U.S.
      SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


FORM
      10-KSB





x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(D)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      fiscal year ended December 31, 2006





o
      13 OR 15(D) OF THE
      TRANSITION REPORT UNDER


SECTION
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from ______________ to _______________





Commission
      File Number 0-23788





XECHEM
                INTERNATIONAL, INC.(Name
                of small business issuer in its
                charter)




Delaware
            
            22-3284803(State
                other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
                Employer Identification Number)




New
                Brunswick Technology Center
              100
                Jersey Avenue, Building B, Suite 310, New Brunswick, New Jersey
                08901(Address
                of principal executive offices)732-247-3300(Issuer’s
                telephone number, Including Area
                Code)




Securities
      registered under Section 12(b) of the Exchange Act:





Title
                of each class
            
            Name
                of each exchange on which
                registered





Securities
      registered under Section 12(g) of the Exchange Act:





Common
                Stock, $.00001 par value(Title
                of Class)





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
xNO
o





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not
      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.


YES
oNO
x





State
      issuer's revenues for its most recent fiscal year. $202,000. State the aggregate
      market value of the voting stock held by non-affiliates computed by reference
      to
      the price at which the stock was sold, or the average bid and asked prices
      of
      such stock, as of a specified date within the past 60 days: $41,916,000 as
      of
      April 10, 2007.





The
      number of shares outstanding of our Common Stock 1,552,467,965 as of April
      1,
      2007.





DOCUMENTS
      INCORPORATED BY REFERENCE





None.





Transitional
      Small Business Disclosure Format: Yes o   No x





**Table
      of Contents**





**Page**Item
                  1.
              
              Description
                  of Business
              
              1Item
                  2.
              
              Description
                  Of Property
              
              29Item
                  3.
              
              Legal
                  Proceedings
              
              30Item
                  4.
              
              Submission
                  Of Matters To A Vote Of Stockholders
              
              30Item
                  5.
              
              Market
                  For Common Equity And Related Stockholder Matters
              
              31Item
                  6.
              
              Management's
                  Discussion And Analysis
              
              35Item
                  7.
              
              Financial
                  Statements
              
              45Item
                  8.
              
              Changes
                  In And Disagreements With Accountants On Accounting And Financial
                  Disclosure
              
              46Item
                  8A.
              
              Controls
                  and Procedures
              
              46Item
                  8B.
              
              Other
                  Information
              
              47Item
                  9.
              
              Directors,
                  Executive Officers, Promoters And Control Persons; Compliance With
                  Section
                  16(A)
                Of
                  The Exchange Act.
              
              48Item
                  10.
              
              Executive
                  Compensation
              
              50Item
                  11.
              
              Security
                  Ownership Of Certain Beneficial Owners And Management
              
              56Item
                  12.
              
              Certain
                  Relationships And Related Transactions
              
              57Item
                  13.
              
              Exhibits
              
              59


iii


**CAUTIONARY
      NOTE REGARDING FORWARD LOOKING STATEMENTS**





This
      report on Form 10-KSB contains forward-looking statements within the meaning
      of
      the Private Securities Litigation Reform Act of 1995. The forward-looking
      statements are contained principally in the sections entitled “Business” and
“Management’s Discussion and Analysis or Plan of Operation.” These statements
      involve known and unknown risks, uncertainties and other factors which may
      cause
      our actual results, performance or achievements to be materially different
      from
      any future results, performance or achievements expressed or implied by the
      forward-looking statements.




In
      some
      cases, you can identify forward-looking statements by terms such as “may,”
“should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “projects,” “predicts,” “potential” and similar expressions
      intended to identify forward-looking statements. These statements reflect our
      current views with respect to future events and are based on assumptions and
      subject to risks and uncertainties. Given these uncertainties, you should not
      place undue reliance on these forward-looking statements. We discuss many of
      these risks in this report in greater detail under the heading “Factors
      Affecting Future Performance.” These forward-looking statements represent our
      estimates and assumptions only as of the date of this report, and we do not
      assume any obligation to update any of these statements.




iv




**Part
      I**




**Item
                1.**
            **Description
                of Business**




**Business
      Development**


Xechem
        International, Inc. (“Xechem”), a Delaware corporation formed in 1994, is a
        holding company which owns all of the capital stock of Xechem, Inc., a
        development stage biopharmaceutical company engaged in the research, development
        and production of niche generic and proprietary drugs from natural sources.
        Xechem, Inc. was a subsidiary of LyphoMed, Inc. (later known as
        Fujisawa/LyphoMed, Inc.), a publicly traded company before it was acquired
        with
        all of its assets by Dr. Ramesh C. Pandey in 1990. Xechem Laboratories, Inc.
        (formed in 1993), XetaPharm, Inc. (formed in 1996), Xechem (India) Pvt. Ltd.
        (acquired in 1996), and Xechem UK Ltd. (formed in 2005) are all our
        subsidiaries. Xechem Pharmaceutical China Ltd. (formed in 2000) is an inactive
        affiliate. Xechem Pharmaceuticals Nigeria Limited (formed in 2002) is currently
        wholly-owned by us. Xechem’s principal product under development is
        NICOSANTM/HEMOXINTM which has shown efficacy in the prophylactic management of
        Sickle Cell Disease (SCD). The development and production of NICOSANTM/HEMOXINTM
at this time is being conducted through Xechem Nigeria, Xechem Research
        Laboratories of Xechem, Inc. and Children’s Hospital of Philadelphia (CHOP).
  In
        2002,
        Xechem acquired the exclusive worldwide rights to produce, market and sell
        the
        sickle cell drug formerly known as NIPRISANTM under an exclusive licensing
        agreement with the Federal Republic of Nigeria’s National Institute for
        Pharmaceutical Research & Development (NIPRD). The medicine, to be produced
        at a state-of-the-art facility being constructed in Abuja, Nigeria by Xechem
        Nigeria, will be marketed and sold in African continent under the name NICOSANTM.
        In the United States and rest of the world, the product will be known as
        HEMOXINTM. In February 2005, Xechem Nigeria signed a long-term lease at a nominal
        cost to build a production facility on approximately nine acres of land in
        Science Village owned by Sheda Science and Technology Complex (SHESTCO),
        Abuja,
        a parastatal of the Federal Ministry of Science and Technology, Abuja, Nigeria.
        Currently, we have invested over $7,000,000 in the development of the technology
        for the production of NICOSANTM and building a modern commercial scale production
        facility. We have also acquired equipment and other supplies for the facilities,
        that we believe will be the only cGLP and cGMP facility in Nigeria. Xechem
        Nigeria plans to develop this facility into a self-sufficient five-building
        complex for the R&D and commercial production of NICOSANTM/HEMOXINTM. Xechem
        Nigeria has developed the formulation which has shown efficacy in the treatment
        of Sickle Cell Disease. Xechem Nigeria must further refine and standardize
        this
        formulation for consistent commercial scale production quantities. The cost
        of
        completing the build out, equipping, and opening the facility are projected
        to
        be in excess of $20,000,000.


NIPRD
      conducted Phase I, IIa and IIb clinical trials in Nigeria using its staff as
      volunteers. The drug materials of the NICOSANTM dosage had no adverse effect on
      the volunteers in the identified clinical parameters (blood chemistry, liver
      functional status and kidney functional status). Results from the clinical
      trials indicated that approximately 90% of the participants experienced no
      major
      SCD crises since entering the program. The approximately 10% who did experience
      one or more SCD crises report that the crises were both less frequent and less
      severe than those they had previously experienced. These figures vary slightly
      from the results of a Phase IIb trial of NICOSANTM, conducted at an army base
      hospital in Yaba, Lagos, Nigeria between 1996 and 1997, wherein 73% of the
      30
      patients who participated in the study experienced no crisis during the 12
      month
      trial period and the remaining 27% experienced less frequent and less severe
      crises. Certain patients also exhibited the benefits of positive weight gain,
      as
      well as, reduced or eliminated sickling tendencies with resulting healthy liver
      and kidney functioning. Two patients on NICOSANTM developed non-itching macular
      rashes, three to four days after commencing treatment. These rashes disappeared
      two to five days later. Six patients experienced headaches. No other side
      effects were observed or reported during the trial period. The preliminary
      results indicate that NICOSANTM/HEMOXINTM appear to be safe and effective for
      prophylactic management of SCD.




