successful entity.
  The
        information in this Report is presented as if the Company existing since
        1986
        had been the registrant for all periods presented. The section "Management's
        Discussion and Analysis or Plan of Operation" and the audited financial
        statements presented in this Report are exclusive of any assets or results
        of
        operations or business attributable to Medallion. As used in this Report,
        unless
        otherwise indicated, the terms "we," "us," "our" and "the Company" refer
        to
        CepTor Corporation.





**Financings**




In
      connection with the Merger, we also completed the closing of a private offering
      of our securities ("Private Placement") in which we sold an aggregate of 511.65
      Units to accredited investors in the Private Placement, pursuant to the terms
      of
      a Confidential Private Placement Memorandum dated October 22, 2004, as
      supplemented. Each Unit consists of one share of Series A Preferred Stock and
      a
      three-year warrant to purchase our common stock, par value $0.0001 per share
      ("Common Stock") at $2.50 per share. Each share of Series A Preferred Stock
      is
      convertible into 10,000 shares of Common Stock and each unit warrant entitles
      the holder to purchase 5,000 shares of Common Stock for $2.50 per share. The
      Units were offered by Brookshire Securities Corporation ("Placement Agent")
      pursuant to a placement agent agreement, as amended ("Placement Agent
      Agreement"), under which the Placement Agent is entitled, in addition to a
      percentage of gross proceeds of the Private Placement, to receive 300,000 shares
      of Common Stock and a warrant to purchase up to an aggregate of 10% of the
      shares of Common Stock into which the Series A Preferred Stock may be converted
      that are sold in the Private Placement. We realized gross proceeds from the
      Private Placement of $12,791,250, before payment of commissions and
      expenses.




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




Cornell
        Capital was granted the right to convert a portion or all of the outstanding
        principal and interest under the Cornell Convertible Debentures into shares
        of
        Common Stock at a conversion price per share equal to the lesser of $0.9765
        (105% of the closing bid price of the Common Stock on December 8, 2005) (the
        "Fixed Price") or (ii) 95% of the lowest closing bid price of the Common
        Stock
        for the twenty trading days immediately preceding the conversion date (the
        "Floating Price" and together with the Fixed Price, the "Conversion Price"),
        subject to adjustment as provided in the Cornell Convertible Debentures;
        provided, that any such conversion based on the Floating Price will generally
        be
        limited to $150,000 of principal outstanding under the Cornell Convertible
        Debentures in any thirty day period; and further provided, that Cornell Capital
        may not convert the Cornell Convertible Debentures into shares of Common
        Stock
        if such conversion would result in Cornell Capital, together with its
        affiliates, beneficially owning in excess of 4.9% of the then issued and
        outstanding shares of Common Stock, but upon 65 days notice, may waive this
        restriction. The Conversion Price and number of shares of Common Stock issuable
        upon conversion of the Cornell Convertible Debentures are subject to
        certain exceptions and adjustment for stock splits and combinations and other
        dilutive events.
 
 Subject
        to the terms and condition of the Cornell Convertible Debentures, we have
        the
        right at any time upon three business days' notice to redeem the Cornell
        Convertible Debentures, in whole or in part. If the closing bid price of
        the
        Common Stock is less than the Fixed Price at the time of the redemption,
        we are
        obligated to pay, in addition to the principal and accrued interest being
        redeemed, a redemption premium of 8% of the principal amount being redeemed
        (the
        "Redemption Amount"). If the closing bid price is greater than the Fixed
        Price,
        we may redeem up to 50% of the principal amount at the Redemption Amount
        and the
        remaining 50% at the greater of the (x) Redemption Amount or (y) the market
        value of the Common Stock. In addition, Cornell Capital will receive a
        three-year warrant to purchase 25,000 shares of Common Stock for every $100,000
        redeemed by us, on a pro rata basis, at an exercise price per share of $0.9765
        (the "Redemption Warrant").
 
 3
 Table
            of Contents
  If
        an
        Event of Default (as such term is defined in the Cornell Convertible Debentures)
        occurs, any principal and accrued interest outstanding will become immediately
        due and payable, in cash or Common Stock, at Cornell Capital's
        election.
  Pursuant
        to the Securities Purchase Agreement, on December 9, 2005, we issued to Cornell
        Capital a three-year warrant at an exercise price per share of $1.023 (110%
        of
        the closing bid price of the Common Stock on December 8, 2005) ("Cornell
        Warrant") and (ii) 268,817 shares of Common Stock, and on each of December
        9,
        2005 and December 28, 2005, we made a cash payment to an affiliate of Cornell
        Capital of $80,000 for expenses incurred in connection with the
        transaction.
 
 We
        have
        granted a security interest in all of our assets to Cornell Capital to secure
        our obligations under the Cornell Convertible Debentures.
 On
        June
        29, 2006,Cornell
        Capital, the Company and certain assignees (each an ‘‘Assignee’’) entered into
        an assignment agreement (‘‘Assignment Agreement’’)by
        and
        between Cornell Capital and various assignees (each an ‘‘Assignee’’)which
        provides for, among other things, the assignment of the unpaid and unconverted
        amounts outstanding under each of theCornell
        Convertible Debentures to the Assignees in the amounts listed in the Assignment
        Agreement. All of the terms and conditions remain unchanged in theCornell
        Convertible Debentures except that the Assignment Agreement provides that
        the
        Company may not redeem theCornell
        Convertible Debentures, in whole or in part. The all asset pledge that secured
        the Securities Purchase Agreement was assigned to the Assignees, who continue
        to
        hold a security interest in all of the Company’s
        assets.


On
        December 9, 2005, we issued a convertible promissory note (the "Harbor Note")
        in
        the principal amount of $250,000 to Harbor Trust which bears interest at
        the
        rate of 6% percent per year. All unpaid principal and interest under the
        Harbor
        Note were
        due
        and payable on December 9, 2006. No payment of principal or interest was
        made at
        that time or since, and we are presently in default of our payment obligations
        under the Harbor Note. The Harbor Note is convertible, in whole or in part,
        at
        any time, into Common Stock at a conversion price of $1.00 per share, subject
        to
        certain limitations on conversion as set forth in the Harbor Note, including
        where the resulting number of shares converted on a cumulative basis, would
        exceed 19.99% of the total number of shares of Common Stock outstanding and,
        subject to a conversion price adjustment in the event we offer or sell an
        option
        to acquire Common Stock at a price per share less than the conversion
        price.


On
      May
      26, 2006, we entered into a placement agency agreement and term sheet for a
      private offering of one-year 6% convertible notes in an aggregate principal
      amount of up to $6,000,000 (the ‘‘2006 6% Convertible Notes’’). We offered the
      2006 6% Convertible Notes on a ‘‘best efforts’’ basis only to ‘‘accredited
      investors’’ (as defined in Rule 501 (a) of Regulation D under Section 4(2) of
      the Securities Act of 1933, as amended) by offer letter dated May 25, 2006
      (the
‘‘Offer Letter’’), which sets forth the terms and conditions of the
      offering.




The
        2006
        6% Convertible Notes are payable one year after the date of funding, or earlier
        upon acceleration following the occurrence of an ‘‘Event of Default’’, as
        defined in the 2006 6% Convertible Notes. Interest on the 2006 6% Convertible
        Notes will accrue from the date of issue at 6% per annum, or 12 % per annum
        upon
        the occurrence of an Event of Default. The principal of, and accrued interest
        on, the 2006 6% Convertible Notes is convertible into shares of common stock,
        at
        the option of the holders of the 2006 6% Convertible Notes, at an initial
        conversion price per share of $0.15, subject to adjustment for certain issuances
        or events that will result in dilution (the ‘‘Fixed Conversion Price’’). Since
        the 2006 6% Convertible Notes had not been fully converted or repurchased
        for
        200% of their principal amount by September 30, 2006, on October 1, 2006,
        the
        conversion price became
        the lesser of (i) the Fixed Conversion Price and (ii) 90% of the lowest closing
        price (or, if no closing price is available, the average of closing bid and
        asked prices) of the Company’s common stock for the 20 trading days immediately
        preceding the date on which a notice of conversion is delivered (the ‘‘Floating
        Conversion Price’’).


4
 Table
          of Contents




Purchasers
        of 2006 6% Convertible Notes who had not previously purchased shares of the
        our
        Series A Convertible Preferred Stock, par value $0.0001 per share (the
‘‘Preferred Stock’’) received, without additional consideration, five-year
        warrants to purchase a number of additional shares of common stock equal
        to 100%
        of the number of shares that the purchaser may initially acquire upon conversion
        of the 2006 6% Convertible Notes, at an initial exercise price of $0.30 per
        share, subject to adjustment for certain issuances and events that will result
        in dilution. Purchasers of 2006 6% Convertible Notes who purchased shares
        of
        Preferred Stock will be issued a number of additional shares of common stock
        upon conversion of the Preferred Stock, based upon the principal amount of
        2006
        6% Convertible Notes purchased relative to the total purchase price of the
        shares of Preferred Stock purchased, which will effectively reduce the per
        share
        conversion price of the Preferred Stock so that it is the same as the conversion
        price per share of the 2006 6% Convertible Notes, or to the extent purchasers
        have converted shares of Preferred Stock, but not sold the common stock received
        upon conversion, we will issue a number of additional shares of common
        stock that will provide equivalent value, in each case without additional
        consideration. We will issue warrants to purchase a number of additional
        shares of common stock at $0.15 that will provide equivalent value, to those
        purchasers of 2006 6% Convertible Notes who have sold or otherwise disposed
        of
        shares of common stock received upon conversion of Preferred Stock. We have
        also
        reduced to $0.30 the per share exercise price of warrants purchasers of the
        2006
        6% Convertible Notes received with their purchase of Preferred Stock, to
        the
        extent of the principal amount of 2006 6% Convertible Notes purchased relative
        to the total purchase price for the shares of Preferred Stock, subject
        to our right, after the registration statement referred to below has become
        effective, to force the exercise of those warrants on 20 days’ notice by
        offering to purchase those warrants for a nominal price if the closing price
        per
        share of the common stock exceeds $0.45 for ten consecutive trading
        days.




**Default
        of Various Obligations**
 
 The
        Company has been unsuccessful in its efforts to raise the necessary capital
        to
        fully execute its business plan and has not been able to remain current with
        respect to the payment terms of any of its operating obligations including
        its
        trade payables which aggregated approximately $3.9 million at December 31,
        2006.
        In addition, as described in Note 12, the Company is in default of substantially
        all of its note obligations, which amount to approximately $6,314,180 in
        aggregate principal amount. These defaults occurred principally as a result
        of
        (i) the Company's failure to make the required payments of principal and
        interest under certain of these obligations (which triggered cross default
        provisions under the remaining note obligations), (ii)its failure to file
        a
        registration statement pursuant to the 2006 6% Convertible Notes within a
        specified period, and (iii) its failure to file a post-effective amendment
        to
        its registration statement on Form SB-2 covering shares issuable under the
        Cornell Convertible Debentures within a specified period. The Company is
        also
        required to, but currently does not, have sufficient authorized but unissued
        shares available to settle its Convertible Debentures and all of its
        derivative and other financial instruments.


**BUSINESS**


**Historical**
 
 We
        are a
        development-stage biopharmaceutical company which historically had been 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). Our goal has always been to increase the quality and quantity of life of people
        suffering with these diseases. Since our inception, we have devoted our efforts
        and resources to the development of our receptor mediated drug-targeting
        platform for neuromuscular and neurodegenerative diseases, and to raising
        the
        funds necessary to continue this research.


We
        currently do not have, and historically have never had, any revenues from
        operations and have funded the development of our products through the sale
        of
        our securities and other loans and equity contributions. Our ability to continue
        as a going concern is and has always been entirely dependent on securing
        sufficient capital from outside lenders and investors. In recent months,
        we have
        been unsuccessful in our efforts to secure the necessary capital to execute
        our
        business plan or to continue to develop our existing technologies, and have
        not
        been able to remain current with respect to the payment terms of our operating
        obligations. In addition, we have substantial convertible debt obligations
        which
        are currently in default, and we have not identified any means to satisfy
        such
        obligations, and have no immediate prospects of doing so. We have exhausted
        substantially all of our capital resources, terminated substantially all
        of our
        employees except for our newly appointed, part-time chief executive officer
        and
        are currently unable to pursue further direct development of our product
        candidates.
 
 5
 Table
            of Contents
  CepTor’s
        current financial and operational predicament is based largely on our inability
        to date to get our IND approved for our lead compound, MyodurTM. In October 2006,
        we were informed by the FDA that our IND for MyodurTM remains on hold pending the
        resolution of two remaining issues. Additional internal research is required
        to
        fully resolve the FDA issues and complete our internal research program,
        which
        we estimate would take an additional twelve to eighteen months to complete.
        We
        lack the funding that is necessary to resolve these issues and are currently
        unable to secure financing commitments for this purpose. Due to these remaining
        issues and the lack of adequate funding, we have halted development of our
        programs.
 
 In
        light
        of our financial situation, we have been focusing on a two-part strategy,
        in
        cooperation with the existing secured creditors, whereby (i) our existing
        technologies will essentially be divested from the corporation pursuant to
        a
        transaction that will allow CepTor to retain significant upside should the
        technologies ultimately fulfill their promise as marketable and commercially
        viable products, and (ii) we will seek to finalize a transaction for the
        acquisition of a new technology around which we could restructure our affairs.
        Any such transaction would have to have the full support of the existing
        secured
        creditors, as they have a priority position with respect to all of CepTor’s
        current assets.
 
 With
        respect to seeking to identify the best transaction related to the existing
        CepTor technologies, our goal has been to find a transaction which will allow
        the research and development efforts to continue despite the absence of
        immediately available funds, and will give CepTor meaningful upside should
        the
        technologies ultimately achieve commercialization. After considering a number
        of
        potential transactions, including straight licensing arrangements that would
        have resulted in CepTor licensing the technologies to a large corporation
        in
        exchange for a limited future royalty, management has concluded that the
        best
        opportunity for the advancement of the technologies on terms fair to CepTor
        would be as part of a transaction with the original founding scientists,
        Dr.
        Alfred Stracher and Dr. Leo Kesner.
 
 **Transfer
        of Technologies to New Entity to be Controlled by Founding
        Scientists**
 
 On
        March
        29, 2007, we executed a term sheet, subject to Board and secured creditor
        approval, which we intend to seek in the second half of April, 2007, with
        Drs.
        Stracher and Kesner, the original founding scientists of the CepTor
        technologies, pursuant to which our MyodurTM and NeurodurTM technologies will be
        assigned to a new private entity (“Newco”) that will initially be owned 55% by
        Drs. Stracher and Kesner and 45% by CepTor. Drs. Stracher and Kesner will
        resume
        the research and development activities for these products, with the goal
        of
        getting the FDA process back on track, and initially intend to seek public
        and
        private grants to fund their efforts. CepTor will cooperate in efforts to
        attract outside funding, but will have no direct role in the management of
        Newco, nor will it be under any obligation to fund Newco’s operations. Other
        principal terms of the transaction include retention by CepTor of a gross
        royalty of 8% on all revenues generated by the new entity and a release by
        the
        founding scientists of substantial claims against the company related to
        their
        consulting agreements with the company. Pursuant to the transaction with
        Drs.
        Stracher and Kesner, CepTor’s 45% interest may be further reduced as a result of
        dilution caused by new investment in the subsidiary, or by transfers of a
        portion of its interest to creditors or other interested parties. The Company’s
        existing secured creditors, who collectively have a security interest in
        all of
        the Company’s assets, will retain a security interest in the shares of stock of
        Newco held by CepTor. Should the new corporation succeed in its efforts to
        advance the technologies, CepTor will benefit through its significant equity
        stake and, should the projects prove commercially viable, through its gross
        royalty on eventual product sales.
 
 **Acquisition
        of New Technology Being Pursued**
 
 Upon
        consummation of the transaction with Drs. Stracher and Kesner, CepTor’s only
        material remaining asset will be its minority interest in the newly formed
        corporation and its royalty rights granted as part of that transaction. To
        return to economic viability, CepTor has been focusing its attentions and
        efforts toward identifying an appropriate transaction supported by its
        secured creditors, which will result in a new technology being acquired by
        CepTor which is hoped will have better prospects for attracting
        investment and more quickly achieving commercial viability. Although no final
        agreement has yet been entered into, we are currently in advanced negotiations
        with a private biotech company that would result in CepTor acquiring, continuing
        to develop and seeking to commercialize a new technology platform. Details
        regarding that potential transaction will be reported if and when the final
        terms of a transaction are mutually agreed to. Should our efforts regarding
        the
        transaction currently being negotiated fail to be successfully concluded,
        we
        will continue to pursue an alternative transaction that will result in our
        acquiring a new technology around which to restructure our affairs.
 
 Regardless
        of what transaction may ultimately materialize, it is clear that a likely
        pre-condition of any possible transaction will be the successful, consensual
        restructuring of CepTor’s approximately $4 million in trade debt. In
        anticipation of possibly entering into such a transaction, in December 2006,
        CepTor offered a ten (10%) percent cash payment to its existing trade creditors
        in exchange for a release of their claims. The offer
        was
        predicated on the acceptance of the holders of not less than 90% of the total
        trade debt. Although a large majority of the Company’s creditors accepted the
        proposal, the Company failed to reach the threshold level of acceptances,
        and
        the offer has not been consummated. As CepTor works to finalize an arrangement
        for the acquisition of a new technology, we expect to circulate a revised
        offer
        to our creditors that we hope will be accepted.
  6
 Table
            of Contents
  If
        we are
        not able to finalize a transaction that results in the acquisition of a new
        commercially viable technology, including the requirement that we first
        consensually restructure our remaining outstanding trade debt, we will likely
        have no choice but to wind down our affairs and/or commence bankruptcy
        proceedings. There can be no assurance that we will be successful either
        in
        winning support from our existing trade creditors for the voluntary
        restructuring of their debts, or that we will finalize and close upon a
        transaction for a new technology around which to reorganize CepTor’s affairs. In
        addition, all of our assets are pledged to certain secured creditors to secure
        our repayment obligations to them. These matters raise substantial doubt
        about
        our ability to continue as a going concern. The financial statements do not
        include any adjustments that may result from the outcome of this
        uncertainty.


**EXISTING
        TECHNOLOGY**
 
 The
        description below relates to the existing CepTor technologies which are being
        assigned to Newco as part of the above-described transaction with Drs. Stracher
        and Kesner. Given the retention by CepTor of a substantial minority interest
        in
        Newco, as well as certain royalty rights, the information related to our
        existing technologies is useful for purposes of evaluating the value to CepTor
        of its retained investment in Newco.
 
 Through
        an existing proprietary platform technology, our efforts, prior to the
        suspension of all ongoing research and development activities, had been directed
        to the pursuit of drug candidates that exploit the understanding that activation
        of the cysteine protease calpain initiates the cellular degradation that
        accompanies many neuromuscular and neurodegenerative diseases. Early studies
        undertaken by us found that the calpain inhibitor leupeptin substantially
        ameliorated the degenerative effects of these diseases. Our technology includes
        utilizing the carrier molecules carnitine and taurine, which are used to
        target
        various passenger molecules, including our analogue of leupeptin, to skeletal
        muscle cells and nerve cells, respectively. This provides for potential
        applications of this technology in muscular dystrophy, multiple sclerosis
        (MS),
        epilepsy, ALS, CIDP, cancer cachexia, AIDS wasting, traumatic nerve injury,
        retinal degeneration, ototoxicity, Alzheimer's disease, Huntington's disease
        and
        cardiomyopathies.
 We
            have
            been issued compound patents on both carrier molecules (carnitine and
            taurine)
            in combination with any passenger molecule and have received orphan drug
            status
            for MyodurTM for Duchenne and Becker muscular dystrophy. Additional provisional
            and other patent applications have been filed or are in process (see *DESCRIPTION
            OF BUSINESS—Intellectual Property* ).
  Much
          of
          our existing technology is based on muscle and nerve cell targeting for
          calpain
          inhibition. Calpain exists in every cell of the body and is a protease
          that
          degrades cells naturally, in a normal metabolic process, in concert with
          new
          cells that are constantly being generated. If calpain is up regulated
          abnormally, the cellular degradation process breaks down cells and tissues
          faster than they can be restored, resulting in several serious neuromuscular
          and
          neurodegenerative diseases. Whether by genetic defect, trauma or insult,
          if cell
          membrane integrity is compromised, it can lead to up regulation of calpain
          causing deleterious muscle or nerve cell and tissue degradation. Although
          the
          subject of our continued research, we believe this to be because the cell
          membrane defect allows the entry of extracellular calcium ions into the
          cell,
          which, consequently, up regulates calpain. Our technology is designed to
          target
          calpain inhibitors to muscle and nerve cells preventing degradation of
          those
          tissues.
 
 Based
          on
          managements’ decision to assign our existing technologies to Newco, under the
          control of Drs. Stracher and Kesner, we do not intend directly to continue
          to
          pursue the development and commercialization of our existing technologies,
          but
          rather such efforts will be the sole responsibility of the newly formed
          entity,
          of which CepTor shall be a minority owner (as more specifically described
          above).


7
 Table
          of Contents




**STRATEGY**


Our
        longstanding efforts prior to exhausting our available financial resources
        and
        discontinuing all efforts related to the research and development of our
        existing technologies, including the continued prosecution of our IND had
        been
        primarily focused on a two-pronged business strategy to minimize product
        development risk and time to market and maximize market protection through
        a
        combination of internal development and licensing and the orphan drug model.
        We
        sought to take advantage of the legislative, regulatory, and commercial
        opportunities common to rare orphan diseases. We focused on developing and
        commercializing orphan drug candidates internally, while working to partner
        product development opportunities for non-orphan drug candidates with third
        parties.
  The
        MyodurTM and NeurodurTM technologies represent substantially all of the focus of
        the Company, and largely as a result of the continued clinical hold placed
        on
        our efforts to obtain FDA approval for our MyodurTM compound, our investors are
        no longer willing to fund the continued research and development of these
        technologies or fund our ongoing operations. However, rather than merely
        sell
        off the assets and terminate all operations, file a bankruptcy petition or
        consent to the foreclosure of the assets by the secured creditors, we have
        instead turned our attentions, in cooperation with the existing secured
        creditors, to pursue a strategy whereby (i) our existing technologies will
        be
        divested from the corporation pursuant to a transaction that will allow CepTor
        to retain significant upside should the technologies ultimately fulfill their
        promise as marketable and commercially viable products, and (ii) a new
        technology will be acquired by the Company around which we could restructure
        our
        affairs. Any such transaction would have to have the full support of the
        existing secured creditors, as they have a priority position with respect
        to all
        of CepTor’s current assets.
 As
          described above (see “ *DESCRIPTION
          OF BUSINESS--Business--Transfer of Technologies to New Entity to be
          Controlled by Founding Scientists”), t* he
          first
          prong of this strategy was recently initiated with the execution on March
          29,
          2007 of a term sheet with Drs. Stracher and Kesner, the original founding
          scientists of the CepTor technologies. Under the terms of that transaction,
          and
          subject to CepTor Board approval and the approval of our secured creditors,
          our
          MyodurTM and NeurodurTM technologies will be assigned to a new private entity in
          which CepTor shall retain a 45% interest (subject to possible future dilution),
          together with an 8% gross royalty in any eventual product sales. In the
          meantime, as described above (see “ *DESCRIPTION
          OF BUSINESS* -- *Business--Acquisition
          of New Technology Being Pursued”),* CepTor
          is
          continuing to progress toward finalizing a transaction that will result
          in a
          new, unrelated technology being acquired by CepTor and, as it seeks to
          finalize
          such a transaction, will continue to pursue the consensual restructuring
          of its
          outstanding trade debt. Should our efforts regarding the transaction currently
          being negotiated fail to be successfully concluded, we will continue to
          seek an
          alternative transaction that will result in our acquiring a new technology
          around which to restructure our affairs.




**MANUFACTURING**




With
      regard to the technology which we plan to convey, we did not have, and did
      not
      intend to establish, manufacturing facilities to produce any product or medical
      technology candidates, including those acquired or developed as part of any
      contemplated transaction for a new technology. With regard to any to be acquired
      technology, we plan to utilize contract manufacturers for our production
      requirements, if any. We believe that there are a number of high quality Good
      Laboratory Practice (GLP) and Good Manufacturing Practice (GMP) contract
      manufacturers available for these purposes.




8
 Table
          of Contents




**FDA
      OVERSIGHT OF MANUFACTURING**





The
      manufacturer of any future product or the implementation of any technology
      platform, whether done by third-party contractors or internally, will be subject
      to rigorous regulations, including the need to comply with the FDA's current
      GMP
      standards. As part of obtaining FDA approval for each product or technology,
      each of the manufacturing facilities must be inspected, approved by and
      registered with the FDA. In addition to obtaining FDA approval of the
      prospective manufacturer's quality control and manufacturing procedures,
      domestic and foreign manufacturing facilities are subject to periodic inspection
      by the FDA and/or foreign regulatory authorities which have the authority to
      suspend or withdraw approvals.





**INTELLECTUAL
      PROPERTY**





The
      intellectual property portfolio to be conveyed includes:


•
              Patent
                4,742,081 - Carnitine, which preferentially accumulates in cardiac
                and skeletal muscle, is coupled to a protease inhibitor or any other
                pharmaceutically active compound, for the purpose of site-specific
                drug
                delivery to these tissues. These products may be useful in a variety
                of
                muscle wasting diseases as well as cardiac conditions including cardiac
                ischemia;




•
            Patents
                4,866,040, 5,008,288 and 5,876,747 - These patents cover the compounds
                carnitine, aminocarnitine and cysteic acid (taurine) as carriers
                linked to
                protease inhibitors, propranolol, procainamide and quinidine and,
                as well,
                phosphatidyl carnitine incorporated into liposomes for the treatment
                of
                muscle disorders as well as cardiac
                arrhythmias;





•
            PCT
                international patent application no. PCT/US05/16132, which was filed
                on
                May 6, 2005, covers compound C-301 and related compounds to treat
                a number
                of neurologic, otologic, and ophthalmologic disorders such as epilepsy
                and
                bipolar disorder. The international application claims priority upon
                a
                U.S. provisional application no. 60/568,720, which was filed on May
                6,
                2004.





•
            PCT
                international patent application (no. to be assigned), which was
                filed on
                June 13, 2005 and covers MyodurTM and related compounds as well as their
                use to treat muscle disorders. The application claims new compositions
                of
                matter (i.e., oral prodrugs and pharmaceutical formulations thereof),
                kits, and use of these materials to treat a variety of diseases such
                as
                muscular dystrophy. The international application claims priority
                upon
                U.S. provisional application nos. 60/578,914 and 60/633,274, which
                were
                filed on June 12, 2004 and December 3, 2004, respectively. A U.S.
                utility
                application will be filed shortly with the U.S. Patent and Trademark
                office.




•
              PCT
                  international patent application (no. to be assigned), which was
                  filed on
                  September 29, 2005, covers NeurodurTM and related compounds to treat a
                  number of neurologic, otologic, and ophthalmologic disorders. The
                  application claims new compositions of matter and use of these
                  compositions as oral pro-drugs to treat a variety of diseases such
                  as
                  multiple sclerosis. The international application claims priority
                  upon
                  U.S. provisional application, which was filed on September 29,
                  2004. A
                  U.S. utility application will be filed shortly with the U.S. Patent
                  and
                  Trademark office.


9
 Table
            of Contents




At
      present, the Company’s patent protection for MyodurTM extends solely to the
      United States. Provisional patents for NeurodurTM are scheduled to expire
      shortly, and the Company is in the process of securing final patent protection
      for the US, the European Union and Japan. These patents are being undertaken
      pending the consummation of the transaction with Professors Stracher and Kesner
      relating to the transfer of the MyodurTM and Neurodur technologies. Certain of
      the related compounds included as part of the provisional patent application
      for
      NeurodurTM will not be included in the request for final patents. In conjunction
      with the transaction with Drs. Stracher and Kesner, the costs related to the
      patent filings will be borne by CepTor and them in proportion to their equity
      ownership in Newco.





We
      have
      made the following orphan drug designation filings:




•
            Orphan
                Drug Designation has been granted for leupeptin in denervation
                injury;





•
            Orphan
                Drug Designation has been granted for Duchenne and Becker muscular
                dystrophies;





We
      have
      also relied on protection afforded by confidentiality and invention
      acknowledgement agreements with key personnel in order to secure and protect
      our
      intellectual property rights that are not subject to patent or other statutory
      protection.




All
      patents and intellectual property rights related to our existing technologies
      will be assigned to Newco as part of the contemplated transaction with Drs.
      Stracher and Kesner.





All
      intellectual property rights held by CepTor related to the MyodurTM and Neurodur
      technologies will be assigned to Newco upon consummation of the pending
      transaction with Drs. Stracher and Kesner.





**LICENSES**





On
      September 15, 2004 we granted an exclusive fifteen-year license to JCR
      Pharmaceuticals Co., Ltd. ("JCR") to develop, manufacture, use, sell, and
      sublicense MyodurTM for the treatment of muscular dystrophy in Japan, South
      Korea, China, Taiwan and Singapore. The licensing agreement provides, among
      other things, for royalty payments to us in the amount of 25% of "net sales"
      (as
      such term is defined in the agreement) provided that the sum of the cost of
      goods sold, plus royalty payments does not exceed 35% of net sales. Pursuant
      to
      the license agreement, JCR acquired 554,413 shares of our Common Stock for
      $1,000,000 ($929,231 after expenses), and upon FDA approval of an IND
      application for MyodurTM for muscular dystrophy in the United States, is
      obligated to purchase $1,000,000 of additional shares of our Common Stock.
      The
      purchase price at the time of the second $1,000,000 investment required under
      the license agreement will be the then market price of our Common Stock which
      may be higher, or lower, on a price per share basis, than the purchase price
      applicable to the initial investment. In addition, JCR is obligated to make
      a
      milestone payment of $500,000 to us upon FDA approval of an IND application
      to
      initiate Phase I/II clinical studies for MyodurTM for muscular dystrophy in the
      United States.





Based
      on
      our current financial condition, as well as the pending transaction with Drs.
      Stracher and Kesner related to the existing technologies, the status of the
      JCR
      license agreement is uncertain and may be terminated or the subject of further
      discussions with JCR as to its continuation.





**COMPETITIVE
      BUSINESS CONDITIONS AND COMPETITIVE POSITION IN THE INDUSTRY; METHODS OF
      COMPETITION**





We
      currently have no products or drugs in commercial production and have been
      exclusively engaged in research and development, pre-clinical and pre-regulatory
      review and preparation. Accordingly, we do not compete with any product or
      in
      any market or industry. Similarly, any new technology we may acquire as part
      of
      a possible third party transaction currently being contemplated would also
      be at
      the development stage. While there is no assurance that our existing
      technologies being assigned to will be capable of commercialization, we believe
      that competition in its planned area of concentration, should our transferred
      products or technologies obtain regulatory clearances required for
      commercialization, will primarily involve effectiveness of our products and
      technologies, and, to a lesser degree, price and insurance availability.





**DISTRIBUTION
      METHODS**





We
      currently have no distribution methods since all of existing products are
      presently in development and we have neither applied for nor received any
      regulatory approvals.





10
 Table
            of Contents





**SOURCES
      AND AVAILABILITY OF RAW MATERIALS**





In
      connection with our existing MyodurTM and NeurodurTM technologies, we have
      maintained relationships with two companies, Bachem AG and Sigma Tau, for raw
      materials for our research and testing needs. The raw materials required by
      us
      in the past have been available from a limited number of suppliers capable
      of
      production which meet our requirements and FDA standards. We are in substantial
      arrears in payment of our obligations to Bachem AG and Sigma Tao, and we cannot
      be certain they will continue to supply required raw materials to Newco as
      part
      of the continued development of these products. If not, Newco will be forced
      to
      seek alternative sources.





**CUSTOMERS**





We
      currently have no customers.





**GOVERNMENT
      REGULATION**





The
      following discussion regarding “Government Regulation” relates to our existing
      MyodurTM and NeurodurTM technologies, which are being assigned to Newco, and are
      relevant to Newco’s efforts to commercialize these compounds. To the extent we
      succeed in acquiring a new technology, we expect that, depending on the
      particular technology involved, that similar regulations will
      apply.





The
      manufacturing and marketing of the technologies we are assigning to Newco are
      subject to regulation for safety, efficacy and quality by numerous governmental
      authorities in the United States and other countries. We anticipate that these
      regulations will apply separately to the drugs and compounds we have developed
      and which are being assigned to Newco, as well as any other technology we may
      seek to develop. Compliance with these regulations will involve a considerable
      amount of time, expense and uncertainty.





In
      the
      United States, drugs and other medical technologies are subject to rigorous
      federal regulation and, to a lesser extent, state regulation. The United States
      Food, Drug and Cosmetic Act, the regulations promulgated thereunder, and other
      federal and state statutes and regulations govern, among other things, the
      testing, manufacture, safety, efficacy, labeling, storage, record keeping,
      approval, advertising and promotion of our drugs. Drug development and approval
      within this regulatory framework is difficult to predict and will take a number
      of years and involve material expenditures that cannot be accurately projected
      at this early stage of development of our existing or acquired products, but
      which will exceed our current resources and those of Newco and will require
      sources of funds which are presently uncertain.





The
      steps
      required before a pharmaceutical agent may be marketed in the United States
      include:




•
            Pre-clinical
                laboratory tests*,
                in vivo*pre clinical studies and formulation
                studies;





•
            The
                submission to the FDA of an IND application for human clinical testing
                which must become effective before human clinical trials can
                commence;





•
            Adequate
                and well controlled human clinical trials to establish the safety
                and
                efficacy of the product;





•
            The
                submission of a NDA or BLA to the FDA;
                and





•
            FDA
                approval of the NDA or BLA prior to any commercial sale or shipment
                of the
                product.





In
      addition to obtaining FDA approval for each product, each domestic product
      manufacturing facility must be registered with, and approved by, the FDA.
      Domestic manufacturing facilities are subject to biennial inspections by the
      FDA
      and must comply with the FDA's Good Laboratory Practices for products, drugs
      and
      devices.





**PRE-CLINICAL
      TESTING** .
      Pre-clinical testing includes laboratory evaluation of chemistry and
      formulation, as well as tissue culture and animal studies to assess the
      potential safety and efficacy of the product. Pre-clinical safety tests must
      be
      conducted by laboratories that comply with FDA regulations regarding Good
      Laboratory Practices. No assurance can be given as to the ultimate outcome
      of
      such pre-clinical testing. The results of pre-clinical testing are submitted
      to
      the FDA as part of an IND application and are reviewed by the FDA prior to
      the
      commencement of human clinical trials.





We
      have
      relied upon contractors to perform pre-clinical studies related to MyodurTM and
      NeurodurTM. To date, we have not been successful in obtaining approval of our IND
      for MyodurTM, and those efforts will now be continued by Newco under the
      direction of Drs. Stracher and Kesner.





11
 Table
            of Contents




**CLINICAL
      TRIALS** .
      Clinical trials involve the administration of the new product to healthy
      volunteers or to patients under the supervision of a qualified principal
      investigator. Clinical trials must be conducted in accordance with Good Clinical
      Practices under protocols that detail the objectives of the study, the
      parameters to be used to monitor safety and the efficacy criteria to be
      evaluated. Each protocol must be submitted to the FDA as part of the IND
      application. Further, each clinical study must be conducted under the auspices
      of an independent institutional review board at the institution where the study
      will be conducted. The institutional review board will consider, among other
      things, ethical factors, the safety of human subjects and the possible liability
      of the institution. Compounds must be formulated according to Good Manufacturing
      Practices.





Clinical
      trials are typically conducted in three sequential phases, but the phases may
      overlap. In Phase I, the initial introduction of the product into healthy human
      subjects, the drug is tested for safety (adverse side effects), absorption,
      dosage tolerance, metabolism, bio distribution, excretion and pharmacodynamics
      (clinical pharmacology). Phase II is the proof of principal stage and involves
      studies in a limited patient population in order to:




•
            Determine
                the efficacy of the product for specific, targeted
                indications;





•
            Determine
                dosage tolerance and optimal dosage;
                and





•
            Identify
                possible adverse side effects and safety
                risks.