1




The
        Drug
        Master File (DMF) dossier for NICOSANTM for adults and pediatrics was submitted
        for registration approval to the National Agency for Food and Drug
        Administration and Control (NAFDAC) Abuja, Nigeria, which is Nigeria’s
        regulatory agency. In July 2006, NAFDAC approved the marketing and sale of
        NICOSANTM for the prophylactic management of SCD. The approval is for an initial
        term of two years, which will allow Xechem to complete confirmatory Phase
        III
        clinical trials in Nigeria. The company faces no restrictions on its ability
        to
        market and sell the drug in Nigeria. We are also preparing our Investigational
        New Drug (IND) application for the drug HEMOXINTM to the FDA so that we may begin
        clinical trials in U.S. hospitals, for eventual sale of the drug in the United
        States. We have obtained the “orphan drug” designation for HEMOXINTM from the
        FDA, which is granted only for diseases that afflict less than 200,000 people
        in
        the United States. The orphan drug status brings many advantages that could
        assist us in obtaining FDA approval for the drug and enhance its commercial
        potential. Orphan drug status provides us with various incentives, including
        the
        waiver of regulatory filing fees, access to grant funding for non-clinical
        research to generate the required data for marketing approval, and seven
        years
        of marketing exclusivity for the drug once approved by the FDA. Xechem must
        complete the pre-clinical and Phase I, Phase II and Phase III clinical trials
        in
        the United States in order to obtain FDA approval. Orphan drug status has
        also
        been obtained from the European Medicine Evaluation Agency (EMEA), the European
        Union’s counterpart to the FDA. The World Health Organization policy on herbal
        medicine provides that when a plant-based product is safe and indicates
        efficacy, it can be subsequently standardized and formulated into suitable
        dosage form for clinical trials.




NICOSANTM/HEMOXINTM
      are not the only promising SCD drugs in our product pipeline. In late 2005,
      we
      acquired the exclusive, worldwide licensing rights to a new five-member
      heterocyclic anti-sickling compound known as 5-HMF from Virginia Commonwealth
      University (VCU), Richmond, Virginia. Research has shown that the 5-HMF compound
      is not only a natural product with very little, if any, toxicity, it also
      appears to be an effective anti-sickling agent which has shown high affinity
      for
      hemoglobin and is very active in genetically modified transgenic (Tg) mice.
      The
      new compound further expands our existing portfolio of products to be used
      in
      the fight against SCD. In March 2006, we submitted our orphan drug designation
      application for 5-HMF and received the designation in June 2006 from the FDA.
      In
      October 2006, VCU received a notice of patent allowance relating to the method
      of treating SCD with 5-HMF.




We
        continue to apply our expertise in the research and development of other
        compounds using traditional medicinal plants, microbial fermentation or
        semi-synthesis from sources derived from China, India, and Nigeria to produce
        anti-cancer, anti-fungal, anti-viral (including anti-AIDS), anti-inflammatory,
        anti-aging and memory enhancing compounds. A number of these efforts have
        been
        carried out in cooperation with the National Cancer Institute (NCI), the
        National Institute of Mental Health (NIMH), the National Heart, Lung and
        Blood
        Institute (NHLBI) of the National Institutes of Health (NIH).
  **Treatment
        Of Sickle Cell Diseases**




Based
      on
      extensive and persuasive scientific evidence, including clinical trials
      conducted under NIPRD’s auspices, and work done at the National Heart, Lung and
      Blood Institute - Sickle Cell Disease Reference laboratory (NHLBI - SCDRL)
      at
      Children’s Hospital of Philadelphia (CHOP), we believe that NICOSANTM/HEMOXINTM will
      prove to be a breakthrough treatment for sickle cell sufferers in Africa and
      worldwide. Though NICOSANTM/HEMOXINTM do not cure Sickle Cell Disease (SCD), the
      medicines greatly reduce the degree of “sickling” of the affected red blood
      cells, which in turn eliminates or greatly reduces the devastating secondary
      consequences most patients succumb to, including strokes, kidney and liver
      failure, and extremely painful episodes known as “crises.”




2




Sickle
      Cell Disease (SCD) is the genetic blood disorder caused by an abnormality in
      the
      hemoglobin molecule. The disease causes the production of abnormal hemoglobin
      which contains portions that stick together after the release of oxygen. This
      phenomenon produces stiff, abnormally shaped red blood cells (or sickle-shaped
      cells) which do not flow freely through blood vessels. These abnormally shaped
      cells create clogs in the blood vessels, which in turn cut off the flow of
      normal hemoglobin and oxygen to the body. The result is severe pain or “crises”,
      ulcers, blindness and organ and tissue damage and break down (resulting in
      stroke and acute chest pain). Furthermore, the body’s immune system recognizes
      the abnormally shaped sickle cells and attacks and destroys them, often leaving
      the body with an insufficient number of normal oxygen-carrying red blood cells,
      resulting in an anemic condition (fatigue and enhanced susceptibility to
      infection).




Sickle
        Cell Disease is common among people whose ancestors come from sub-Saharan
        Africa. In Nigeria alone, over 4 million people suffer with SCD and 26 million
        carry the SCD gene. There are approximately 800 million persons living on
        the
        African continent, of which approximately 130 million carry the SCD gene
        and
        over 10 to 12 million suffer from the disease. There are also high incidences
        of
        the disease in South and Central America, Cuba, Saudi Arabia, India, Turkey,
        the
        United States, Greece and Italy. In the United States more than 80,000 people
        suffer from the disease. The disease appears in approximately 1 in every
        500
        African-American births and 1 in every 1,000-1,400 Latino-American births.
  Infants
        born in the United States are screened for the disease, and if it is detected,
        they are treated with penicillin. Painful symptoms are treated with painkillers.
        The only FDA approved drug treatment for SCD is Hydroxyurea (HU), which is
        said
        to prevent painful crises from occurring. The drug is sold under the trade
        name
        HydreaTM and has also been used in the treatment of leukemia and certain other
        cancers. Hydrea treats the painful symptoms of SCD and is not a cure. Hydrea
        induces the synthesis of fetal hemoglobin, which inhibits the production
        of the
        abnormal sickle cells. Not all patients respond to Hydrea treatment and certain
        others experience negative side effects.
  The
        other
        known cure for SCD is a bone marrow transplant to replace defective red blood
        cells with donor healthy cells. Experimental treatments include butyrate
        to
        stimulate production of fetal hemoglobin, which is not affected by SCD and
        gene
        therapy. In 1995, Alpha Therapeutic Corporation entered into a licensing
        agreement with Ventex Pharmaceuticals to develop an orally deliverable compound
        to treat the disease. Furthermore, Supergn currently has Decitabine in Phase
        III
        clinical studies for the treatment of tumors, leukemia and SCD.


**Competition**




Competition
      within the pharmaceuticals industry is intense. Principal factors of competition
      include therapeutic efficacy, side effects, profile, ease of use, physician
      acceptance, patient compliance, safety, cost, manufacture, distribution, price
      and marketing. Treatments exist for Sickle Cell Disease, cancer, viruses and
      fungi. Additional therapeutics are under development, including other naturally
      sourced pharmaceuticals.




**Sources
      And Availability Of Raw Materials**




There
      is
      a lack of data to document the influence of raw materials (i.e. plant material
      quality, age, time of harvest, location, soil quality, preparation, handling,
      etc.) on the production of NICOSANTM/HEMOXINTM. We have initiated collaborations
      with Rutgers, the State University of New Jersey and G.B. Pant University of
      Agriculture and Technology at Pantnagar, Uttarakhand, India to perform a study
      of the sustainability of raw material generation in adequate quantity and
      quality that could help Xechem in producing high quality NICOSANTM/HEMOXINTM on a
      commercial basis.


3





**Patents
      And Proprietary Technology**




We
      have
      been granted the following patents on various technologies and
      products:




UNITED
      STATES PATENTS




U.S.
                PATENT
              NUMBER
            
            TITLE
                OF PATENT1.
            
            5,159,002
            
            “Method
                for Purifying Dermostatin A and B”
            
            19922.
            
            5,210,226
            
            “Method
                for Separating Purifying Polyene Macrolide Antibiotics”
            
            19933.
            
            5,654,448
            
            “Isolation
                and Purification of Paclitaxel from Organic Matter containing Paclitaxel,
                Cephalomannine and Other Related Taxanes”
            
            19974.
            
            5,840,748
            
            “Dihalocephalomannine
                and Methods of Use Therefor”
            
            19985.
            
            5,854,278
            
            “Preparation
                of Chlorinated Paclitaxel Analogues and Their Use Thereof as Antitumor
                Agents”
            
            19986.
            
            5,807,888
            
            “Preparation
                of Brominated Paclitaxel Analogues and Their Use as Effective Antitumor
                Agents”
            
            19987.
            
            5,840,930
            
            “Method
                for Production of 2”, 3” Dihalocephalomannine”
            
            19988.
            
            5,817,510
            
            “Device
                and Method for Evaluating Microorganisms”
            
            19989.
            
            Des.
                411,308
            
            “Covered,
                Multi-Well Assay Plate”
            
            199910.
            
            6,177,456
            
            “Monohalocephalomannines
                having Anticancer and Antileukemic Activity and Method Preparation
                Therefor”
            
            200111.
            
            6,765,015
                B2
            
            “Halogenated
                Derivatives Paclitaxel”
            
            2004




4


INTERNATIONAL
      PATENTS




1.
            Pandey,
                R.C. and L. Yankov, "Isolation and Purification of Paclitaxel from
                Organic
                Matter Containing Paclitaxel, Cephalomannine and Other Related Taxanes"
                South African Letters Patent # 97/6834, July 28,
                1999.




2.
            Pandey,
                R.C., L.K. Yankov, R. Nair and A. Poulev, "Paclitaxel Analogs, Preparation
                and Use as Antitumor Agents" South African Letter Patent #97/6833,
                July
                28, 1999.




3.
            Pandey,
                R.C., L.K. Yankov, "Isolation and Purification of Paclitaxel and
                Cephalomannine" New Zealand Letter Patent # 321499, August 13,
                1999.




4.
            Pandey,
                R.C., L.K. Yankov, "Isolation and Purification of Paclitaxel from
                organic
                Matter Containing Paclitaxel, Cephalomannine and other Related Taxanes",
                Australian Letter Patent # 720719, September 21,
                2000.




5.
            Pandey,
                R.C., L.K. Yankov, R. Nair and A. Poulev, "Paclitaxel Analogs, Preparation
                and Use as Antitumor Agents", Australian Letter Patent #724929, January
                25, 2001.




6.
            Pandey,
                R.C. and L.K. Yankov, “Isolation and Purification of Paclitaxel and
                Cephalomannine,” Mexican Letter Patent # 203,824, August 20,
                2001.




7.
            Pandey,
                R.C., L.K. Yankov, R. Nair and A. Poulev, "Paclitaxel Analogs, Preparation
                and Use as Antitumor Agents", Mexican Patent, September 4,
                2001.




8.
            Pandey,
                R.C., L.K. Yankov, R. Nair and A. Poulev, "Paclitaxel Analogs, Preparation
                and Use as Antitumor Agents" New Zealand Letter Patent #326527, June
                8,
                2000.




9.
            Pandey,
                R.C., L.K. Yankov, “Procedimiento Para Aislar Y Purificar El Paclitaxel
                Del Material Organico Y Un Metodo Para Separar El Paclitaxel Desdeuna
                Mezcla Que Contiene Paclitaxel Y Cefalomanina. El Paclitaxel Es Una
                Droga
                Antineoplasica Para Quimioterapia”, Republic de Chile Letters Patent No.
                41.558, August 20, 2002.




10.
            Pandey,
                R.C., L.K. Yankov, "Isolation and Purification of Paclitaxel and
                Cephalomannine" Canadian Patent #2,210,972, October 21,
                2003.




11.
            Pandey,
                R.C., L.K. Yankov, "Isolation and Purification of Paclitaxel and
                Cephalomannine" Chinese Patent #ZL96193149.3, April 2,
                2003.




12.
            “Isolation
                and Purification of Paclitaxel and Cephalomannine” European Patent
                #0809639, July 19, 2004.




13.
            “Paclitaxel
                analogs, preparation and use as anti-tumor agents” Korean Patent #0474792,
                February 24, 2005.




Though
      we
      believe we have conducted an exhaustive patent search, there can be no assurance
      that patents do not exist or could not be filed which would have an adverse
      effect on our ability to market our products. If other companies were to
      successfully bring legal actions against us claiming patent or other
      intellectual property right infringements, in addition to any potential
      liability for damages, we could be required to obtain a license to continue
      to
      use the affected process or to manufacture or use the affected product or may
      be
      required to cease using such products or processes. There can be no assurance
      that we would prevail in any such action or that any license required under
      any
      such patent would be made available on acceptable terms, or at all. There could
      be significant litigation in the industry regarding patent and other
      intellectual property rights. If we become involved in such litigation, it
      could
      consume a substantial portion of our financial and human resources, regardless
      of the outcome of such litigation.




5




We
      also
      rely on trade secrets and proprietary know-how, which we seek to protect, in
      part, by confidentiality agreements with our employees, consultants and others.
      There can be no assurance that these agreements will not be breached, that
      we
      would have adequate remedies for any breach or that our trade secrets will
      not
      otherwise become known or independently developed by competitors.




**Scientific
      Advisory Board**




We
      have
      established the Scientific Advisory Board ("SAB"), which is composed of
      scientists, researchers, and clinicians with recognized expertise in our areas
      of research. Certain members of the SAB are asked from time to time to review
      our research programs, advise us with respect to technical or clinical matters,
      and recommend personnel. The advisory board functions solely in an advisory
      capacity and does not have any legal oversight responsibility nor do the members
      acting individually or as a board have the authority to act on our
      behalf.




The
      following are the members of the SAB:




**ELIAS
      J. ANAISSIE, M.D.**, is a Professor of Medicine, Director of Clinical
      Affairs of the Myeloma and Transplantation Research Center and the University
      of
      Arkansas School of Medical Sciences, Little Rock, Arkansas. Before joining
      the
      University of Arkansas, Dr. Anaissie was an Associate Internist and Associate
      Professor of Medicine in the Section of Infectious Diseases, Department of
      Medical Specialties, at the University of Texas System Center M.D. Anderson
      Hospital and Tumor Institute, Houston, Texas.




**NITYA
      ANAND PH.D., F.N.A.**, is a Scientist Emeritus at the Central Drug
      Research Institute in Lucknow, India, of which he was the Director between
      1974
      and 1984. He was previously the Senior Scientist of the Indian National Science
      Academy. Dr. Anand has been involved in medicinal science research for over
      40
      years, during which he has worked in the areas of drug design, drug synthesis,
      mode of action, and metabolism of drugs, and in evolving new approaches to
      therapeutics. He was responsible for the discovery of many new drugs, which
      include Centchroman, a contraceptive, Centbutindole, a neuroleptic,
      Centbucridine, a local anesthetic and Gugulipid, a lipid-lowering agent. Dr.
      Anand received his Ph.D. from Bombay University in 1948 and from Cambridge
      University in 1980.




**BRIAN
      ARENARE, M.D.**, is currently a physician at NASA's Johnson Space Center
      in Houston, Texas, providing clinical and medical research support to the
      nation's space program. He holds an M.D. degree from Yale University, an M.B.A.
      from Columbia University, and an M.P.H from the University of Texas. Beginning
      with The Wilkerson Group in 1992, Dr. Arenare has been strategy consultant
      and
      advisor to the pharmaceutical and medical product industries for the past
      decade. He has also held a number of clinical and academic appointments,
      including attending physician at Beth Israel Medical Center and Lenox Hill
      Hospital in New York. He currently is clinical assistant professor at the
      University of Texas Medical Branch. Dr. Arenare was one of our directors from
      1994 to 1997.