If
      there
      is evidence that the product is found to be effective and has an acceptable
      safety profile in Phase II evaluations, Phase III trials may be undertaken
      to
      further evaluate clinical efficacy and to test for safety within an expanded
      patient population at geographically dispersed multi-center clinical study
      sites. Phase III frequently involves randomized controlled trials and, whenever
      possible, double blind studies. We, or the FDA, may suspend clinical trials
      at
      any time if it is believed that the individuals participating in trials are
      exposed to unacceptable health risks.





It
      is our
      expectation that Newco will rely upon contractors to perform clinical trials
      for
      NeurodurTM and MyodurTM, but that is an issue that will be determined by its
      management.





**NDA
      AND FDA APPROVAL PROCESS** .
      The
      results of pharmaceutical development, pre-clinical studies and clinical studies
      are required to be submitted to the FDA in the form of a NDA for approval of
      the
      marketing and commercial shipment of all regulated products. The testing and
      approval process is likely to require substantial cost, time and effort. In
      addition to the results of pre-clinical and clinical testing, the NDA applicant
      must submit detailed information about chemistry, manufacturing and controls
      that will determine how the product will be made. The approval process is
      affected by a number of factors, including the severity of the disease, the
      availability of alternative treatments and the risks and benefits demonstrated
      in clinical trials. Consequently, there can be no assurance that any approval
      will be granted on a timely basis, if at all. The FDA may deny a NDA if
      applicable regulatory criteria are not satisfied, require additional testing
      or
      information or require post-marketing testing and surveillance to monitor the
      safety of a company's product if it does not believe the NDA contains adequate
      evidence of the safety and efficacy of the drug. Notwithstanding the submission
      of such data, the FDA may ultimately decide that a NDA does not satisfy its
      regulatory criteria for approval. Moreover, if regulatory approval of a drug
      is
      granted, such approval may entail limitations on the indicated uses for which
      it
      may be marketed. Finally, product approvals may be withdrawn if compliance
      with
      regulatory standards is not maintained or if problems occur following initial
      marketing. Post approval studies may be conducted as Phase IV to explore further
      intervention, new indications, or new product uses. Among
      the
      conditions for NDA approval is the requirement that any manufacturer's quality
      control and manufacturing procedures conform to Good Manufacturing Practices
      and
      the requirement specifications of the FDA. In complying with standards set
      forth
      in these regulations, manufacturers must continue to expend time, money and
      effort in the area of drug application and quality control to ensure full
      technical compliance. Manufacturing facilities, both foreign and domestic,
      also
      are subject to inspections by or under the authority of the FDA and by other
      federal, state or local agencies.





**INTERNATIONAL
      APPROVAL** .
      Whether
      or not FDA approval has been obtained, approval of a product by regulatory
      authorities in foreign countries must also be obtained prior to the commencement
      of commercial sales of the drug in such countries. The requirements governing
      the conduct of clinical trials and drug approvals vary widely from country
      to
      country, and the time required for approval may be longer or shorter than that
      required for FDA approval. Although there are some procedures for unified
      filings for certain European countries, in general, each country at this time
      has its own procedures and requirements.





**OTHER
      REGULATION** .
      In
      addition to regulations enforced by the FDA, we are also subject to regulation
      under the Occupational Safety and Health Act, the Environmental Protection
      Act,
      the Toxic Substances Control Act, the Resource Conservation and Recovery Act,
      and other present and future federal, state or local regulations. Research
      and
      development related to our existing technologies by Newco may involve the
      controlled use of hazardous materials, chemicals, and various radioactive
      compounds. Although we believe that our safety procedures for handling and
      disposing of such materials comply with the standards prescribed by state and
      federal regulations, the risk of accidental contamination or injury from these
      materials cannot be completely eliminated. In the event of any accident, Newco
      and possibly CepTor could be held liable for any damages that result and any
      such liability could exceed our resources.





12
 Table
            of Contents




In
      pre-clinical studies MyodurTM has demonstrated efficacy in muscular dystrophy,
      NeurodurTM has demonstrated efficacy in MS, and C-301 has demonstrated efficacy
      in animal models for epilepsy. We filed an IND application with the FDA for
      MyodurTM on January 12, 2006. The FDA approval process typically takes
      approximately 30 days but may be extended if the FDA has questions regarding
      the
      IND application or requires additional data, as was the case here. All efforts
      related to the continuation of the FDA process for MyodurTM and NeurodurTM,
      including the IND, will be the responsibility of Newco, subject to the closing
      of the transaction with Drs. Stracher and Kesner.





**RISK
      FACTORS**





The
      following risk factors should be considered carefully in addition to the other
      information contained in this Report. Our most significant risks and
      uncertainties are described below; however, they are not the only risks we
      face.
      If any of the following risks actually occur, our business, financial condition,
      or results or operations could be materially adversely affected.





Specific
      risk factors related to any new technology we may acquire will depend on the
      technology acquired, and must await final agreement between CepTor and the
      company whose assets would be acquired, regarding the terms of the acquisition.
      No such agreement has been reached as of the date of this Report. Risk factors
      related to the continued development of our transferred technologies by Newco
      are described separately below:





**General
      Risk Factors**





***TRANSACTION
      FOR POTENTIAL NEW TECHNOLOGY MAY NOT BE FINALIZED OR SUCCESSFULLY CLOSE DUE
      TO
      INABILITY TO MEET CONDITIONS PRECEDENT***





CepTor
      has hinged its future prospects primarily on its ability to successfully close
      upon a transaction with a third party for the acquisition of a new technology
      platform around which to restructure its operations. One of the pre-conditions
      to any such transaction is expected to be the Company’s ability to successfully
      restructure its trade debt on a consensual basis. There is no assurance that
      we
      will successfully restructure our trade debt, nor is there any assurance that,
      even if such debt is restructured, any transaction, including the one currently
      in advanced negotiations, will be finalized or successfully close. If we are
      unsuccessful either in restructuring our trade debt or finalizing and closing
      upon a transaction for a new technology, we may be forced to terminate
      operations, liquidate our assets and/or file for bankruptcy
      protection.





***THERE
      ARE SERIOUS DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING
      CONCERN***





Even
      if
      we succeed in finalizing and closing on a transaction for a new technology,
      absent additional funding from private or public equity or debt financings,
      collaborative or other partnering arrangements, or other sources, we will be
      unable to meet our operating expenses, or to initiate and sustain our
      development efforts as planned, and we may need to cease operations or sell
      assets. Even if we are able to obtain funding, there are no assurances that
      we
      will be able to obtain sufficient funding to meet all of our needs, and even
      if
      we obtain sufficient funding, that we will be able to bring a product to market
      which will ensure our future potential profitability.


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




We
      have
      yet to establish any history of profitable operations. At December 31, 2006,
      we
      had an accumulated deficit of $46,078,074. Our revenues are nonexistent and
      therefore sustainability of our operations is purely based on ability to obtain
      investor financing. We expect that our revenues will not be sufficient to
      sustain our operations for the foreseeable future. Our profitability will
      require the successful commercialization of our proposed or other products
      or
      technologies, as well as the value to us of our remaining interest in Newco.
      No
      assurances can be given when, or if, this will occur or that we will ever be
      profitable.





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





***THE
      COMPANY WILL REQUIRE ADDITIONAL FUNDING WHICH WILL BE SIGNIFICANT AND THERE
      MAY
      BE DIFFICULTY RAISING NEEDED CAPITAL IN THE FUTURE BECAUSE OF OUR LIMITED
      OPERATING HISTORY AND BUSINESS RISKS ASSOCIATED WITH THE
      COMPANY***


We
        do not
        currently generate any revenues. Subject to finalization of terms and closing,
        our intention is to shift our focus from our existing technologies to a
        transaction based upon the development of a newly acquired technology, which,
        if
        consummated, will require substantial additional funds for working capital,
        including the research and development costs, operating expenses, etc. Even
        assuming CepTor successfully acquires a new technology platform, there is
        no
        assurance additional funds will be available on acceptable terms, if at all,
        to
        implement any business plan related to such new technology. If that occurs,
        we
        will likely be forced to terminate all operations. Our long term capital
        requirements are expected to depend on a number of factors,
        including:





13
 Table
            of Contents




·
            our
                ability to finalize and close on a third party transaction, whether
                the
                one currently being negotiated or one as yet to be identified, for
                the
                acquisition of a new technology, and our ability to consensually
                restructure our existing trade debt, which is expected to be a condition
                to the closing of that transaction;




·
            the
                nature of the particular technology acquired, including the stage
                of
                development and the funds required to adequately progress with its
                development;




·
            progress
                with pre-clinical studies and clinical trials that may be
                required;




·
            the
                time and costs involved in obtaining regulatory
                clearance;




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




·
            costs
                of developing sales, marketing and distribution channels for any
                new
                technology we may acquire;




·
            competing
                technological and market
                developments;




·
            market
                acceptance of our products or
                technologies;




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




·
            costs
                for training physicians and scientists.




We
        may
        consume whatever financial resources we acquire more rapidly than anticipated,
        resulting in the need for additional funding. We may seek to raise any necessary
        additional funds through the exercise of warrants, equity, or debt financings,
        collaborative arrangements with corporate partners, or other sources. Any
        such
        equity financing may be dilutive to existing stockholders and debt financing,
        if
        available, may involve restrictive covenants that would limit how CepTor
        conducts its operations, how it finances its operations, or otherwise have
        a
        material effect on our current or future business prospects. In addition,
        in the
        event that additional funds are obtained by us through arrangements with
        collaborative partners or other sources, we may have to relinquish economic
        and/or proprietary rights to some of the technologies or products we may
        acquire
        that we would otherwise seek to develop or commercialize independently. If
        adequate funds are not available, we may be required to significantly reduce,
        refocus, or delay development efforts with regard to any new technology we
        acquire, and we may be forced to cease operations.





***DILUTION
      LIKELY TO RESULT UPON CLOSING OF TRANSACTION FOR NEW
      TECHNOLOGY***





Although
      no transaction for the acquisition of a new technology has been finalized,
      nor
      is there any assurance such terms will be agreed to, the only “currency” which
      CepTor has available to it with which to acquire a new, potentially viable
      technology is its equity, and accordingly, the consideration paid by CepTor
      for
      any such new technology is likely to be paid in CepTor stock and other non-cash
      consideration (e.g., warrants). As a result any such transaction is likely
      to
      result in substantial dilution to existing shareholders.




***FUTURE
        SALES BY OUR DEBT HOLDERS UPON CONVERSION MAY ADVERSELY AFFECT OUR STOCK
        PRICE
        AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS***


The
      sale
      of shares issued upon conversion of our debt will have a dilutive impact on
      our
      stockholders. If the aggregate principal amount of our debt of $5,968,180 and
      accrued interest is converted at December 31, 2006 (if its maturity was due
      before December 31, 2006) or at maturity, into shares of our Common Stock at
      the
      current conversion price of $0.15 per share, up to 44,759,400 shares of Common
      Stock will be issued to the debt holders. If the Cornell Convertible Debentures
      are converted, in whole or in part, at the Floating Price (as define in the
      Cornell Convertible Debentures), the number of shares issuable to Cornell
      Capital’s Assignees upon conversion may be substantially greater. The debt
      holders may sell such shares in the market immediately, which could cause our
      stock price to decline.






14
 Table
            of Contents




***OUR
        FINANCIAL CONDITION AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR OUTSTANDING
        DEBT INSTRUMENTS MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR TO RAISE
        ADDITIONAL EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE
        OPERATIONS***
  The
      terms
      of our outstanding Cornell Convertible Debentures, as assigned to certain
      Assignees, may limit our ability, without such Assignees’ consent, to, among
      other things:




•
            enter
                into certain transactions;





•
            create
                additional liens on our assets;





•
            issue
                preferred stock or Common Stock at certain discounts below market
                prices;
                or





•
            merge
                or consolidate with other entities,


and
      could
      adversely affect our liquidity and our ability to attract additional funding
      as
      required. There is no assurance that such consent would be given for any
      proposed transaction, including that which is currently being negotiated (See
      “*DESCRIPTION
      OF BUSINESS--Business--Acquisition of New Technology Being
      Pursued*”).





***SINCE
      WE HAVE NOT BEEN ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS WHEN DUE WE ARE
      IN
      DEFAULT OF THE OBLIGATIONS AND WE MAY BE REQUIRED TO SEEK OR MAY BE FORCED
      INTO
      BANKRUPTCY PROTECTION OR OUR ASSETS MAY BE SEIZED AS A
      RESULT***





We
      have
      not paid many of our debt and other obligations when due and are in default
      under our existing debt instruments. We currently do not have sufficient funds
      to repay our past due obligations or those not yet due, and we do not expect
      to
      be able to internally generate the cash flow required to service our
      obligations. As of April 5, 2007, our outstanding debt includes (i) $448,736
      of
      principal plus accrued interest which was due on July 3, 2006, (ii) $250,000
      plus accrued interest which was due on December 9, 2006, (iii) $1,700,000 of
      principal plus accrued interest of our Cornell Convertible Debentures due in
      December 2008, (iv) an aggregate of $3,569,444 of principal plus accrued
      interest of our 2006 6% Convertible Notes, due within twelve months of issuance
      beginning in June 2007, and (v) 356,000 in unsecured advances. Cornell Capital’s
      Assignees may require us to repay all of the principal and interest outstanding
      under the Cornell Convertible Debentures under certain circumstances. We do
      not
      currently have, and do not expect to have, sufficient cash reserves to repay
      the
      Cornell Convertible Debentures, which are currently in default. Our noteholders
      could aggressively seek to enforce the rights under their instruments, which
      could force us to consider bankruptcy or wind down our affairs. If we raise
      additional funds to repay the convertible notes and Cornell Convertible
      Debentures by selling equity securities, the relative equity ownership of our
      existing investors could be diluted and new investors could obtain terms more
      favorable than previous investors. Any such issuance of shares could cause
      a
      significant drop in the price of our stock and significant dilution to our
      stockholders. In addition, although we are seeking to consensually restructure
      our trade debt, we currently owe in excess of $4 million to our trade creditors,
      which is past due. There is no assurance that one or more of our trade creditors
      or our noteholders will not take action to seek to force us into bankruptcy
      involuntarily, or to cause us to seek bankruptcy protection voluntarily.




***OUR
        OBLIGATIONS UNDER THE CORNELL CONVERTIBLE DEBENTURES ARE SECURED BY ALL OF
        OUR
        ASSETS***


Our
      obligations under the Cornell Convertible Debentures are secured by all of
      our
      assets. We are currently in default of our obligations under the terms of the
      Cornell Convertible Debentures or related agreements, and the Assignees could
      decide to aggressively seek to enforce the rights under their instruments,
      which
      could force us to consider bankruptcy or wind down our affairs. In addition,
      Cornell Capital’s Assignees could foreclose their security interest and
      liquidate some or all of our assets and we could cease to operate.





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





Since
      our
      inception in 1986, we have incurred operating losses. As of December 31, 2006,
      our accumulated deficit amounted to $46,078,074. In addition, we expect to
      continue incurring operating losses for the foreseeable future as we continue
      to
      develop new technologies, should we succeed in closing on a transaction for
      such
      a new technology. Any new product or technology we may acquire will cause us
      to
      incur substantial research and development costs. Our ability to generate
      revenue and achieve profitability depends upon our ability, alone or with
      others, to complete the development of any newly acquired technology, obtain
      the
      required regulatory approvals and market any such new technology. Development
      is
      extremely costly and requires significant investment. In the absence of
      additional financing we may not be able to continue our development activities.
      In addition, we may choose to license the rights to particular drugs or other
      technology. License fees may increase our costs.





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





15
 Table
            of Contents




***OUR
      LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS MORE DIFFICULT, AND
      THEREFORE, INVESTORS HAVE LIMITED INFORMATION UPON WHICH TO
      RELY***





An
      investor can only evaluate our business based on a limited operating history.
      While we were organized in 1986, our current level of activity and operations
      only recently began following our acquisition by Xechem and subsequent closing
      on our financing during the period December 2004 through February 2005. Our
      operations continue to change and our costs will likely increase dramatically
      as
      we evolve from primarily a technology holding company to a capitalized company
      with employees and internal operations. Since inception, we have engaged
      primarily in research and development, relied to a great extent on third-party
      efforts, sought avenues for licensing technology, sought grants, raised capital,
      and recruited scientific and management personnel external to us. We have not
      generated any meaningful revenue to date, and have no royalty revenue or
      products ready for use and in the marketplace. In addition, our intention now
      is
      to redirect our focus to a newly acquired technology, which CepTor and its
      shareholders will have had little or no prior information to assist in
      evaluating its prospects. This limited history may not be adequate to enable
      an
      investor to fully assess our ability to successfully develop and commercialize
      any new technology we may acquire, or Newco’s ability to develop our existing
      technologies and proposed products, obtain FDA approval, achieve market
      acceptance, and respond to competition, or conduct such affairs as are presently
      contemplated.





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





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





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


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





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




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




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





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


16
 Table
              of Contents




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




***WE
      WILL NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL WHICH MAY BE UNAVAILABLE DUE
      TO
      THE NECESSITY OF UNIQUE SKILLS AND RESOURCES***





In
      recent
      months, we have operated as a virtual company with only one part time employee.
      As we seek to resume our status as a fully operational, development stage
      business, including through the acquisition of a new technology, our success
      will depend to a significant degree upon the ability to attract and retain
      highly skilled personnel. Competition for qualified personnel is intense, and
      the process of hiring and integrating such qualified personnel is often lengthy.
      We may be unable to recruit such personnel on a timely basis, if at all.
      Management and other employees may voluntarily terminate their employment at
      any
      time. The loss of the services of key personnel, or the inability to attract
      and
      retain additional qualified personnel, could result in delays to development
      or
      approval, loss of sales and diversion of management resources. Additionally,
      failure to attract and retain highly qualified management personnel would damage
      our business prospects.





**Risks
      Related Solely to the Continued Development of our Transferred
      Technologies**





There
      are
      many risk factors that relate exclusively to the continued research and
      development of our MyodurTM and NeurodurTM technologies, which will be the sole
      responsibility of Newco. We believe they are relevant to considering risks
      associated with Newco’s efforts to move forward with these technologies, and
      therefore of any residual value CepTor may retain in the form of its minority
      equity stake and royalty interest, and are thus included here.





***THE
      FAILURE BY NEWCO TO COMPLETE DEVELOPMENT OF OUR EXISTING TECHNOLOGY, OBTAIN
      GOVERNMENT APPROVALS, INCLUDING REQUIRED FDA APPROVALS, OR TO COMPLY WITH
      ONGOING GOVERNMENTAL REGULATIONS COULD DELAY OR LIMIT INTRODUCTION OF PROPOSED
      PRODUCTS BY NEWCO AND RESULT IN FAILURE TO ACHIEVE REVENUES OR MAINTAIN ITS
      ONGOING BUSINESS***





Newco’s
      continued research and development activities and the manufacture and marketing
      of our existing products are subject to extensive regulation for safety,
      efficacy, and quality by numerous government authorities in the United States
      and abroad. Before receiving FDA clearance to market its existing products,
      Newco will have to demonstrate that these products are safe and effective on
      the
      patient population and for the diseases that are to be treated. Clinical trials,
      manufacturing and marketing of drugs are subject to the rigorous testing and
      approval process of the FDA and equivalent foreign regulatory authorities.
      The
      Federal Food, Drug and Cosmetic Act ("FDC Act") and other federal, state, and
      foreign statutes and regulations govern and influence the testing, manufacture,
      labeling, advertising, distribution, and promotion of drugs and medical devices.
      As a result, clinical trials and regulatory approval can take a number of years
      or longer to accomplish and require the expenditure of substantial financial,
      managerial, and other resources.





In
      order
      to be commercially viable, Newco must successfully research, develop, obtain
      regulatory approval for, manufacture, introduce, market, and distribute our
      technologies. For each product Newco seeks to develop, it must successfully
      meet
      a number of critical developmental milestones, including:




•
            demonstrate
                benefit from and efficacy of CepTor’s existing
                technology;





•
            demonstrate
                through pre-clinical and clinical trials that our technology is safe
                and
                effective;





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




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





17
 Table
            of Contents




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




Should
      Newco fail to become commercially viable for the above or any other reasons,
      the
      value of CepTor’s equity interest and royalty rights related to Newco would be
      adversely affected and could prove to have no realizable value for CepTor.





***DATA
      OBTAINED FROM CLINICAL TRIALS IS SUSCEPTIBLE TO VARYING INTERPRETATIONS, WHICH
      COULD DELAY, LIMIT OR PREVENT REGULATORY CLEARANCES FOR EXISTING
      TECHNOLOGIES***





Data
      obtained from pre-clinical studies and clinical trials do not necessarily
      predict the results that will be obtained from later pre-clinical studies and
      clinical trials. Moreover, pre-clinical and clinical data is susceptible to
      varying interpretations, which could delay, limit or prevent regulatory
      approval. A number of companies in the pharmaceutical industry have suffered
      significant setbacks in advanced clinical trials, even after promising results
      in earlier trials. The failure to adequately demonstrate the safety and
      effectiveness of an intended product under development could delay or prevent
      regulatory clearance of a potential drug, resulting in delays to
      commercialization, and could materially harm Newco’s business. Newco’s clinical
      trials may not demonstrate sufficient levels of safety and efficacy necessary
      to
      obtain the requisite regulatory approvals for our existing drugs being assigned
      to Newco, and thus the proposed drugs may not be approved for marketing. Even
      after approval, further studies could result in withdrawal of FDA and other
      regulatory approvals and voluntary or involuntary withdrawal of products from
      the market.





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





***OUR
      TRANSFERRED DRUGS MAY NOT GAIN FDA APPROVAL IN CLINICAL TRIALS OR BE EFFECTIVE
      AS A THERAPEUTIC AGENT WHICH COULD AFFECT NEWCO’S FUTURE PROFITABILITY AND
      PROSPECTS***





In
      order
      to obtain regulatory approvals for our existing compounds, Newco must
      demonstrate that the procedure is safe and effective for use in humans and
      functions as a therapeutic against the effects of injury or disease. To date,
      neither CepTor nor Newco have conducted any human pilot study on our existing
      technologies pursuant to Institutional Review Board oversight in anticipation
      of
      our initial FDA submission for patient-specific or other therapy. Further,
      our
      drugs or technologies have not been subject to all of the rigorous testing
      standards that would be acceptable for publication in scientific peer review
      journals.





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





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





***NEWCO
      WILL BE DEPENDENT ON OUR COLLABORATIVE AGREEMENTS FOR THE DEVELOPMENT OF OUR
      TRANSFERRED TECHNOLOGIES AND BUSINESS DEVELOPMENT WHICH EXPOSES IT TO THE RISK
      OF RELIANCE ON THE VIABILITY OF THIRD PARTIES***




In
        conducting our research and development activities, we have relied upon numerous
        collaborative agreements with universities, governmental agencies, charitable
        foundations, manufacturers, contract research organizations, and corporate
        partners. Newco will be similarly beholden to such collaborative arrangements
        going forward. The loss of, or failure to perform under, any of these
        arrangements by any of these entities may substantially disrupt or delay
        Newco’s
        research and development activities.


18
 Table
            of Contents




***ACCEPTANCE
      OF OUR EXISTING PRODUCTS IN THE MARKETPLACE IS UNCERTAIN AND FAILURE TO ACHIEVE
      MARKET ACCEPTANCE WILL PREVENT OR DELAY NEWCOS’S ABILITY TO GENERATE
      REVENUES***





Newco’s
      financial performance will depend, in part, upon the introduction and customer
      acceptance of the products we are assigning to Newco. Even if approved by the
      necessary regulatory authorities, such products or technologies may not achieve
      market acceptance. The degree of market acceptance will depend upon a number
      of
      factors, including:




•
            the
                receipt of regulatory clearance of marketing claims for the uses
                that
                Newco is developing;





•
            the
                establishment and demonstration of the advantages, safety and efficacy
                of
                the transferred technologies;





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





•
            Newco’s
                ability to attract corporate partners, including pharmaceutical companies,
                to assist in commercializing its intended products;
                and





•
            Newco’s
                ability to market its products and technologies.




Physicians,
      patients, payors or the medical community in general may be unwilling to accept,
      utilize, or recommend any of Newco’s products or technologies. If Newco is
      unable to obtain regulatory approval, commercialize, and market our transferred
      -products and technologies when planned, Newco may not achieve any market
      acceptance or generate revenue.





***IF
      NEWCO IS UNABLE TO ADEQUATELY PROTECT OR ENFORCE ITS RIGHTS TO INTELLECTUAL
      PROPERTY OR SECURE RIGHTS TO THIRD PARTY PATENTS, IT MAY LOSE VALUABLE RIGHTS,
      EXPERIENCE REDUCED MARKET SHARE, ASSUMING ANY, OR INCUR COSTLY LITIGATION TO
      PROTECT SUCH RIGHTS***





Newco’s
      ability to obtain licenses from third-party patents, maintain trade secret
      protection, and operate without infringing the proprietary rights of others
      will
      be important to its commercialization of the existing products under development
      which are being assigned to Newco. Therefore, any disruption in access to the
      technology could substantially delay the development by Newco of such
      technology.





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





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





Although
      our trade secrets and technical know how will be important to Newco, its
      continued access to the patents is a significant factor in the development
      and
      commercialization by Newco of our drug delivery technology. Aside from the
      general body of scientific knowledge from other drug delivery processes and
      technology, we believe these patents, based upon our current scientific data,
      are the only intellectual property necessary for Newco to develop short-term
      plans for our current drug delivery system using our proposed MyodurTM, NeurodurTM
and other drugs. We do not believe that we or Newco are, have been or will
      be
      violating any other patents in developing our technology.





19
 Table
            of Contents




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





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





Research
      and development and clinical trials involve a complex process, and these third
      parties' facilities may not be sufficient. Inadequate facilities could delay
      clinical trials by Newco of our transferred drugs and result in delays in
      regulatory approval and commercialization of those drugs, either of which would
      materially harm Newco’s business and adversely affect the value of our
      investment in Newco.





Newco
      may
      rely on third party contract research organizations, service providers, and
      suppliers to support development and clinical testing of our transferred
      products. Failure of any of these contractors to provide the required services
      in a timely manner or on reasonable commercial terms could materially delay
      the
      development and approval by Newco of our products, increase expenses, and
      materially harm Newco’s business, financial condition, and results of
      operations, all of which would have an adverse effect on the value of our
      investment in Newco.





In
      addition, our patent protection for MyodurTM is limited to the United States, and
      that for NeurodurTM, will be limited to the US, the European Union and possibly
      Japan. Newco therefore may have competition for these products in jurisdictions
      where we lack patent protection.





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





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




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





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





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




We
      do not
      have long-term agreements with any of our suppliers, nor is there any assurance
      such suppliers will continue to meet Newco’s requirements. In addition, CepTor
      is currently in arrears on its obligations to many of its suppliers, and they
      may therefore elect not to cooperate with Newco in connection with supplying
      the
      raw materials and required components. Any interruption in the supply of
      components could cause Newco to seek alternative sources of supply or
      manufacture these components internally. If the supply of any components is
      interrupted, components from alternative suppliers may not be available in
      sufficient volumes within required timeframes, if at all, to meet Newco’s needs.
      This could delay its ability to complete clinical trials, obtain approval for
      commercialization or commence marketing, or cause it to lose sales, incur
      additional costs, delay new product introductions, or harm its or our
      reputation. Further, components from a new supplier may not be identical to
      those provided by the original supplier. Such differences if they exist could
      affect product formulations or the safety and effect of our existing products
      that are being developed and delay regulatory approvals for Newco.





***NEWCO
      HAS NO MANUFACTURING EXPERIENCE AND ONCE OUR EXISTING PRODUCTS ARE APPROVED,
      IF
      AT ALL, NEWCO MAY NOT BE ABLE TO MANUFACTURE SUFFICIENT QUANTITIES AT AN
      ACCEPTABLE COST***





Our
      existing products remain in the research and development and pre-clinical trial
      phase of commercialization. Once Newco succeeds in getting our products approved
      for commercial sale, if at all, it will need to establish the capability to
      commercially manufacture these products in accordance with FDA and other
      regulatory requirements. Newco has no established experience in establishing,
      supervising, and conducting commercial manufacturing. If it fails to adequately
      establish, supervise, and conduct all aspects of the manufacturing processes,
      it
      may not be able to commercialize our assigned products. Newco does not presently
      own manufacturing facilities necessary to provide clinical or commercial
      quantities of the assigned products.





20
 Table
            of Contents





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





***DUE
      TO NEWCO’S LIMITED MARKETING, SALES, AND DISTRIBUTION EXPERIENCE, IT MAY BE
      UNSUCCESSFUL IN ITS EFFORTS TO SELL OUR EXISTING PRODUCTS, ENTER INTO
      RELATIONSHIPS WITH THIRD PARTIES, OR DEVELOP A DIRECT SALES
      ORGANIZATION***





Neither
      we nor Newco has yet to establish any marketing, sales, or distribution
      capabilities for our existing products. Until such time as these products are
      further along in the regulatory process, Newco will not devote any meaningful
      time or resources to this effort. At the appropriate time, we expect Newco
      to
      enter into agreements with third parties to sell our existing products or it
      may
      develop its own sales and marketing force. Newco may be unable to establish
      or
      maintain third party relationships on a commercially reasonable basis, if at
      all. In addition, these third parties may have similar or more established
      relationships with competitors who may exist after the introduction of our
      existing products, if any.





If
      Newco
      does not enter into relationships with third parties for the sales and marketing
      of our products being assigned to it, Newco will need to develop its own sales
      and marketing capabilities. Newco has no experience in developing, training,
      or
      managing a sales force. If Newco chooses to establish a direct sales force,
      it
      may incur substantial additional expenses in developing, training, and managing
      such an organization. Newco may be unable to build a sales force on a cost
      effective basis or at all. Any such direct marketing and sales efforts may
      prove
      to be unsuccessful. In addition, Newco will compete with many other companies
      that currently have extensive marketing and sales operations. Newco’s marketing
      and sales efforts may be unable to compete against these other companies. Newco
      may be unable to establish a sufficient sales and marketing organization on
      a
      timely basis, if at all, and may be unable to engage qualified distributors.
      Even if engaged, these distributors may:




•
            fail
                to satisfy financial or contractual obligations to
                Newco;





•
            fail
                to adequately market our assigned
                products;





•
            cease
                operations with little or no notice;
                or





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




If
      Newco
      fails to develop sales, marketing, and distribution channels, it would
      experience delays in product sales and incur increased costs, which would harm
      its financial results and diminish or eliminate any return to CepTor related
      to
      its equity interest and royalty rights.





***IF
      NEWCO IS UNABLE TO CONVINCE PHYSICIANS AS TO THE BENEFITS OF THE INTENDED
      PRODUCTS, IT MAY INCUR DELAYS OR ADDITIONAL EXPENSE IN AN ATTEMPT TO ESTABLISH
      MARKET ACCEPTANCE***





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





***THE
      MARKET FOR OUR TRANSFERRED PRODUCTS IS RAPIDLY CHANGING AND COMPETITIVE, AND
      NEW
      MECHANISMS, TECHNOLOGIES, NEW THERAPEUTICS, NEW DRUGS, AND NEW TREATMENTS WHICH
      MAY BE DEVELOPED BY OTHERS COULD IMPAIR NEWCO’S ABILITY TO MAINTAIN AND GROW ITS
      BUSINESS AND BECOME COMPETITIVE***





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





21
 Table
            of Contents




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





***IF
      USERS OF NEWCO’S OR OUR PRODUCTS ARE UNABLE TO OBTAIN ADEQUATE REIMBURSEMENT
      FROM THIRD PARTY PAYORS, OR IF NEW RESTRICTIVE LEGISLATION IS ADOPTED, MARKET
      ACCEPTANCE OF SUCH PRODUCTS MAY BE LIMITED AND NEWCO MAY NOT ACHIEVE ANY
      SIGNIFICANT REVENUES***





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





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





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





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





**Risks
      Related to Our Common Stock**





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





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





22
 Table
            of Contents




***INVESTORS
      IN OUR SECURITIES WILL SUFFER DILUTION***





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





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





Our
      Common Stock historically been sporadically or "thinly-traded" on the OTC
      Bulletin Board, meaning that the number of persons interested in purchasing
      our
      Common Stock at or near ask prices at any given time may be relatively small
      or
      non-existent. This situation is attributable to a number of factors, including
      the fact that we are a small company which is relatively unknown to stock
      analysts, stock brokers, institutional investors and others in the investment
      community that generate or influence sales volume, and that even if we came
      to
      the attention of such persons, they may tend to be risk-averse and may be
      reluctant to follow an unproven company such as ours or purchase or recommend
      the purchase of our shares until such time as we became more seasoned and
      viable. This is particularly true as we shift our focus away from our existing
      technologies toward a new technology. As a consequence, there may be periods
      of
      several days or more when trading activity in our shares is minimal or
      non-existent, as compared to a seasoned issuer which has a large and steady
      volume of trading activity that will generally support continuous sales without
      an adverse effect on share price. There can be no assurance that a broader
      or
      more active public trading market for our Common Stock will develop or be
      sustained, or that current trading levels will be sustained.





***HISTORICALLY,
      OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT PRICE
      FLUCTUATIONS***





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




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





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





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





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





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




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





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




***WE
        HAVE NOT HAD EARNINGS, BUT IF EARNINGS WERE AVAILABLE, IT IS OUR GENERAL
        POLICY
        TO RETAIN ANY EARNINGS FOR USE IN OUR OPERATIONS***
 
 We
        do not
        anticipate paying any cash dividends on our Common Stock or Series A Preferred
        Stock in the foreseeable future despite the recent reduction of the federal
        income tax rate on dividends. Any payment of cash dividends on our Common
        Stock
        or Series A Preferred Stock in the future will be dependent upon our financial
        condition, results of operations, current and anticipated cash requirements,
        preferred rights of holders of preferred stock, restrictive covenants in
        debt or
        other instruments or agreements, plans for expansion, as well as other factors
        that our board of directors deems relevant. We anticipate that any future
        financing agreements may restrict or prohibit the payment of dividends without
        prior consent.




23
 Table
            of Contents




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





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





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





**OU** ***R
      BOARD OF DIRECTORS HAS ADOPTED A STOCKHOLDER RIGHTS
      PLAN***





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





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





***THERE
      IS A LIMITED PUBLIC MARKET FOR OUR SECURITIES***





It
      is
      highly unlikely in the foreseeable future that our Common Stock will qualify
      for
      initial or continued listing on a registered stock exchange or for initial
      or
      continued inclusion in the NASDAQ system, so trading, if any, in our Common
      Stock, will probably continue to be conducted on the NASD's "Electronic Bulletin
      Board" in the over-the-counter market and in what are commonly referred to
      as
      "pink sheets." As a result, an investor may find it more difficult to dispose
      of, or to obtain accurate quotations as to the market value of our Common Stock,
      and our Common Stock would become substantially less attractive for margin
      loans, for investment by financial institutions, as consideration in future
      capital raising transactions or other purposes.





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





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





Keeping
      abreast of, and in compliance with, changing laws, regulations and standards
      relating to corporate governance and public disclosure, including the
      Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we are
      approved for listing on either NASDAQ or a registered exchange, NASDAQ and
      stock
      exchange rules, will require an increased amount of management attention and
      external resources. We intend to continue to invest all reasonably necessary
      resources to comply with evolving standards, subject to availability of the
      required funds, which may result in increased general and administrative
      expenses and a diversion of management time and attention from
      revenue-generating activities to compliance activities. We have insufficient
      authorized capital to accommodate the excise of outstanding warrants and
      conversions of outstanding convertible debt. Although approximately 108 million
      shares
      would be required to accommodate the exercise of all outstanding warrants and
      conversion of all outstanding convertible notes, only 100 million shares
      are currently authorized by the State of Delaware. Increasing the number of
      authorized shares to approximate the outstanding conversion privileges would
      involve additional costs.