**PROF.
      JOAN W. BENNETT, PH.D.**, is a specialist in the generic and secondary
      metabolism of filamentous fungi. A graduate of the University of Chicago, Dr.
      Bennett is currently a Professor in the Department of Cell and Molecular Biology
      at Tulane University in New Orleans, Louisiana. Active in a number of
      professional societies, she has been Vice President of the British Mycological
      Society, a Board member of the Society for Industrial Microbiology, and is
      a
      Past President of the American Society for Microbiology. She is currently
      co-editor of The Mycota and Advances in Applied Microbiology, an Associate
      Editor of Mycologia, and Mycology Series Editor for Marcel Dekker. She has
      co-edited six books, and published well over 100 research papers, chapters
      and
      reviews.




6




**WILLIAM
      T. BRADNER, PH.D.**, is an Adjunct Professor for the Departments of
      Chemistry and Biology at Syracuse University and is also the President of
      Research Advisors, an independent consulting firm. Dr. Bradner has published
      over 194 articles, book chapters, abstracts, and patents. He was previously
      Director of Administration and Deputy Director of Preclinical Anti-Cancer
      Research at Bristol-Myers Squibb. Dr. Bradner received his Ph.D. from Lehigh
      University in 1952.




**PROF.
      GEOFFREY A. CORDELL, PH.D.**, is a Professor and former administrator at
      The College of Pharmacy, University of Illinois at Chicago. He has lectured
      throughout the world on the isolation of biologically active natural products
      and on the future of drug discovery from plants. He has published over 480
      scientific papers and reviews and has received a number of fellowships and
      awards. He received his Ph.D. from the University of Manchester in
      1970.




**PROF.
      SUKH DEV, PH.D., D.SC., F.N.A.**, is a visiting Professor at the Centre
      for Biomedical Research, University of Delhi, India and has studied the organic
      chemistry of natural products and Ayurvedic medicinal plants for more than
      40
      years. He has held a Research Professorship at the Indian Institute of
      Technology in Delhi (1988 - 1992), Director of the Malti-Chem Research Center
      in
      Nandesari, Varodara, India (1974 - 1988) and has been a Visiting Professor
      at
      the Stevens Institute of Technology, the University of Georgia, and the
      University of Oklahoma. He is a recipient of several awards including the Ernest
      Guenther Award (1980) of the American Chemical Society, and the Third World
      Academy of Sciences Award in Chemistry (1988). He has published over 350
      scientific papers, books, and chapters and holds over 50 patents. He received
      his Ph.D. and D.Sc. from the Indian Institute of Science in 1948 and 1960,
      respectively.




**PROF.
      SUN HAN-DONG, PH.D.**, is a professor of Natural Product Chemistry at the
      Kunming Institute of Botany, the Academy of Sciences of China. He was previously
      the Director of the Kunming Institute of Botany. Dr. Sun Han-Dong is known
      for
      his academic achievements on ent-kauranoids, taxoids, cumarins, and phenolic
      constituents. He has published over 350 papers and received nineteen awards
      in
      the People's Republic of China for his research achievements, including the
      Second and Third Award of Science and Technology from the Academy of Sciences
      of
      China and Yunnan Province and the First Award of Science and Technology of
      Kunming City.




**ALLEN
      I. LASKIN, PH.D.**, is President of Laskin/Lawrence Associates. He has
      previously served as the Vice President of Research and Development and Chief
      Scientific Officer of Ethigen Corporation, President of Matrix Research
      Laboratories and Head of bioscience research at Exxon Research and Engineering
      Company. Among his honors, Dr. Laskin has received the Charles Thom Research
      Award, presented by the Society for Industrial Microbiology. His work in
      microbial transformations led to two dozen patents and numerous publications
      while working at the Squibb Institute for Medical Research and Exxon. Dr. Laskin
      is the Senior Editor of The Journal of Industrial Microbiology and Co-Editor
      of
      Advances in Applied Microbiology. Dr. Laskin received his Ph.D. from the
      University of Texas in 1956.




**PROF.
      ZHANG LI-HE, PH.D.**, is Professor and Director of National Key
      Laboratory of Natural and Biomimetic Drugs, School of Pharmaceutical Sciences
      at
      Peking University of the People's Republic of China. He has studied for over
      two
      decades the chemistry of nucleosides, nucleotides, and anti-tumor and anti-viral
      drugs and has published over 150 scientific papers in these areas. He has been
      a
      recipient of the National Scientific Research Excellence Award from the Science
      and Technology Commission and The Ministry of Education of the People's Republic
      of China and the Science and Technology Prize from the Beijing Government.
      He
      received the Otani Prize and an honorary Ph.D. from Hoshi University, Japan
      in
      1988 and 1990, respectively. He was awarded the 12th Edgar Snow Professorship
      by
      the University of Missouri-Kansas City, USA in 1993. He received the Millennium
      Pharmaceutical Scientist Award from FIP in 2000.




7




**RENUKA
      MISRA, PH.D.**, is currently our Director of Natural Products Research
      and Development and is a guest research scientist/consultant at NIA and NIH
      engaged in the study of natural products, as well as alternative and
      complimentary medicines (nutraceuticals) for their validity of use, efficacy
      and
      quality control, including Ayurvedic substances and their anti-aging and memory
      enhancing activities. She has studied the chemistry of herbal and bioactive
      natural products for over two decades. She has occupied Research and Academic
      positions at a number of research centers including the University of Nebraska,
      North Carolina State University, the University of Toronto, the University
      of
      Illinois, John Hopkins University and the NCI-Frederick Facility. Dr. Misra
      received her Ph.D. from the National Chemical Laboratory, Pune, India in
      1965.




**PROF.
      LESTER A. MITSCHER, PH.D.**, is currently the University Distinguished
      Professor and former Chairman of the Department of Medicinal Chemistry at the
      University of Kansas, one of the nation’s premier research institutions for
      chemistry. Among his past accomplishments, he has served on the Senior Advisory
      Council of G.D. Searle & Co., and has been the Chairman of the Biological
      and Natural Products Study Section for the NIH, as well as Chairman of the
      American Society for Pharmacognosy. Dr. Mitscher received his Ph.D. from Wayne
      State University in 1968. Dr. Mitscher was a director of ours from 1994 to
      1997.




**PROF.
      OTTO J. PLESCIA, PH.D.**, Professor Emeritus of Immunology, Waksman
      Institute, Rutgers University, is currently Adjunct Professor of Medical
      Microbiology & Immunology at the University of South Florida, College of
      Medicine, Tampa, Florida. His main research interests relate to the pathogenesis
      of virus and cancer induced immunodeficiency, and the development of
      immunomodulating drugs to treat such immunodeficiencies. He has served on the
      Advisory Boards of several immunological journals, is a member of the American
      Association of Immunologists and other professional societies, and has published
      extensively on the subject of acquired immunodeficiency. He received his Ph.D.
      from Cornell University in 1947.




**C.
      L. PROPST, PH.D.**, is President and CEO of the Texas Biotechnology
      Foundation. Previously she was Founder and Executive Director of the Center
      for
      Biotechnology, and Director of the Graduate Program in Biotechnology, at
      Northwestern University. She has also served as President and CEO of Affiliated
      Scientific, Inc., as Corporate Vice President, Research and Development
      Worldwide for Flow General, Inc., as Divisional Vice President, Research and
      Development for Ayerst Laboratories, American Home Products, and as Head of
      Microbial and Molecular Biology for Abbott Laboratories. Dr. Propst received
      her
      Ph.D. from Yale University in 1973.