**EMPLOYEES**
 
 As
        of
        April 5, 2007, we had one part-time employee.


24
 Table
            of Contents




**ITEM
      2.DESCRIPTION OF PROPERTY.**





We
      lease
      our executive offices in New York, NY consisting of a single small office of
      approximately 180 square feet for approximately $2,100 per month. This lease
      is
      a month-to-month lease and we believe should provide sufficient space for our
      administrative functions during this stage of our operations.





**ITEM
      3. LEGALPROCEEDINGS.**





We
      are
      not presently a party to any pending litigation, nor, to the knowledge of our
      management, is any litigation threatened against us.




**ITEM
      4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
      HOLDERS.**





No
      matters were submitted during the fourth quarter of 2006 to a vote of our
      stockholders.






**PART
      II**





**ITEM
        5. MARKETFOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        PURCHASE OF EQUITY SECURITIES.**
 
 **Market
        Information**
 
 Our
        Common Stock has been quoted on the OTC Bulletin Board since December 13,
        2004
        under the symbol CEPO.OB. Prior to that date, there was no active market
        for our
        Common Stock. Based upon information furnished by our transfer agent, as
        of
        April 5, 2007, we had approximately 285 holders of record of our Common
        Stock.
 
 The
        following table sets forth the high and low sales prices for our Common Stock
        for the periods indicated, as reported by the OTC Bulletin Board. The prices
        state inter-dealer quotations, which do not include retail mark-ups, mark-downs
        or commissions. Such prices do not necessarily represent actual
        transactions.
 
 
 **FISCAL
                  YEAR 2005**First
                  Quarter
              
              $
              6.70
              
              $
              3.85Second
                  Quarter
              
              
              4.09
              
              
              2.25Third
                  Quarter
              
              
              3.00
              
              
              0.88Fourth
                  Quarter
              
              
              1.84
              
              
              0.71**FISCAL
                  YEAR 2006**First
                  Quarter
              
              $
              0.84
              
              $
              0.27Second
                  Quarter
              
              
              0.46
              
              
              0.09Third
                  Quarter
              
              
              0.39
              
              
              0.12Fourth
                  Quarter
              
              
              0.32
              
              
              0.07Second
                  Quarter (through April 5, 2007)
              
              
              0.08
              
              
              0.07
   25
 Table
            of Contents
 
 **Dividends**
 
 We
        have
        not declared or paid dividends on our Common Stock and do not anticipate
        declaring or paying any cash dividends on our Common Stock in the foreseeable
        future. We currently expect to retain future earnings, if any, for the
        development of our business. Dividends may be paid on our Common Stock only
        if
        and when declared by our board of directors and paid on an as-converted basis
        to
        the holders of our Series A Preferred Stock.
 
 **EQUITY
        COMPENSATION PLAN INFORMATION**
 
 We
        maintain a Founders' Plan, a 2004 Incentive Stock Plan and a 2006 Incentive
        Stock Plan. As of April 5, 2007, we have issued (i) 3,031,943 shares of Common
        Stock under the Founders' Plan, and (ii) 1,465,483 and 776,230 shares of
        Common
        Stock under the 2004 Incentive Stock Plan and the 2006 Incentive Stock Plan,
        respectively and we have outstanding non-qualified stock options to purchase
        a
        total of 1,102,604 and 776,230 shares of Common Stock under the 2004 Incentive
        Stock Plan and the 2006 Incentive Stock Plan, respectively, with exercise
        prices
        at or in excess of the fair market value on the date of grant. (See
*"Executive Compensation - Stock Plans"* for a detailed description of
        our equity compensation plans.)
 
 The
        following table provides information as of December 31, 2006 with respect
        to the
        shares of Common Stock that may be issued under our existing equity compensation
        plans:
 
 **Number
                  of****Number
                  of securities to**
              
              **Weighted-average**
              
              **securities****be
                  issued upon**
              
              **exercise
                  price of**
              
              **remaining****exercise
                  of outstanding**
              
              **outstanding
                  options,**
              
              **available
                  for****Plan
                  Category**
              
              **options,
                  warrants and rights**
              
              **warrants
                  and rights**
              
              **future
                  issuance**Equity
                  compensationplans
                  approved bysecurity
                  holders (1)
              
              1,102,604
              
              $
                  0.97
              
              118,424Equity
                  compensationplans
                  not approved bysecurity
                  holders (2)
              
              776,230
              
              $0.15
              
              1,177,630
 
 (1)
        Represents the 2004 Incentive Stock Plan and the Founders' Plan.
 (2)
        Represents the 2006 Incentive Stock Plan.
 
 **RECENT
        SALES OF UNREGISTERED SECURITIES**
 
 During
        the period covered by this Report, we have issued the following unregistered
        securities which have not been previously reported. None of these transactions
        involved any underwriters, underwriting discounts or commissions, except
        as
        specified below, or any public offering, and we believe that each transaction
        was exempt from the registration requirements of the Securities Act by virtue
        of
        Section 4(2) thereof and/or Regulation D promulgated thereunder.
  On
        March
        3, 2006, we issued five-year options to purchase 557,103 shares of our common
        stock at $0.359 per share to each of two consultants for financial services
        provided to us, and on March 3, 2006 we issued 278,552 shares each to such
        consultants upon partial exercise of such option.
 
 On
        March
        3, 2006, we issued a 45 month option to purchase an aggregate of 400,000
        shares
        of our common stock at $0.359 per share to our investor relations firm as
        a
        replacement of a previously forfeited option.
 
 On
        May 3,
        2006, we issued additional options to purchase 388,115 shares of our common
        stock at $0.15 per share to and we issued an additional 388,115 shares of
        our
        common stock to each of two consultants pursuant to the anti-dilution provisions
        contained in their option agreements.
  On
        June
        1, 2006, we issued 2006 6% Convertible Notes in the aggregate principal amount
        of $1,500,000 under a private placement. Pursuant to this transaction, certain
        note holders who did not previously participate in our Preferred Stock offering
        received warrants to purchase in the aggregate 6,500,000 shares of our common
        stock at $0.30 per share. Certain note holders who did participate in our
        Preferred Stock offering received adjustments to the conversion price of
        their
        Preferred Stock of equivalent value to what they invested in the 2006 6%
        Convertible Note offering, to $0.15 per share which will require us to issue
        in
        the aggregate an additional 3,290,000 shares of common stock upon conversion
        of
        their Preferred Stock and an adjustment to the warrants to purchase 105,000
        shares of common stock originally issued with the Preferred Stock ,to $.0.30
        per
        share.
  26
 Table
            of Contents
  On
        June
        1, 2006, the Company a warrant to purchase a 2006 6% Convertible Note in
        the
        principal amount of $150,000 and a warrant to purchase 650,000 shares of
        common
        stock at $0.15 per share as yield enhancement fees under the 2006 6% Convertible
        Note offering.
 
 On
        June
        15, 2006, we issued a 2006 6% Convertible Note in the principal amount of
        $125,000 under a private placement. Pursuant to this transaction, the note
        holder who did not previously participate in our Preferred Stock offering,
        received a warrant to purchase 833,333 shares of our common stock at $0.30
        per
        share.
 
 On
        June
        15, 2006, the Company issued a warrant to purchase a 2006 6% Convertible
        Note in
        the principal amount of $12,500 and a warrant to purchase 83,333 shares of
        common stock at $0.15 per share as yield enhancement fees under the 2006
        6%
        Convertible Note offering.
 
 On
        June
        26, 2006, we issued ten-year options to purchase in the aggregate 16,000
        shares
        of our common stock at $0.21 per share to our three outside directors as
        compensation for preparing for and participating in our board of directors’
meeting.
 
 On
        June
        29, 2006, we issued a three-year warrant to Cornell Capital to purchase
        5,000,000 shares of our common stock at an initial exercise price of $0.25
        per
        share, to induce them to assign their rights and obligations under the Cornell
        Convertible Debentures. Pursuant to the anti-dilution terms of the warrant,
        upon
        the July 18, 2006 issuance of 2006 6% Convertible Notes, the exercise price
        of
        the warrant was reduced to $0.15 and a corresponding increase of 3,333,333
        in
        the number of shares of common stock issuable upon exercise of the warrant
        was
        made.
 
 On
        July
        18, 2006, we issued 2006 6% Convertible Notes to accredited investors in
        the
        aggregate principal amount of $950,00 under the 6% Notes Offering. Pursuant
        to
        the 6% Notes Offering, on July 18, 2006 we (i) issued to certain investors
        who
        did not previously invest in our Preferred Stock, warrants to purchase an
        aggregate of 4,833,333 shares of our common stock at $0.30 per share, (ii)
        we
        increased the number of shares of common stock to which our previously issued
        Preferred Stock would convert into by 1,410,000 and reduced the exercise
        price
        of the warrants to purchase 45,000 shares of our common stock, issued as
        a part
        of the Preferred Stock, to $0.30 per share.
 
 On
        July
        18, 2006, we issued a warrant to purchase a 2006 6% Convertible Note in the
        principal amount of $95,000 with an attached warrant to purchase 633,333
        shares
        of our common stock at $0.30 per share, at an exercise price of $95,000 and
        a
        warrant to purchase 483,333 shares of our common stock at $0.15 per share
        as
        yield enhancement fees for the 6% Notes Offering.
 
 On
        August
        17, 2006, we issued 2006 6% Convertible Notes to accredited investors in
        the
        aggregate principal amount of $300,000 under the 6% Notes Offering. Pursuant
        to
        the 6% Notes Offering, on August 17, 2006 we increased the number of shares
        of
        our common stock to which our previously issued Preferred Stock would convert
        into by 1,880,000 and reduced the exercise price of the warrants to purchase
        60,000 shares of our common stock, issued as a part of the Preferred Stock,
        to
        $0.30 per share.
 
 On
        August
        17, 2006, we issued a warrant to purchase a 2006 6% Convertible Note in the
        principal amount of $30,000 with an attached warrant to purchase 200,000
        shares
        of our common stock at $0.30 per share, at an exercise price of $30,000 as
        yield
        enhancement fees for the 6% Notes Offering.
 
 On
        September 28, 2006, we issued 2006 6% Convertible Notes to accredited investors
        in the aggregate principal amount of $180,000 under the 6% Notes Offering.
        Pursuant to the 6% Notes Offering, on September 28, 2006, we issued certain
        investors who did not previously invest in our Preferred Stock, warrants
        to
        purchase an aggregate of 1,200,000 shares of our common stock at $0.30 per
        share.
 
 On
        September 28, 2006, we issued a warrant to purchase a 2006 6% Convertible
        Note
        in the principal amount of $18,000 with an attached warrant to purchase 120,000
        shares of our common stock at $0.30 per share, at an exercise price of $18,000
        and a warrant to purchase 120,000 shares of our common stock at $0.15 per
        share
        as yield enhancement fees for the 6% Notes Offering.
 
 On
        October 19, 2006, we issued 2006 6% Convertible Notes to accredited investors
        in
        the aggregate principal amount of $514,444 under the 6% Notes Offering. Pursuant
        to the 6% Notes Offering, on October 19, 2006 we (i) issued certain investors
        who did not previously invest in our Preferred Stock offering, warrants to
        purchase an aggregate of 651,847 shares of our common stock at $0.30 per
        share,
        (ii) increased the number of shares of common stock to which our previously
        issued Preferred Stock would convert into by 2,611,113 and reduced the exercise
        price of the warrants to purchase 83,333 shares of common stock, issued as
        a
        part of the Preferred Stock, to $0.30 per share.
  27
 Table
            of Contents
 
 On
        October 19, 2006, we issued a warrant to purchase a 2006 6% Convertible Note
        in
        the principal amount of $51,444 with an attached warrant to purchase 342,963
        shares of our common stock at $0.30 per share, at an exercise price of $51,444
        and a warrant to purchase 65,185 shares of our common stock at $0.15 per
        share
        as yield enhancement fees for the 6% Notes Offering.
  **ITEM
        6. MANAGEMENT'SDISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION.**
 
 The
        following discussion of our plan of operations should be read in conjunction
        with our financial statements and notes thereto appearing elsewhere in this
        document.
 
 **OVERVIEW**
 
 Since
        its
        inception, CepTor 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. Our two lead compounds are MyodurTM, for neuromuscular disease, and
        NeurodurTM, for neurodegenerative diseases. In January 2006, we submitted an
        Investigational New Drug Application (IND) to the FDA for MyodurTM with the hope
        and expectation of beginning clinical trials for this compound following
        approval of the IND. Since that time, our IND has remained on “clinical hold”
pending resolution of certain issues raised by the FDA. Most recently, in
        October 2006, we were advised that, despite our efforts to resolve the concerns
        and issues previously raised by the FDA, our IND would remain on hold pending
        further testing and research as directed by the FDA.
 
 We
        believe, but cannot be certain, that the issues raised by the FDA in connection
        with our IND for MyodurTM can be successfully resolved and that an IND will
        ultimately win FDA approval, and we continue to remain optimistic about the
        promise and potential of our neuromuscular and neurodegenerative compounds.
        However, our existing investors have advised us that they were unwilling
        to
        continue to fund either the research and development costs required to fully
        prosecute the IND filing, or the general operating costs necessary to keep
        the
        business afloat as those research and development activities continued. With
        no
        other financial resources available to us, we had no choice but to cease
        all
        efforts related to the research and development of our compounds, terminate
        all
        of our employees, and close down our corporate offices in Maryland. At present,
        we are maintaining our operations as a “virtual” office operated out of New York
        City and have one part-time employee, Howard Becker, our newly appointed
        CEO.
 
 The
        MyodurTM and NeurodurTM technologies represent substantially all of the focus
        of the Company, and those technologies have been pledged to certain secured
        creditors under a credit facility entered into by the Company in late 2005.
        Based on the currently realizable value of our early stage technologies,
        we do
        not believe that the liquidation of those assets would generate more than
        the
        amount of the debt which is secured by these technologies. However, rather
        than
        merely sell off the assets and terminate all operations, file a bankruptcy
        petition or consent to the foreclosure of the assets by the secured creditors,
        we have instead been focusing on a two-part strategy, in cooperation with
        the
        existing secured creditors, whereby (i) our existing technologies will
        essentially be divested from the corporation pursuant to a transaction that
        will
        allow CepTor to retain significant upside should the technologies ultimately
        fulfill their promise as marketable and commercially viable products, and
        (ii) a
        new technology will be acquired by the Company around which we could restructure
        our affairs. Any such transaction would have to have the full support of
        the
        existing secured creditors, as they have a priority position with respect
        to all
        of CepTor’s current assets.
 
 With
        respect to seeking to identify the best transaction related to the existing
        CepTor technologies, our goal has been to find a transaction which will allow
        the research and development efforts to continue despite the absence of
        immediately available funds, and will give CepTor meaningful financial upside
        should the technologies progress and ultimately achieve commercialization.
        After
        considering a number of potential transactions, including straight licensing
        arrangements that would have resulted in CepTor licensing the technologies
        to a
        large corporation in exchange for a limited future royalty, management has
        concluded that the best available opportunity, and the one most likely to
        result
        in the advancement of the technologies on terms fair to CepTor, would be
        a
        transaction with the original founding scientists, Dr. Alfred Stracher and
        Dr.
        Leo Kesner.
  As
          described more fully above (see **“** *DESCRIPTION
          OF BUSINESS--Business* - **-** *Transfer
          of Technologies to New Entity to be Controlled by Founding
          Scientists”* ), **** on
          March
          29, 2007, we executed a term sheet (which is subject to Board and secured
          creditor approval, which is intended to be obtained in the second part
          of April
          2007, after this Form 10-KSB is filed) with Drs. Stracher and Kesner, pursuant
          to which our MyodurTM and NeurodurTM technologies will be assigned to a new
          corporation controlled by them (“Newco”), and these scientists will dedicate
          their efforts to the continued research and development activities for
          these
          products, with the initial goal of getting the FDA process back on track.
          CepTor
          will retain a substantial minority interest in Newco, as well as a gross
          royalty
          on any product sales should their efforts prove successful. CepTor will
          have no
          direct role in the management of Newco and no obligation to fund its
          activities.
  28
 Table
            of Contents
  Drs.
        Stracher and Kesner intend to focus initially on pursuing the availability
        of
        grant funding to move the projects forward, while at the same time seeking
        to
        attract outside investment or an appropriate third-party transaction that
        will
        ensure the project garners adequate funding to move through the FDA process.
        Should Newco succeed in its efforts to advance the technologies, CepTor will
        benefit through its significant equity stake and, should the projects prove
        commercially viable, through its gross royalty on eventual product sales. Upon
        consummation of the transaction with Drs. Stracher and Kesner, CepTor’s only
        material remaining asset will be its minority interest in Newco and its royalty
        rights granted as part of that transaction. CepTor’s existing secured creditors
        will retain a security interest in CepTor’s ownership interest in the newly
        formed entity and income streams from the royalty interest.
 
 To
        return
        to economic viability, CepTor has been focusing its attentions and efforts
        in
        identifying a transaction that has the support of its secured creditors and
        which will result in a new technology being acquired by CepTor which could
        have better prospects for attracting investment and more quickly achieving
        commercial viability. Although no final agreement has yet been entered into,
        we
        are currently in advanced negotiations with a private biotech company that
        would
        result in CepTor acquiring, continuing to develop and seeking to commercialize
        a
        new technology platform. Details regarding that potential transaction will
        be
        reported if and when the final terms of a transaction are mutually agreed
        to.
        Should our efforts regarding the transaction currently being negotiated fail
        to
        be successfully concluded, we will continue to seek an alternative transaction
        that will result in our acquiring a new technology around which to restructure
        our affairs.
 
 Regardless
        of what transaction may ultimately materialize, it is clear that a likely
        pre-condition of any possible transaction will be the successful, consensual
        restructuring of CepTor’s approximately $4 million in trade debt. In that
        regard, in December 2006, CepTor offered a ten (10%) percent cash payment
        to its
        existing trade creditors in exchange for a release of their claims. The offer
        was predicated on the acceptance of the holders of not less than 90% of the
        total trade debt. Although a large majority of the Company’s creditors accepted
        the proposal, the Company failed to reach the minimum threshold level of
        acceptances, and the offer has not been consummated. As CepTor works to finalize
        an arrangement for the acquisition of the new technology, we expect to circulate
        a revised offer to our creditors that we hope will be accepted. Without such
        acceptance, we do not believe that we will be able to successfully close
        the
        transaction for the new technology, which would likely leave us with no choice
        but to wind down our affairs.
 
 Given
        our
        present financial circumstances, we believe that our two-part strategy of
        divesting CepTor of its existing technologies, thereby enabling those
        technologies to continue their development with appropriate upside for CepTor,
        and seeking to finalize a transaction to acquire a commercially viable new
        technology around which to reorganize CepTor’s affairs, offers the best and
        perhaps only chance of realizing value for all of our shareholders, creditors
        and other stakeholders. However, there is no assurance that these efforts
        will
        prove to be successful, or that CepTor will not be forced to cease
        operations.
 
 **LIQUIDITY
        AND FINANCIAL CONDITION**
 
 We
        have
        had difficulty securing the necessary capital to fully execute our business
        plan
        and have not been able to remain current with respect to the payment terms
        of
        our operating obligations including our trade payables which aggregated
        approximately $3.9 million at December 31, 2006. As described in Note 12,
        we are
        in default of substantially all of our note obligations, which amount to
        approximately $6,314,180 in aggregate principal. These defaults occurred
        principally as a result of (i) our failure to make the required payments
        of
        principal and interest under certain of these obligations when due (which
        triggered cross default provisions under the remaining note obligations),
        (ii)our failure to file a registration statement pursuant to the 2006 6%
        Convertible Notes within a specified period, and (iii) our failure to file
        a
        post-effective amendment to our registration statement on Form SB-2 covering
        shares issuable under the Cornell Convertible Debentures within a specified
        period. We are also required to have sufficient authorized but unissued shares
        available to net share settle our Cornell Convertible Debentures and all
        of our
        derivative financial instruments.
 
 We
        have
        exhausted substantially all of our capital resources, terminated all of our
        employees except for our newly appointed chief executive officer and are
        currently unable to, and do not believe it is likely, to pursue further
        development of our product candidates. We pursued this course of action as
        a
        result of having been informed by the FDA that our IND remains on hold pending
        the resolution of several remaining issues. Additional internal research
        is
        required to fully resolve the FDA issues and complete our internal research
        program. We lack the funding that is necessary to resolve these issues and
        are
        currently unable to secure financing commitments for this purpose. Due to
        these
        remaining issues and the lack of adequate funding, we have halted development
        of
        our programs. We have executed a Term Sheet for a transaction with our
        former founding scientists, pursuant to which we will transfer our existing
        technologies to a newly formed entity in which we will maintain a minority
        interest and royalty rights. We are actively pursuing discussions for the
        acquisition of a new technology platform around which to reorganize our affairs,
        though no such transaction has yet been agreed to. In anticipation of such
        a
        transaction, we previously initiated discussions with our trade creditors
        in an
        effort to consensually restructure their remaining outstanding balances.
        Though
        a large majority of the affected creditors accepted the proposal, the minimum
        acceptances were not received, and the restructuring was not consummated.
        As and
        when we make further progress in our efforts to finalize a transaction for
        the
        acquisition of a new technology, we expect to resume discussions with our
        trade
        creditors regarding a possible restructuring of their claims.
 
 If
        we are
        not able to settle our remaining outstanding obligations, or otherwise identify
        and close upon a transaction for the acquisition of a new technology, we
        may be
        forced to terminate operations, liquidate our assets or commence bankruptcy
        proceedings. In addition, our obligations under the Cornell Convertible
        Debentures have been secured by a pledge of substantially all of our
        assets.
  29
 Table
            of Contents
 
 These
        matters raise substantial doubt about our ability to continue as a going
        concern. The financial statements do not include any adjustments that may
        result
        from the outcome of this uncertainty.
 
 During
        the year ended December 31, 2006, we received (i) proceeds from exercises
        of
        stock options of $200,000, (ii) $3,569,444 from the issuance of our 2006
        6%
        Convertible Notes (see Note 12), and (iii) unsecured advances of
        $346,000.
 
 Primarily
        as the result of recording non-cash interest expense of $12,908,213, and
        the
        non-cash gain associated with the decrease in the fair values of its derivative
        financial instruments of $8,495,881, we recorded a net loss for the year
        ended
        December 31, 2006 of $8,161,979. Non-cash interest expense consisted primarily
        of the amortization of the excess fair values of its derivative securities
        included in our financing transactions and amortization of deferred financing
        costs of those financing transactions. We used net cash flows in our operating
        activities of $3,899,767 during the year ended December 31, 2006. Our working
        capital deficiency amounted to $14,845,277 and our development stage accumulated
        deficit amounted to $46,078,074 at December 31, 2006. We will require
        substantial additional funding if we are to fund the operations and implement
        our plan to acquire and develop a new technology around which to restructure
        our
        affairs.
 
 At
        December 31, 2006, we had $6,314,180 in principal of convertible notes
        outstanding. The December 2004 Convertible Note in the principal amount of
        $448,736, was due July 3, 2006. There has not been an agreement on amended
        terms
        and no assurance that we will reach agreement with the note holder on amended
        terms. The terms of the December 2004 Convertible Note does not provide for
        penalties or other payments upon default, and accordingly, we have not accrued
        a
        penalty as of December 31, 2006. Of the remaining debt, (i) $250,000 in
        principal plus accrued interest was due on December 9, 2006, (ii) $3,569,444
        in
        principal representing 2006 6% Convertible Notes mature during the period
        June
        2007 through October 2007, (iii) the Cornell Convertible Debentures of
        $1,700,000 mature in December 2008, and (iv) $346,000 represent interest-free,
        unsecured advances. Currently, we are currently in default of substantially
        all
        of our obligations to our noteholders, and do not have, or expect to have,
        the
        available cash to repay these obligations. The noteholders holding $1,700,000
        in
        principal indebtedness have a security interest in all of our
        assets.
 
 Due
        to
        the lack of resources to settle our obligations when due, the presence of
        material defaults in our existing debt instruments and the possibility that
        our
        debts will be accelerated by the holders, we have recorded all of its
        liabilities as current.
  ***Corporate
        Development***
 
 In
        August
        2006, we entered into a letter of intent with Ferring International Center
        S.A.
        with respect to a proposed divesture of Ferring’s rights and interests with
        respect to the technology - SOD, subject to our completion of due diligence,
        the
        execution of a definitive agreement and entry into a written agreement with
        the
        FDA on end points governing the clinical trial of SOD. Due to the lack of
        resources and the termination of our employees, as well as the abandonment
        of
        our efforts to directly pursue the continued development of our existing
        technologies, there is virtually no possibility that the transactions with
        Ferring will be further pursued or ever consummated.
 
 ***Research,
        Development and Manufacturing***
 
 Our
        primary efforts to date have been raising capital and moving our lead product
        into phase I clinical trials for Duchenne muscular dystrophy. During the
        year
        ended December 31, 2006 we had focused our efforts on responding to the FDA
        questions received after submission of our investigational drug application
        in
        January 2006. We have been informed by the FDA that our IND remains on hold
        pending the resolution of two remaining issues. Additional internal research
        is
        required to fully resolve the FDA issues and complete our own internal research
        program, which we estimate would take an additional twelve to eighteen months
        to
        complete. We are not proceeding with any further research or development
        of our
        current proposed products, rather we are assigning our existing technologies
        to
        a company that will be controlled by our founding scientists, who will have
        sole
        responsibility for the continued research, development and manufacturing
        of our
        existing technologies.
 
 ***Off
        Balance Sheet Arrangements***
 
 Currently,
        we do not have any off balance sheet arrangements which would require disclosure
        in our financial statements.
 
 ***Employees***
 
 As
        of
        April 5, 2007, we had one part time employee.
 
 ***Properties***
 
 We
        lease
        our executive offices in New York, NY consisting of a single small office
        of
        approximately 180 square feet for approximately $2,100 per month. This lease
        is
        a month-to-month lease and we believe should provide sufficient space for
        our
        administrative functions at this time.
  30
 Table
            of Contents
  
 **FORWARD-LOOKING
        STATEMENTS**
 
 This
        Annual Report on Form 10-KSB contains forward-looking statements (as defined
        in
        Section 27A of the Securities Act and Section 21E of the Securities Exchange
        Act
        of 1934 (the "Exchange Act"). To the extent that any statements made in this
        Report contain information that is not historical, these statements are
        essentially forward-looking. Forward-looking statements can be identified
        by the
        use of words such as "expects," "plans" "will," "may," "anticipates," believes,"
        "should," "intends," "estimates," and other words of similar meaning. These
        statements are subject to risks and uncertainties that cannot be predicted
        or
        quantified and consequently, actual results may differ materially from those
        expressed or implied by such forward-looking statements. Such risks and
        uncertainties include, without limitation, our ability to consummate our
        pending
        transaction with Drs. Stracher and Kesner related to the transfer of our
        existing technologies to Newco, Newco’s ability to progress with the development
        and commercialization of the products, our ability to finalize and close
        on a
        transaction for a new technology, and our ability to raise capital to finance
        the development of any newly acquired technologies, the effectiveness,
        profitability and the marketability of those technologies, our ability to
        protect our proprietary information, general economic and business conditions,
        the impact of technological developments and competition, including 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 Report,
        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
        7. FINANCIALSTATEMENTS.**
 
 See
        the
        Company's Financial Statements beginning on page F-1.
   31
 Table
            of Contents
  **CEPTOR
            CORPORATION**
 **CONSOLIDATED
          FINANCIAL STATEMENTS**
 **FOR
          THE**
 **FISCAL
          YEARS ENDED DECEMBER 31, 2006 AND 2005**
 
 
 **INDEX**
 
  **Page**Report
                    of Independent Registered Public Accounting
                    Firms
                F-2Balance
                    Sheet
                F-5Statement
                    of Operations
                F-6Statement
                    of Stockholders' Equity
                    (Deficiency)
                F-7Statements
                    of Cash Flows
                F-12Notes
                    to Consolidated Financial Statements
                F-14
  F-1
 Table
            of Contents
 **REPORTS
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
            FIRMS**
   **Report
            of Independent Registered Public Accounting Firm**
 
 
 Board
            of
            Directors and Shareholders
 CepTor
            Corporation.
 
 We
            have
            audited the accompanying balance sheet of CepTor Corporation. (the Company),
            as
            of December 31, 2006, and the related statements of operations, stockholders’
deficiency, and cash flows for the year then ended. These financial statements
            are the responsibility of the Company's management. Our responsibility
            is to
            express an opinion on these financial statements based on our
            audit.
 
 We
            conducted our audits in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audit to obtain reasonable assurance about whether the
            financial
            statements are free of material misstatement. The Company is not required
            to
            have, nor were we engaged to perform, an audit of its internal control
            over
            financial reporting.  Our audit included consideration of internal control
            over financial reporting as a basis for designing audit procedures that
            are
            appropriate in the circumstances, but not for the purpose of expressing
            an
            opinion on the effectiveness of the Company's internal control over financial
            reporting. Accordingly we express no such opinion. An audit also includes
            examining, on a test basis, evidence supporting the amounts and disclosures
            in
            the financial statements, assessing the accounting principles used, and
            significant estimates made by management, as well as evaluating the overall
            financial statement presentation. We believe that our audit provide a
            reasonable
            basis for our opinion.
 
 In
            our
            opinion, the financial statements referred to above present fairly, in
            all
            material respects, the financial position of the Company (a development
            stage
            company) as of December 31, 2006 and the results of its operations and
            its cash
            flows for the year then ended, in conformity with accounting principles
            generally accepted in the United States of America.
 
 The
            accompanying financial statements have been prepared assuming that the
            company
            will continue as a going concern. As more fully described in Note 2,
            the Company
            has incurred significant losses since inception and has limited capital
            resources, which raise substantial doubt about the Company's ability
            to continue
            as a going concern. Management's plans in regard to these matters are
            also
            described in Note 2. The financial statements do not include any adjustments
            that might result from the outcome of this uncertainty.
 
 
 /s/
            Bernstein & Pinchuk, LLP
 New
            York,
            NY
 March
            20,
            2007
 
 F-2
 Table
            of Contents
 **Report
            of Independent Registered Public Accounting Firm**
 The
                Board
                of Directors and Stockholders
 CepTor
                Corporation
 
 
 We
                have
                audited the accompanying statements of operations, changes in stockholders'
                equity (deficiency), and cash flows of CepTor Corporation (a development
                stage
                company) for the years ended December 31, 2005 and December 31, 2004.
                These
                financial statements are the responsibility of the Company's management.
                Our
                responsibility is to express an opinion on these financial statements
                based on
                our audits.
 
 The
                financial statements of the Company for the period from August 11,
                1986 (date of
                inception) to December 31, 2003 were audited by another independent
                registered
                public accounting firm whose report dated July 26, 2004 expressed
                an unqualified
                opinion on those statements and included an explanatory paragraph
                regarding the
                Company's ability to continue as a going concern. The financial statements
                for
                the period of August 11, 1986 (date of inception) to December 31,
                2003 reflect a
                net loss of $911,586 of the total inception to date net loss of $22,432,090.
                The
                other independent registered public accounting firm's report has
                been furnished
                to us, and our opinion, insofar as it relates to the amounts included
                for such
                prior periods are based solely on the report of such other independent
                registered public accounting firm.
 
 We
                conducted our audits in accordance with the standards of the Public
                Company
                Accounting Oversight Board (United States). Those standards require
                that we plan
                and perform the audit to obtain reasonable assurance about whether
                the financial
                statements are free of material misstatement. The Company is not
                required to
                have, nor were we engaged to perform, an audit of its internal control
                over
                financial reporting. Our audits included consideration of internal
                control over
                financial reporting as a basis for designing audit procedures that
                are
                appropriate in the circumstances, but not for the purpose of expressing
                an
                opinion on the effectiveness of the Company's internal control over
                financial
                reporting. Accordingly we express no such opinion. An audit also
                includes
                examining, on a test basis, evidence supporting the amounts and disclosures
                in
                the financial statements, assessing the accounting principles used
                and
                significant estimates made by management, as well as evaluating the
                overall
                financial statement presentation. We believe that our audits provide
                a
                reasonable basis for our opinion.
 
 In
                our
                opinion, based upon our report and the report of the other independent
                registered public accounting firm, the financial statements referred
                to above
                present fairly, in all material respects, the results of operations,
                changes in
                stockholders’ equity (deficiency) and cash flows of CepTor Corporation (a
                development stage company) for the years ended December 31, 2005
                and December
                31, 2004 and for the period from August 11, 1986 (date of inception)
                to December
                31, 2005 in conformity with United States generally accepted accounting
                principles.
 
 The
                financial statements have been prepared assuming that the Company
                will continue
                as a going concern. Note 2 to those financial statements, which is
                not included
                herein, indicates that the Company incurred significant losses since
                inception
                and has limited capital resources, which raises substantial doubt
                about the
                Company's ability to continue as a going concern. The financial statements
                do
                not include any adjustments that might result from the outcome of
                this
                uncertainty.
 
 /s/
                Marcum & Kliegman LLP
 New
                York,
                New York
 April
                10,
                2006
 
 F-3
 Table
            of Contents
  **Report
          of Independent Registered Public Accounting Firm**
 
 
 To
          the
          Board of Directors,
 CepTor
          Corporation (A Development Stage Company):
 
 We
          have
          audited the balance sheet of CepTor Corporation (A Development Stage Company)
          as
          of December 31, 2003, and the related statements of operations, stockholders’
deficiency and cash flows for the year then ended and for the period from
          August
          11, 1986 (date of inception) to December 31, 2003. These financial statements
          are the responsibility of the Company’s management. Our responsibility is to
          express an opinion on these financial statements based on our audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audit provides a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of CepTor Corporation (A Development
          Stage Company) as of December 31, 2003, and the results of its operations
          and
          its cash flows for the year then ended and for the period from August 11,
          1986
          (date of inception) to December 31, 2003 in conformity with accounting
          principles generally accepted in the United States of America.
 
 The
          accompanying financial statements have been prepared assuming that the
          Company
          will continue as a going concern. As more fully described in Note 2 to
          the
          December 31, 2003 financial statements, the Company has sustained reoccurring
          operating losses and has an accumulated deficit of $915,846 as of December
          31,
          2003. These conditions raise substantial doubt about the Company’s ability to
          continue as a going concern. Management’s plans regarding those matters are also
          described in Note 2 of the 2003 financial statement. The financial statements
          do
          not include any adjustments that might result from the outcome of this
          uncertainty.
  
 /s/
          WithumSmith+Brown, P.C.
 