**PROF.
      FEDERICO ARCAMONE, PH.D.**, received a "Diplome d'etudes superieures de
      sciences physiques de l'Universite de Paris (1952) and a "Libera Docenza" in
      biological chemistry in Rome (1962). He has been active in the field of natural
      products and antibiotic research, drug metabolism and organic synthesis,
      becoming Head of Chemical R&D at Farmitalia, Milan in 1973. In 1987 was
      Chairman of the Research Division of the Menarini Company (Florence, Italy).
      From 1997 he is associated with the National Research Council, Italy. His
      achievements include the discovery and development of the antitumor
      anthracyclines doxorubicin, epirubicin, idarubicin and their analogs, the
      structure elucidation and synthesis of new antibiotics, the development of
      new
      ergoline drugs and the synthesis of glycopeptides, penem derivatives and DNA
      conjugates.




8




Prof.
      Arcamone is author and co-author of over 200 research papers and reviews, over
      100 patents and has been an active lecturer in different countries, and has
      been
      associated as a "contract professor" with the Universities of Bologna, Parma
      and
      Milan. He has received the Bristol-Myers award for Cancer Chemotherapy, (1981),
      the Gold Medal of the "Academia delle Scienze detta dei XL" (1982), and the
      Bruce Cain award of the American Ass. Of Cancer Res. (1985), the Medal of the
      University of Florence (1992), the Gold Medal of the Italian Federation of
      Chemical Industries (1994), the Medal of the Italian Chemical Society,
      Carbohydrate Division (2000), and other scientific recognition. Prof. Arcamone
      is a member "emeritus" of the American Chemical Society, member Italian Chemical
      Soc. of the Am. Ass. Of Cancer Research, Am. Soc. of Pharmacognosy, Am. Soc.
      of
      Microbiology, and Int. Society for the Study of Xenobiotics.




**Sickle
      Cell Research, Efficacy, Marketing Advisory Board**




We
      have
      established the Sickle Cell Research, Efficacy, Marketing Advisory Board, which
      is composed of distinguished individuals from the fields of pharmaceutical
      sales
      and marketing, urban marketing, international consulting, professional
      networking, entertainment, academia and business. Certain members of the
      advisory board may be asked from time to time to review and comment upon our
      business and marketing strategies. The advisory board functions solely in an
      advisory capacity and does not have any legal responsibilities, nor do the
      members, acting individually or as a board, have the authority to act on our
      behalf. The names and brief biological profiles of the charter members are
      set
      forth below:




**VINCENT
      A. CARTER**, **MBA** is an experienced pharmaceutical
      industry professional involved in the healthcare industry over the last nineteen
      years. In 2004, Mr. Carter joined MedImmune, Inc., which manufactures a
      monoclonal antibody used in premature babies. Mr. Carter is an active member
      of
      the Healthcare Committee for One Hundred Black Men of New York.




**DESIREE
      V. DELGADO** is President and Chief Executive Officer of R2Network.net,
      Ltd., a DelzBrük Company, a general market media company offering a full-range
      of services to support the advertising, marketing and public relations process.




**DR.
      GEORGE C. FRASER** is Chairman and CEO of FraserNet, Inc., headquartered
      in Cleveland, Ohio, which is the publisher of the award-winning SuccessGuide
      Worldwide; The Networking Guide to Black Resources, which is published annually.
      Dr. Fraser is the author of two books, the critically acclaimed best sellers
      Success Runs In Our Race: The Complete Guide to Effective Networking in the
      African American Community and Race for Success: The Ten Best Business
      Opportunities for Blacks in America. Dr. Fraser spent seventeen years in
      management with Procter & Gamble, United Way, and Ford Motor Company.




**GLENDA
      BASKIN GLOVER, Ph.D., CPA, JD** is the Dean of the School of Business at
      Jackson State University in Jackson, Mississippi. She is a Certified Public
      Accountant, an attorney and a higher education administrator. She holds a Ph.D.
      in economics and finance, and is one of two African American women to hold
      the
      economics Ph.D.-CPA-JD combination in the nation.




**MARCELLUS
      GRACE, Ph.D.** has served as Professor of Pharmacy Administration and as
      the Associate Dean of the School of Pharmacy in the College of Pharmacy, Nursing
      and Allied Health Sciences at Howard University in Washington, DC since July
      2004. He previously served as Dean and Professor of Pharmacy Administration
      in
      the College of Pharmacy at Xavier University of Louisiana in New Orleans, LA.




9




**NADINE
      B. HACK, MPA, MALS** is the Founder and President of beCause Global
      Consulting, Inc., which is a global consulting firm that conceives, develops,
      facilitates and executes the cause-related strategies and initiatives of
      corporate and nonprofit clients to build awareness of and support for
      humanitarian efforts. Ms. Hack has extensive experience with the United Nations,
      where she served as New York City Commissioner for the United Nations, Consular
      Corps and International Business, the city’s senior official liaison with the
      world’s largest diplomatic and business communities. The Boards on which she
      currently serves include the Desmond Tutu Peace Foundation (President),
      Africa-America Institute (Vice Chair), World Policy Institute, International
      League for Human Rights, and Synergos Institute. She has Master Degrees from
      the
      John F. Kennedy School of Government at Harvard University (MPA) and the
      Graduate Faculty of Political and Social Science at New School University
      (MALS).




**J.
      WAYMAN HENRY III** has over ten years of experience in financial
      analysis, contract negotiations and marketing. He is Co-Founder and Vice
      President of Business Development of E-Merge International in Atlanta, GA,
      where
      he oversees all of the firm’s business operations in sports marketing,
      entertainment representation, National Football League apparel, event planning
      and intellectual property development.




**WALLYE
      INESE HOLLOWAY** is a Vice President and Account Group Supervisor of
      Cline Davis & Mann, a leading and award winning pharmaceutical marketing,
      brand development and advertising agency in New York City, where she has managed
      marketing and brand development strategies for large pharmaceutical companies,
      including Pfizer and Amgen since June 2002. Prior to joining Cline, Davis &
Mann, Ms. Holloway worked in similar leadership capacities over a period of
      seven years in New York City with several pharmaceutical marketing and brand
      management firms, including KPR, Sandler Science, Lowe McAdams Healthcare and
      FCB Healthcare.




**STEPHEN
      H. KOLISON, Jr., Ph.D**. is the Dean and Research Director of the
      Institute of Agricultural and Environmental Research at Tennessee State
      University in Nashville, TN. His international experiences include research
      conducted in the Republic of Trinidad and Tobago, Jamaica, and Ghana, and other
      professional activities carried out in Belgium, Brazil, Finland, and The
      Netherlands. Dr. Kolison, Jr. obtained his Ph.D. and M.S. degrees in Forest
      Economics from Iowa State University of Science and Technology and his B.Sc.
      degree in General Forestry from the University of Liberia. In November 2004,
      Dr.
      Kolison assumed the role of Chair and Chief Executive Officer of the Association
      of Research Directors, Inc.




**KOFI
      LOMOTEY, Ph.D.** was recently appointed as the Provost and Executive Vice
      President at Fisk University. He was previously a Senior Fellow at the American
      Association of State Colleges and Universities. He is the former President
      of
      Fort Valley State University in Fort Valley, GA. **** Prior
      to
      that, he was at Medgar Evers College of The City University of New York, where
      he was the Senior Vice President and Provost. Dr. Lomotey is the editor,
      co-editor or author of seven books and has published numerous articles and
      book
      chapters. Dr. Lomotey holds a B.A. degree from Oberlin College in Economics,
      a
      M.Ed. degree from Cleveland State University in Elementary Curriculum, and
      obtained his M.A. and Ph.D. degrees from Stanford University.




**TAMARA
      NEW, M.D**. is the Director of the Comprehensive Sickle Cell Center at
      Harlem Hospital Center, as well as the Director of the Pediatric Residency
      Program, Director of the Pediatric Hematology-Oncology of Harlem Hospital Center
      and Clinical Director of the third year medical student Pediatric Clerkship
      program. Dr. New obtained her Doctor of Medicine degree from Mount Sinai School
      of Medicine, New York, NY and her BA in Chemistry from Smith College,
      Northampton, MA.