 New
          Brunswick, New Jersey
 July
          26,
          2004, except for Note 14(g) to the December 31, 2003
 Financial
          Statements, which is dated December 8, 2004


F-4
 Table
          of Contents




**CEPTOR
                  CORPORATION****(A
                  Development Stage Company)****BALANCE
                  SHEET********DECEMBER
                  31, 2006****ASSETS**Current
                  Assets:Cash
              
              $
              12,315Prepaid
                  expenses
              
              
              12,897**Total
                  current assets**
              
              
              25,212Property
                  and equipment, net
              
              
              36,362Deferred
                  financing costs
              
              
              1,187,214**TOTAL
                  ASSETS**
              
              $
              1,248,788**LIABILITIES
                  AND STOCKHOLDERS' DEFICIENCY**Current
                  Liabilities:Accounts
                  payable
              
              $
              3,877,171Accrued
                  expenses
              
              
              1,065,012Convertible
                  notes (net of debt discount of $2,595,887)
              
              
              3,718,293Warrant
                  liability
              
              
              3,603,628Conversion
                  option liability
              
              
              2,606,385Total
                  current liabilities
              
              
              14,870,489Commitments
                  and contingenciesStockholders'
                  Deficiency:Preferred
                  stock, $0.0001 par value; authorized 20,000,000 shares,
                  issuedand
                  outstanding - 221.40 shares of Series A ConvertiblePreferred
                  Stock at December 31, 2006; liquidationpreference
                  - $6,203,750
              
              
              5,535,000Common
                  stock, $0.0001; authorized 100,000,000 shares, issued andoutstanding
                  - 15,500,069
              
              
              1,550Additional
                  paid-in capital
              
              
              26,919,823Deficit
                  accumulated during the development stage
              
              
              (46,078,074
              )Total
                  stockholders' deficiency
              
              
              (13,621,701
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIENCY**
              
              $
              1,248,788See
                  notes to financial statements






F-5
 Table
          of Contents







**CEPTOR
                CORPORATION****(A
                Development Stage Company)****STATEMENTS
                OF OPERATIONS****Cumulative****August
                11, 1986****(Date
                of****For
                the Years Ended**
            
            **Inception)
                to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2006**REVENUES:Other
                income
            
            $
            -
            
            $
            -
            
            $
            75,349OPERATING
                EXPENSES:Research
                and development
            
            
            1,564,469
            
            
            10,007,649
            
            
            14,165,974In-process
                research and development
            
            
            -
            
            
            -
            
            
            5,034,309General
                and administrative
            
            
            2,245,825
            
            
            3,564,712
            
            
            12,363,170Gain
                on extinguishment of debt
            
            
            (387,362
            )
            
            (311,281
            )
            
            (698,643
            )Change
                in fair value of derivativefinancial
                instruments
            
            
            (8,495,881
            )
            
            (949,981
            )
            
            (9,445,862
            )Interest
                expense
            
            
            13,234,928
            
            
            998,394
            
            
            15,597,763Interest
                income
            
            
            -
            
            
            (41,903
            )
            
            (52,318
            )Total
                operating expenses
            
            
            8,161,979
            
            
            13,267,590
            
            
            36,964,393NET
                LOSS
            
            
            (8,161,979
            )
            
            (13,267,590
            )
            
            (36,889,044
            )Preferred
                dividends
            
            
            -
            
            
            (9,164,500
            )
            
            (10,100,616
            )NET
                LOSS AVAILABLE TO COMMON STOCKHOLDERS
            
            $
            (8,161,979
            )
            $
            (22,432,090
            )
            $
            (46,989,660
            )Basic
                and diluted loss per common share
            
            $
            (0.56
            )
            $
            (2.11
            )Weighted-average
                number of common shares outstanding
            
            
            14,650,070
            
            
            10,653,286See
                notes to financial statements








F-6
 Table
          of Contents




**CEPTOR
                  CORPORATION****(A
                  DEVELOPMENT STAGE COMPANY)****STATEMENTS
                  OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY****Deficit****Accumulated**
              
              **Total****Subscrip-**
              
              **Deferred**
              
              **Additional**
              
              
              
              
              
              **During
                  the**
              
              **Stockholders'****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **tion**
              
              **Compen-**
              
              **Paid-in**
              
              **Treasury
                  Stock**
              
              **Development**
              
              **(Deficiency)****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Receivable**
              
              **sation**
              
              **Capital**
              
              **Shares**
              
              **Amount**
              
              **Stage**
              
              **Equity****Balance,
                  August 11, 1986 and December 31, 1986**
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -Issuance
                  of common stock for cash ($0.0012)
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000**Balance,
                  December 31, 1987**
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000**Balance,
                  December 31, 1988**
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000**Balance,
                  December 31, 1989**
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000**Balance,
                  December 31, 1990**
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000**Balance,
                  December 31, 1991**
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,006
              )
              
              (8,006
              )**Balance,
                  December 31, 1992**
              
              
              -
              
              
              -
              
              
              840,818
              
              
              84
              
              
              -
              
              
              -
              
              
              916
              
              
              -
              
              
              -
              
              
              (8,006
              )
              
              (7,006
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,169
              )
              
              (1,169
              )Convertible
                  notes
              
              
              -
              
              
              -
              
              
              176,572
              
              
              18
              
              
              -
              
              
              -
              
              
              3
              
              
              -
              
              
              -
              
              
              -
              
              
              21Issuance
                  of common stock in exchange forservices
                  rendered ($
                  0.0142)
              
              
              -
              
              
              -
              
              
              176,572
              
              
              18
              
              
              -
              
              
              -
              
              
              2,482
              
              
              -
              
              
              -
              
              
              -
              
              
              2,500**Balance,
                  December 31, 1993**
              
              
              -
              
              
              -
              
              
              1,193,962
              
              
              120
              
              
              -
              
              
              -
              
              
              3,401
              
              
              -
              
              
              -
              
              
              (9,175
              )
              
              (5,654
              )Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,222
              
              
              10,222Distribution
                  to stockholders
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,260
              )
              
              (4,260
              )**Balance,
                  December 31, 1994**
              
              
              -
              
              
              -
              
              
              1,193,962
              
              
              120
              
              
              -
              
              
              -
              
              
              3,401
              
              
              -
              
              
              -
              
              
              (3,213
              )
              
              308Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,342
              )
              
              (1,342
              )**Balance,
                  December 31, 1995**
              
              
              -
              
              
              -
              
              
              1,193,962
              
              
              120
              
              
              -
              
              
              -
              
              
              3,401
              
              
              -
              
              
              -
              
              
              (4,555
              )
              
              (1,034
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,727
              )
              
              (8,727
              )**Balance,
                  December 31, 1996**
              
              
              -
              
              
              -
              
              
              1,193,962
              
              
              120
              
              
              -
              
              
              -
              
              
              3,401
              
              
              -
              
              
              -
              
              
              (13,282
              )
              
              (9,761
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,975
              )
              
              (3,975
              )Issued
                  pursuant to acquisition ($3.3501)
              
              
              -
              
              
              -
              
              
              59,700
              
              
              6
              
              
              -
              
              
              -
              
              
              199,994
              
              
              -
              
              
              -
              
              
              -
              
              
              200,000Issuance
                  of common stock for cash ($3.3501)
              
              
              -
              
              
              -
              
              
              29,850
              
              
              3
              
              
              -
              
              
              -
              
              
              99,997
              
              
              -
              
              
              -
              
              
              -
              
              
              100,000Capital
                  contribution by stockholder
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000Expense
                  pursuant to grant of stock option
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              20,356
              
              
              -
              
              
              -
              
              
              -
              
              
              20,356**Balance,
                  December 31, 1997**
              
              
              -
              
              
              -
              
              
              1,283,512
              
              
              129
              
              
              -
              
              
              -
              
              
              373,748
              
              
              -
              
              
              -
              
              
              (17,257
              )
              
              356,620Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (21,102
              )
              
              (21,102
              )**Balance,
                  December 31, 1998**
              
              
              -
              
              
              -
              
              
              1,283,512
              
              
              129
              
              
              -
              
              
              -
              
              
              373,748
              
              
              -
              
              
              -
              
              
              (38,359
              )
              
              335,518Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (25,172
              )
              
              (25,172
              )**Balance,
                  December 31, 1999**
              
              
              -
              
              
              -
              
              
              1,283,512
              
              
              129
              
              
              -
              
              
              -
              
              
              373,748
              
              
              -
              
              
              -
              
              
              (63,531
              )
              
              310,346Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (36,256
              )
              
              (36,256
              )Issuance
                  of common stock for cash ($3.1409)
              
              
              
              
              
              
              
              
              15,919
              
              
              2
              
              
              
              
              
              
              
              
              49,998
              
              
              
              
              
              
              
              
              
              
              
              50,000**Balance,
                  December 31, 2000**
              
              
              -
              
              
              -
              
              
              1,299,431
              
              
              131
              
              
              -
              
              
              -
              
              
              423,746
              
              
              -
              
              
              -
              
              
              (99,787
              )
              
              324,090Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (233,958
              )
              
              (233,958
              )Issued
                  pursuant to funding agreement ($0.0838)
              
              
              
              
              
              
              
              
              1,083,729
              
              
              108
              
              
              
              
              
              
              
              
              90,659
              
              
              
              
              
              
              
              
              
              
              
              90,767**Balance,
                  December 31, 2001**
              
              
              -
              
              
              -
              
              
              2,383,160
              
              
              239
              
              
              -
              
              
              -
              
              
              514,405
              
              
              -
              
              
              -
              
              
              (333,745
              )
              
              180,899Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (654,599
              )
              
              (654,599
              )Issued
                  pursuant to funding agreement ($0.0838)
              
              
              
              
              
              
              
              
              1,515,053
              
              
              151
              
              
              
              
              
              
              
              
              126,742
              
              
              
              
              
              
              
              
              
              
              
              126,893**Balance,
                  December 31, 2002**
              
              
              -
              
              
              -
              
              
              3,898,213
              
              
              390
              
              
              -
              
              
              -
              
              
              641,147
              
              
              -
              
              
              -
              
              
              (988,344
              )
              
              (346,807
              )Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              72,498
              
              
              72,498**Balance,
                  December 31, 2003**
              
              
              -
              
              $
              -
              
              
              3,898,213
              
              $
              390
              
              $
              -
              
              $
              -
              
              $
              641,147
              
              
              -
              
              $
              -
              
              $
              (915,846
              )
              $
              (274,309
              )
   F-7
 Table
            of Contents
  **CEPTOR
                  CORPORATION****(A
                  DEVELOPMENT STAGE COMPANY)****STATEMENTS
                  OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY****Deficit****Accumulated**
              
              **Total****Subscrip-**
              
              **Deferred**
              
              **Additional**
              
              
              
              
              
              **During
                  the**
              
              **Stockholders'****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **tion**
              
              **Compen-**
              
              **Paid-in**
              
              **Treasury
                  Stock**
              
              **Development**
              
              **(Deficiency)****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Receivable**
              
              **sation**
              
              **Capital**
              
              **Shares**
              
              **Amount**
              
              **Stage**
              
              **Equity**
 **Balance,
                  December 31, 2003**
              
              
              -
              
              $
              -
              
              
              3,898,213
              
              $
              390
              
              $
              -
              
              $
              -
              
              $
              641,147
              
              
              -
              
              $
              -
              
              $
              (915,846
              )
              $
              (274,309
              )Acquisition
                  by Xechem International, Inc. andapplication
                  of push-down accounting
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,118,463
              
              
              -
              
              
              -
              
              
              915,846
              
              
              5,034,309Option
                  granted pursuant to spinoff agreement
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,082,500
              
              
              -
              
              
              -
              
              
              -
              
              
              2,082,500Common
                  stock subject to repurchase under put right
              
              
              -
              
              
              -
              
              
              (401,305
              )
              
              (40
              )
              
              -
              
              
              -
              
              
              (1,637,285
              )
              
              -
              
              
              -
              
              
              -
              
              
              (1,637,325
              )Common
                  stock issued May 2004, in connectionwith
                  bridge loans ($1.22)
              
              
              -
              
              
              -
              
              
              451,597
              
              
              45
              
              
              -
              
              
              -
              
              
              549,955
              
              
              -
              
              
              -
              
              
              -
              
              
              550,000Common
                  stock issued May 2004, to placementagent
                  for bridge loans
                  ($2.50)
              
              
              -
              
              
              -
              
              
              36,000
              
              
              4
              
              
              -
              
              
              -
              
              
              89,996
              
              
              -
              
              
              -
              
              
              -
              
              
              90,000Common
                  stock issued September 2004, net ofoffering
                  expenses of $70,760 ($1.68)
              
              
              
              
              
              
              
              
              554,413
              
              
              55
              
              
              
              
              
              
              
              
              929,176
              
              
              
              
              
              
              
              
              
              
              
              929,231Common
                  stock issued December 2004 to advisors forpast
                  services ($2.50)
              
              
              
              
              
              
              
              
              675,690
              
              
              68
              
              
              
              
              
              
              
              
              1,689,157
              
              
              
              
              
              
              
              
              
              
              
              1,689,225Reclassification
                  in December 2004 of advances fromXechem
                  as contribution to capital
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              350,310
              
              
              
              
              
              
              
              
              
              
              
              350,310Minority
                  shareholders pursuant to recapitalization
              
              
              
              
              
              
              
              
              1,850,000
              
              
              185
              
              
              
              
              
              
              
              
              (185
              )
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued December 2004 pursuant toexercise
                  of options granted pursuant
                  tospinoff
                  agreement ($0.00001)
              
              
              
              
              
              
              
              
              3,031,943
              
              
              303
              
              
              (303
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Intrinsic
                  value of beneficial conversion feature ofreplacement
                  notes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,111,240
              
              
              
              
              
              
              
              
              
              
              
              1,111,240Common
                  stock issued December 2004 in conversionof
                  convertible note
                  ($1.25)
              
              
              
              
              
              
              
              
              167,610
              
              
              17
              
              
              
              
              
              
              
              
              209,495
              
              
              
              
              
              
              
              
              
              
              
              209,512Common
                  stock issued December 2004 in connectionwith
                  litigation settlement ($2.50)
              
              
              
              
              
              
              
              
              125,000
              
              
              12
              
              
              
              
              
              
              
              
              312,488
              
              
              
              
              
              
              
              
              
              
              
              312,500Warrants
                  issued in connection withlitigation
                  settlement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              109,500
              
              
              
              
              
              
              
              
              
              
              
              109,500Common
                  stock issued December 2004 pursuant toplacement
                  agent agreement ($2.50)
              
              
              
              
              
              
              
              
              150,000
              
              
              15
              
              
              
              
              
              
              
              
              (15
              )
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  issued to nonemployees for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              396,000
              
              
              
              
              
              
              
              
              
              
              
              396,000Preferred
                  stock and warrants issued pursuant to units soldDecember
                  2004 in a
                  private placement ($25,000) 145.07
              
              
              
              
              
              3,626,750
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (822,510
              )
              
              
              
              
              
              
              
              
              
              
              2,804,240Acquisition
                  December 2004 of treasury stockunder
                  put right ($2.50)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              145,070
              
              
              (362,675
              )
              
              
              
              
              (362,675
              )Deemed
                  dividend of beneficial conversion featureof
                  units sold in private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              936,116
              
              
              
              
              
              
              
              
              (936,116
              )
              
              -Stock
                  option-based compensation for investorrelation
                  services rendered
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,198,500
              )
              
              1,198,500
              
              
              
              
              
              
              
              
              
              
              
              -Stock
                  option-based compensation for researchconsulting
                  services rendered
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (30,600
              )
              
              30,600
              
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              604,350
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              604,350Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (14,547,889
              )
              
              (14,547,889
              )**Balance,
                  December 31, 2004**
              
              
              145.07
              
              $
              3,626,750
              
              
              10,539,161
              
              $
              1,054
              
              $
              (303
              )
              $
              (624,750
              )
              $
              12,294,648
              
              
              145,070
              
              $
              (362,675
              )
              $
              (15,484,005
              )
              $
              (549,281
              )
  F-8
 Table
            of Contents
  **CEPTOR
                  CORPORATION****(A
                  DEVELOPMENT STAGE COMPANY)****STATEMENTS
                  OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY****Deficit****Accumulated**
              
              **Total****Subscrip-**
              
              **Deferred**
              
              **Additional**
              
              
              
              
              
              **During
                  the**
              
              **Stockholders'****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **tion**
              
              **Compen-**
              
              **Paid-in**
              
              **Treasury
                  Stock**
              
              **Development**
              
              **(Deficiency)****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Receivable**
              
              **sation**
              
              **Capital**
              
              **Shares**
              
              **Amount**
              
              **Stage**
              
              **Equity**
 **Balance,
                  December 31, 2004**
              
              
              145.07
              
              $
              3,626,750
              
              
              10,539,161
              
              $
              1,054
              
              $
              (303
              )
              $
              (624,750
              )
              $
              12,294,648
              
              
              145,070
              
              $
              (362,675
              )
              $
              (15,484,005
              )
              $
              (549,281
              )Preferred
                  stock and warrants issued pursuant tounits
                  sold on January 5, 2005 in aprivate
                  placement ($25,000) 48.35
              
              
              
              
              
              1,208,750
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (159,359
              )
              
              
              
              
              
              
              
              
              
              
              1,049,391Deemed
                  dividend of beneficial conversion featureof
                  units sold January 5, 2005 in private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,208,750
              
              
              
              
              
              
              
              
              (1,208,750
              )
              
              -Acquisition
                  January 5, 2005 of treasurystock
                  under put right ($2.50)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              48,350
              
              
              (120,875
              )
              
              
              
              
              (120,875
              )Preferred
                  stock and warrants issued pursuant tounits
                  sold on January 18, 2005 in
                  aprivate
                  placement ($25,000) 76.25
              
              
              
              
              
              1,906,250
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (252,624
              )
              
              
              
              
              
              
              
              
              
              
              1,653,626Deemed
                  dividend of beneficial conversion featureof
                  units sold January 18, 2005 in private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,906,250
              
              
              
              
              
              
              
              
              (1,906,250
              )
              
              -Acquisition
                  January 18, 2005 of treasurystock
                  under put right ($2.50)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              76,250
              
              
              (190,625
              )
              
              
              
              
              (190,625
              )Common
                  stock issued January 2005 in connectionwith
                  payment of legal fees
                  ($3.04)
              
              
              
              
              
              
              
              
              23,000
              
              
              2
              
              
              
              
              
              
              
              
              69,998
              
              
              
              
              
              
              
              
              
              
              
              70,000Common
                  stock issued January 2005 pursuant toamendment
                  of placement agent agreement ($2.50)
              
              
              
              
              
              
              
              
              150,000
              
              
              15
              
              
              
              
              
              
              
              
              (15
              )
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued February 2005 to advisorsfor
                  past services
                  ($6.25)
              
              
              
              
              
              
              
              
              7,500
              
              
              1
              
              
              
              
              
              
              
              
              46,874
              
              
              
              
              
              
              
              
              
              
              
              46,875Preferred
                  stock and warrants issued pursuant tounits
                  sold on February 3, 2005 in
                  aprivate
                  placement ($25,000) 224.48
              
              
              
              
              
              5,612,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (851,447
              )
              
              
              
              
              
              
              
              
              
              
              4,760,553Deemed
                  dividend of beneficial conversion featureof
                  units sold February 3, 2005 in private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,612,000
              
              
              
              
              
              
              
              
              (5,612,000
              )
              
              -Acquisition
                  February 3, 2005 of treasurystock
                  under put right ($2.50)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              224,480
              
              
              (561,200
              )
              
              
              
              
              (561,200
              )Preferred
                  stock and warrants issued pursuant tounits
                  sold on February 11, 2005 in aprivate
                  placement ($25,000) 17.50
              
              
              
              
              
              437,500
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (256,681
              )
              
              
              
              
              
              
              
              
              
              
              180,819Deemed
                  dividend of beneficial conversion featureof
                  units sold February 11, 2005 in private placement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              437,500
              
              
              
              
              
              
              
              
              (437,500
              )
              
              -Acquisition
                  February 11, 2005 of treasurystock
                  under put right ($2.50)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,500
              
              
              (43,750
              )
              
              
              
              
              (43,750
              )Common
                  stock issued February 2005 pursuant tocashless
                  exercise of option ($3.05)
              
              
              
              
              
              
              
              
              100,191
              
              
              10
              
              
              
              
              
              
              
              
              (10
              )
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued March 2005 upon conversionof
                  preferred shares ($2.50) (44.00)
              
              
              
              
              
              (1,100,000
              )
              
              440,000
              
              
              44
              
              
              
              
              
              
              
              
              1,099,956
              
              
              
              
              
              
              
              
              
              
              
              -Payment
                  for common stock issued December 2004pursuant
                  to exercise of options granted pursuant tospinoff
                  agreement
                  ($0.00001)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              303
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              303Common
                  stock issued March 2005 pursuant toexercise
                  of warrants
                  ($1.25)
              
              
              
              
              
              
              
              
              5,000
              
              
              1
              
              
              
              
              
              
              
              
              6,249
              
              
              
              
              
              
              
              
              
              
              
              6,250Common
                  stock issued April 2005 upon conversionof
                  preferred shares ($2.50) (15.00)
              
              
              
              
              
              (375,000
              )
              
              150,000
              
              
              15
              
              
              
              
              
              
              
              
              374,985
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued May 2005 pursuant tofinancing
                  letter agreement ($3.00)
              
              
              
              
              
              
              
              
              25,000
              
              
              2
              
              
              
              
              
              
              
              
              74,998
              
              
              
              
              
              
              
              
              
              
              
              75,000Common
                  stock issued May 2005 upon conversionof
                  preferred shares ($2.50) (41.00)
              
              
              
              
              
              (1,025,000
              )
              
              410,000
              
              
              41
              
              
              
              
              
              
              
              
              1,024,959
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued June 2005 upon conversionof
                  preferred shares ($2.50) (29.00)
              
              
              
              
              
              (725,000
              )
              
              290,000
              
              
              29
              
              
              
              
              
              
              
              
              724,971
              
              
              
              
              
              
              
              
              
              
              
              -Capital
                  contribution for repurchase of common stockpursuant
                  to Stock Purchase Agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              424,818
              
              
              
              
              
              
              
              
              
              
              
              424,818Common
                  stock repurchased June 2005 pursuantto
                  Stock Repurchase Agreement
                  ($0.80)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,886,563
              
              
              (2,734,068
              )
              
              
              
              
              (2,734,068
              )Common
                  stock issued July 2005 pursuant to RegulatoryMilestone
                  Plan ($2.70)
              
              
              
              
              
              
              
              
              100,000
              
              
              10
              
              
              
              
              
              
              
              
              269,990
              
              
              
              
              
              
              
              
              
              
              
              270,000
  F-9
 Table
            of Contents
  **CEPTOR
                  CORPORATION****(A
                  DEVELOPMENT STAGE COMPANY)****STATEMENTS
                  OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY****Deficit****Accumulated**
              
              **Total****Subscrip-**
              
              **Deferred**
              
              **Additional**
              
              
              
              
              
              **During
                  the**
              
              **Stockholders'****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **tion**
              
              **Compen-**
              
              **Paid-in**
              
              **Treasury
                  Stock**
              
              **Development**
              
              **(Deficiency)****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Receivable**
              
              **sation**
              
              **Capital**
              
              **Shares**
              
              **Amount**
              
              **Stage**
              
              **Equity**
 Common
                  stock issued July 2005 upon conversionof
                  preferred shares ($2.50) (20.00)
              
              
              
              
              
              (500,000
              )
              
              200,000
              
              
              20
              
              
              
              
              
              
              
              
              499,980
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued August 2005 upon conversionof
                  preferred shares ($2.50) (83.50)
              
              
              
              
              
              (2,087,500
              )
              
              835,000
              
              
              84
              
              
              
              
              
              
              
              
              2,087,416
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued September 2005 upon conversionof
                  preferred shares ($2.50) (25.00)
              
              
              
              
              
              (625,000
              )
              
              250,000
              
              
              25
              
              
              
              
              
              
              
              
              624,975
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued September 2005 pursuant toStock
                  Purchase Agreement
              
              
              
              
              
              
              
              
              25,000
              
              
              2
              
              
              
              
              
              
              
              
              (2
              )
              
              
              
              
              
              
              
              
              
              
              -Expenses
                  incurred pursuant to entering into StockPurchase
                  Agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (89,340
              )
              
              
              
              
              
              
              
              
              
              
              (89,340
              )Net
                  proceeds from October 2005 sale of common stockissued
                  December 2004 pursuant to exercise ofoptions
                  granted pursuant to spinoffagreement
                  ($0.63)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              163,014
              
              
              
              
              
              
              
              
              
              
              
              163,014Common
                  stock issued October 2005 pursuant toStock
                  Purchase Agreement
              
              
              
              
              
              
              
              
              377,359
              
              
              38
              
              
              
              
              
              
              
              
              (38
              )
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued November 2005 upon conversionof
                  preferred shares ($2.50) (2.00)
              
              
              
              
              
              (50,000
              )
              
              20,000
              
              
              2
              
              
              
              
              
              
              
              
              49,998
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued December 2005 pursuant toSecurities
                  Purchase Agreement
              
              
              
              
              
              
              
              
              268,817
              
              
              27
              
              
              
              
              
              
              
              
              37,343
              
              
              
              
              
              
              
              
              
              
              
              37,370Warrant
                  liability established
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,350,697
              )
              
              
              
              
              
              
              
              
              
              
              (3,350,697
              )Common
                  stock issued December 2005 upon conversionof
                  replacement notes ($0.375)
              
              
              
              
              
              
              
              
              485,000
              
              
              48
              
              
              
              
              
              
              
              
              181,827
              
              
              
              
              
              
              
              
              
              
              
              181,875Common
                  stock issued December 2005 upon conversionof
                  preferred shares ($2.50) (4.00)
              
              
              
              
              
              (100,000
              )
              
              40,000
              
              
              4
              
              
              
              
              
              
              
              
              99,996
              
              
              
              
              
              
              
              
              
              
              
              -Discount
                  of secured convertible debenture uponfair
                  value allocation of proceeds
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              250,000
              
              
              
              
              
              
              
              
              
              
              
              250,000Retirement
                  of treasury shares
              
              
              
              
              
              
              
              
              (3,398,213
              )
              
              (340
              )
              
              
              
              
              
              
              
              (4,012,853
              )
              
              (3,398,213
              )
              
              4,013,193
              
              
              
              
              
              -Reverse
                  common stock subject to repurchase undervariable
                  shares put right at December 31, 2004
              
              
              
              
              
              
              
              
              401,305
              
              
              40
              
              
              
              
              
              
              
              
              1,637,285
              
              
              
              
              
              
              
              
              
              
              
              1,637,325Stock
                  option-based compensation for investorrelation
                  services rendered
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (620,700
              )
              
              620,700
              
              
              
              
              
              
              
              
              
              
              
              -Stock
                  option-based compensation for employeesand
                  directors
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (293,231
              )
              
              293,231
              
              
              
              
              
              
              
              
              
              
              
              -Fair
                  value adjustment of stock options previouslygranted
                  to non-employees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              180,150
              
              
              (180,150
              )
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,035,701
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,035,701Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (13,267,590
              )
              
              (13,267,590
              )**Balance,
                  December 31, 2005**
              
              
              248.15
              
              $
              6,203,750
              
              
              11,744,120
              
              $
              1,174
              
              $
              -
              
              $
              (322,830
              )
              $
              22,969,495
              
              
              -
              
              $
              -
              
              $
              (37,916,095
              )
              $
              (9,064,506
              )
  F-10
 Table
            of Contents
  **CEPTOR
                  CORPORATION****(A
                  DEVELOPMENT STAGE COMPANY)****STATEMENTS
                  OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY****Deficit****Accumulated**
              
              **Total****Subscrip-**
              
              **Deferred**
              
              **Additional**
              
              
              
              
              
              **During
                  the**
              
              **Stockholders'****Preferred
                  Stock**
              
              **Common
                  Stock**
              
              **tion**
              
              **Compen-**
              
              **Paid-in**
              
              **Treasury
                  Stock**
              
              **Development**
              
              **(Deficiency)****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Receivable**
              
              **sation**
              
              **Capital**
              
              **Shares**
              
              **Amount**
              
              **Stage**
              
              **Equity**
 **Balance,
                  December 31, 2005**
              
              
              248.15
              
              $
              6,203,750
              
              
              11,744,120
              
              $
              1,174
              
              $
              -
              
              $
              (322,830
              )
              $
              22,969,495
              
              
              -
              
              $
              -
              
              $
              (37,916,095
              )
              $
              (9,064,506
              )Common
                  stock issued January 2006 upon conversionof
                  preferred shares ($2.50) (10.00)
              
              
              
              
              
              (250,000
              )
              
              100,000
              
              
              10
              
              
              
              
              
              
              
              
              249,990
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued January 2006 upon conversionof
                  replacement notes ($0.375)
              
              
              
              
              
              
              
              
              855,267
              
              
              85
              
              
              
              
              
              
              
              
              320,640
              
              
              
              
              
              
              
              
              
              
              
              320,725Common
                  stock issued February 2006 upon conversionof
                  preferred shares ($2.50) (7.00)
              
              
              
              
              
              (175,000
              )
              
              70,000
              
              
              7
              
              
              
              
              
              
              
              
              174,993
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued February 2006 upon conversionof
                  2005 Convertible Debentures ($0.5795)
              
              
              
              
              
              
              
              
              86,281
              
              
              9
              
              
              
              
              
              
              
              
              49,991
              
              
              
              
              
              
              
              
              
              
              
              50,000Common
                  stock issued March 2006 upon conversionof
                  preferred shares ($2.50) (6.75)
              
              
              
              
              
              (168,750
              )
              
              67,500
              
              
              7
              
              
              
              
              
              
              
              
              168,743
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued March 2006 upon conversionof
                  options ($0.359)
              
              
              
              
              
              
              
              
              557,102
              
              
              56
              
              
              
              
              
              
              
              
              199,944
              
              
              
              
              
              
              
              
              
              
              
              200,000Expenses
                  incurred pursuant to entering into StockPurchase
                  Agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (38,181
              )
              
              
              
              
              
              
              
              
              
              
              (38,181
              )Common
                  stock issued March 2006 upon conversionof
                  2005 Convertible Debentures ($0.3373)
              
              
              
              
              
              
              
              
              148,236
              
              
              15
              
              
              
              
              
              
              
              
              49,985
              
              
              
              
              
              
              
              
              
              
              
              50,000Common
                  stock issued April 2006 upon conversionof
                  2005 Convertible Debentures
                  ($0.1985)
              
              
              
              
              
              
              
              
              755,735
              
              
              76
              
              
              
              
              
              
              
              
              149,924
              
              
              
              
              
              
              
              
              
              
              
              150,000Common
                  stock issued May 2006 upon conversionof
                  preferred shares ($2.50) (3.00)
              
              
              
              
              
              (75,000
              )
              
              30,000
              
              
              3
              
              
              
              
              
              
              
              
              74,997
              
              
              
              
              
              
              
              
              
              
              
              -Common
                  stock issued May 2006 upon conversionof
                  2005 Convertible Debentures ($0.1616)
              
              
              
              
              
              
              
              
              309,598
              
              
              31
              
              
              
              
              
              
              
              
              49,969
              
              
              
              
              
              
              
              
              
              
              
              50,000Common
                  stock issued May 2006 pursuantto
                  anti-dilution provisions
              
              
              
              
              
              
              
              
              776,230
              
              
              77
              
              
              
              
              
              
              
              
              155,169
              
              
              
              
              
              
              
              
              
              
              
              155,246Incremental
                  fair value of additional common stockissuable
                  upon conversion of preferred shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,936,377
              
              
              
              
              
              
              
              
              
              
              
              1,936,377Reclassification
                  of deferred compensation asa
                  result of adoption of SAB 107
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              322,830
              
              
              (322,830
              )
              
              
              
              
              
              
              
              
              
              
              -Amortization
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              730,617
              
              
              
              
              
              
              
              
              
              
              
              730,617Net
                  icome (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,161,979
              )
              
              (8,161,979
              )**Balance,
                  December 31, 2006**
              
              
              221.40
              
              $
              5,535,000
              
              
              15,500,069
              
              $
              1,550
              
              $
              -
              
              $
              -
              
              $
              26,919,823
              
              
              -
              
              $
              -
              
              $
              (46,078,074
              )
              $
              (13,621,701
              )




F-11
 Table
          of Contents







**CEPTOR
                CORPORATION****(A
                Development Stage Company)****STATEMENTS
                OF CASH FLOWS****Cumulative****August
                11, 1986****(Date
                of****For
                the Years Ended**
            **Inception)
                to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2006**CASH
                FLOWS USED IN OPERATING ACTIVITIES:Net
                loss
            
            $
            (8,161,979
            )
            $
            (13,267,590
            )
            $
            (36,889,044
            )Adjustments
                to reconcile net loss to net cashused
                in operating activities:Depreciation
                and amortization
            
            
            19,069
            
            
            18,207
            
            
            50,559Write-off
                of in-process research and development
            
            
            -
            
            
            -
            
            
            5,034,309Charge
                for stock option issued pursuant to spinoffagreement
            
            
            -
            
            
            -
            
            
            2,082,500Stock-based
                compensation to employees and directors
            
            
            151,026
            
            
            116,776
            
            
            267,802Stock-based
                compensation to nonemployees
            
            
            579,591
            
            
            1,310,800
            
            
            4,802,822Stock-based
                component of payment of legal fees
            
            
            -
            
            
            70,000
            
            
            70,000Stock-based
                component of litigation settlement
            
            
            -
            
            
            -
            
            
            422,000Gain
                on extinguishment of debt
            
            
            (387,362
            )
            
            (311,281
            )
            
            (698,643
            )Change
                in fair value of derivativefinancial
                instruments
            
            
            (8,495,881
            )
            
            (949,981
            )
            
            (9,445,862
            )Non-cash
                interest expense
            
            
            12,908,213
            
            
            901,620
            
            
            15,128,408Changes
                in assets and liabilities:Prepaid
                expenses
            
            
            192,888
            
            
            (68,056
            )
            
            (12,897
            )Other
                assets
            
            
            18,511
            
            
            -
            
            
            -Accounts
                payable and accrued expenses
            
            
            (693,843
            )
            
            4,812,409
            
            
            4,515,727Net
                cash used in operating activities
            
            
            (3,899,767
            )
            
            (7,367,096
            )
            
            (14,672,319
            )CASH
                FLOWS USED IN INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            -
            
            
            (13,023
            )
            
            (86,921
            )CASH
                FLOWS PROVIDED BY FINANCING ACTIVITIES:Net
                proceeds from issuances of common stock
            
            
            200,000
            
            
            169,567
            
            
            1,499,819Net
                proceeds from issuances of preferred stock
            
            
            -
            
            
            7,644,389
            
            
            10,448,629Acquisition
                of treasury stock under put right
            
            
            -
            
            
            (916,450
            )
            
            (1,279,125
            )Acquisition
                of treasury stock under purchase agreement
            
            
            -
            
            
            (2,309,250
            )
            
            (2,309,250
            )Distribution
                to shareholders
            
            
            -
            
            
            -
            
            
            (4,260
            )Capital
                contributed by Xechem International, Inc.
            
            
            -
            
            
            -
            
            
            350,310Proceeds
                from issuance of bridge loans and unsecured advances
            
            
            3,915,444
            
            
            2,250,000
            
            
            7,540,444Debt
                issue costs
            
            
            (637,639
            )
            
            (355,373
            )
            
            (1,125,012
            )Principal
                payments on bridge loans
            
            
            -
            
            
            -
            
            
            (350,000
            )Net
                cash provided by financing activities
            
            
            3,477,805
            
            
            6,482,883
            
            
            14,771,555Net
                increase (decrease) in cash and cashequivalents
            
            
            (421,962
            )
            
            (897,236
            )
            
            12,315CASH
                AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD
            
            
            434,277
            
            
            1,331,513
            
            
            -CASH
                AND CASH EQUIVALENTS AT THE END OF PERIOD
            
            $
            12,315
            
            $
            434,277
            
            $
            12,315See
                notes to financial statements




F-12
 Table
          of Contents




**CEPTOR
                CORPORATION****(A
                Development Stage Company)****STATEMENTS
                OF CASH FLOWS****Cumulative****August
                11, 1986******
            
            
            
            **(Date
                of****For
                the Years Ended**
            
            **Inception)
                to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2006**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONDeemed
                dividend of the beneficial conversion feature ofUnits
                sold in private placement
            
            $
            -
            
            $
            9,164,500
            
            $
            10,100,616Issuance
                of 2,635,000 shares of common stock uponconversion
                of preferred shares
            
            
            -
            
            
            6,587,500
            
            
            6,587,500Issuance
                of 267,500 shares of common stock uponconversion
                of preferred shares
            
            
            668,750
            
            
            -
            
            
            668,750Issuance
                of 485,000 shares of common stock uponconversion
                of convertible note
            
            
            -
            
            
            181,875
            
            
            181,875Issuance
                of 855,267 shares of common stock uponconversion
                of convertible note
            
            
            302,725
            
            
            -
            
            
            302,725Issuance
                of 1,299,850 shares of common stock uponconversion
                of convertible debentures
            
            
            300,000
            
            
            -
            
            
            300,000Issuance
                of 100,000 shares of common stock pursuant tostock
                plan
            
            
            -
            
            
            270,000
            
            
            270,000Issuance
                of 7,500 shares of common stock as compensationfor
                past services
            
            
            -
            
            
            46,875
            
            
            46,875Issuance
                of 25,000 shares of common stock as compensationfor
                financial planning
            
            
            -
            
            
            75,000
            
            
            75,000Issuance
                of 23,000 shares of common stock in payment ofaccrued
                legal fees
            
            
            -
            
            
            70,000
            
            
            70,000Capital
                contribution for repurchase of common stockpursuant
                to Stock Purchase Agreement
            
            
            -
            
            
            424,818
            
            
            424,818Issued
                36,000 shares of common stock as debt issuancecosts
            
            
            -
            
            
            -
            
            
            90,000Issued
                451,597 shares of common stock to bridge loaninvestors
                and placement agent
            
            
            -
            
            
            -
            
            
            550,000Issued
                167,610 shares upon conversion of convertiblenotes
            
            
            -
            
            
            -
            
            
            209,512Issuance
                of convertible notes in exchange for bridgeloans
                and long-term debt plus accrued interest
            
            
            -
            
            
            -
            
            
            1,111,240Obligation
                to repurchase 401,305 shares of common stockpursuant
                to put right
            
            
            -
            
            
            -
            
            
            1,637,325Cash
                paid during the year for:Interest
            
            
            35,421
            
            
            -
            
            
            35,421











F-13
 Table
          of Contents







**CEPTOR
      CORPORATION**


**(A
      Development Stage Company)**


**NOTES
      TO FINANCIAL STATEMENTS - DECEMBER 31, 2006**





**NOTE
      1 - THE COMPANY**





**ORGANIZATION**





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





**MERGER
      OF MEDALLION CREST MANAGEMENT, INC. AND CEPTOR CORPORATION**





As
      described in Note 6, 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 have been retroactively
      restated to give effect to this transaction.