10




**DAKOTA
      PIPPINS, MBA** is the Founder and CEO of Pippins Strategies, LLC, a
      marketing consulting firm that advises large corporations on strategies for
      attracting Urban consumers. Mr. Pippins is an Adjunct Assistant Professor at
      New
      York University where he previously served for five years as Director of NYU’s
      Management Institute and currently teaches a course on Urban Marketing
      Strategies. Mr. Pippins also serves on the Board of Directors of Hormel Foods
      Corp.




**MARCY
      STREET, M.D.** is the owner of Doctor’s Approach Dermatology & Laser
      Center in Lansing, MI, and is a Member of the Michigan Board of Medicine &
Disciplinary Committee. Dr. Street has been in private practice since 1991
      as a
      Medical Dermatologist, Skin Cancer Specialist and Mohs Surgeon with a CLIA
      approved Mohs surgery laboratory. Dr. Street is also a Clinical Instructor
      in
      Michigan State University’s Department of Internal Medicine, where she has
      lectured to medical students and residents on topics in general and surgical
      dermatology since 1991. Dr. Street received her M.D. from the University of
      Illinois College of Medicine in Chicago, IL.




**Government
      Approval**




The
      researching, developing, manufacturing and marketing of product in the United
      States is subject to substantial regulation by the United Stated Food and Drug
      Administration, and equivalent government bodies in other countries. These
      government agencies regulate the research and development activities and the
      testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
      approval, advertising and promotion of product. Historically, it takes 7-10
      years to take a product from the laboratory to market.




Prior
      to
      marketing a pharmaceutical product for other than research purposes, a company
      must submit a Drug Master File (DMF) to the FDA in order to obtain overall
      approval of the facility as a manufacturer of pharmaceuticals and a DMF in
      order
      to obtain approval for the process of manufacturing such products. Prior to
      manufacturing and marketing, a product must undergo: (i) preclinical testing
      including stability studies and animal testing; (ii) submission of an
      Investigational New Drug (IND) application, which must become effective before
      clinical trials may begin; (iii) successful initiation and completion of human
      clinical trials to establish the safety and efficacy of the proposed drug in
      its
      intended application; and (iv) FDA approval of the New Drug Application (NDA).
      Certain toxicity tests may be avoided if the product has previously been
      approved in another dosage form.




Clinical
      trials are normally conducted in three sequential phases that may overlap.
      Phase
      I involves the initial introduction of the drug into healthy human subjects
      where the product is tested for safety, dosage tolerance, absorption, metabolism
      distribution and excretion. Phase II involves studies in a limited patient
      population in order to determine: (i) the efficacy of the product for specific,
      targeted indications; (ii) dosage tolerance and optimal dosage; and (iii)
      possible adverse side effects and safety risks. Once Phase II studies
      demonstrate that the product is effective and has an acceptable safety profile,
      Phase III trials are begun to further evaluate dose size and clinical efficacy
      while further testing for safety in an expanded patient population at
      geographically dispersed clinical study sites. The company and/or the FDA may
      terminate the clinical trials if at any point in the process it is determined
      that the clinical subjects are exposed to an unacceptable health risk, among
      other reasons.




The
      results of the product development, pre-clinical studies and clinical studies
      are submitted as part of the NDA for FDA approval. The FDA may deny an NDA
      if
      applicable regulatory criteria have not been satisfied, or they may require
      additional clinical data. There is no guaranty of FDA approval. Once a product
      is approved, the FDA continues to monitor the product. Ongoing FDA monitoring
      may require additional testing and surveillance programs to monitor the effects
      of the product. If the product does not meet regulatory compliance standards,
      or
      develops problems after entering the market, the FDA product approval may be
      modified, limited or rescinded. The product is also subject to state and local
      standards.




11




**Orphan
      Drug Designation**




In
      August
      2003, our Sickle Cell Disease product, NICOSANTM/HEMOXINTM, received the Orphan
      Drug designation from the FDA Office of Orphan Drug Products Development. The
      Orphan Drug designation provides tax incentives with respect to clinical trials
      and also gives the company to first receive FDA approval for the product the
      right to market the product exclusively within the United States for a period
      of
      seven years from the date of receipt of its FDA approval.




An
      Orphan
      Drug is defined as one that addresses: (i) a rare disease that affects fewer
      than 200,000 people; or (ii) a common disease that has been ignored because
      it
      is less prominent in the United States as compared to developing
      nations.




In
      October 2005, we also obtained the orphan drug designation for NICOSANTM/HEMOXINTM
from the European Medicine Evaluation Agency, which is the drug regulating
      agency overseeing all 25 countries comprising the European Union. That
      designation carries similar benefits and incentives to those that accompany
      the
      FDA orphan drug designation.




In
      June
      2006, we received Orphan Drug designation from the FDA O ffice
      of
      Orphan Drug Products Development for the five-membered heterocyclic
      anti-sickling compound known as 5-HMF for the treatment of SCD.




**Research
      And Development**




During
      2006, we spent approximately $826,000 on research and development as compared
      to
      $1,111,000 spent in 2005.




**Employees**




Xechem
      currently employs 80 full-time employees of whom 15 are located in the United
      States, 15 are located in India and 50 are located in Nigeria.




**Recent
      Business Transactions**




*Alembic
      Settlement*




On
      January 5, 2006, we and our subsidiary, Xechem Pharmaceuticals Nigeria Ltd.,
      received executed copies of a series of agreements with Alembic Limited, dated
      as of December 22, 2005, including:




(A)
      Agreement between Xechem and Alembic Regarding Termination of Agreements and
      Repayment of Loan;




(B)
      Promissory Note, in the amount of $3,000,000 (New Note); and




(C)
      Security Agreement, (the Termination Agreement, New Note and the Security
      Agreement are referred to together as the Agreements).




The
      Agreements superseded all previous agreements between Xechem and Xechem Nigeria,
      on the one hand, and Alembic, on the other, including: (a) Memorandum of
      Understanding, dated December 3, 2003, as amended by that certain Rider to
      the
      MOU, dated February 13, 2004 (MOU), (b) Royalty, Distribution Rights and Joint
      Cooperation Agreement, dated April 7, 2004 (Cooperation Agreement); and (c)
      Alembic Promissory Note in the amount of $3,000,000, dated April 7, 2004 (Old
      Note). Alembic approached Xechem and Xechem Nigeria regarding a restructuring
      of
      the agreements, and Xechem and Xechem Nigeria agreed on the following terms.




12




(1)  Xechem
      and Alembic agreed to terminate the Old Note and enter into the New Note.
      Pursuant to the terms of the New Note, we agreed to repay Alembic in full the
      outstanding principal and interest remaining from the New Note as follows:
      $1,000,000 to be paid on or before January 31, 2006 (Initial Payment), with
      the
      balance (Remaining Balance) due on or before December 31, 2006. In January
      2006,
      we paid $1,000,000 of principal and $190,700 of accrued interest, for an
      aggregate payment of $1,190,700. Furthermore, for every month beginning July
      2006, in which any portion of the New Note remains unpaid, we agreed to pay
      Alembic, as additional consideration, the sum of $16,600, for a total of up
      to
      $99,600. Furthermore, if we had increased our initial payment to $1,500,000,
      then the $16,600 monthly additional consideration payment would have been
      reduced to $12,500. The New Note continues to bear interest at the rate of
      8%.
      The New Note is not convertible into shares of our common stock.