**NATURE
      OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS**





CepTor
      Corporation is a biopharmaceutical company which had engaged in the research
      and
      development of therapeutic products for neuromuscular and neurodegenerative
      diseases. Since its inception, the Company had 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. Due to lack of available capital, on October 31,
      2006, the Company terminated all employees, with the exception of the CEO,
      and
      halted all activities.




In
        response to its financial condition, the Company has been focusing on a two-part
        strategy, in cooperation with the existing secured creditors, whereby (i)
        CepTor’s existing technologies will essentially be divested from the corporation
        pursuant to a transaction that will allow CepTor to retain significant upside
        should the technologies ultimately fulfill their promise as marketable and
        commercially viable products, and (ii) CepTor will seek to finalize a
        transaction for the acquisition of a new technology around which the Company
        could restructure its affairs. There is no assurance that such a transaction
        can
        be identified or consummated. In addition, any such transaction would have
        to
        have the full support of the existing secured creditors, as they have a priority
        position with respect to all of CepTor’s current assets, and there can be no
        assurance such approval will be obtained.





**NOTE
      2 - LIQUIDITY AND FINANCIAL CONDITION**





The
      Company has had difficulty securing the necessary capital to execute its
      business plan and has not been able to remain current with respect to the
      payment terms of its operating obligations including its trade payables which
      aggregated approximately $3.9 million at December 31, 2006. As described in
      Note
      12, the Company is in default of substantially all of its note obligations,
      which amount to approximately $6,314,180 in aggregate principal. These defaults
      occurred principally as a result of (i) the Company's failure to make the
      required payments of principal and interest under certain of these obligations
      (which triggered cross default provisions under the remaining note obligations),
      (ii)its failure to file a registration statement pursuant to the 2006 6%
      Convertible Notes within a specified period, and (iii) its failure to file
      a
      post-effective amendment to its registration statement on Form SB-2 covering
      shares issuable under the Cornell Convertible Debentures within a specified
      period. The Company is also required to have sufficient authorized but unissued
      shares available to net share settle its Cornell Convertible Debentures and
      all
      of its derivative financial instruments.


The
        Company has exhausted all of its capital resources, terminated all of its
        employees and is currently unable to, and does not believe it is likely,
        to
        pursue further development of its product candidates. The Company pursued
        this
        course of action as a result of having been informed by the Food and Drug
        Administration (FDA) that its Investigational New Drug Application (IND)
        remains
        on hold pending the resolution of several remaining issues. Additional internal
        research is required to fully resolve the FDA issues and complete the Company’s
        own internal research program. The Company lacks the funding that is necessary
        to resolve these issues and is currently unable to secure financing commitments
        for this purpose. With no other financial resources available to it, the
        Company
        had no choice but to cease all efforts related to the research and development
        of its compounds, terminate all of its employees, and close down its corporate
        offices in Maryland. At present, CepTor is maintaining its operations as
        a
“virtual” office operated out of New York City and has one part-time employee,
        Howard Becker, the Company’s newly appointed CEO.
 However,
          rather than selling off the assets and terminating all operations, filing
          a
          bankruptcy petition or consenting to the foreclosure of the assets by the
          secured creditors, CepTor has instead been focusing on a two-part strategy,
          in
          cooperation with the existing secured creditors, whereby (i) the Company’s
          existing technologies will be divested from the corporation pursuant to
          a
          transaction that will allow CepTor to retain a significant financial stake
          should the technologies ultimately fulfill their promise as marketable
          and
          commercially viable products, and (ii) CepTor will seek to finalize a
          transaction for the acquisition of a new technology around which it could
          restructure its affairs. There is no assurance that such a transaction
          can be
          identified or consummated. In addition, any such transaction would have
          to have
          the full support of the existing secured creditors, as they have a priority
          position with respect to all of CepTor’s current assets, and there can be no
          assurance such approval can be obtained.





F-14
 Table
            of Contents




If
      we are
      not able to finalize a transaction that results in the acquisition of a new
      commercially viable technology, including the requirement that we first
      consensually restructure our remaining outstanding trade debt, we will likely
      have no choice but to wind down our affairs and/or commence bankruptcy
      proceedings. There can be no assurance that we will be successful either in
      winning support from our existing trade creditors for the voluntary
      restructuring of their debts, or that we will finalize and close upon a
      transaction for a new technology around which to reorganize CepTor’s affairs. In
      addition, all of our assets are pledged to certain secured creditors to secure
      our repayment obligations to them. These matters raise substantial doubt about
      our ability to continue as a going concern. The financial statements do not
      include any adjustments that may be
      necessary should the Company be unable to continue as a going
      concern..




During
      the year ended December 31, 2006, the Company received (i) proceeds from
      exercises of stock options of $200,000, (ii) $3,569,444 from the issuance of
      its
      2006 6% Convertible Notes before debt issuance costs of $637,639 (see Note
      12)
      and (iii) unsecured advances of $346,000.




Primarily
      as the result of recording non-cash interest expense of $12,908,213, and the
      non-cash gain associated with the decrease in the fair values of its derivative
      financial instruments of $8,495,881, the Company recorded a net loss for the
      year ended December 31, 2006 of $8,161,979. Non-cash interest expense consisted
      primarily of the amortization of the excess fair values of its derivative
      securities included in its financing transactions and amortization of deferred
      financing costs of those financing transactions. The Company used net cash
      flows in its operating activities of $3,899,767 during the year ended December
      31, 2006. The Company’s working capital deficiency amounted to $14,845,277 and
      its development stage accumulated deficit amounted to $46,078,074 at December
      31, 2006. The Company will require substantial additional funding to develop
      any
      newly acquired technology and fund ongoing costs of its operations.


At
        December 31, 2006, the Company had $6,314,180 in principal of convertible
        notes
        outstanding. The December 2004 Convertible Note in the principal amount of
        $448,736, was due July 3, 2006. There has not been an agreement on amended
        terms
        and no assurance that the Company will reach agreement with the note holder
        on
        amended terms. The terms of the December 2004 Convertible Note does not provide
        for penalties or other payments upon default, and accordingly, the Company
        has
        not accrued a penalty as of December 31, 2006. Of the remaining debt, (i)
        $250,000 in principal plus accrued interest was due on December 9, 2006,
        (ii)
        $3,569,444 in principal representing 2006 6% Convertible Notes mature during
        the
        period June 2007 through October 2007, (iii) the Cornell Convertible Debentures
        of $1,700,000 mature in December 2008, and (iv) $346,000 represent
        interest-free, unsecured advances. Currently, the Company is in default of
        substantially all of its obligations to its noteholders and the Company’s
        creditors currently have the right to demand immediate payment of these loans.
        At present, the Company does not have, and has no immediate prospect of
        obtaining, the available cash to repay these obligations. The note holders
        holding $1,700,000 in principal have a security interest in all the assets
        of
        the Company.





Due
      to
      the defaults and arrears with its noteholders and trade creditors, and the
      lack
      of resources to settle its obligations, creditors may seek to aggressively
      pursue remedies available to them, which could force the Company to commence
      bankruptcy proceedings or wind down its affairs. Such creditors may also seek
      to
      file an involuntary bankruptcy petition against the Company. Based on the status
      of its obligations, the Company has recorded all of its liabilities as currently
      due.




In
      August
      2006, the Company entered into a letter of intent with Ferring International
      Center S.A. with respect to the proposed acquisition by the Company of Ferring’s
      rights and interests with respect to superoxide dismutase, subject to the
      Company’s completion of due diligence, the execution of definitive agreements
      and entry into a written agreement with the FDA on end points governing the
      clinical trial of SOD. Due to the lack of resources, the termination of the
      employees of Company, and the pending transfer by the Company of its existing
      technologies to another company, the Company believes it is extremely unlikely
      that the transactions with Ferring will be further pursued or ever
      consummated.





**NOTE
      3 - 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, cash flows and statement changes in
      stockholders' deficiency for the period of August 11, 1986 (date of inception)
      to December 31, 2006 in accordance with Statement of Financial Accounting
      Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage
      Enterprises".





The
      Company's net loss as reported in its statement of operations for the period
      of
      August 11, 1986 (date of inception) to December 31, 2006 is $46,989,660 whereas
      the deficit accumulated during its development stage as reported on its balance
      sheet at December 31, 2006 is $46,078,074. 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.


**PROPERTY
        AND EQUIPMENT**
 
 Property
        and equipment is recorded at cost less accumulated depreciation. Property
        and
        equipment acquired for the sole purpose to be used in research and development
        is charged to operations when acquired. Depreciation is provided on the
        straight-line method over the estimated useful lives of the assets, which
        is
        primarily five years. Leasehold improvements are amortized over the terms
        of
        their respective leases or service lives of the improvements, whichever is
        shorter. Gains and losses on depreciable assets retired or sold are recognized
        in the statement of operations in the year of disposal. Repairs and maintenance
        expenditures are expensed as incurred.





F-15
 Table
            of Contents






**DEBT
      AND EQUITY ISSUE COSTS**





Pursuant
      to a common stock purchase agreement entered into during October 2005, the
      Company incurred expenses of $89,340 in legal and accounting fees, SEC
      registration fees and non-accountable expense reimbursement. These expenses
      were
      charged to additional paid-in capital during the year ended December 31, 2005.
      In addition, the Company issued 25,000 shares of common stock with a value
      of
      $22,500 on the date of issuance charging additional paid-in capital for par
      value of the issued shares.





Pursuant
      to a securities purchase agreement entered into during December 2005, the
      Company incurred expenses of $86,033 for legal fees, accounting fees, and SEC
      registration fees. In addition, the Company also paid the investor $20,000
      in
      deal-related expenses reimbursement and commitment fees of $160,000. These
      expenses will be amortized over the three-year term of the secured convertible
      note.





Pursuant
      to the terms of the 2006 6% Convertible Notes entered into during the year
      ended
      December 31, 2006, the Company incurred expenses of $226,639 in deal-related
      expenses. In addition, the Company paid yield enhancement fees of $374,444
      and
      issued various warrants with fair values aggregating $1,388,854 as additional
      yield enhancement fees. These expenses and yield enhancement fees are being
      amortized over the twelve-month periods of each respective 2006 6% Convertible
      Note.





**STOCK
      BASED COMPENSATION**





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which
      replaced SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123)
      and superseded Accounting Principles Board Opinion No. 25, Accounting for
      Stock Issued to Employees (APB No. 25). SFAS 123R established standards for
      the accounting for which an entity exchanges its equity instruments for goods
      or
      services. This statement also addressed transactions in which an entity incurs
      liabilities in exchange for goods or services that are based on the fair value
      of the entity’s equity instruments or that may be settled by the issuance of
      those equity instruments. SFAS 123R requires the Company to measure the cost
      of
      employee services received in exchange for an award of equity instruments based
      on the grant-date fair value of the award. That cost shall be recognized over
      the period during which an employee is required to provide service in exchange
      for the award—the requisite service period (vesting period). The grant-date fair
      value of employee stock options is estimated using the Black-Scholes
      option-pricing model adjusted for the unique characteristics of those
      instruments. The Company adopted SFAS 123R using the modified
      prospective method on January 1, 2006.  Results for prior
      periods have not been restated. The Company previously accounted for share-based
      compensation under the recognition and measurement principles of APB No. 25
      and related interpretations. Under APB No. 25, compensation cost for
      employee and director grants was recorded only if the market price of the
      underlying common stock on the date of grant exceeded the exercise price. See
      Note 17 for the disclosures related to stock based compensation.




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 Year Ended****December
                    31, 2005**Net
                    loss available to common stockholders
                
                $
                (22,432,090
                )Adjust:
                    Stock-based employee compensationDetermined
                    under the fair value method
                
                
                (81,399
                )Pro
                    forma net loss
                
                $
                (22,513,489
                )Net
                    loss per share available to common stockholders:Basic
                    and diluted, as reported
                
                $
                (2.11
                )Basic
                    and diluted, pro forma
                
                
                (2.11
                )
 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
            year
            ended December 31, 2005.


Compensation
        expense for options granted to non-employees is determined in accordance
        with
        EITF 96-18, and related interpretations, as the fair value of the consideration
        received or the fair value of the equity instruments issued, whichever is
        more
        reliably measured. Compensation expense for options granted to non-employees
        is
        re-measured each period as the underlying equity instruments vest.


F-16
 Table
            of Contents


**Accounting
        for Warrants and Freestanding Derivative Financial
        Instruments**
 
 The
        Company accounts for the issuance of common stock purchase warrants and other
        freestanding derivative financial instruments in accordance with the provisions
        of EITF 00-19. Based on the provisions of EITF 00-19, the Company classifies
        as
        equity any contracts that (i) require physical settlement or net-share
        settlement or (ii) gives the Company a choice of net-cash settlement or
        settlement in its own shares (physical settlement or net-share settlement).
        The
        Company classifies as assets or liabilities any contracts that (i) require
        net-cash settlement (including a requirement to net-cash settle the contract
        if
        an event occurs and if that event is outside the control of the Company)
        or (ii)
        give the counterparty a choice of net-cash settlement or settlement in shares
        (physical settlement or net-share settlement).
 The
        terms
        of the Company’s Cornell Convertible Debentures (see Note 12) provide for a
        conversion price in certain situations based on a floating conversion price
        which results in an indeterminable number of shares of common stock potentially
        issued upon conversion. Under accounting guidance provided by EITF 00-19,
        as of
        December 31, 2006, the Company had liabilities of $3,603,620 representing
        the
        fair value of warrants and options to purchase approximately 35.8 million
        shares
        of common stock which had been issued as components of other financing
        instruments or granted to non-employees for services rendered. The Company
        recorded additional liabilities for the fair value of warrants granted during
        the year ended December 31, 2006 in the aggregate of approximately $5.7 million.
        The fair value of these awards was estimated at the date of grant using the
        Black-Scholes option pricing model with the following assumptions: risk fee
        interest rate: 4.7% to 5.1%; expected dividend yield: 0%; expected life: 3
        years to 5 years; and volatility: 106% to 223%.
  The
        accounting guidance shows that the warrants are a derivative liability and
        are marked to market for each reporting period. During the year ended December
        31, 2006, the Company recognized a credit of $5,276,577 for the decrease
        in fair
        value of the derivative financial instruments. The fair value of these awards
        was estimated at December 31, 2006 using the Black-Scholes option pricing
        model
        with the following assumptions: risk fee interest rate: 4.7% to 5.0%; expected
        dividend yield: 0%; expected option life: 1.0 years to 4.8 years; and
        volatility: 227%.


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





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





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




During
        the years ended December 31, 2006 and 2005, the Company issued $5,819,444
        in
        principal of various convertible notes (see Note 12) with embedded conversion
        options accounted for as free standing derivative financial instruments in
        accordance with SFAS 133 and EITF 00-19 and on the dates of issuance recorded
        liabilities for conversion options of $6,018,813. The fair value of these
        embedded conversion options were estimated at the date of issuance using
        the
        Black-Scholes option pricing model with the following assumptions: risk fee
        interest rate: 3.3% to 5.2%; expected dividend yield: 0%; expected option
        life:
        one year to 3 years; and volatility: 130% to 223%. The accounting guidance
        instructs that the conversion options are a derivative liability and are
        marked
        to market for each reporting period. During the year ended December 31, 2006,
        the Company recognized a credit of $3,219,304 for the decrease in fair value
        of
        the derivative financial instruments. The fair value of these embedded
        conversion options were estimated at December 31, 2006 using the Black-Scholes
        option pricing model with the following assumptions: risk fee interest rate:
        4.8% to 5.0%; expected dividend yield: 0%; expected option life: one year
        to 2
        years; and volatility: 227.




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





**RESEARCH
      AND DEVELOPMENT**





Research
      and development costs are expensed as incurred.





**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 years ended December 31, 2006 and 2005 excludes potentially
      dilutive securities because their inclusion would be anti-dilutive.





F-17
 Table
            of Contents





Shares
      of
      common stock issuable upon conversion or exercise of potentially dilutive
      securities at December 31, 2006 and 2005 are as follows:





**December
                31,****2006**
            
            **2005**Series
                A Preferred Stock
            
            
            11,405,113
            
            
            2,481,500Warrants
            
            
            33,912,855
            
            
            5,777,259Options
            
            
            1,878,834
            
            
            646,695Convertible
                Notes
            
            
            44,662,888
            
            
            4,404,279TOTAL
            
            
            91,859,690
            
            
            13,309,733








**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





The
      carrying amounts reported in the balance sheet for cash, accounts payable and
      accrued expenses approximate fair value based upon the short term nature of
      those instruments. The carrying amount of the convertible notes approximates
      their fair value as the effective rate of such instruments, which takes into
      consideration the allocation of proceeds based on the relative fair values
      of
      the notes and equity instruments issued concurrently, are consistent with market
      rates for investments with similar levels of risk.





**CONCENTRATION
      OF CREDIT RISK**





The
      Company maintains cash balances, at times, with financial institutions in an
      amount which is more than amounts insured by the Federal Deposit Insurance
      Corporation. Management monitors the soundness of these institutions and
      considers the Company's risk negligible.





**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**


In
        February 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS
        No. 155, which is an amendment of SFAS No. 133 and 140. This Statement: a)
        permits fair value re-measurement for any hybrid financial instrument that
        contains an embedded derivative that otherwise would require bifurcation,
        b)
        clarifies which interest-only strip and principal-only strip are not subject
        to
        the requirements of SFAS 133, c) establishes a requirement to evaluate interests
        in securitized financial assets to identify interests that are freestanding
        derivatives or that are hybrid financial instruments that contain an embedded
        derivative requiring bifurcation, d) clarifies that concentrations of credit
        risk in the form of subordination are not embedded derivatives, e) amends
        SFAS
        140 to eliminate the prohibition on a qualifying special-purpose entity from
        holding a derivative financial instrument that pertains to a beneficial interest
        other than another derivative financial instrument. This Statement is effective
        for financial statements for fiscal years beginning after September 15, 2006.
        Earlier adoption of this Statement is permitted as of the beginning of an
        entity’s fiscal year, provided the entity has not yet issued any financial
        statements for that fiscal year. The Company is evaluating if this Statement
        will have an impact on the financial statements of the Company.
 
 In
        March
        2006, the FASB issued SFAS No. 156, which amends FASB Statement No. 140.
        This
        Statement establishes, among other things, the accounting for all separately
        recognized servicing assets and servicing liabilities. This Statement amends
        SFAS 140 to require that all separately recognized servicing assets and
        servicing liabilities be initially measured at fair value, if practicable.
        This
        Statement permits, but does not require, the subsequent measurement of
        separately recognized servicing assets and servicing liabilities at fair
        value.
        An entity that uses derivative instruments to mitigate the risks inherent
        in
        servicing assets and servicing liabilities is required to account for those
        derivative instruments at fair value. Under this Statement, an entity can
        elect
        subsequent fair value measurement to account for its separately recognized
        servicing assets and servicing liabilities. By electing that option, an entity
        may simplify its accounting because this Statement permits income statement
        recognition of the potential offsetting changes in fair value of those servicing
        assets and servicing liabilities and derivative instruments in the same
        accounting period. This Statement is effective for financial statements for
        fiscal years beginning after September 15, 2006. Earlier adoption of this
        Statement is permitted as of the beginning of an entity’s fiscal year, provided
        the entity has not yet issued any financial statements for that fiscal year.
        The
        Company believes this Statement will not have an impact on the financial
        statements of the Company once adopted.
 
 In
        September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’
(‘‘SFAS 157’’). This statement defines fair value, establishes a framework for
        measuring fair value in accordance with accounting principles generally accepted
        in the United States (‘‘GAAP’’), and expands disclosures about fair value
        measurements. SFAS 157 does not require any new fair value measurements.
        However, for some entities, the application of SFAS 157 will change current
        practice. SFAS 157 is effective for financial statements issued for fiscal
        years
        beginning after November 15, 2007, and interim periods within those fiscal
        years, with earlier application permitted. The Company does not expect SFAS
        157
        to have a material impact on the Company's financial position or results
        of
        operations.
  F-18
 Table
                of Contents
 In
        September 2006, the staff of the Securities and Exchange Commission issued
        Staff
        Accounting Bulletin No. 108 (‘‘SAB 108’’) which provides interpretive guidance
        on how the effects of the carryover or reversal of prior year misstatements
        should be considered in quantifying a current year misstatement. SAB 108
        becomes
        effective in fiscal 2007. The Company is evaluating the effect that the adoption
        of SAB 108 may have on its previously issued financial statements.
 
 In
        November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
        Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”).  EITF 06-6 addresses the modification of a convertible debt
        instrument that changes the fair value of an embedded conversion option and
        the
        subsequent recognition of interest expense for the associated debt instrument
        when the modification does not result in a debt extinguishment pursuant to
        EITF
        96-19, “Debtor’s Accounting for a Modification or Exchange of Debt
        Instruments.”  The consensus should be applied to modifications or
        exchanges of debt instruments occurring in interim or annual periods beginning
        after November 29, 2006.  The Company does not expect the adoption of EITF
        06-6 to have a material impact on its consolidated financial position, results
        of operations or cash flows.
 
 In
        November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer’s Accounting for a
        Previously Bifurcated Conversion Option in a Convertible Debt Instrument
        When
        the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
        No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
        06-7”). At the time of issuance, an embedded conversion option in a convertible
        debt instrument may be required to be bifurcated from the debt instrument
        and
        accounted for separately by the issuer as a derivative under FAS 133, based
        on
        the application of EITF 00-19. Subsequent to the issuance of the convertible
        debt, facts may change and cause the embedded conversion option to no longer
        meet the conditions for separate accounting as a derivative instrument, such
        as
        when the bifurcated instrument meets the conditions of Issue 00-19 to be
        classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
        option previously accounted for as a derivative under FAS 133 no longer meets
        the bifurcation criteria under that standard, an issuer shall disclose a
        description of the principal changes causing the embedded conversion option
        to
        no longer require bifurcation under FAS 133 and the amount of the liability
        for
        the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
        applied to all previously bifurcated conversion options in convertible debt
        instruments that no longer meet the bifurcation criteria in FAS 133 in interim
        or annual periods beginning after December 15, 2006, regardless of whether
        the
        debt instrument was entered into prior or subsequent to the effective date
        of
        EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
        financial statements have not yet been issued.
 
 In
        December 2006, the FASB issued FSP EITF 00-19-2 “Accounting for Registration
        Payment Arrangements” (“FSP EITF 00-19-2”). FSP EITF 00-19-2 addresses an
        issuer’s accounting for registration payment arrangements. This pronouncement
        specifies that the contingent obligation to make future payments or otherwise
        transfer consideration under a registration payment arrangement, whether
        issued
        as a separate agreement or included as a provision of a financial instrument,
        should be separately recognized and accounted for as a contingency in accordance
        with SFAS 5 “Accounting for Contingencies.”  FSP EITF 00-19-2 amending
        previous standards relating to rights agreements became effective on December
        21, 2006 with respect to arrangements entered into or modified beginning
        on such
        date and for the first fiscal year beginning after December 15, 2006 with
        respect to those arrangements entered into prior to December 21, 2006.  The
        Company is in the process of evaluating the impact of the adoption of this
        statement on the Company’s results of operations and financial
        condition.
 
 In
        February 2007, the FASB issued Statement No. 159, "The Fair Value Option
        for
        Financial Assets and Financial Liabilities, including an amendment of FASB
        Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure
        many financial instruments and certain other items at fair value that are
        not
        currently required to be measured at fair value and establishes presentation
        and
        disclosure requirements designed to facilitate comparisons between companies
        that choose different measurement attributes for similar types of assets
        and
        liabilities. The provisions of FAS 159 become effective as of the beginning
        of
        our 2009 fiscal year. We are currently evaluating the impact that FAS 159
        will
        have on our financial statements.
 
 The
        Company is currently evaluating the impact of this guidance on its consolidated
        financial position, results of operations or cash flows. Other accounting
        standards that have been issued or proposed by the FASB or other
        standards-setting bodies that do not require adoption until a future date
        are
        not expected to have a material impact on the consolidated financial statements
        upon adoption.


**NOTE
      4 - ACQUISITION OF CEPTOR CORPORATION BY XECHEM INTERNATIONAL,
      INC.**





On
      January 27, 2004, the former shareholders of the Company received shares of
      preferred stock of Xechem (convertible into 30,000,000 shares of common stock
      of
      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.





F-19
 Table
            of Contents





Effective
      upon the acquisition of the Company by Xechem, the Company's balance sheet
      was
      adjusted to record existing assets and liabilities to fair value. Fair value
      was
      generally assigned to these assets based on the net present value of the
      projected cash flows expected to be generated by those assets. Significant
      assumptions underlying these cash flows include the Company's assessment of
      the
      timing and ability to successfully complete the in-process research and
      development ("IPR&D") projects, and interest rates used to discount these
      cash flows to their present value. In accordance with EITF Issue No. 99-12,
      "Determination of the Measurement Date for the Market Price of an Acquirer's
      Securities Issued in a Business Combination," the Company determined the fair
      value of the consideration paid in the transaction was the average closing
      price
      of Xechem's common stock for a reasonable period of time before and after the
      terms of the acquisition were agreed to and announced. The fair value of the
      consideration determined under this method amounted to $4,760,000. In allocating
      the consideration paid, the fair value of the recorded assets and liabilities
      were determined to equal the carrying value with the excess value assigned
      to
      the IPR&D which represents the value assigned to the acquired intangible
      assets which had not reached technological feasibility and for which there
      is no
      alternative use.





During
      the year ended December 31, 2004, the Company recorded approximately $5,034,300
      of IPR&D, consisting of granted patents and pending patent applications,
      which has been expensed as in-process research and development costs. The
      following table summarizes the fair value of the assets acquired and liabilities
      assumed in the acquisition:








Consideration
                paid by Xechem to former stockholders of CepTor
                Corporation
            $
            4,760,000Net
                Liabilities Assumed:Current
                liabilities
            
            
            35,000Notes
                and advances payable
            
            
            325,000Current
                and other assets
            
            
            (85,691)274,309
            )Purchase
                price in excess of net liabilities assumed by Xechem -allocated
                to in-process research and development
            
            $
            5,034,309





**NOTE
      5 - SPINOFF OF CEPTOR CORPORATION BY XECHEM INTERNATIONAL,
      INC.**





**DESCRIPTION
      OF XECHEM SPINOFF AGREEMENT**





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 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,
      former 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
      its shares held by Xechem out of the proceeds of future financing under the
      Redemption Obligation 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
      described in Note 6. The Company also agreed to pay royalties on future revenues
      and assume certain obligation for contingent consideration payable to the former
      stockholders of the Company (who sold their shares to Xechem).





The
      Spinoff 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.





**REDEMPTION
      OBLIGATION**





Under
      the
      terms of the original Spinoff Agreement, Xechem was entitled to receive 25%
      of
      the proceeds of any offering of securities of the Company, up to $2,000,000.
      Following discussion with prospective selling agents for a proposed private
      placement of the Company's securities, Xechem agreed to accept 10% of the
      proceeds, up to $2,000,000, of any future financing in partial redemption of
      shares of the Company held by Xechem. During the year ended December 31, 2005,
      the Company satisfied this redemption obligation (see Note 11).





F-20
 Table
            of Contents





**ALLOCATION
      OF STOCK UNDER FOUNDERS' PLAN**





Pursuant
      to the Spinoff Agreement, Mr. Pursley was allocated, initially through a 10-year
      option exercisable at par value ($0.0001 per share), the right to designate
      for
      issuance 3,031,943 shares of the common stock of the Company, equal to 43.75%
      of
      the fully diluted common stock outstanding (the "Founders' Shares") assuming
      the
      issuance of all of the Founders' Shares. The aforementioned right of Mr. Pursley
      provided him the irrevocable right to allocate such award to certain other
      employees and persons designated by Mr. Pursley as having importance to the
      future success of the Company, on a discretionary basis.





Pursuant
      to the grant of the option to purchase the 3,031,943 shares of the Company's
      common stock at the nominal exercise price of par value during the year ended
      December 31, 2004, the Company recorded compensation expense of $2,082,500
      representing the intrinsic value of the option determined by applying the
      percent that the Founders' Shares represent of the fully diluted shares
      outstanding, to the net assets acquired by Xechem in its acquisition of the
      Company.





As
      of
      December 31, 2005, Mr. Pursley has allocated all shares of the option, retaining
      1,247,428. All shares were issued concurrent with the Company's spin-off from
      Xechem and reverse merger with Medallion on December 9, 2004. All of the
      Founders' Shares immediately upon issuance became fully voting, and are subject
      to the terms of the Founders' Plan, as amended. Pursuant to the terms of the
      Founders' Plan, restrictions on holders of Founders' Shares will lapse 10%
      on
      the six month anniversary following issuance, 10% on the twelve month
      anniversary following issuance, and the balance upon initiation of a Phase
      III
      clinical trial for the Myodor technology for muscular dystrophy. Upon the
      happening of certain events described in the Founders' Plan, such as the
      cessation of employment by a participant following an award, shares issued
      or
      issuable to Founders' Plan participants may revert to Mr. Pursley and may be
      cancelled, forfeited, re-designated or re-issued in his sole discretion subject
      to Board of Directors or Compensation Committee approvals.





As
      of
      December 31, 2006, 816,696 shares of common stock issued under the Founders
      Plan
      had vested and due to termination of certain employees during the year then
      ended, 811,102 shares of common stock issued under the Founders Plan had
      reverted to Mr. Pursley.





**FUTURE
      ROYALTY COMMITMENT**





The
      Company agreed to pay royalties to Xechem in an amount equal to 2% of the gross
      revenues received by the Company, its subsidiaries, affiliates and assigns,
      with
      respect to the sale of any products incorporating any of the technology owned
      by
      the Company as of March 31, 2004 or the licensing of any of the Company's
      intellectual property, or the sale of the licensing rights to any of the
      Company's intellectual property. This future royalty commitment was eliminated
      upon termination of the Spinoff Agreement upon satisfaction of the Redemption
      Obligation (see Note 11).





**CONTINGENT
      CONSIDERATION**





Pursuant
      to the terms of the acquisition of CepTor 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 earlier to occur of filing (i) of a Phase
      II application for any drug in development which relies, in whole or in part,
      on
      the technology or the efforts of its management, provided such Phase II
      application is filed (or substantial steps taken to be filed) within 36 months
      of the date of the final acquisition or merger; (ii) of any Phase III
      application for such technology or efforts provided such Phase III application
      is filed (or substantial steps taken to filed) within 60 months of the date
      of
      acquisition or merger; and (iii) of any NDA filings made within 72 months of
      the
      date of the final acquisition or merger with Xechem. 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.





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 thereunder and during July 2005, the Company issued
      a total of 100,000 shares of its common stock in satisfaction of this
      obligation. For the year ended December 31, 2005, the Company recorded a
      $270,000 charge to general and administrative expenses in the accompanying
      statement of operations, representing the fair value of these
      shares.





**NOTE
      6 - MERGER WITH MEDALLION CREST MANAGEMENT, INC. AND RELATED TRANSACTIONS**





**AGREEMENT
      OF MERGER AND PLAN OF REORGANIZATION**





On
      December 8, 2004, Medallion, CepTor Acquisition Corp., a Delaware corporation
      and wholly-owned subsidiary of Medallion ("Acquisition Corp."), and the Company,
      entered into an Agreement of Merger and Plan of Reorganization (the "Merger
      Agreement"). Pursuant to the Merger Agreement, on December 8, 2004 the Company
      merged with Acquisition Corp., with the Company surviving as a wholly-owned
      subsidiary of Medallion (the "Merger"). Upon effectiveness of the Merger,
      Medallion filed with the Florida Department of State, Articles of Amendment
      to
      the Articles of Incorporation to change its name to CepTor Corporation ("New
      CepTor" and now the Company), and to authorize the issuance of up to 1,000
      shares of its Series A Convertible Preferred Stock (the "Preferred
      Stock").





F-21
 Table
            of Contents




Pursuant
      to the Merger, Medallion acquired all of the outstanding capital stock of the
      Company in exchange for 5,278,068 shares of New CepTor's common stock, par
      value
      $0.0001 per share, and assumption of certain obligations of the Company. As
      a
      result, the Company's former stockholders became the majority stockholders
      of
      New CepTor. The Merger was accounted for as a recapitalization, since the former
      stockholders of the Company owned a majority of the outstanding shares of New
      CepTor's common stock immediately following the Merger. New CepTor intended
      to
      carry on the Company's business as its sole line of business and remain in
      Hunt
      Valley, Maryland and continued as a development-stage bio-pharmaceutical company
      focusing on therapeutic products for neuromuscular, neurodegenerative diseases
      and other orphan diseases.





**REINCORPORATION
      OF COMPANY**





On
      December 9, 2004, the Board of Directors of the Company authorized a change
      of
      the state of incorporation to Delaware from Florida through a merger of the
      New
      CepTor and the Company (its wholly-owned subsidiary). Approval of the change
      was
      authorized by shareholder consent during January 2005. Pursuant to an Agreement
      dated November 15, 2004, Xechem, the single largest shareholder of New CepTor,
      agreed to vote for the change of the state of incorporation to Delaware in
      connection with the spin-off of its majority ownership of the Company pursuant
      to the Spinoff Agreement. On January 31, 2005, the Company merged with New
      CepTor to change its domicile to Delaware from Florida and to collapse the
      parent-subsidiary relationship resulting from the Merger, with the Company
      being
      the surviving entity.





**NOTE
      EXCHANGE OFFER**





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 (the "December 2004 Convertible Notes").
      See Note 12 for a description of further amendments made to the December 2004
      Convertible Notes.





**ADOPTION
      OF STOCK PLANS**





In
      connection with the Merger, New CepTor adopted the Company's Founders' Stock
      Plan and 2004 Incentive Stock Plan. On December 9, 2004 the Company issued
      to
      Mr. Pursley and certain other employees, designated by Mr. Pursley, 3,031,943
      shares of restricted common stock under the Founders' Stock Plan. Under the
      2004
      Incentive Stock Plan, officers, consultants, third-party collaborators, and
      employees of the Company or its subsidiaries may be granted rights in the form
      of options or shares of restricted stock for up to a maximum of 2,773,820 shares
      of common stock.





**NOTE
      7 - PREPAID EXPENSES**





Prepaid
      expenses principally consist of unamortized premiums paid to carriers for
      insurance policies and
      advance payments to a clinical contractor.