(2)  The
      parties agreed to terminate the MOU and the Cooperation Agreement. Under the
      MOU
      and the Cooperation Agreement, Alembic had previously agreed to loan Xechem
      $3,000,000 (Old Note). As additional consideration for the Old Note, Xechem
      agreed to pay Alembic a fee (Investment Fee) during the License Term (15 years)
      equal to the product of the Alembic Applicable Percentage multiplied by the
      Gross Product Sales Amount, as those terms are defined. The Gross Product Sales
      Amount means the amount of gross sales revenue generated by the company from
      sales of NICOSAN/HEMOXINTM in Nigeria and other African countries, calculated on
      a cash-received basis. For the period from the commencement date through the
      fifth anniversary, the Alembic Applicable percentage was 15%, for the period
      from the fifth to the tenth anniversary, the Alembic Applicable percentage
      was
      10%, and for the period from the tenth anniversary to the end of the term,
      the
      Alembic Applicable percentage was 5%. During the License Term, we also agreed
      to
      pay Alembic a U.S. Export Fee in an amount equal to one percent of the amount
      of
      purchase price paid by the company for any NICOSAN/HEMOXINTM sold by the company
      in the United States and internationally, except Nigeria (Export Fee). Xechem
      also issued Alembic a warrant to purchase 10,000,000 shares of Xechem’s common
      stock at an exercise price of $0.20 per share (Alembic Warrant). Alembic also
      agreed to provide certain production and regulatory compliance personnel to
      assist Xechem Nigeria, which services would be compensated upon terms agreeable
      to the parties (Services). We also gave Alembic the right of first offer
      regarding the licensing of any distribution rights with respect to
      NICOSAN/HEMOXINTM in the territory of Africa and India (Distribution Rights). All
      existing agreements and understandings between Xechem and Xechem Nigeria, on
      the
      one hand and Alembic on the other regarding the Cooperation Agreement, the
      MOU
      and the Old Note were terminated, including the Investment Fee, the Export
      Fee,
      the Alembic Warrant, the Services and the Distribution Rights. Notwithstanding
      the foregoing, the parties agreed that the provisions addressing the disclosure
      of confidential information, non-circumvention, confidentiality and
      nonsolicitation were not terminated and remain in full force and effect.




(3)  Xechem
      and Alembic entered into a Security Agreement, as security for the payment
      of
      the Initial Payment and the Remaining Balance of the New Note. We granted
      Alembic a security interest in: (a) 500,000 shares of restricted stock in CepTor
      Corporation owned by us (CepTor Shares), (b) 15% of the issued and outstanding
      shares of common stock of Xechem Nigeria; and (c) 5,000,000 shares of common
      stock of Xechem. Notwithstanding the foregoing, if we had increased our Initial
      Payment to $1,500,000, then the CepTor Shares would have been released. The
      parties also signed mutual releases.




(4)  Xechem
      did not pay the amounts due Alembic in December 31, 2006. X echem
      and
      Alembic have extended the Maturity Date, pursuant to a Letter Agreement dated
      January 4, 2007, to January 31, 2007. Pursuant to a second Letter Agreement
      dated January 31, 2007, the parties had agreed to extend the Maturity Date
      to
      February 24, 2007. As consideration for the second extension, Xechem agreed
      to
      pay to Alembic, in reduction of the indebtedness due under the Note, the sum
      of
      $100,000. P ursuant
      to a third Letter Agreement, dated as of February 24, 2007 (executed March
      1,
      2007), the parties agreed to extend the Maturity Date to March 31, 2007. As
      consideration for the third extension, Xechem paid Alembic in reduction of
      the
      indebtedness due under the Note, the sum of $100,000 on March 1, 2007, which
      payment was a condition to the extension.




13




The
      parties agreed that, if Xechem made a principal payment to Alembic in reduction
      of the Note of not less than $1,000,000 together with accrued interest, on
      or
      before March 31, 2007, then the Maturity Date of Alembic Agreements and the
      Note
      shall thereupon be extended for an additional six months. Payment was made
      on
      April 5, 2007.




(5)
      As of
      March 28, 2007, Xechem received loans totaling $100,000 from Ms. Chassman and
      $569,600 from eight unrelated parties, which amounts bear simple interest at
      8%
      per annum and are due and payable in six months.





(6)
      On
      April 4, 2007, the Company completed a private placement of $4,959,963 of Units
      pursuant to a securities purchase agreement (“Purchase Agreement”) with a number
      of investors (“Purchasers”). The Units are comprised of (i) 8% convertible
      debentures (“Debentures”) in an aggregate principal amount of $4,959,963;
      convertible into Common Stock of the Company at $0.0175 per share (representing
      283,426,449 shares of common stock on an as converted basis, subject to possible
      adjustment as discussed below); and (ii) two warrants per Debenture, each
      providing a right to purchase 37.5% of the number of shares of Common Stock
      purchasable with the original principal amount of the Debentures (i.e. up to
      75%
      of the Common Stock in the aggregate), at a price of $0.0225 per share (subject
      to possible adjustment as discussed below); the first warrant has a term ending
      March 31, 2009 and is not callable (the “Two Year Warrant”), and the second
      warrant has a term ending March 31, 2010 and is callable by the Company at
      a
      purchase price of $0.06 per share provided the volume weighted average price
      (“VWAP”) of the Company’s Common Stock exceeds $0.06 for 30 consecutive trading
      days (the “Three Year Warrant”— together with the Two Year Warrant,
      collectively, the “Warrants”). The Company has entered into a “Registration
      Rights Agreement,” pursuant to which it is obligated to file a registration
      statement to register the Common Stock of the Company underlying the Debentures
      and Warrants, which contains certain penalties if not timely filed. In
      connection with the transaction the principal officers and directors of the
      Company were required to lock up their shares of the Company for a period ending
      6 months after the registration of the common stock underlying the Debentures
      and Warrants and in addition, the Company’s CEO pledged certain personal assets
      (his 25% beneficial ownership in the entity that owns the New Brunswick, NJ
      facility leased to the Company) to secure the Debentures. The Company has agreed
      to grant to the advisor on the transaction an option to purchase 12% of the
      shares of Common Stock of the Company issuable upon the immediate conversion
      of
      the Debentures (i.e., 34,011,173 shares ) at a price of $0.001 per share,
      expiring March 31, 2009 for advising it in connection with the transaction.
      In
      addition, in the event of the exercise of any of the warrants issued as part
      of
      the offering, it is entitled to a 5% fee for the amount of the warrant exercise.
      The Company has also agreed to reimburse the Purchasers for interest at the
      rate
      of 8% per annum for the monies deposited by them in escrow pending the initial
      closing of the Purchase Agreement and to reimburse the advisor for $75,000
      of
      its legal fees in connection with the transaction.




The
      Purchase Agreement contains certain limitations as to application of the
      proceeds of the offering and further limits the release of in excess of
      $1,500,000 to the payment of past due payables on the occurrence of one of
      the
      following “Release Conditions:” (i) the closing of the current Nexim Bank loan
      commitment to Xechem Pharmaceuticals Nigeria, Limited (“Xechem Nigeria”) for the
      funding of at least 350 million Naira (approximately $2.6 million US dollars);
      (ii) the closing of funding of at least $9,000,000 of the proposed $9,388,980
      UPS Capital Loan to Xechem Nigeria, to be guaranteed by the Ex-Im Bank, which
      in
      turn is to be supported by guarantees of one half of such amount by each of
      Diamond Bank PLC and Bank PHB, PLC, which are local Nigerian banks; or (iii)
      the
      funding of at least $3,000,000 of equity financing by Xechem
      Nigeria.