**NOTE
      8 - DEFERRED FINANCING COSTS**





The
      Company capitalizes the costs and expenses incurred in entering into its debt
      obligations which are then amortized over the term of the debt. During the
      years
      ended December 31, 2006 and 2005, the Company incurred $104,408 in deferred
      financing costs associated with its Cornell Convertible Debentures offering.
      During the year ended December 31, 2006, the Company incurred $1,989,937 in
      deferred financing costs associated with its 2006 6% Convertible Notes offering.
      The deferred financing costs associated with the 2006 6% Convertible Note
      offering consisted of $226,639 of professional fees paid, $374,444 of yield
      enhancement fees paid and $1,388,854 representing the fair value of the warrants
      issued as additional yield enhancement fees.





During
      the year ended December 31, 2006, the Company amortized $907,131 of deferred
      financing costs to non-cash interest expense. There was no amortization of
      deferred financing cost for the year ended December 31, 2005.





**NOTE
      9 - PROPERTY AND EQUIPMENT**





Property
      and equipment as of December 31, 2006, is as follows:





Office
                equipment
            
            $
            69,408Lab
                equipment
            
            
            500Less-accumulated
                depreciation and amortization
            
            
            33,046Total
            
            $
            36,362




For
        the
        year ended December 31, 2006 and December 31, 2005, respectively, depreciation
        expense was 19,069 and $18,207.


F-22
 Table
            of Contents





**NOTE
        10 - ACCRUED EXPENSES**





Accrued
      expenses as of December 31, 2006, are as follows:








Financial
                investor relations fees
            
            $
            188,278Miscellaneous
                expenses
            
            
            302Interest
                on convertible note
            
            
            376,710Liquidated
                damages associated with2006
                6% Convertible Note offering
            
            
            499,722Total
            
            $
            1,065,012




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





Pursuant
      to the registration rights agreement in connection with the 2006 6% Convertible
      Notes offering, the Company was obligated to pay liquidating damages of 2%
      of
      the principal amount for each 30-day period the registration statement was
      filed
      past August 21, 2006. As of December 31, 2006, the Company accrued 14% of the
      outstanding principal, representing seven 30-day periods.





**NOTE
      11 - COMMON STOCK SUBJECT TO REPURCHASE UNDER REDEMPTION
      OBLIGATION**





The
      Spinoff Agreement, as amended, provided 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 "Redemption Obligation").
      Pursuant to the terms of the Redemption Obligation, the Company was 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. At the end of two years, Xechem
      had
      the right to put the remaining portion of the shares held for sale back to
      the
      Company to cover any deficiency.




During
      the year ended December 31, 2005, the Company redeemed 366,580 shares of its
      common stock for $916,450, which represents 10% of the gross proceeds that
      the
      Company received from the sale of Units in the private placement transactions
      that were consummated during the period January 2005 through February 11, 2005.
      Pursuant to a securities purchase agreement entered into with Xechem effective
      June 17, 2005, the Company repurchased an additional 2,886,563 shares of its
      common stock from Xechem in exchange for $2,309,250 in cash and the forfeiture
      of an option held by the Company's chief executive officer to purchase 43
      million shares of common stock of Xechem with a fair value of $424,818, which
      satisfied the Company's Redemption Obligation with Xechem. 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.




F-23
 Table
            of Contents





**NOTE
      12 -CONVERTIBLE NOTES**




**NOTE
      OBLIGATIONS IN DEFAULT**





The
      Company is in default of substantially all of its note obligations, which amount
      to approximately $6,314,000 in aggregate principal. These defaults occurred
      as a
      result of (i) the Company's failure to make the required payments of principal
      and interest under certain of these obligations (which triggered cross default
      provisions under the remaining loans), (ii) not filing a registration statement
      covering shares issuable under the 2006 6% Convertible Notes within the
      specified period, and (iii) not filing a post-effective amendment to its
      registration statement on Form SB-2 covering shares issuable under the Cornell
      Convertible Debentures within the specified period. The Company is also required
      to have sufficient authorized but unissued shares available to net share settle
      its Cornell Convertible Debentures and all of its derivative financial
      instruments. As of December 31, 2006, the Company, on a fully diluted basis,
      had
      108,655,813 shares issued and potentially issuable in connection with all of
      its
      outstanding common stock convertible instruments, stock options and derivative
      financial instruments.


At
        the
        time of the filing of the Company’s quarterly Report under Form 10-QSB for the
        second quarter of 2006, the Company had defaulted in its payment obligation
        to
        certain noteholders, which triggered cross-defaults under various other loan
        agreements. When the filing occurred, CepTor did not list the various
        cross-defaults, make disclosures related thereto, or bring current its
        obligations to its noteholders on the Company’s balance sheet. All such
        defaults, disclosures and accounting adjustments were properly made by the
        Company in connection with the filing of its Form 10-QSB for the third quarter
        of 2006, but CepTor has since concluded that these debt obligations should
        have
        been classified as current liabilities and disclosures should have been made
        in
        the June 30, 2006 Form 10-QSB.   The Company intends to file an
        amended Form 10-QSB.
  **CONVERTIBLE
        PROMISSORY NOTES**




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





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





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





The
      remaining Amended December 2004 Convertible Note in the principal amount of
      $448,736 was due July 3, 2006. There has not been an agreement on amended terms
      and there is no assurance the Company will reach agreement with the note holder.
      The terms of the December 2004 Convertible Note do not provide for penalties
      or
      other payments upon default, and accordingly, the Company has not accrued any
      as
      of December 31, 2006. The conversion price was adjusted to $0.15 from $0.75
      pursuant to the 2006 6% Convertible Note offering which commenced June 1, 2006
      (see below).





As
      of
      December 31, 2006, the principal amount of $448,736 remains outstanding under
      the December 2004 Convertible Note.





**2005
      HARBOR NOTE**





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





F-24
 Table
            of Contents





The
      fair
      value of the conversion option was to $130,183 at December 31,
      2006.





There
      has
      not been an agreement on amended terms and no assurance the Company will reach
      agreement with the note holder. The terms of the 2005 Harbor Note do not provide
      for penalties or other payments upon default, and accordingly, the Company
      has
      not accrued any as of December 31, 2006.





As
      of
      December 31, 2006, the principal amount of $250,000 remains outstanding under
      the 2005 Harbor Note. The amount of discount of this note, based on the original
      allocation of proceeds to the carrying amount of the note and the free standing
      conversion option, has been fully amortized to non-cash interest expense at
      December 31, 2006.





**CORNELL
      CONVERTIBLE DEBENTURES**





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





Cornell
      Capital has the right to convert a portion or all of the outstanding principal
      and interest under the Cornell Convertible Debentures into shares of common
      stock at a conversion price per share equal to the lesser of $0.9765 (105%
      of
      the closing bid price of the common stock on December 8, 2005) (the ‘‘Fixed
      Price’’) or (ii) 95% of the lowest closing bid price of the common stock for the
      twenty trading days immediately preceding the conversion date (the ‘‘Floating
      Price’’ and together with the Fixed Price, the ‘‘Conversion Price’’), subject to
      adjustment as provided in the Cornell Convertible Debentures; provided, that
      any
      such conversion based on the Floating Price will generally be limited to
      $150,000 of principal outstanding under the Cornell Convertible Debentures
      in
      any thirty day period; and further provided, that Cornell Capital may not
      convert the Cornell Convertible Debentures into shares of common stock if such
      conversion would result in Cornell Capital, together with its affiliates,
      beneficially owning in excess of 4.9% of the then issued and outstanding shares
      of common stock. The Conversion Price and number of shares of common stock
      issuable upon conversion of the Cornell Convertible Debentures is subject to
      certain exceptions and adjustment for stock splits and combinations and other
      dilutive events.





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





If
      an
      Event of Default (as such term is defined in the Cornell Convertible Debentures)
      occurs, any principal and accrued interest outstanding will become immediately
      due and payable, in cash or common stock, at Cornell Capital’s election. Pursuant
      to the Securities Purchase Agreement, on December 9, 2005, the Company issued
      to
      Cornell Capital a warrant to purchase 1,000,000 shares of common stock at an
      exercise price per share of $1.023 (110% of the closing bid price of the common
      stock on December 8, 2005) and (ii) 268,817 shares of common stock, and (iii)
      on
      each of December 9, 2005 and December 28, 2005, the Company made a cash payment
      to an affiliate of Cornell Capital of $80,000 for expenses incurred in
      connection with the transaction.





On
      June
      29, 2006, the Company entered into an assignment agreement (‘‘Assignment
      Agreement’’) by and between Cornell Capital, The Longview Fund, LP
      (‘‘Longview’’), Alpha Capital Aktiengesellschaft (‘‘Alpha’’), Ellis
      International Ltd. (‘‘Ellis’’) and Momona Capital Corp. (‘‘Momona’’) (each an
‘‘Assignee’’) which provides for, among other things, the assignment of the
      unpaid and unconverted amounts outstanding under each of the Cornell Convertible
      Debentures to the Assignees in the amounts listed in the Assignment Agreement.
      The aggregate unpaid and unconverted principal amount of $1,700,000 under the
      Cornell Convertible Debentures was assigned. The aggregate purchase price paid
      by the Assignees was $1,914,180, of which $1,836,000 is being paid for principal
      (which includes the Redemption Amount) and $78,180 represents accrued interest.
      The Company now owes the principal amounts of $700,000 and $400,000 to Longview
      and $300,000, $200,000 and $100,000 to Alpha, Ellis and Momona, respectively,
      in
      proportion to their assignment from Cornell Capital. All of the terms and
      conditions remain unchanged in the Cornell Convertible Debentures except that
      the Assignment Agreement provides that the Company may not redeem the Cornell
      Convertible Debentures, in whole or in part.





F-25
 Table
            of Contents





Pursuant
      to the Assignment Agreement, the Company was obligated to file an amended
      registration statement to reflect the change in selling shareholders by July
      10,
      2006. As of December 31, 2006, the Company has not met this obligation causing
      it to be in default under the terms of the agreement. There has not been an
      agreement on amended terms and no assurance the Company will reach agreement
      with the note holders. The terms of the Cornell Convertible Debentures do not
      provide for penalties or other payments upon default, and accordingly, the
      Company has not accrued any as of December 31, 2006.




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





As
      of
      December 31, 2006, $1,700,000 of principal of the Cornell Convertible Debentures
      remains outstanding. The conversion option featured in these Debentures is
      being
      accounted for as a free standing derivative financial instrument in accordance
      with SFAS 133 and EITF 00-19. The fair value of the conversion option amounted
      to $1,083,513 at December 31, 2006. The amount of the unamortized discount
      of
      these Debentures, based on the original allocation of proceeds to the carrying
      amount of the note and the free standing conversion option, amounts to $938,522,
      at December 31, 2006.





**2006
      6% CONVERTIBLE NOTES**





On
      May
      26, 2006, the Company entered into a placement agency agreement and term sheet
      for a private offering of one-year 6% convertible notes in an aggregate
      principal amount of up to $6,000,000 (the ‘‘2006 6% Convertible
      Notes’’).





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





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





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





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





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





The
      Company was obligated to file a registration statement by August 21, 2006 to
      register for resale the shares of common stock that purchasers of 2006 6%
      Convertible Notes may acquire upon conversion of the 2006 6% Convertible Notes
      or exercise of the warrants, as well as any additional shares of common stock
      which may be issued as part of the offering. Since the Company failed to file
      a
      registration statement for the resale of these shares by August 21, 2006, the
      Company will be obligated to pay purchasers of the 2006 6% Convertible Notes
      liquidated damages in an amount equal to 2% of the principal amount of the
      2006
      6% Convertible Notes for each month, or portion of a month, for which the
      Company fails to timely file the registration statement or until the
      registration statement becomes effective, but in no event may the liquidated
      damages exceed 18% of the principal amount of the 2006 6% Convertible Notes.
      At
      December 31, 2006, the Company has accrued $499,722 as estimated liquidated
      damages, which represents the damages which would be due with a potential delay
      of seven months in the filing of its registration statement.





F-26
 Table
            of Contents




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





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





The
      Harbor Trust has agreed to a pledge of its 2005 Harbor Note dated December
      9,
      2005 issued in the name of The Harbor Trust in the principal amount of $250,000
      to secure a non-recourse obligation to increase the return to purchasers of
      Preferred Stock to the extent required to protect investors from a loss on
      their
      investment to the extent of such collateral, measured on the earlier of May
      20,
      2007 or the date on which all the 2006 6% Convertible Notes offered have been
      sold or otherwise disposed of, including by conversion. In consideration for
      the
      agreements made by The Harbor Trust, at each closing the Company will (i) pay
      The Harbor Trust a yield enhancement incentive fee equal to 10% of the aggregate
      gross proceeds of the 2006 6% Convertible Notes receiving the benefit of such
      protection (the ‘‘Yield Protected Notes’’), plus (ii) issue to The Harbor Trust,
      for nominal consideration, five-year warrants to purchase, for the principal
      amount thereof, (A) 2006 6% Convertible Notes having a principal amount equal
      to
      10% of the principal amount of the Yield Protected Notes sold in the Offering,
      and (B) five-year warrants to purchase a number of shares of common stock equal
      to 10% of the shares of common stock that purchasers of the Yield Protected
      Notes sold in the offering may acquire upon exercise of the warrants they
      received with the purchase of the Yield Protected Notes, at an exercise price
      of
      $0.30 per share. In no event will the total yield enhancement incentive fee,
      plus the placement agent fee, paid by the Company exceed 10% of the gross
      proceeds of the offering.





From
      June
      1, 2006 through October 19, 2006 (date of last closing under the offering),
      the
      Company sold an aggregate principal amount of $3,569,444 of 2006 6% Convertible
      Notes. The Company issued five-year warrants to purchase an aggregate of
      14,018,513 shares of common stock, at an initial exercise price of $0.30 per
      share to purchasers of $2,102,777 of 2006 6% Convertible Notes who had not
      previously purchased its Preferred Stock. The Company will issue to those
      purchasers of $1,466,667 of 2006 6% Convertible Notes who had previously
      purchased Preferred Stock, upon the conversion of their Preferred Stock,
      9,191,113 additional shares of common stock and adjust the exercise price to
      $0.30 on warrants to purchase an aggregate of 293,333 shares of common stock
      received upon the purchase of the Preferred Stock. Pursuant to the terms of
      the
      6% Notes Offering, the Company issued (i) warrants to purchase $356,944 of
      2006
      6% Convertible Notes at an exercise price of $356,944 and attached warrants
      to
      purchase 2,379,629 shares of common stock, and (ii) a warrant to purchase
      1,401,851 shares of common stock at an exercise price of $0.30, as yield
      enhancement fees.





Of
      the
      $2,102,777 in principal purchased by those investors who had not previously
      purchased the Company’s Preferred Stock, the Company recognized a debt discount
      of $1,545,208 at date of issuance based on an allocation of the proceeds based
      on relative fair values of the 2006 6% Convertible Notes, the warrants and
      the
      conversion option, as determined by the Black-Scholes option pricing model.
      Since the Company is required to account for its derivative financial
      instruments as liabilities (see Note 3), the Company recorded the full fair
      values of the warrants and the conversion options at date of issuance of the
      2006 6% Convertible Notes of $3,161,789 and $3,019,573, respectively, as
      liabilities and charged non-cash interest expense. The fair value of the
      warrants and conversion option was estimated at the date of issuance using
      the
      Black-Scholes option pricing model with the following assumptions: risk fee
      interest rate: 4.7% to 5.1%; expected dividend yield: 0%; expected option life:
      3 years to 5 years; and volatility: 173% to 223%. The Company marks to market
      these derivative financial instruments at each reporting date.





Of
      the
      $1,466,667 in principal purchased by those investors who had previously
      purchased the Company’s Preferred Stock, the Company recognized a debt discount
      of $1,466,667 at date of issuance based on the (i) fair values of the conversion
      option, (ii) the incremental increase in fair value of the additional shares
      of
      common stock to be issued upon conversion of the Preferred Stock and (iii)
      the
      change in fair value of the underlying warrants associated with the Preferred
      Stock due to the change in exercise price, as determined by the Black-Scholes
      option pricing model. Since the Company is required to account for its
      derivative financial instruments as liabilities (see Note 3), the Company
      recorded the incremental fair value of the Preferred Stock warrants and the
      full
      fair value of the conversion options at date of issuance of the 2006 6%
      Convertible Notes of $18,148 and $2,026,398, respectively, as liabilities and
      charged the excess to non-cash interest expense. The fair value of these
      derivatives was estimated at the date of grant using the Black-Scholes option
      pricing model with the following assumptions: risk fee interest rate: 4.7%
      to
      5.1%; expected dividend yield: 0%; expected option life: 3 years to 5 years;
      and
      volatility: 173% to 223%. The Company marks to market these derivative financial
      instruments at each reporting date. In addition, the Company charged non-cash
      interest expense and credited equity for the incremental increase in fair value
      of the additional shares of common stock issuable upon conversion of the
      Preferred Stock. At December 31, 2006, the Company's authorized common stock
      was
      not sufficient to accommodate the exercise of warrants or conversion privileges
      of outstanding convertible debts if exercised.





F-27
 Table
            of Contents




**ADJUSTMENTS
      TO OUTSTANDING CONVERTIBLE SECURITIES AND OTHER RIGHTS TO PURCHASE COMMON STOCK
      RESULTING FROM 2006 6% CONVERTIBLE NOTES OFFERING**





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


The
        Amended December 2004 Convertible Note and the 2005 Harbor Note in the principal
        amount of $448,736 and $250,000, respectively and with adjusted conversion
        prices of $0.75 per share and $0.375 per share, respectively, had their
        conversion prices adjusted to $0.15 per share. As a result of this adjustment,
        the Company anticipates that it will issue an additional 2,937,220 and 1,063,616
        shares, respectively, calculated
        as of December 31, 2006.


The
      Company evaluated the revision in the remaining Amended December 2004
      Convertible Note to determine whether the reduction in the conversion price
      resulted in the issuance of a substantially different debt instrument. The
      Company determined that after giving effect to the substantial increase in
      the
      fair value of the beneficial conversion feature that resulted from reducing
      the
      conversion price, it had issued a substantially different debt instrument which
      resulted in a constructive extinguishment of the original debt instrument.
      Accordingly, the Company recorded a gain on the extinguishment of debt in the
      amounts of $387,362 for the Amended December 2005 Convertible Note that is
      included in the accompanying statement of operations for the year ended December
      31, 2006.





Since
      the
      incremental fair value of the Company's common stock which would be issued
      upon
      conversion, as determined by the Black-Scholes option pricing model, was in
      the
      aggregate greater than the principal balance of individual notes, the Company
      recorded an original issuance discount equal to the fair value of this
      beneficial conversion feature, limited to the principal balance of the notes.
      This debt discount is being amortized as non-cash interest expense over the
      remaining term of the Amended December 2004 Convertible Note. During the year
      ended December 31, 2006, the Company amortized an aggregate of $448,736 of
      the
      debt discount which is included in interest expense in the accompanying
      statement of operations. Assumptions relating to the estimated fair value of
      the
      beneficial conversion features are as follows: risk-free interest rate of 5.1%;
      expected dividend yield zero percent; expected life of 1.5 years; and current
      volatility of 165.4%.





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





Certain
      options granted pursuant to our 2004 Incentive Stock Plan and certain shares
      of
      common stock issued upon exercise of those options, contain anti-dilution
      provisions which provide for a reduction of the exercise price if the Company
      sells common stock or issues convertible securities at a per share price less
      than their exercise price of $0.359 (fair market value on the date of grant).
      As
      a result of the anti-dilution provision, the Company issued an additional
      776,231 shares of common stock and increased the remaining unexercised option
      by
      an additional 776,230 shares of common stock issuable upon exercise to the
      option holders.





**NOTE
      13 - LICENSE AGREEMENT WITH JCR PHARMACEUTICALS CO., LTD.**





On
      September 15, 2004 the Company entered into an exclusive license agreement
      with
      JCR Pharmaceuticals Co., Ltd. ("JCR") to manufacture and sell MyodurTM, the
      Company's proposed product for muscular dystrophy, in certain Pacific Rim
      countries consisting of Japan, South Korea, China, Taiwan, and Singapore. Under
      the terms of the JCR license, the Company will receive royalties in the amount
      of 25% of net sales (as defined), provided that the sum of cost of goods sold
      plus royalty payments does not exceed 35% of net sales in total. In addition,
      JCR is obligated to make a $500,000 payment upon approval of an Investigational
      New Drug application ("IND") in the United States for the Company's therapy
      for
      muscular dystrophy. Pursuant to the agreement, JCR purchased 554,413 shares
      of
      common stock of the Company for a payment of $1,000,000. In addition, JCR has
      agreed to purchase an additional $1,000,000 of common stock of the Company
      at
      the then market price existing at the time of IND approval from the Food and
      Drug Administration for the Company's therapy for muscular
      dystrophy.





F-28
 Table
            of Contents





In
      view
      of the Company’s current financial situation, as well as its decision to
      transfer its MyodurTM technology to a new entity controlled by its founding
      scientists while it pursues acquisition of a new technology, the status of
      the
      JCR license agreement is uncertain and will be the subject of further
      discussions between CepTor and JCR.





**NOTE
      14 - INCOME TAXES**





At
      December 31, 2006 the Company estimates that it has federal and state net
      operating loss carry forwards of approximately $12.5 million that will be
      available to offset future taxable income, if any, through 2026. The Company's
      utilization of its net operating loss carry forwards could be subject to
      substantial limitation due to the "change of ownership" provisions under Section
      382 of the Internal Revenue Code and similar state provisions. Such limitation
      may result in the expiration of the net operating loss carry forwards prior to
      their utilization.





The
      tax
      effects of significant temporary difference which give rise to the Company's
      deferred tax assets and liabilities are as follows:




**2006**Deferred
                  tax assets:Net
                  operating loss carry forwards
              
              $
              7,387,254Stock-based
                  compensation
              
              
              2,863,539Non-cash
                  interest expense
              
              
              5,830,197Gain
                  on extinguishment of debt
              
              
              (269,816
              )Change
                in fair value of derivativefinancial instruments
              
              
              (3,281,109
              )12,530,065Valuation
                  allowance
              
              
              (12,530,065
              )$
              -







The
      Company's recorded income benefit, net of the change in the valuation allowance
      for each period presented, is as follows:







**Years
                Ended December 31,****2006**
            
            **2005**CurrentFederal
            
            $
            -
            
            $
            -State
            
            
            -
            
            
            --
            
            
            -DeferredFederal
            
            
            (1,315,549
            )
            
            (4,711,500
            )State
            
            
            (1,836,608
            )
            
            (640,209
            )(3,152,157
            )
            
            (5,351,709
            )Change
                in valuation allowance
            
            
            3,152,157
            
            
            5,351,709$
            -
            
            $
            -







F-29
 Table
            of Contents





Pursuant
      to SFAS No. 109 "Accounting for Income Taxes," management has evaluated the
      recoverability of the deferred income tax assets and the level of the valuation
      allowance required with respect to such deferred income tax assets. After
      considering all available facts, the Company has fully reserved for its deferred
      tax assets because it is more likely than not that their benefit will not be
      realized in future periods. The Company will continue to evaluate its deferred
      tax assets to determine whether any changes in
      the
      circumstances could affect the realization of their future benefit. If it is
      determined in future periods that portions of the Company's deferred tax assets
      satisfies the realization standard of SFAS No. 109, the valuation allowance
      will
      be adjusted accordingly.





A
      reconciliation of the expected federal statutory rate of 34% to the Company's
      actual rate as reported for each of the periods presented is as
      follows:








**Years
                Ended December 31,****2006**
            
            **2005**Expected
                statutory rate
            
            
            (34.0
            %)
            
            (34.0
            %)State
                income tax rate, net of federal benefit
            
            
            (4.6
            %)
            
            (4.6
            %)Effect
                of permanent differences
            
            
            0.0
            %
            
            (0.0)
            %(38.6
            %)
            
            (38.6
            %)Valuation
                allowance
            
            
            38.6
            %
            
            38.6
            %0.0
            %
            
            0.0
            %








**NOTE
      15 - COMMITMENTS AND CONTINGENCIES**





**EMPLOYMENT
      AGREEMENTS**





The
      Company entered into employment agreements with certain of its executives
      commencing March 31, 2004 and April 26, 2004 (the "Executives"), which provide
      each Executive with a base salary for an initial term of two years,
      automatically renewable annually thereafter. The Company is obligated to pay,
      in
      the aggregate, approximately $865,000 for the year ended December 31, 2006.
      If
      Executive's employment with the Company is terminated without cause or good
      reason, as those terms are defined in the employment agreement, the Company
      is
      obligated to pay Executive his current base salary and his benefits for an
      additional twelve months. If Executive's employment is terminated due to total
      disability, the Company is obligated to continue to pay his current base salary
      and his benefits for an additional thirty-six months. If Executive's employment
      is terminated due to his death, the Company is obligated to continue to pay
      his
      current base salary for an additional three months and continue to pay for
      his
      benefits for the next twelve months. In addition, the employment agreement
      contains confidentiality and covenant not to compete provisions for the period
      of his employment plus an additional twelve months.





Certain
      of the Executives were terminated without cause on October 31, 2006, and the
      remaining Executives were terminated or resigned on or before December 31,
      2006.
      No amounts in settlement of the obligations contained in the agreements have
      been accrued at December 31, 2006 because we believe such amounts will not
      have
      to be paid.




In
        December 2006, the Company retained Howard Becker as its part-time chief
        executive officer. He is presently the only employee of the Company. Mr.
        Becker
        is currently being paid a flat fee of $10,000 per month, with the understanding
        that approximately half of his time will be dedicated to CepTor. That figure
        may
        be increased if Mr. Becker’s efforts exceed the part-time services currently
        being performed. Although there is no written employment agreement, the Company
        has also agreed to provide Mr. Becker with benefits, stock options, bonuses
        and
        other reasonable and customary benefits for a similarly situated executive.
        The
        specifics of such arrangement will be finalized as circumstances evolve and
        the
        nature and extent of his role with the Company are determined.
  **DEFINED
        CONTRIBUTION PLAN**
 During
        the year ended December 31, 2004, the Company instituted an Internal Revenue
        Service-approved defined contribution plan under Section 401(k) of the Internal
        Revenue Code. This type of plan requires the Company to match its employee's
        contributions in an amount up to 4% of each eligible participant's compensation.
        The Company's contributions to the plan amounted to approximately $41,300
        and
        $60,600 for the years ended December 31, 2006 and 2005, respectively, which
        are
        included in general and administrative expenses in the accompanying statements
        of operations.


Certain
        of the Company's match of its employees’ contributions were not funded during
        the year ended December 31, 2006 due to liquidity shortfalls. The effect
        of not
        funding these contributions, which are not material, has not been determined
        as
        of December 31, 2006.


F-30
 Table
            of Contents





**CONSULTING
      AGREEMENTS**




Pursuant
      to Xechem's acquisition of the Company, Xechem entered into consulting
      agreements with its two founding scientists (the "Scientists") for a period
      of
      sixty months. In consideration for the services to be rendered, Xechem was
      obligated to pay a total of $276,000 to each Scientist, plus expenses as allowed
      for in the consulting agreements. Pursuant to the Spinoff Agreement, the Company
      entered into new consulting agreements to replace and supersede their agreements
      with Xechem. The consulting agreements are non-cancelable for a period of sixty
      months, effective February 1, 2004 and provide for a monthly fee of $5,000
      each,
      plus allowable expenses.





Due
      to
      liquidity issues encountered during the
      year
      ended December 31, 2006, payments under these consulting agreements were halted.
      Under the terms of the pending transaction between CepTor and the Scientists
      related to the transfer of the existing technologies, the Scientists will
      release all claims against the Company, including those for unpaid consulting
      fees.





**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 had
      intended to use these clinical materials to conduct pre-clinical studies,
      toxicology tests and human clinical trials. 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. Through December 31, 2005 the Company incurred costs of product
      requirements from Bachem in the aggregate of approximately $3.6 million and
      as
      of December 31, 2006 the Company has amounts payable to Bachem and other
      entities of approximately $1.4 million. The Company charged the aforementioned
      costs to research and development expenses. Given the Company’s decision to
      cease development of its MyodurTM and NeurodurTM technologies, Bachem will have no
      ongoing role with CepTor, but may possibly remain involved in the development
      of
      the technologies through Newco, subject to an understanding as between Bachem
      and Newco (as defined in Note 19).





**DEFAULT
      OF VARIOUS OBLIGATIONS**





The
      Company has had difficulty securing the necessary capital to fully execute
      its
      business plan and has not been able to remain current with respect to the
      payment terms of any of its operating obligations including its trade payables
      which aggregated approximately $3.9 million at December 31, 2006. As described
      in Note 12, the Company is in default of substantially all of its note
      obligations, which amount to approximately $6,314,180 in aggregate principal.
      These defaults occurred principally as a result of (i) the Company's failure
      to
      make the required payments of principal and interest under certain of these
      obligations (which triggered cross default provisions under the remaining note
      obligations), (ii)its failure to file a registration statement pursuant to
      the
      2006 6% Convertible Notes within a specified period, and (iii) its failure
      to
      file a post-effective amendment to its registration statement on Form SB-2
      covering shares issuable under the Cornell Convertible Debentures within a
      specified period. The Company is also required to have sufficient authorized
      but
      unissued shares available to net share settle its Cornell Convertible Debentures
      and all of its derivative financial instruments.





The
      Company has exhausted substantially all of its capital resources, terminated
      all
      of its employees except for its chief executive officer and is currently unable
      to, and does not believe it is likely, to pursue further development of its
      product candidates. The Company pursued this course of action as a result of
      having been informed by the FDA that its IND remains on hold pending the
      resolution of several remaining issues. Additional internal research is required
      to fully resolve the FDA issues and complete the Company’s own internal research
      program. The Company lacks the funding that is necessary to resolve these issues
      and is currently unable to secure financing commitments for this purpose. Due
      to
      these remaining issues and the lack of adequate funding, the Company
      has.





In
      light
      of our financial situation, we have halted development of our programs as we
      have turned our focus toward pursuing a two-part strategy, in cooperation with
      the existing secured creditors, whereby (i) our existing technologies will
      essentially be divested from the corporation pursuant to a transaction that
      will
      allow CepTor to retain significant upside should the technologies ultimately
      fulfill their promise as marketable and commercially viable products, and (ii)
      we will seek to finalize a transaction for the acquisition of a new technology
      around which we could restructure our affairs. Any such transaction would have
      to have the full support of the existing secured creditors, as they have a
      priority position with respect to all of CepTor’s current assets.




If
      we are
      not able to finalize a transaction that results in the acquisition of a new
      commercially viable technology, including the requirement that we first
      consensually restructure our remaining outstanding trade debt, we will likely
      have no choice but to wind down our affairs and/or commence bankruptcy
      proceedings. There can be no assurance that we will be successful either in
      winning support from our existing trade creditors for the voluntary
      restructuring of their debts, or that we will finalize and close upon a
      transaction for a new technology around which to reorganize CepTor’s affairs. In
      addition, all of our assets are pledged to certain secured creditors to secure
      our repayment obligations to them.




These
      matters raise substantial doubt about our ability to continue as a going
      concern. The financial statements do not include any adjustments that may result
      from the outcome of this uncertainty.


**Amendment
        of Financial Statements For Second Quarter 2006**
 
 At
        the
        time of our filing of our quarterly Report under Form 10-QSB for the second
        quarter of 2006, we had defaulted in our payment obligation to certain
        noteholders, which triggered cross-defaults under various other loan agreements.
        When the filing occurred, we did not list the various cross-defaults, make
        disclosures related thereto, or bring current our obligations to our noteholders
        on our balance sheet. All such defaults, disclosures and accounting adjustments
        were properly made by the Company in connection with the filing of our Form
        10-QSB for the third quarter of 2006, but we have since concluded that we
        were
        mistaken in not disclosing the defaults, making the appropriate disclosures,
        and
        bringing current all of our obligations to our noteholders as of the time
        of the
        filing of our Second Quarter results. On March 15, 2007, we filed an 8-KA
        disclosing that error, and indicating that our financial statements for the
        second and subsequent quarters of 2006 should not be relied upon pending
        the
        filing of an amended 10-QSB for the affected period.
 
 F-31
 Table
                of Contents
 ***SEC
          Comment Letters***
  On
          September 15, 2006, November 20, 2006, and February 20, 2007, the SEC advised
          the Company that it had certain comments regarding (i) the valuation of
          a stock
          option granted to its Chief Executive Officer during the year ended December
          31,
          2004 and (ii) that if the Company had insufficient authorized but unissued
          shares at June 30, 2006, what impact would that have had on the Company’s
          classification of liabilities as long-term as opposed to current in view
          of the
          potential default and the timing of when the Company might have to settle
          its
          share contracts, and (iii) the termination of our prior auditors, Marcum
&
Kliegman, LLP and the retention of our new auditors, Bernstein & Pinchuk,
          LLP.
 The
        Company, in its Annual Report on Form 10-KSB for the year ended December
        31,
        2004 recorded compensation cost for a stock option granted to its Chief
        Executive Officer at the time it was spun-off from its former parent. While
        the
        Company believes it has a reasonable basis for the accounting treatment of
        this
        award, these comments could impact the Company's prior periodic filings,
        including filings that are incorporated by reference into registration
        statements. The Company has reviewed the SEC's comments regarding this award
        but
        is currently unable to determine what changes, if any may be required to
        its
        accounting for this award or to quantify any possible impact on its financial
        statements.




**NOTE
      16 - EQUITY TRANSACTIONS**





**COMMON
      STOCK ISSUED FOR CASH**





As
      described in Note 13, the Company issued 554,413 shares of common stock to
      JCR
      Pharmaceuticals Co., Ltd. for net proceeds of $929,231 (gross proceeds of
      $1,000,000 less transaction expenses of $70,769) on September 15,
      2004.





**COMMON
      STOCK ISSUED IN CONNECTION WITH BRIDGE LOANS**





The
      Company issued 451,597 shares of common stock with an allocated fair value
      of
      $550,000 to the holders of the Bridge Loans and 36,000 shares of common stock
      with a fair of $90,000 to the placement agent in the Bridge Loan
      transaction.





**CONVERSION
      OF DECEMBER 2004 CONVERTIBLE NOTES INTO COMMON STOCK**





As
      described in Note 12, on December 9, 2004, one of the holders of the Company's
      December 2004 Convertible Notes elected to convert its principal balance of
      $209,512 into 167,610 shares of common stock with a fair value of
      $419,024.





**COMMON
      STOCK ISSUED UNDER FOUNDERS' PLAN**





On
      December 9, 2004 the Company issued to employees of the Company and others
      3,031,943 shares of restricted common stock under the Founders' Stock Plan
      (see
      Note 5).





**ISSUANCES
      OF WARRANTS**




During
      March 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.





During
      August 2005, the Company issued three-year warrants to purchase 160,000 shares
      of common stock at $1.70 per share to two consulting firms for past financial
      assistance. The Company recorded a charge to general and administrative expenses
      for the fair value of these warrants of $180,800.




On
      December 9, 2005, the Company entered into a securities purchase agreement
      with
      an investor pursuant to which the investor purchased the Cornell Convertible
      Debentures from the Company in a private placement during December 2005 (see
      Note 12). Pursuant to the securities purchase agreement, the Company issued
      to
      the investor a warrant to purchase up to 1,000,000 shares of common stock,
      at an
      exercise price per share of $1.023 (110% of the closing bid price of the common
      stock on December 8, 2005). The Company recorded $720,000 as a debt discount,
      which represents an allocation of a portion of the offering proceeds to the
      warrants based upon the relative fair value of such warrants to all securities
      issued under this arrangement. Pursuant to the anti-dilution provisions
      contained in the securities purchase agreement, effective with the first closing
      under the 2006 6% Convertible Note offering, the exercise price per share was
      reduced to $0.15.





On
      June
      29, 2006, as an inducement to enter into the Assignment Agreement, the Company
      issued to Cornell capital, a warrant to purchase up to 5,000,000 shares of
      common stock at an exercise price per share of $0.25. Pursuant to the
      anti-dilution provisions contained in the warrant, upon closing of the 2006
      6%
      Convertible Notes during July 2006, the exercise price per share of this warrant
      was reduced to $0.15 and the number of shares into which the warrant may be
      exercised was increased to 8,333,333 shares of common stock.




F-32
 Table
            of Contents





**ISSUANCES
      OF WARRANTS PURSUANT TO 2006 6% CONVERTIBLE NOTES**




Pursuant
      to the terms of the 2006 6% Convertible Note offering, the Company issued (i)
      five-year warrants to purchase an aggregate of 14,018,513 shares of common
      stock, at an initial exercise price per share of $0.30, (ii) warrants to
      purchase $356,944 of 2006 6% Convertible Notes at an exercise price of $356,944
      and attached warrants to purchase 2,379,629 shares of common stock at an
      exercise price per share of $0.30, as a yield enhancement fee, and (iii)
      warrants to purchase 1,401,851 shares of common stock at an exercise price
      per
      share of $0.30, as additional yield enhancement fee.





**PRIVATE
      PLACEMENT OF PREFERRED STOCK**





Pursuant
      to a placement agent agreement dated October 22, 2004, the Company agreed to
      sell in a private placement up to 240 Units at $25,000 per Unit, subject to
      increase to permit sale of up to an additional 36 Units upon agreement of the
      Company and the placement agent. Each Unit consists of one share of Series
      A
      Convertible Preferred Stock, and a three-year warrant to purchase up to 5,000
      shares of common stock for $2.50 per share. Each share of Series A Convertible
      Preferred Stock is convertible into 10,000 shares of common stock. On January
      13, 2005, CepTor and the placement agent amended the placement agent agreement
      to increase the private placement to up to 480 Units, subject to increase to
      permit sale of up to an additional 72 Units, provided that such increase could
      be terminated at any time prior to closing by the Company. Under the terms
      of
      the placement agent agreement, as amended, the placement agent was entitled
      to a
      selling commission of 8%, plus a 2% non-accountable expense reimbursement
      payable from the proceeds of the private placement, five-year warrants
      exercisable at $1.25 per share for an amount equivalent to 10% of the shares
      of
      common stock to which the Units would be convertible into, and up to 300,000
      shares of common stock.





Pursuant
      to the placement agent agreement, as amended, the Company issued 300,000 shares
      of common stock and warrants to purchase up to an aggregate of 511,650 shares
      of
      common stock to the placement agent in connection with the private placement.
      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.





Commencing
      December 9, 2004 through February 11, 2005, CepTor sold 511.65 Units to
      investors pursuant to a Confidential Private Placement Memorandum dated October
      22, 2004 as supplemented. The Company received gross proceeds of $12,791,250
      (net proceeds of $10,448,629, after the payment of commissions and other
      expenses of the transactions which amounted to $2,342,621), from the sale of
      the
      Units.





Holders
      of Series A Preferred Stock will be entitled at any time to convert their shares
      of Series A Preferred Stock into common stock, without any further payment
      therefore. Each share of Series A Preferred Stock is initially convertible
      into
      10,000 shares of common stock. The number of shares of common stock issuable
      upon conversion of the Series A Preferred Stock is subject to adjustment upon
      the occurrence of certain events, including, among others, a stock split,
      reverse stock split or combination of our common stock, an issuance of common
      stock or other securities as a dividend or distribution on the common stock,
      a
      reclassification, exchange or substitution of the common stock, or our capital
      reorganization. Upon merger or consolidation of the Company with or into another
      company, or any transfer, sale or lease by us of substantially all of the common
      stock or assets of the Company, the Series A Preferred Stock will be treated
      as
      common stock for all purposes, including the determination of any assets,
      property or stock to which holders of the Series A Preferred Stock are entitled
      to receive, or into which the Series A Preferred Stock is converted, by reason
      of the consummation of such merger, consolidation, sale or lease.





Except
      as
      otherwise required by law, the holders of Series A Preferred Stock are entitled
      to vote their shares on an as-if-converted to common stock basis, and shall
      vote
      together with the holders of the common stock, and not as a separate
      class.





In
      the
      event of voluntary or involuntary liquidation, dissolution or winding-up of
      the
      Company, holders of Series A Preferred Stock will be entitled to receive out
      of
      our assets available for distribution to our stockholders, before any
      distribution is made to holders of our common stock, liquidating distributions
      in an amount equal to $25,000 per share. After payment of the full amount of
      the
      liquidating distributions to which the holders of the Series A Preferred Stock
      are entitled, holders of the Series A Preferred Stock will receive liquidating
      distributions pro rata with holders of common stock, based on the number of
      shares of common stock into which the Series A Preferred Stock is convertible
      at
      the conversion rate then in effect.





The
      Series A Preferred Stock may not be redeemed except as stated
      above.





Holders
      of Series A Preferred Stock will not be entitled to receive dividends, if
      any.





The
      Company issued warrants to purchase 2,558,250 shares of common stock at an
      exercise price of $2.50 per share, as a component of the Unit. The Company
      determined that the preferred stock was issued with an effective beneficial
      conversion feature for which it recorded a deemed dividend of $10,100,616 based
      upon an allocation of the proceeds to the relative fair values of the preferred
      stock and the warrants. The Company calculated the fair value of the warrants
      using an option pricing model.




F-33
 Table
            of Contents





The
      warrants may not be redeemed by the Company at any time. The warrants contain
      provisions that protect the holders against dilution by adjustment of the
      purchase price in certain events, such as stock dividends, stock splits, and
      other similar events. Prior to exercise, the warrants do not confer upon holders
      any voting or any other rights as a stockholder.





Substantially
      all of the warrants issued in these transactions are exercisable by the holders
      at any time. In addition, the registration rights do not preclude the Company
      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 00-19, it has classified its warrants as equity
      instruments.





The
      Company filed a registration statement covering the resale of all of the common
      stock issuable under this arrangement that became effective on July 27, 2005.
      Pursuant to the terms of the 2006 6% Convertible Note offering, certain note
      holders who previously participated in the Series A Preferred Stock, will
      receive 9,191,113 additional shares of common stock upon conversion of their
      Series A Preferred Stock and will have the exercise price per share adjusted
      to
      $0.30 on the warrants to purchase 293,333 shares of common stock issued as
      a
      part of the Series A Preferred Stock unit.





**COMMON
      STOCK ISSUED UPON CONVERSION OF SERIES A PREFERRED STOCK**





During
      the years ended December 31, 2006 and 2005, the Company issued 267,500 and
      2,635,000 shares of common stock upon conversion of 26.75 and 263.50 shares
      of
      Series A Preferred Stock, respectively.





**OPTIONS
      GRANTED PURSUANT TO 2004 INCENTIVE STOCK PLAN**





F-34
 Table
            of Contents





During
      February 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 its 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 for
      which
      the Company recorded a liability. The Company recorded a $172,750 charge to
      general and administrative expenses in the accompanying statement of operations
      for the fair value of these warrants during the year ended December 31,
      2005.





During
      February 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. 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.





During
      February 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 general and administrative expenses in the accompanying
      statement of operations for the intrinsic value of these restricted shares
      of
      common stock. The restrictions on these shares lapsed in August
      2005.





During
      March 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 general
      and administrative expenses in the accompanying statement of operations for
      the
      fair value of this warrant during the year ended December 31, 2005.





During
      March 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 general
      and
      administrative expenses in the accompanying statement of operations for the
      fair
      value of this warrant.





During
      July 2005, the Company issued an option to purchase 10,000 shares of its common
      stock for $2.70 per share to one of its directors. 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.





During
      August 2005, the Company issued to an employee upon hire, an option to purchase
      25,000 shares of its common stock for $1.71 per share, and such options vest
      over four years. Upon termination of employment effective March 31, 2006, the
      option was forfeited.





During
      September 2005, the Company issued an option to purchase 2,000 shares of its
      common stock for $1.02 per share to each of its two outside directors. 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.





During
      March 2006, the Company granted stock options to acquire an aggregate of
      1,514,206 shares of common stock to three consultants. The option agreements
      for
      two of the consultants contained anti-dilution protection of the exercise price
      and the number of shares issuable upon conversion in the event the Company
      issued common stock at a price less then the exercise price contained in their
      option. Each option was exercisable at a price of $0.359 per share for a period
      of up to five years from issuance. All of these options were fully vested and
      non forfeitable on their date of issuance. The Company charged the estimated
      fair value of $579,591 to compensation expense during the nine-month period
      ended September 30, 2006 with respect to these options. Assumptions relating
      to
      the estimated fair value of these stock options (as determined by the
      Black-Scholes option pricing model), which the Company accounted for in
      accordance with SFAS 123(R) and EITF 96-18, are as follows: risk-free interest
      rate of 4.7%; expected dividend yield zero percent; expected option life of
      5
      years; and current volatility of 129.6%. Pursuant to the 2006 6% Convertible
      Note offering commencing in May 2006, the options for the two consultants who
      had the anti-dilution protection were adjusted for the dilutive effect of the
      offering. The two consultants were granted additional options to acquire an
      aggregate of 776,230 additional shares of common stock at an exercise price
      of
      $0.15 per share, of which the fair value (as determined by the Black-Scholes
      option pricing model) of $158,144 was charged to non-cash interest expense
      as a
      component of the 2006 6% Convertible Note offering. Assumptions related to
      the
      estimated fair value of the stock options at the date of adjustment, which
      the
      Company accounted for in accordance with SFAS 123R and EITF-96-18 were: risk
      fee
      interest rate: 5.1%; expected dividend yield: 0%; expected option life: 5 years;
      and volatility: 173%. The exercise price on their remaining unexercised options
      was adjusted to $0.15 per share.





During
      June 2006, the Company granted stock options to acquire an aggregate of 16,000
      shares of common stock to three directors of the Company. Each option was
      exercisable at a price of $0.21 per share for a period of up to ten years from
      issuance.





F-35
 Table
            of Contents





All
      of
      these options vest over three years and were non forfeitable on their date
      of
      issuance. The fair value of these options (as determined by the Black-Scholes
      option pricing model) was $3,360 and the Company amortized $188 to compensation
      expense during the nine-month period ended September 30, 2006 with respect
      to
      these options. Assumptions relating to the estimated fair value of these stock
      options, which the Company accounted for in accordance with SFAS 123(R) and
      EITF
      96-18 are as follows: risk-free interest rate of 5.1%; expected dividend yield
      zero percent; expected option life of 10 years; and current volatility of
      220.3%.





**COMMON
      STOCK ISSUED UPON EXERCISE OF OPTIONS**





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





**COMMON
      STOCK ISSUED UPON CASHLESS EXERCISE OF WARRANTS**





During
      February 2005, a non-employee warrant holder exercised its right to purchase
      187,500 shares of common stock of the Company at $3.05 per share through a
      cashless exercise whereby in exchange for the exercise price of $571,875, the
      Company 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**




During
      January 2005, in lieu of a cash 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 UPON EXERCISE OF WARRANTS**





During
      March 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 amounted to $75,000
      at date of issuance, was initially characterized as a prepaid expense in the
      balance sheet at June 30, 2005, and upon termination of the letter agreement,
      has been amortized to general and administrative expenses in the accompanying
      statement of operations for the year ended December 31, 2005.





Pursuant
      to a letter agreement dated September 14, 2005, the Company issued 25,000 shares
      of common stock as initial compensation in connection with a subsequent common
      stock purchase agreement. Pursuant to a common stock purchase agreement dated
      October 7, 2005, the Company issued 377,359 shares of its common stock as an
      initial commitment fee. The par value of $0.0001 per share for the shares issued
      was charged to additional paid-in capital in the accompanying balance sheet
      at
      December 31, 2005. The common stock purchase agreement was cancelled during
      the
      second quarter of 2006.





**COMMON
      STOCK PURCHASE AGREEMENT - FOUNDERS' PLAN SHARES**





The
      Company entered into a stock purchase agreement for the sale of approximately
      265,600 shares of its common stock under its Founders' Plan and received net
      proceeds of $163,014 (gross proceeds of $167,250 less expenses of $4,236) during
      October 2005.





**TREASURY
      SHARES ACQUIRED AND RETIRED**





Pursuant
      to the redemption obligation contained in the Spinoff Agreement with Xechem
      (see
      Note 11), the Company repurchased 511,650 shares of its common stock from
      Xechem. 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 for $2,734,068 and terminated the Spinoff
      Agreement. 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.





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





F-36
 Table
            of Contents





**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.





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 thereunder and during July 2005, the Company issued
      a total of 100,000 shares in satisfaction of this obligation. The Company
      recorded a $270,000 charge to additional paid-in capital for the fair value
      of
      these shares.





**COMMON
      STOCK ISSUED PURSUANT TO SECURITIES PURCHASE AGREEMENT - CORNELL CONVERTIBLE
      DEBENTURES**





On
      December 9, 2005, the Company entered into a Securities Purchase Agreement
      with
      an investor pursuant to which the investor purchased the Cornell Convertible
      Debentures from the Company in a private placement during December 2005 (see
      Note 12). Pursuant to the Securities Purchase Agreement, the Company issued
      to
      the investor 268,817 shares of common stock for expenses incurred in connection
      with the transaction. The Company recorded $37,370 as a debt discount, which
      represents an allocation of a portion of the offering proceeds to the shares
      based upon the relative fair value of such shares to all securities issued
      under
      the arrangement. The Company charged additional paid-in capital for the par
      value of these shares.




During
      the year ended December 31, 2006, the holder of the Company’s Cornell
      Convertible Debentures elected to convert a portion of its aggregate principal
      balance of $300,000 into 1,299,850 shares of common stock at a conversion price
      pursuant to the terms of the Cornell Convertible Debentures.





**CONVERSION
      OF AMENDED DECEMBER 2004 CONVERTIBLE NOTE INTO COMMON
      STOCK**





During
      the years ended December 31, 2006 and 2005, the holder of the Company's Amended
      December 2004 Convertible Note elected to convert the principal balance plus
      accrued interest of $320,725 and $181,875 into 855,267 and 485,000 shares of
      common stock, respectively, at a conversion price of $0.375 per share.





**INSUFFICIENT
      AUTHORIZED BUT UNISSUED SHARES OF COMMON STOCK**




On
      May 9,
      2006, the Board of Directors authorized an amendment to the Company's Amended
      and Restated Certificate of Incorporation to increase the number of authorized
      shares of capital stock from 120,000,000 shares (100,000,000 shares have been
      designated as common stock and 20,000,000 shares have been designated as
      preferred stock) to 270,000,000 shares, of which 250,000,000 shares would be
      designated as common stock and 20,000,000 shares would be designated as
      Preferred Stock. Unless the proposed amendment is approved by the stockholders,
      the Company will not be able to satisfy its obligations in the agreements
      relating to those securities. If the stockholders do not approve the amendment,
      the Company will be in default of its obligations under those agreements, and
      the holders of those securities may accelerate payment of the Company's
      obligations, obtain liquidated damages under certain of those agreements and
      pursue other legal remedies against the Company that would have a material
      adverse affect on the Company’s ability to remain in existence.





As
      of
      December 31, 2006, fully diluted shares of common stock are
      approximately 108,000,000.




**NOTE
      17 - STOCK BASED COMPENSATION**




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





Effective
      January 1, 2006, the Company adopted SFAS No. 123R ‘‘Share Based Payment.’’ This
      statement is a revision of SFAS Statement No. 123, and supersedes APB Opinion
      No. 25, and its related implementation guidance. SFAS 123R addresses all forms
      of share based payment (‘‘SBP’’) awards including shares issued under employee
      stock purchase plans, stock options, restricted stock and stock appreciation
      rights. Under SFAS 123R, SBP awards result in a cost that will be measured
      at
      fair value on the awards' grant date, based on the estimated number of awards
      that are expected to vest and that will result in a charge to operations. The
      Company adopted the modified prospective method with respect to accounting
      for
      its transition to SFAS 123(R) and had unrecognized compensation cost of $407,425
      as deferred compensation at January 1, 2006. Accordingly, the Company recognized
      expense on the statement of operations of $151,026 for the fair value of these
      stock options which vested during the year ended December 31, 2006. The fair
      value of these awards was estimated at the date of grant using the Black-Scholes
      option pricing model with the following weighted average assumptions: risk
      fee
      interest rate: 3.3% to 3.6%; expected dividend yield: 0%; expected option life:
      10 years; and volatility: 108% to 123%.





F-37
 Table
            of Contents




For
      the
      year ended December 31, 2005, the Company applied APB Opinion No. 25,
‘‘Accounting for Stock Issued to Employees.’’ As required under SFAS No. 148,
‘‘Accounting for Stock-based Compensation - Transition and Disclosure,’’ the
      following table presents pro-forma net loss and basic and diluted loss per
      share
      as if the fair value-based method had been applied to all awards during that
      period.







**For
                the Year**
              **Ended**
              **December
                31,**
              **2005**Net
                loss available to common stockholders
            
            $
            (22,432,090
            )Stock-based
                employee compensation cost, under fair value accounting
            
            
            (81,399
            )Pro-forma
                net loss under fair value method
            
            $
            (22,513,489
            )Net
                loss per share - basic and diluted
            
            $
            (2.11
            )Pro-forma
                net loss per share, basic and diluted
            
            $
            (2.11
            )




The
      pro
      forma amounts that are disclosed in accordance with SFAS No. 123 for the year
      ended December 31, 2005, reflect the portion of the estimated fair value of
      awards that were earned for that year.





During
      the quarter ended December 31, 2006, the Company reclassified certain components
      of its stockholders’ equity section to reflect the elimination of deferred
      compensation arising from unvested share-based compensation pursuant
      to the requirements of Staff Accounting Bulletin No. 107, regarding Statement
      of
      Financial Accounting Standards No. 123(R), ‘‘Share-Based Payment.’’ This
      deferred compensation was previously recorded as an increase to additional
      paid-in capital with a corresponding reduction to stockholders’ equity for such
      deferred compensation. This reclassification has no effect on net income or
      total stockholders’ equity as previously reported. The Company
      will record an increase to additional paid-in capital as the
      share-based payments vest.





**NON-EMPLOYEE
      STOCK BASED COMPENSATION**





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 the instruments
      issued in exchange for such services, whichever is more readily determinable,
      using the measurement date guidelines enumerated in EITF 96-18, "Accounting
      for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
      in
      Conjunction with Selling, Goods or Services."





***Stock
      Option Plans***





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





The
      2004
      Incentive Stock Plan was first approved by the Board of Directors and the
      stockholders of the Company on May 31, 2004 and re-approved on December 8,
      2004.
      The purpose of the 2004 Incentive Stock Plan is to provide an incentive to
      retain in the employ of and as directors, officers, consultants, advisors and
      employees of the Company, persons of training, experience and ability, to
      attract new directors, officers, consultants, advisors and employees whose
      services are considered valuable, to encourage the sense of proprietorship
      and
      to stimulate the active interest of such persons into the development and
      financial success of the Company. Under the 2004 Incentive Stock Plan, the
      Company will be authorized to issue Incentive Stock options intended to qualify
      under Section 422 of the Code, non-qualified stock options, and restricted
      stock. The 2004 Incentive Stock Plan is administered by the board of directors
      or the Compensation Committee. Upon approval, 2,773,820 shares of common stock
      of the Company were reserved for issuance under the 2004 Incentive Stock Plan.
      Through December 31, 2006, options for the purchase of 2,364,401 shares of
      common stock of the Company, of which 2,219,206 are to nonemployees for services
      rendered, have been granted. In addition, through December 31, 2006, the Company
      issued 808,190 shares of restricted common stock of the Company pursuant to
      the
      2004 Incentive Stock Plan as payment for services rendered. Through December
      31,
      2006, options previously granted to purchase 517,195 shares of common stock
      have
      been forfeited. As of December 31, 2006, there were 118,424 shares available
      for
      grant under the 2004 Incentive Stock Plan.





F-38
 Table
            of Contents




The
      2006
      Incentive Stock Plan was approved by the Company’s Board of Directors at its
      February 2006 meeting. The Company intends to submit the 2006 Incentive Stock
      Plan for approval of its stockholders. The purpose of the 2006 Incentive Stock
      Plan is to provide an incentive to retain in the employ of and as directors,
      officers, consultants, advisors and employees of the Company, persons of
      training, experience and ability, to attract new directors, officers,
      consultants, advisors and employees whose services are considered valuable,
      to
      encourage the sense of proprietorship and to stimulate the active interest
      of
      such persons into the development and financial success of the Company. Under
      the 2006 Incentive Stock Plan, the Company is authorized to issue incentive
      stock options intended to qualify under Section 422 of the Code, non-qualified
      stock options, and restricted stock. The 2006 Incentive Stock Plan is
      administered by the Board of Directors or the Compensation Committee. The
      Company reserved 2,730,090 shares of common stock for issuance under the 2006
      Incentive Stock Plan. Through December 31, 2006, options to acquire 1,552,460
      shares of common stock were issued to financial consultants upon initiation
      of
      the 2006 6% Convertible Note offering pursuant to anti-dilution provisions
      contained in the initial grant of their options under the 2004 Incentive Stock
      Plan (see Note 12). As of December 31, 2006, there were 1,177,630 shares
      available for grant under the 2006 Incentive Stock Plan.





The
      following table summarizes the stock option activity for the years ended
      December 31:





**2006**
            
            **2005****Weighted-**
            
            **Weighted-****Average**
            
            **Average****Exercise**
            
            **Exercise****Options**
            
            **Price**
            
            **Options**
            
            **Price**Outstanding
                - January 1
            
            
            646,695
            
            $
            3.08
            
            
            662,340
            
            $
            2.64Granted
            
            
            3,082,666
            
            
            0.18
            
            
            171,855
            
            
            4.70Exercised
            
            
            (1,333,332
            )
            
            0.15
            
            
            (187,500
            )
            
            3.00Canceled
            
            
            (517,195
            )
            
            2.45
            
            
            -
            
            
            3.00Outstanding
                - December 31
            
            
            1,878,834
            
            
            0.57
            
            
            646,695
            
            
            3.08Options
                exercisable at December 31
            
            
            1,849,334
            
            $
            0.53
            
            
            417,549
            
            $
            3.29







The
      following table summarizes additional information about outstanding and
      exercisable stock options at December 31, 2006:








**Weighted-****Average**
            
            
            
            
            
            **Weighted-****Number**
            
            **Remaining**
            
            
            
            
            
            **Average****Exercise
                Prices**
            
            **Outstanding**
            
            **Contractual
                Life**
            
            **Exercise
                Price**
            
            **Number
                Exercisable**
            
            **Exercise
                Price**$0.00-$1.00
            
            
            1,747,334
            
            
            3.9
                years
            
            $
            0.20
            
            
            1,736,834
            
            $
            0.20$1.01-$5.00
            
            
            82,000
            
            
            3.2
            
            $
            4.29
            
            
            66,000
            
            $
            4.18$5.01-$9.50
            
            
            49,500
            
            
            4.3
            
            $
            7.58
            
            
            46,500
            
            $
            7.66Total
            
            
            1,878,834
            
            
            3.9
            
            $
            0.57
            
            
            1,849,334
            
            $
            0.53




All
      options granted have exercise prices equal to the fair market value on the
      date
      of grant.  There is no intrinsic value in any outstanding options, both
      exercisable and not exercisable.





F-39
 Table
            of Contents





Options
      granted during the years ended December 31, 2006, 2005 and 2004 had weighted
      average fair values of $0.20, $3.37, and$2.19, respectively. The fair value
      of
      each option grant was estimated throughout the year using the Black-Scholes
      option pricing model using the following assumptions:





**2006**
            
            **2005**
            
            **2004**Expected
                dividend yield
            
            
            -
            
            
            -
            
            
            -Range
                of risk free interest rate
            
            
            4.7%
                - 5.1
            %
            
            3.3%
                - 3.8
            %
            
            3.3
            %Range
                of volatility
            
            
            129.6%
                - 220.3
            %
            
            107.8%
                - 123.0
            %
            
            111.6%
                - 114.9
            %Range
                of expected option life (years)
            
            
            3.8
                - 10.0
            
            
            3.0
                - 10.0
            
            
            5.0
                - 10.0





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


As
      of
      December 31, 2006, the Company has $259,759 of unrecognized compensation cost
      related to non-vested share-based compensation arrangements. These costs are
      expected to be recognized over a weighted-average period of 3.0
      years.





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





At
      its
      February 2006 board meeting, the directors of the Company unanimously approved
      the adoption of a shareholder rights plan pursuant to which the Company issued
      one preferred share purchase right for each share of the Company’s common stock
      held by shareholders of record as of the close of business on March 7, 2006.
      Each right will entitle the holder to purchase one one-hundredth of a share
      of
      Series B Preferred Stock at an exercise price of $168. These preferred shares
      are structured so that the value of one one-hundredth of a preferred share
      will
      approximate the value of one share of the Company’s common stock. The Series B
      Preferred stock has not yet been designated by the Board. The purpose of the
      plan is to protect the long-term value of the Company for its shareholders
      and
      to protect shareholders from various abusive takeover tactics, including
      attempts to acquire control of the Company at an inadequate price. The plan
      is
      designed to give the Company’s Board of Directors sufficient time to study and
      respond to an unsolicited takeover attempt. Adoption of the plan was unanimously
      approved by the Company’s directors





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





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




**NOTE
      19 - SUBSEQUENT EVENTS**





**Transfer
      of Technologies to New Entity to be Controlled by Founding
      Scientists**





On
      March
      29, 2007, we executed a term sheet, subject to Board and secured creditor
      approval, which we intend to seek in the second half of April, 2007, with Drs.
      Stracher and Kesner, the original founding scientists of the CepTor
      technologies, pursuant to which our MyodurTM and NeurodurTM technologies will be
      assigned to a new private entity (“Newco”) that will initially be owned 55% by
      Drs. Stracher and Kesner and 45% by CepTor. Drs. Stracher and Kesner will resume
      the research and development activities for these products, with the goal of
      getting the FDA process back on track, and initially intend to seek public
      and
      private grants to fund their efforts. CepTor will cooperate in efforts to
      attract outside funding, but will have no direct role in the management of
      Newco, nor will it be under any obligation to fund Newco’s operations. Other
      principal terms of the transaction include retention by CepTor of a gross
      royalty of 8% on all revenues generated by the new entity and a release by
      the
      founding scientists of substantial claims against the company related to their
      consulting agreements with the company. Pursuant to the transaction with Drs.
      Stracher and Kesner, CepTor’s 45% interest may be further reduced as a result of
      dilution caused by new investment in the subsidiary, or by transfers of a
      portion of its interest to creditors or other interested parties. The Company’s
      existing secured creditors, who collectively have a security interest in all
      of
      the Company’s assets, will retain a security interest in the shares of stock
      held by CepTor in Newco. Should the new corporation succeed in its efforts
      to
      advance the technologies, CepTor will benefit through its significant equity
      stake and, should the projects prove commercially viable, through its gross
      royalty on eventual product sales.




***Additional
            Securities Issued Upon Conversion of Preferred
            Stock***
 During
          the first quarter of 2007, 50,000 shares of Common Stock were issued upon
          the
          conversion of the Company’s Series A Preferred Stock.





F-40
 Table
            of Contents




**ITEM
      8. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE.**





On
      February 1, 2007, the Board of Directors of CepTor Corporation (the
“Company”) approved, subject to execution of a definitive engagement letter, the
      retention of Bernstein & Pinchuk, LLP, certified public accountants (the
“Accountant”) to serve as its independent registered public accounting firm. The
      Accountant replaces Marcum & Kliegman LLP (“M&K”), which was dismissed
      by the Company, upon the approval of its Board of Directors, as its independent
      registered public accounting firm as of February 1, 2007.





During
      the term of M&K’s engagement and through the date of this Report, there have
      been no disagreements between the Company and M&K on any matter of
      accounting principles or practices, financial statement disclosures, or auditing
      scope or procedure, which, if not resolved to the satisfaction of M&K, would
      have caused M&K to make reference to the subject matter in connection with
      their report on the Company’s financial statements for the years ended
      December 31, 2004 and 2005. In addition, except as set forth below, there
      were no reportable events, as listed in Item 304(a)(1)(iv) of
      Regulation S-B.




During
      the last two completed fiscal years and the subsequent interim periods, neither
      the Company nor anyone on its behalf has consulted the Accountant regarding
      (i) either: the application of accounting principles to a specific
      completed or contemplated transaction, or the type of audit opinion that might
      be rendered on the Company’s financial statements; as such, no written or oral
      advice was provided, and none was an important factor considered by the Company
      in reaching a decision as to the accounting, auditing or financial reporting
      issues; or (ii) any matter that was a subject of a disagreement or
      reportable event with M&K, as there were none.




M&K’s
      report on the financial statement of the Company for the year ended
      December 31, 2005 and 2004 and for the period of August 11, 1986 (date of
      inception) through December 31, 2005, was qualified by uncertainty concerning
      the substantial doubt as to the Company’s ability to continue as a going
      concern.




M&K,
      prior to its dismissal, advised the Company that information came to its
      attention that if further investigated might cause it to conclude that an
      amendment and/or restatement of its June 30, 2006 financial statements may
      be required. Specifically, a question has arisen as to the Company’s triggering
      of certain cross default provisions on its debt instruments by failing to repay
      a note which matured in July 2006. If it is determined that such default
      had not been waived, the Company may be required to present substantially all
      of
      its debt obligations as current liabilities in its June 30, 2006 balance
      sheet and make certain related disclosures. In addition, the Company was in
      the
      process of responding to an SEC comment letter dated November 20, 2006
      which response was not yet finalized at the time of M&K’s dismissal. M&K
      advised the Company that due to its dismissal, it did not have the opportunity
      to evaluate the SEC’s comments and was therefore unable to conclude as to
      whether any such comments contained in the letter could have an impact on
      previously reported financial statements or financial statements of any interim
      periods preceding the date of M&K’s dismissal.




M&K
      also previously advised the Company that it identified certain matters that
      it
      believes constitute material weaknesses in its internal controls over its
      financial reporting. One such material weakness relates to the Company’s ability
      to ensure that its accounting for equity based transactions was accurate and
      complete. In addition, M&K advised the Company that its finance department
      was understaffed and therefore lacked segregation of duties.




The
      Company provided M&K with a copy of this disclosure on February 7,
      2007, providing M&K with the opportunity to furnish the Company with a
      letter addressed to the Securities and Exchange Commission containing any new
      information, clarification of the Company’s expression of its views, or the
      respect in which M&K does not agree with the statements contained
      herein.


32
 Table
            of Contents


**ITEM
      8A. 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 concluded that as of the end of the period covered by this Report,
      our
      disclosure controls and procedures were effective to enable us to record,
      process, summarize and report information required to be included in our
      periodic SEC filings within the required time period.





**DISCLOSURE
      CONTROLS AND INTERNAL CONTROLS**





Disclosure
      controls are procedures that are designed with the objective of ensuring that
      information required to be disclosed in our reports filed under the Securities
      Exchange Act of 1934, as amended, such as this Report, is recorded, processed,
      summarized, and reported within the time periods specified in the SEC's rules
      and forms. Disclosure controls are also designed with the objective of ensuring
      that such information is accumulated and communicated to our management, 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 currently required to deliver management's report on control over our
      financial reporting until our fiscal year ended December 31, 2006. Nevertheless,
      we consider the effectiveness of our internal controls over financial reporting
      as part of the quarterly evaluations of our procedures. In connection therewith,
      we reported, for the years ended December 31, 2005 and 2006, that we identified
      certain matters that we believed constituted material weaknesses (as such term
      is defined under the Public Company Accounting Oversight Board Auditing Standard
      No. 2) in our internal controls over financial reporting. The first such
      material weakness related to our ability to ensure that the accounting for
      our
      equity-based transactions is accurate and complete and the second related to
      our
      limited segregation of duties.




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




33
 Table
            of Contents




With
      respect to the second material weakness, which relates to our segregation of
      duties, we have re-evaluated our procedures and believe that due to the fact
      hat
      we now have only one employee, that our risks of either material misstatement
      or
      misappropriation of assets is minimal. In addition, until the suspension of
      our
      research programs and the winddown of our Baltimore office as of December 31,
      2006, substantially all of our general and administrative expenses and
      scientific research expenditures were reviewed and approved by employees who
      are
      knowledgeable of those matters. To date our procedures have also enabled us
      to
      comply with our financial reporting obligations within the time frames required
      by the SEC. Although we believe our risks with respect to this matter are
      minimal, we acknowledge that it would be beneficial for the Company to segregate
      certain procedures to a greater number of employees, once such additional
      employees are hired pending execution of our new business plan. We believe
      that
      our limited segregation of duties still constitutes a material deficiency in
      our
      system. However, we currently have very limited financial resources and do
      not
      believe that at this time, it would be prudent for us to further constrain
      our
      liquidity by allocating resources to hiring additional employees as a corrective
      measure. We believe that the costs we would incur to increase our staff (solely
      for this purpose) exceed the potential reduction in risk, especially given
      our
      current circumstances. Our CEO is monitoring this situation to determine if
      these circumstances change. If the situation changes and sufficient capital
      is
      secured, it is our intention to increase staffing within our general accounting
      and financial functions.





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





**ITEM
      8B. OTHER INFORMATION.**





Not
      Applicable.







**PART
      III**








**ITEM
      9. DIRECTORSAND EXECUTIVE OFFICERS.**





**Directors
      and Executive Officers**





Our
      directors and executive officers are as follows:








**Name**
            
            **Age**
            
            **Position**Howard
                Becker
            
            48
            
            Chief
                Executive Officer,DirectorTony
                Coelho
            
            64
            
            Director





Each
      director holds office until the next annual meeting of stockholders or until
      their successors have been duly elected and qualified. Executive officers are
      elected annually and serve at the discretion of our Board.





In
      February 2005, we adopted a cash and equity compensation plan for our
      non-employee directors. During the year ended December 31, 2006, we granted
      and
      option to purchase 12,000 shares of Common Stock $0.21 per share, to Mr. Coelho
      under our Directors Plan.





34
 Table
            of Contents




The
      principal occupations for the past five years (and, in some instances, for
      prior
      years) of each of our directors and executive officers are as
      follows:





**HOWARD
      BECKER** ,
      has
      served as our Chief Executive Officer, Chief Financial Officer and Chairman
      of
      our Board since December 2006. Before
      joining the Company, from March 2005, Mr. Becker was employed by Xechem
      International, Inc., a development stage pharmaceutical company based in New
      Brunswick, New Jersey, where he most recently served as Vice President of
      Operations. Prior thereto, Mr. Becker served as a business consultant to a
      variety of companies through his private consulting firm. Mr. Becker is also
      a
      licensed attorney and practiced law for eighteen years in New York City,
      specializing in business reorganizations and corporate restructurings, including
      ten years with Kaye, Scholer, Fierman, Hays & Handler, LLP. He was also
      associated with Skadden, Arps, Slate, Meagher & Flom, LLP and Milbank,
      Tweed, Hadley & McCloy, LLP. Mr. Becker graduated *magna
      cum laude* from
      Tufts University in 1981 and received his law degree from the University of
      Michigan Law School in 1984.




**TONY
      COELHO** ,
      has
      served as a Director of the Company since June 26, 2006. Tony Coelho served
      in
      the U.S. House of Representatives from 1978 to 1989 and served as Majority
      Whip
      from 1987 to 1989. After leaving Congress, Mr. Coelho joined Wertheim Schroder
      & Company, Inc. where he served as a Managing Director from 1989 to 1995 and
      as President and CEO of Wertheim Schroder Investment Services (WSIS) from 1990
      to 1995. After Schroder Bank purchased WSIS in 1995, Mr. Coelho formed ETC,
      an
      education and training technology company, where he served as Chairman and
      CEO
      until it was sold in late 1997. Mr. Coelho currently serves on the boards of
      Cyberonics, Inc., Warren Resources, and Service Corporation International,
      and
      on the boards of two private investment funds. Mr. Coelho is the Chair of the
      Epilepsy Foundation of America in addition to other bodies related to
      disabilities and other matters. Mr. Coelho earned a Bachelor of Arts degree
      in
      Political Science in 1964 from Loyola Marymont University.




There
      are
      no family relationships between any of our directors or executive
      officers.





**AUDIT
      COMMITTEE**





At
      this
      point, the Company does not have an Audit Committee due to a lack of resources
      to justify maintaining a “financial expert” on the Board who is independent. If
      and when the Company’s two pronged business plan is successful, and there is a
      fully operational business in the Company, the Board and management shall
      reevaluate the need for an Audit Committee and form one as appropriate. The
      Board does not maintain any other Committees at this time.





**CODE
      OF ETHICS**





We
      adopted a code of ethics that applies to our officers, directors and employees,
      including our chief executive officer and chief financial officer.





**SECTION
      16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Section
      16(a) of the Exchange Act, which requires executive officers and directors,
      and
      persons who beneficially own more than ten percent of the common stock of a
      company with a class of securities registered under the Exchange Act, to file
      initial reports of ownership and reports of changes in ownership with the
      Securities and Exchange Commission, was not applicable to us in 2005 or
      2006.





**ITEM
      10. EXECUTIVECOMPENSATION**




**Summary
      Compensation Table**





The
      following table sets forth information for the three most recently completed
      fiscal years concerning the compensation of (i) the Chief Executive Officer
      and
      (ii) all other executive officers who earned in excess of $100,000 in salary
      and
      bonus in the fiscal year ended December 31, 2006 ("Named Executive
      Officers").





35
 Table
            of Contents




**Annual
                  Compensation**
              
              **Long
                  Term Compensation****Restricted**
              
              **Securities**
              
              
              
              **TOTAL****Stock**
              
              **Underlying**
              
              **All
                  Other**
              
              **COMPENSATION****Salary**
              
              **Award(s)**
              
              **Options**
              
              **Compensation**
              
              **(2006)****Name
                  and Principal Position**
              
              **Year**
              
              **($)**
              
              **($)(1)**
              
              **(#)**
              
              **($)**
              
              **($)**William
                  H. Pursley
              
              
              2006
              
              
              274,313
              
              
              -
              
              
              -
              
              
              -
              
              
              274,313Chairman
                  and Chief
              
              
              2005
              
              
              353,525
              (2)
              
              -
              
              
              -
              
              
              1,630
              (3)Executive
                  Officer(8)
              
              
              2004
              
              
              351,967
              (4)
              
              885,624
              (5)
              
              -
              
              
              1,630
              (3)Norman
                  W. Barton, M.D., Ph.D.
              
              
              2006
              
              
              240,675
              (6)
              
              -
              
              
              -
              
              
              -
              
              
              240,675Executive
                  Vice President and
              
              
              2005
              
              
              285,546
              (2)
              
              -
              
              
              -
              
              
              1,170
              (3)Chief
                  Medical Officer(7)
              
              
              2004
              
              
              187,152
              (4)
              
              22,902
              (5)
              
              -
              
              
              1,364
              (3)Donald
                  W. Fallon
              
              
              2006
              
              
              208,000
              (6)
              
              -
              
              
              -
              
              
              -
              
              
              208,000Senior
                  Vice President,
              
              
              2005
              
              
              238,296
              (2)
              
              -
              
              
              -
              
              
              550
              (3)Finance
                  and Administrative, Chief
              
              
              2004
              
              
              179,667
              (4)
              
              147,613
              (5)
              
              -
              
              
              500
              (3)Financial
                  Officer and Secretary(7)




(1)
      Vesting restrictions on such shares lapse as to (i) 10% on the sixth month
      anniversary of the date of award, (ii) an additional 10% on the twelve month
      anniversary of the date of award, and (iii) the balance upon initiation of
      phase
      III clinical trials for MyodurTM in muscular dystrophy.





(2)
      Includes $8,400 of 401(k) contributions.





(3)
      Represents reimbursement of premiums paid by such executive officer under
      certain term life insurance policies.





(4)
      Includes $5,467, $5,467 and $4,667 of 401(k) contributions for Mr. Pursley,
      Dr.
      Barton and Mr. Fallon, respectively. Includes payments of $71,500 and $29,167
      paid by Xechem to Mr. Pursley and Mr. Fallon, respectively, during
      2004.





(5)
      1,247,428 shares, 454,792 shares, and 207,905 shares of restricted stock
      underlying the Restricted Stock Awards granted in 2004 for Mr. Pursley, Dr.
      Barton and Mr. Fallon, respectively, have been valued at $0.11, the closing
      price per share of our Common Stock as reported by the OTC Bulletin Board on
      December 31, 2006.




(6)
      Includes $8,800 and $8,000 of 401(k) contributions for Dr. Barton and Mr.
      Fallon, respectively.




(7)
      Dr.
      Barton and Mr. Fallon were terminated effective October 31, 2006.




(8)
      Mr.
      Pursley resigned effective December 31, 2006.





36
 Table
          of Contents




**Option
      Grants in Last Fiscal Year**





No
      stock
      options or stock appreciation rights were granted to or exercised by our Named
      Executive Officers during 2006.





**STOCK
      PLANS**





Prior
      to
      our adoption of our Founders' Stock Plan and 2004 Incentive Stock Plan in
      December 2004, we did not have a stock option, long-term incentive or other
      similar plan for officers, directors, and employees.





FOUNDERS'
      PLAN. Our Founders' Plan was adopted by the board of directors and stockholders
      on December 27, 2004. An aggregate of 3,031,943 shares of Common Stock have
      been
      issued under the Founders' Plan. The Founders' Plan is administered by the
      Board
      or the Compensation Committee, which Compensation Committee presently consists
      of Leonard Mudry. Upon the happening of certain events described in the
      Founders' Plan, such as the cessation of employment by a participant following
      an award, shares issued or issuable to Founders' Plan participants may revert
      to
      William Pursley, our Chief Executive Officer, and may be cancelled, forfeited,
      re-designated or re-issued by us in Mr. Pursley's sole discretion subject to
      Board and Compensation Committee approvals. Unless vesting is accelerated by
      the
      Board or Compensation Committee, Founders' Stock Plan shares will vest 10%
      upon
      the six month anniversary of the date of issuance, 10% upon the one-year
      anniversary of the date of issuance and the remainder upon initiation of a
      Phase
      III clinical trial for MyodurTM in muscular dystrophy, provided such date is not
      less than six months following the date of award. In the discretion of the
      Board
      or the Compensation Committee, vesting may be accelerated upon the achievement
      of significant scientific, regulatory, or other development milestones subject
      to approval of the Placement Agent.





2004
      INCENTIVE PLAN. Our 2004 Incentive Plan was adopted by the board of directors
      and stockholders on December 27, 2004. An aggregate of 2,773,820 shares of
      Common Stock have been reserved for issuance under the 2004 Incentive Plan.
      The
      purpose of the 2004 Incentive Plan is to provide an incentive to retain in
      the
      employ of and as directors, officers, consultants, advisors and employees of
      our
      company, persons of training, experience and ability, to attract new directors,
      officers, consultants, advisors and employees whose services are considered
      valuable, to encourage the sense of proprietorship and to stimulate the active
      interest of such persons into our development and financial success. Under
      the
      2004 Incentive Plan, we are authorized to issue incentive stock options intended
      to qualify under Section 422 of the Code, non-qualified stock options and
      restricted stock. The 2004 Incentive Plan is administered by the Board or the
      Compensation Committee. As of March 11, 2007, 1,465,483 shares of Common Stock
      have been issued under the 2004 Incentive Plan, options to purchase 1,102,604
      shares of Common Stock were outstanding and 118,424 shares remain available
      for
      issuance.





2006
      INCENTIVE PLAN. Our 2006 Incentive Plan was adopted by the board of directors
      on
      March 8, 2006. We intend to submit the 2006 Incentive Plan for approval of
      our
      stockholders. An aggregate of 2,730,090 shares of Common Stock have been
      reserved for issuance under the 2006 Incentive Plan. The purpose of the 2006
      Incentive Plan is to provide an incentive to retain in the employ of and as
      directors, officers, consultants, advisors and employees of our company, persons
      of training, experience and ability, to attract new directors, officers,
      consultants, advisors and employees whose services are considered valuable,
      to
      encourage the sense of proprietorship and to stimulate the active interest
      of
      such persons into our development and financial success. Under the 2006
      Incentive Plan, we are authorized to issue incentive stock options intended
      to
      qualify under Section 422 of the Code, non-qualified stock options and
      restricted stock. The 2006 Incentive Plan is administered by the Board or the
      Compensation Committee. As of March 11, 2007, 776,230 shares of Common Stock
      have been issued under the 2006 Incentive Plan, options to purchase 776,230
      shares of Common Stock were outstanding and 1,177,630 shares remain available
      for issuance.





OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR END FOR 2006


**Option
                  Awards**
              
              
              
              
              
              
              
              
              
              **Stock
                  Awards****Name**
                **and
                  Principal Position**
              
              **Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable**
              
              **Number
                  of Securities Underlying Unexercised Options (#)
                  Unexercisable**
              
              **Number
                  of Securities Underlying Unexercised Unearned Options
                  (#)**
              
              **Option
                  Exercise Price**
              
              **Option
                  Expiration Date**
              
              **Number
                  of Shares or Units of Stock That Have Not Vested**
              
              **Market
                  Value of Shares or Units of Stock That Have Not
                  Vested**
              
              **Number
                  of Unearned Shares or Other Rights That Have Not
                  Vested**
              
              **Market
                  Value or Payout Value of Unearned Shares, Units or Other Rights
                  That Have
                  Not Vested**William
                Pursley
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Len Mudry
              
              10,500
              
              5,500
              
              -
              
              $0.21
                  to $6.25
              
              2/11/15
                  to 6/26/16
              
              -
              
              -
              
              -
              
              -Tony Coelho
              
              3,000
              
              9,000
              
              -
              
              $0.21
              
              6/26/06
              
              -
              
              -
              
              -
              
              -Howard
                Becker
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -




37
 Table
            of Contents





**DIRECTORS
      COMPENSATION**





On
      February 11, 2005, our Board adopted a Deferred Stock Plan for Non-Employee
      Directors (the "Directors Plan") as an amendment to our 2004 Incentive Stock
      Plan. An aggregate of 200,000 shares of Common Stock have been reserved under
      the Directors Plan. The purpose of the Directors Plan is to provide an incentive
      for non-employee directors to promote the financial success and progress of
      our
      company. The Directors Plan is administered by the Board or the Compensation
      Committee. Under the Directors Plan we are authorized to issue non-qualified
      stock options to a director who is not, at the time of grant, an employee.
      The
      Directors Plan provides for (i) the automatic initial grant of options to
      purchase 10,000 shares of Common Stock to each non-employee director who joins
      our Board at an exercise price equal to the fair market value at the date of
      such election or appointment to the Board, and (ii) the grant of options to
      purchase 2,000 shares of Common Stock on the date of each Board meeting
      thereafter attended by such non-employee director at an exercise price equal
      to
      the fair market value on the date of such Board meeting, subject to vesting
      as
      follows: one-fourth of the shares issuable pursuant to the option are
      exercisable six months from the date of grant, and an additional one-fourth
      of
      the shares are exercisable on each of the first, second and third anniversaries
      of the date of grant, subject to such person serving as a director at the time
      of vesting. The Directors Plan provides for a maximum lifetime award of 30,000
      shares to any director. The term of each option under the Directors Plan is
      ten
      years. In addition, on February 11, 2005, our Board approved the payment of
      $1,000 to each non-employee director for each Board meeting attended, in person
      or by telephone, plus reimbursement of reasonable expenses incurred in attending
      such meeting.





During
      the fiscal year ended, our Directors were/were not given compensation for
      services rendered as Directors. The following table summarizes any compensation
      given:





**DIRECTOR
      COMPENSATION TABLE**


**Name**
              
              **Fees
                  Earned or Paid in Cash**
              
              **Stock
                  Awards**
              
              **Option
                  Awards**
              
              **Non-Equity
                  Incentive Plan Compensation**
              
              **Nonqualified
                  Deferred Compensation Earnings**
              
              **All
                  Other Compensation**
              
              **Total**William
                  Pursley
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              -Len
                  Mudry
              
              
              -
              
              
              -
              
              
              2000
                  shares@$0.21/share
              
              
              -
              
              
              -
              
              
              -
              
              2000
                  shares@$0.21/shareTony
                  Coelho
              
              
              -
              
              
              -
              
              
              12,000
                  shares @$0.21/share
              
              
              -
              
              
              -
              
              
              -
              
              12,000
                  shares @$0.21/shareHoward
                  Becker
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              -




**ITEM
      11. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS**





The
      information regarding beneficial ownership of our Common Stock has been
      presented in accordance with the rules of the SEC. Under these rules, a person
      or entity may be deemed to beneficially own any shares as to which such person
      or entity, directly or indirectly, has or shares voting power or investment
      power, or has the right to acquire voting or investment power within 60 days
      through the exercise of any stock option or other right. The percentage of
      beneficial ownership as to any person as of a particular date is calculated
      by
      dividing (a) (i) the number of shares beneficially owned by such person, plus
      (ii) the number of shares as to which such person has the right to acquire
      voting or investment power within 60 days, by (b) the total number of shares
      outstanding as of such date, plus any shares that such person has the right
      to
      acquire from us within 60 days. Including those shares in the tables does not,
      however, constitute an admission that the named stockholder is a direct or
      indirect beneficial owner of those shares.




38




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





Based
      solely upon information available to us, the following table sets forth certain
      information regarding beneficial ownership of our Common Stock as of March
      31,
      2007 by (i) each person or entity known by us to own beneficially more than
      5%
      of our outstanding Common Stock, (ii) each of our directors and Named Executive
      Officers, and (iii) all directors and executive officers as a group. Except
      as
      otherwise indicated, each of the stockholders named below has sole voting and
      investment power with respect to such shares of Common Stock:




**Name
                  and Address of**
              
              **Number
                  of Shares**
              
              **Percentage
                  Beneficially****Beneficial
                  Owner(1)**
              
              **Beneficially
                  Owned**
              
              **Owned**William
                  H. Pursley
              
              1,245,397(2)
              
              13.3%Norman
                  Barton, MD, PhD
              
              -Donald
                  W. Fallon
              
              -Len
                  Mudry
              
              10,500(3)
              
              *Tony
                  Coelho
              
              3,000(4)
              
              *Howard
                  Becker
              
              -
              
              -The
                  Longview Fund, LP
              
              16,438,000(5)
              
              51.5%600
                  Montgomery Street, 44th FloorSan
                  Francisco, CA 94111Harbor
                  Trust, Marge Chassman, Trustee
              
              14,405,771(6)
              
              63.5%465
                  West 23rd Street, Apt 12JNew
                  York, NY 10011Cornell
                  Capital Partners LP(7)
              
              9,333,333(8)
              
              37.6%101
                  Hudson StreetSuite
                  3700Jersey
                  City, New Jersey 07302Alpha
                  Capital Aktiengesellschaft
              
              9,080,223(9)
              
              36.9%Pradafant
                  7, 9490 FurstentumsVaduz,
                  LichtensteinCenturion
                  Microcap, L.P.
              
              6,642,500(10)
              
              30.0%3014
                  Avenue LBrooklyn,
                  NY 11210Michael
                  G. Jesselson 12/18/80 Trust
              
              3,781,524(11)
              
              19.7%







39
 Table
          of Contents




Double
                  U Master Fund, L.P.
              
              3,433,334(12)
              
              18.1%c/o
                  Navigator management Ltd.Harbor
                  House, Waterford DriveP.O.
                  Box 972Road
                  Town, British Virgin IslandsJoseph
                  Giamanco
              
              3,433,333(13)
              
              18.1%4 White Rock TerraceHolmdel,
                  NJ 07733Ellis
                  International Ltd.
              
              3,159,036(14)
              
              16.9%c/o
                  SDC Capital20
                  East Sunrise Highway, Suite 302Valley
                  Stream, NY 11581Whalehaven
                  Cap Fund
              
              2,786,666(15)
              
              15.2%Iroquois
                  Master Fund Ltd
              
              2,222,227(16)
              
              12.5%Intellect
                  Neurosciences, Inc.
              
              2,060,000(17)
              
              11.7%7 West 18th Street, 9th FloorNew
                  York, NY 10011Brio
                  Capital, L.P.
              
              1,900,834(18)
              
              10.9%523 Albermarle RoadCedarhurst,
                  NY 11516Little
                  Gem Life Sciences Fund LLC
              
              1,333,333(19)
              
              8.2%Lawrence
                  Zalk
              
              1,373,334(20)
              
              8.1%51 Falmouth StreetShort
                  Hills, NJ 07078SCG
                  Capital, LLC
              
              1,150,000(21)
              
              7.0%19495 Biscayne Blvd., Suite 608Aventura,
                  FL 33180Peter
                  Chung
              
              1,054,782(22)
              
              6.5%c/o
                  Brookshire Securities Corporation4
                  West Las Olas Blvd., Suite 840Ft.
                  Lauderdale, FL 33301George
                  Karfunkel
              
              836,666(23)
              
              5.1%


*
      All
      directors and executive officers as a group (2 persons)-- 3,000
      shares*




*
      Represents less than 1%.




40
 Table
            of Contents




(1)
      Unless otherwise indicated, the address of each stockholder listed above is
      c/o
      CepTor Corporation, 462 Seventh Avenue, Suite 1200, New York, NY
      10018.


(2)
      Includes 369 shares of Common Stock undesignated from the Founders
      Plan.


(3)
      Represents shares subject to an option which are exercisable within 60
      days.


(4)
      Represents shares subject to an option which are exercisable within 60
      days.


(5)
      Includes 80,000 shares issuable upon conversion of Series A Preferred stock,
      40,000 shares issuable upon exercise of Unit Warrants, 11,250,000 shares upon
      conversion of 2006 6% Convertible Notes, and 5,068,000 shares issuable upon
      conversion of 2005 8% Convertible Debentures.


(6)
      Includes 6,161,104 shares issuable upon conversion of 2006 6% Convertible Notes
      and 1,772,694 shares issuable upon conversion of 2005 8% Convertible Debentures.
      Also includes the following shares issuable to Marge Chassman, trustee for
      Harbor Trust - 50,000 shares issuable upon exercise of Unit Warrants, 3,128,137
      shares issuable upon conversion of 2006 6% Convertible Notes, 2,884,741 shares
      issuable upon conversion of 2005 8% Convertible Debentures and 238,750 shares
      issuable upon exercise of various warrants.


(7)
      Mark
      Angelo, the managing member of Yorkville Advisors, LLC, the general partner
      of
      Cornell Capital, has sole voting and dispositive power over such
      shares.


(8)
      Represents shares subject to warrants which are exercisable within 60
      days.


(9)
      Includes 100,000 shares issuable upon conversion of Series A Preferred stock,
      50,000 shares issuable upon exercise of Unit Warrants, 6,766,667 shares upon
      conversion of 2006 6% Convertible Notes, and 2,163,556 shares issuable upon
      conversion of 2005 8% Convertible Debentures.


(10)
      Includes 95,000 shares issuable upon conversion of Series A Preferred stock,
      47,500 shares issuable upon exercise of Unit Warrants, and 6,500,000 shares
      upon
      conversion of 2006 6% Convertible Notes.


(11)
      Includes 3,671,524 shares issuable upon conversion of 2004 Convertible
      Note.


(12)
      Represents shares issuable upon conversion of 2006 6% Convertible
      Notes.


(13)
      Represents shares issuable upon conversion of 2006 6% Convertible
      Notes.


(14)
      Includes 1,716,666 shares issuable upon conversion of 2006 6% Convertible Notes
      and 1,442,370 shares issuable upon conversion of 2005 8% Convertible
      Debenture.


(15)
      Includes 80,000 shares issuable upon conversion of Series A Preferred stock,
      40,000 shares issuable upon exercise of Unit Warrants, and 2,666,666 shares
      upon
      conversion of 2006 6% Convertible Notes.


(16)
      Represents shares issuable upon conversion of 2006 6% Convertible
      Notes.


(17)
      Represents shares issuable upon conversion of 2006 6% Convertible
      Notes.


(18)
      Includes 25,000 shares issuable upon conversion of Series A Preferred stock,
      12,500 shares issuable upon exercise of Unit Warrants, and 1,863,334 shares
      upon
      conversion of 2006 6% Convertible Notes.


(19)
      Includes 666,667 shares subject to an option which are exercisable within 60
      days.


(20)
      Represents shares issuable upon conversion of 2006 6% Convertible
      Notes.


(21)
      Includes 1,000,000 shares issuable upon conversion of 2006 6% Convertible Notes
      and includes the following shares issuable to Geduld Capital Management -
      100,000 shares issuable upon conversion of Series A Preferred stock, and 50,000
      shares issuable upon exercise of Unit Warrants.


(22)
      Includes 666,667 shares subject to an option which are exercisable within 60
      days.


(23)
      Includes 100,000 shares issuable upon conversion of Series A Preferred stock,
      50,000 shares issuable upon exercise of Unit Warrants, and 686,666 shares upon
      conversion of 2006 6% Convertible Notes.




**ITEM
      12. CERTAINRELATIONSHIPS AND RELATED
      TRANSACTIONS**




During
      April and May 2004, as contemplated by a spin-off agreement entered into in
      connection with the spin-off of our company ("Spin-off Agreement"), we entered
      into certain interim financing agreements (the "Bridge Loans") in anticipation
      of the spin-off. The terms of the Bridge Loans provided us with $1,100,000
      pursuant to 8% convertible promissory notes maturing on October 22, 2004.
      In addition, we agreed to issue up to 515,430 shares of Common Stock to the
      Bridge Loan holders, and others. Since we were unable to repay the Bridge Loans
      on their maturity date, the Bridge Loan holders had a right to convert their
      promissory notes into shares of common stock of Xechem. No Bridge Loan holder
      exercised its conversion right and pursuant to an exempt exchange offer dated
      October 22, 2004, as amended November 15, 2004, all of the Bridge Loans were
      either repaid with the proceeds of the initial closing of the Private Placement
      or converted into new 10% convertible promissory notes ("Replacement Notes")
      with a December 8, 2005 maturity date, convertible into shares of Common Stock
      at $1.25 per share in an amount equal to the outstanding principal and interest.
      An aggregate of 238,000 shares of Common Stock originally issued in connection
      with the Bridge Loans was converted into a total of 487,597 shares of Common
      Stock upon the effectiveness of the Merger. In April 2005, the Replacement
      Notes
      were amended to extend the maturity date to July 3, 2006 from December 8, 2005,
      to increase the interest rate to 12%, effective December 9, 2005 and to change
      the conversion price to $0.75 from $1.25 per share. On December 9, 2005, we
      further amended the Replacement Note to change the conversion price to $0.375
      from $0.75 per share.





41
 Table
            of Contents





On
      June
      17, 2005, we entered into a securities purchase agreement with Xechem pursuant
      to which we repurchased 2,886,563 shares of Common Stock from Xechem, which
      was
      the former owner of approximately 29% of our Common Stock, for a purchase price
      of $2,309,250 and terminated the Spinoff Agreement. As additional consideration,
      William Pursley, our Chairman and Chief Executive Officer, surrendered options
      to purchase 43,000,000 shares of common stock of Xechem. Xechem retained 500,000
      shares of Common Stock, 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.





We
      were a
      party to an employment agreement with William Pursley, a director and our Chief
      Executive Officer and Chairman of the Board, at an annual base salary of
      $330,000 and annual increases and bonuses at the discretion of our Board. Mr.
      Pursley resigned effective December 31, 2006. The scheduled expiration of his
      employment agreement was March 31, 2007.





We
      were
      party to an employment agreement with Norman Barton, M.D., Ph.D., our Executive
      Vice President and Chief Medical Officer, which employment agreement had a
      scheduled expiration date of April 26, 2007 (with automatic one-year renewal
      terms) for an annual base salary of $265,000 and annual increases and bonuses
      at
      the discretion of the Board. Mr. Barton was terminated effective October 31,
      2006, and his employment agreement was terminated.





We
      were a
      party to an employment agreement with Donald Fallon, our Senior Vice President,
      Finance and Administration, Chief Financial Officer and Secretary, which
      employment agreement expired on March 31, 2007 (with automatic one-year renewal
      terms) for an annual base salary of $175,000 and annual increases and bonuses
      at
      the discretion of the Board. As of March 1, 2005, Mr. Fallon's annual base
      salary was increased to $240,000. Mr. Fallon was terminated effective October
      31, 2006, but continues to act as a consultant to the Company.





In
      December 2004, Mr. Pursley, Mr. Fallon and Dr. Barton were issued 1,247,428,
      207,905 and 454,792 shares of Common Stock, respectively, under our Founders'
      Plan.





On
      February 11, 2005, we granted a non-qualified option to Leonard Mudry, a
      director, to purchase an aggregate of 12,000 shares of Common Stock at $6.25
      per
      share, the closing price per share of our Common Stock on the OTC Bulletin
      Board
      on the date of grant. The options become exercisable as to 3,000 shares on
      each
      of August 11, 2005, February 11, 2006, February 11, 2007 and February 11,
      2008.





On
      February 11, 2005, we awarded 5,000 restricted shares of Common Stock to Leonard
      Mudry, which restrictions lapsed as to all of the shares awarded on August
      11,
      2005.





On
      July
      20, 2005, we granted a non-qualified option to purchase 10,000 shares of Common
      Stock at $2.70 per share, the closing price per share of the Common Stock on
      the
      OTC Bulletin Board on the date of grant, to John Griffin, a director, in
      accordance with the terms of the Directors Plan.





On
      September 13, 2005, we granted an option to purchase 2,000 shares of Common
      Stock at $1.02 per share, the closing price per share of the Common Stock on
      the
      OTC Bulletin Board on the date of grant, to each of Dr. Griffin and Mr. Mudry,
      our non-employee directors, for participation in our Board meetings in
      accordance with the terms of the Directors Plan.





On
      September 16, 2005, we issued 25,000 shares of Common Stock as an expense
      reimbursement and on October 7, 2005, we issued 377,359 shares of Common Stock
      as initial commitment shares and the Fusion Warrant to purchase 377,359 shares
      of Common Stock at $0.01 per share to Fusion Capital under the Stock Purchase
      Agreement.





On
      December 9, 2005, we issued a $250,000 convertible promissory note at a
      conversion price of $1.00 per share to Harbor Trust which bears interest at
      6%
      per year and matures on December 9, 2006.





On
      December 9, 2005, we issued (i) a $1,000,000 Debenture, (ii) a warrant to
      purchase 1,000,000 shares of Common Stock at $1.023 per share and (ii) 268,817
      shares of Common Stock, to Cornell Capital.





On
      December 28, 2005, we issued a $1,000,000 Debenture to Cornell
      Capital.





42
 Table
          of Contents





**ITEM
      13. EXHIBITS**





A.
      GENERAL


ExhibitNumber
              
              Description1.1
              
              Placement
                  Agent Agreement dated May 2006 attached to Current Report on Form
                  8-K
                  filed on May 26, 20062.1
              
              Certificate
                  of Ownership and Merger of CepTor Corporation into CepTor Research
                  and
                  Development Company (incorporated herein by reference to Exhibit
                  2.1 to
                  our Current Report on Form 8-K, filed on January 31, 2005 ("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 our 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 our Annual Report on Form 10-KSB for the year ended December
                  31,
                  2004 ("2004 10-KSB")4.2
              
              CepTor
                  Agreement, dated March 31, 2004 ("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 ("2004 Form 8-K"))4.3
              
              First
                  Amendment to CepTor Agreement effective April 23, 2004, by and
                  among
                  William Pursley, the Company and Xechem (incorporated herein by
                  reference
                  to Exhibit 4.2 to the 2004 8-K)4.4
              
              Second
                  Amendment to CepTor Agreement, dated December 9, 2004, by and among
                  William Pursley, the Company and Xechem (incorporated by reference
                  to
                  Exhibit 4.3 to the 2004 8-K)4.5
              
              Form
                  of Unit Warrant (incorporated by reference to Exhibit 4.4 to the
                  Company's
                  Registration Statement on Form SB-2 as filed with the SEC on February
                  11,
                  2005 ("Form SB-2"))4.6
              
              Form
                  of Amended and Restated Convertible Promissory Note (incorporated
                  herein
                  by reference to Exhibit 4.7 to the 2004 10-KSB)4.7
              
              Form
                  of Subscription Agreement (incorporated herein by reference to
                  Exhibit 4.6
                  to Form SB-2)4.8
              
              Agreement
                  between the Company and Brown Advisory Securities, LLC, dated May
                  20, 2005
                  (incorporated herein by reference to Exhibit 4.1 to the Company's
                  Registration Statement on Form SB-2 dated October 17, 2005 ("October
                  2005
                  SB-2"))
  43
 Table
              of Contents
  10.3
              
              Employment
                  Agreement, dated March 31, 2004, with Donald W. Fallon (incorporated
                  herein by reference to Exhibit 10.3 to Form SB-2)10.4
              
              Founders'
                  Plan (incorporated herein by reference to Exhibit 10.5 to the
                  SB-2)10.5
              
              2004
                  Incentive Stock Plan (incorporated herein by reference to Exhibit
                  10.6 to
                  Form SB-2)10.6
              
              Deferred
                  Stock Plan for Non-Employee Directors under the 2004 Incentive
                  Stock Plan
                  (incorporated herein by reference to Exhibit 10.7 to the 2004
                  10-KSB)10.7
              
              2006
                  Incentive Stock Plan (incorporated herein by reference to Exhibit
                  10.7 to
                  the December 31, 2005 Form 10-KSB)10.8
              
              Sublease
                  Agreement, dated March 4, 2004, by and between CepTor Corporation
                  and
                  Millennium Inorganic Chemicals, Inc. (incorporated herein by reference
                  to
                  Exhibit 10.7 to Form SB-2)10.9
              
              Exclusive
                  License Agreement, dated September 15, 2004, with JCR Pharmaceuticals
                  Company, Ltd. (incorporated herein by reference to Exhibit 10.8
                  to Form
                  SB-2)10.10
              
              Indemnification
                  Agreement, dated October 6, 2005, with William H. Pursley (incorporated
                  herein by reference to Exhibit 10.9 to the October 2005 Form
                  SB-2)10.11
              
              Indemnification
                  Agreement, dated October 6, 2005, with Norman W. Barton, M.D.
                  (incorporated herein by reference to Exhibit 10.10 to the October
                  2005
                  SB-2)10.12
              
              Indemnification
                  Agreement, dated October 6, 2005, with Donald W. Fallon (incorporated
                  herein by reference to Exhibit 10.11 to the October 2005
                  SB-2)10.13
              
              Indemnification
                  Agreement, dated October 6, 2005, with Leonard A. Mudry (incorporated
                  herein by reference to Exhibit 10.12 to the October 2005
                  SB-2)10.14
              
              Securities
                  Purchase Agreement, dated December 9, 2005, between the Company
                  and
                  Cornell Capital (incorporated herein by reference to Exhibit 10.1
                  to the
                  December 2005 8-K)10.15
              
              Side
                  Letter, dated December 9, 2005, between the Company and Cornell
                  Capital
                  (incorporated herein by reference to Exhibit 10.2 to the December
                  2005
                  8-K)10.16
              
              Investor
                  Registration Rights Agreement, dated December 9, 2005, between
                  the Company
                  and Cornell Capital (incorporated herein by reference to Exhibit
                  10.3 to
                  the December 2005 8-K)10.17
              
              Security
                  Agreement, dated December 9, 2005, between the Company and Cornell
                  Capital
                  (incorporated herein by reference to Exhibit 10.4 to the December
                  2005
                  8-K)10.18
              
              Rights
                  Agreement, dated March 7, 2006, between the Company and American
                  Stock
                  Transfer & Trust Company (incorporated herein by reference to Exhibit
                  1 to the Company's Registration Statement on Form 8-A, dated March
                  8,
                  2006)
  44
 Table
              of Contents
  10.19
              
              Term
                  Sheet, attached as Exhibit 10.1 to our Current Report on Form 8-K,
                  dated
                  May 9, 200614
              
              Code
                  of Ethics (incorporated herein by reference to Exhibit 14 to the
                  2004
                  10-KSB)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.
 
 B.
        CURRENT REPORTS ON FORM 8-K
  Current
                    Report on Form 8-K/A dated January 4, 2006Current
                    Report on Form 8-K dated January 17, 2006Current
                    Report on Form 8-K dated March 8, 2006Current
                    Report on Form 8-K dated May 3, 2006Current
                    Report on Form 8-K dated May 9, 2006Current
                    Report on Form 8-K dated June 2, 2006Current
                    Report on Form 8-K dated June 7, 2006Current
                    Report on Form 8-K dated June 29, 2006Current
                    Report on Form 8-K dated July 6, 2006Current
                    Report on Form 8-K dated July 24, 2006Current
                    Report on Form 8-K dated September 12, 2006Current
                    Report on Form 8-K dated September 14, 2006Current
                    Report on Form 8-K dated October 6, 2006Current
                    Report on Form 8-K dated October 12, 2006Current
                    Report on Form 8-K dated November 1, 2006Current
                    Report on Form 8-K dated December 15, 2006Current
                    Report on Form 8-K dated February 7, 2007Current
                    Report on Form 8-K dated March 15,
                    2007


*filed
        herewith.
 
 45
 Table
            of Contents
 
 **ITEM
        14. PRINCIPALACCOUNTANT FEES AND
        SERVICES.**
 
 Our
        principal accountant for the audit of our annual financial statements for
        our
        fiscal year ended December 31, 2006, was Bernstein & Pinchuk, LLP. There
        were no fees paid to them in 2006.
  In
        accordance with the Sarbanes-Oxley Act of 2002, the Audit Committee established
        policies and procedures under which all audit and non-audit services performed
        by our principal accountants must be approved in advance by the Audit Committee.
        As provided in the Sarbanes-Oxley Act of 2002, all audit and non-audit services
        to be provided after May 6, 2003 must be pre-approved by the Audit Committee
        in
        accordance with these policies and procedures. Based in part on consideration
        of
        the non-audit services provided by Marcum & Kliegman LLP during our 2005
        fiscal year, the Audit Committee determined that such non-audit services
        were
        compatible with maintaining the independence of Marcum & Kliegman
        LLP.
  Our
        principal accountant for the audit of our annual financial statements for
        our
        fiscal year ended December 31, 2005, and for the reviews of our quarterly
        financial statements through September 30, 2006 was Marcum & Kliegman LLP.
        The following table shows the fees paid or accrued by us to Marcum &
Kliegman LLP during the period indicated.
 
 
 **Type
                  of Service**
              
              **Fiscal
                  2006**
              
              **Fiscal
                  2005**Audit
                  Fees (1)
              
              $
              136,940
              
              $
              135,509Audit-Related
                  Fees (2)
              
              
              39,370
              
              
              64,941Tax
                  Fees (3)
              
              
              -
              
              
              -ALL
                  OTHER FEES (4)
              
              
              -
              
              
              -Total
              
              $
              176,310
              
              $
              200,450
 
 
 (1)
        Comprised of the audit of our annual financial statements and reviews of
        our
        quarterly financial statements.
 
 (2)
        Comprised of services rendered in connection with our capital raising efforts,
        registration statement and consultations regarding financial accounting and
        reporting.
  (3)
        Comprised of services for tax compliance, tax return preparation, tax advice
        and
        tax planning.
 
 (4)
        Fees
        related to other filings with the SEC, including consents.
 
 46
 Table
              of Contents
 **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
   **CEPTOR CORPORATION**Date: April
                  17, 2007
              
              /s/
                Howard
                BeckerChief
                  Executive Officer and
                  Director
                  (Principal
                    Executive Officer and
                  Principal
                    Financial Officer)
 
 
 **POWER
        OF ATTORNEY**
  In
          accordance with the Exchange Act, this Report has been signed below by
          the
          undersigned on behalf of the registrant and in the capacities and on the
          date
          indicated.
 Date: April
                    17, 2007
                
                /s/
                  Howard
                  BeckerChief
                    Executive Officer and
                    Director
                    (Principal
                      Executive Officer and
                    Principal
                      Financial Officer)
  47
 Table
            of Contents
   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.
   48