14




The
      Company has affirmative obligations under the Purchase Agreement to: (i) timely
      file all required reports under the Securities Act of 1934; (ii) promptly
      deliver the shares of Common Stock purchased by the Purchasers pursuant to
      conversion of their Debentures or exercise of the Warrants and is subject to
      a
      penalty of $10 per $1000 of securities (with the value computed based on a
      volume weighted average pricing or “VWAP” formula) for each day that it is late
      with respect to effecting such deliveries, increasing to $20 per $1000 of
      securities should it fail to make such delivery commencing 5 trading days after
      failing to meet this obligation; (iii) indemnify the Purchasers against
      enumerated liabilities in the event of actions taken against them in certain
      instances; (iv) reserve at all times a sufficient amount of Common Stock to
      enable it to meet its obligations under the Purchase Agreement (it should be
      noted that the Company adopted a resolution to not issue in excess of
      3,500,000,000 shares of its authorized Common Stock without the approval of
      shareholders as to such increase, and in the event the Company is unable to
      meet
      this obligation, it has an affirmative obligation to obtain shareholder approval
      promptly following the reaching of such level; (v) provide a 2 year preemptive
      right to purchase up to 15% of the securities issued by the Company’s Xechem
      Nigeria Pharmaceuticals, Limited (“Xechem Nigeria”) subsidiary in any public
      offering that may subsequently occur through such subsidiary; (vi) permits
      the
      Purchasers to nominate one member to the Company’s board of directors (and a
      second one in the event of the issuance of not less than $6,000,000 of Units),
      reasonably agreeable to the Company, with there to be a limit of 5 directors
      for
      the first year following the closing of the Purchase Agreement; and (vii)
      provides a 15 day right of first refusal to the Purchasers to participate in
      up
      to 100% of any subsequent common stock transaction of the Company not
      constituting an “Exempt Issuance” as defined in the Purchase Agreement, subject
      to possible waiver if agreed to by holders of at least 80% of the outstanding
      Debenture principal amount.




The
      Purchase Agreement contains a number of negative covenants for so long as the
      Debentures remain outstanding, which include a prohibition against: (i) the
      adoption of certain shareholder rights plans intended to prohibit or deter
      takeovers of the Company; (ii) the providing of material nonpublic information
      to the Purchasers or their counsel, absent execution by the applicable
      Purchaser(s) of a confidentiality agreement regarding such information; (iii)
      the issuance of additional capital stock of the Company (or securities
      convertible into the same) other than certain “Exempt Issuances” as detailed in
      the Purchase Agreement, for a period of 12 months from the initial closing
      of
      the Units issuance; (iv) entering into certain enumerated variable rate
      transactions where the pricing of the equity securities of the Company is
      subject to a variable formula; (v) uneven treatment with respect to the
      Purchasers; and (vi) the prohibition against a reverse or forward split of
      the
      Company’s stock for a year following the effectiveness of a registration
      statement registering the shares underlying the Units absent the consent of
      the
      holders of a majority of the Debentures.




Detailed
      information regarding the Company is enumerated in the body of the Agreement
      and
      its accompanying schedules, including representations and warranties associated
      with its current financial condition. Inaccuracy of any of the representations
      or warranties in a material manner would constitute an event of default that
      would provide the Purchasers the right to accelerate the indebtedness regarding
      the Company. These representations include: (i) an acknowledgment that the
      Company has significant past due payables, many of which will not be satisfied
      with respect to the proceeds of the financing; a total of $1,383,326 of
      liabilities was scheduled as of March 23, 2007, and a total of $8,420,936 of
      notes payable plus accrued interest of $642,368 was scheduled as of March 25,
      2007, including the following primary lenders to the Company (principal amount
      only is summarized here): (a) independent third party individuals - $259,600;
      (b) related party loans - $1,313,439; (c) Dr. Pandey - $124,689; (d) Xechem
      China - $140,120; (e) Marjorie Chassman - $2,788,128; (f) Chassman/Brauser
      2007
      loans - $550,000; (g) Alembic - $2,000,000; (h) NEXIM Bank - $1,153,846; and
      UBA
      Loan - $91,115 (the latter two loans are to Xechem Nigeria); (ii) the issued
      and
      outstanding capital stock of Xechem Nigeria is presently 95,000,000 shares
      all
      issued to the Company, subject to the qualifications that (a) a claim has been
      made by a prior employee of the Company as to ownership in Xechem Nigeria,
      which
      the Company refutes (and for which there has been no further follow up since
      the
      claim was made over a year ago); and (b) the Company outlined that Xechem
      Nigeria is expected to issue up to 20,000,000 additional shares to certain
      persons and entities primarily in Nigeria with respect to services rendered
      and/or to be rendered or purchase by such service providers and/or their
      designees, provided that any issuances other than for services rendered and/or
      to be rendered will be subject to the participation right of the Purchasers
      with
      respect to any subsequent public offering of Xechem Nigeria stock set forth
      elsewhere in the Purchase Agreement; and (c) Xechem India is presently owned
      66-2/3% by the Company and the remainder by Ramesh C. Pandey and family members;
      (c) the Company was required to provide a solvency representation and in doing
      so it provided that anticipated cash flow of the Company, together with the
      proceeds the Company would receive were it to liquidate all of its assets from
      the funding of the Debenture sale after taking into account all anticipated
      uses
      of the cash would be sufficient to pay all amounts on or in respect of its
      liabilities when such amounts are required to be paid, and further provided
      that
      it does not intend to incur debts beyond its ability to pay such debts as they
      mature (taking into account the timing and amounts of cash to be payable on
      or
      in respect of its debt and assuming the continued forbearance of obligations
      from existing creditors consistent with past practice and the assumed
      accelerated increase in sales from Xechem Nigeria and the forbearance of
      existing loans that will be coming due during the next year. (It should be
      noted
      that the aforesaid representations regarding solvency are subject to numerous
      assumptions that may or may not materialize or based upon future liquidation
      values as to which there is not certainty and therefore persons dealing with
      the
      Company should recognize the precarious financial condition in which the Company
      has been historically and as of the present time.) and (iv) the Company has
      provided representations as to its capitalization, which as of March 25, 2007
      included 1,555,797,965 issued and outstanding shares of Common Stock, an
      additional 749,479,461 shares of Common Stock issuable pursuant to options,
      warrants, convertible notes and/or actual issuances or agreed upon issuances
      of
      shares (bringing aggregate Common Stock as adjusted to 2,305,277,426 shares)
      and
      an additional 576,310,000 shares issuable to Ramesh C. Pandey in connection
      with
      his 20% antidilution rights, bringing aggregate estimated diluted capitalization
      (before adjustments for accrued interest convertible to equity) to approximately
      2,881,587,426 shares of Common Stock.




15




Debentures .
      The
      Debentures mature on March 31, 2009. They call for the payment of simple
      interest at the rate of 8% per annum, quarterly in arrears, calculated based
      upon a 360 day year and payable on the last day of May 31, 2007 and the last
      day
      of each third month thereafter through maturity. Interest is payable in cash
      unless otherwise agreed to between the Debenture holder and the Company. A
      late
      fee of 12% per annum is payable with respect to any late payments. Prepayment
      is
      not permitted without the consent of the Debenture holder.




The
      Debentures are convertible from time to time at the option of their holders
      at
      the “Conversion Price.” The “Conversion Price” is $0.0175 per share, subject to
      adjustment to account for: (i) forward and reverse splits and other
      extraordinary transactions; and (ii) a full ratchet clause which effectively
      lowers the purchase price to the lowest price at which there is any subsequent
      placement of the Company’s Common Stock (or securities exchangeable into or
      convertible into or exercisable into Common Stock) placed at a price below
      the
      lowest Conversion Price then in effect, with the exception of certain detailed
      “Exempt Issuances,” which include issuances pursuant to any existing rights to
      acquire Common Stock currently in place. A similar Conversion Price adjustment
      applies to the extent of the value of any rights offerings made by the Company
      entitling stockholders to subscribe for securities at a price below the
      Conversion Price for the Debentures. In addition, the Debentures have protective
      provisions which effectively call for the issuance of additional securities
      to
      the holders as if they were shareholders in connection with any subsequent
      distributions of cash or securities to the holders of the Common Stock. The
      Company has an affirmative obligation to notify the Debenture holders of events
      that cause an adjustment in the conversion price for the Debentures. There
      is a
      limitation of conversions of Debenture principal or interest resulting in a
      holder owning greater than 4.99% of the Company’s Common Stock absent the prior
      consent of the holder. As noted above with respect to share transfers, there
      is
      a liquidated damages obligation of the Company of $10 per trading day per $1,000
      of Common Stock (increasing to $20 per trading day per $1,000 of Common Stock)
      after 7 trading days, to the extent that the Company fails to timely provide
      to
      the Purchasers the stock certificates to which they are entitled upon conversion
      of Debenture indebtedness to Common Stock.




16




The
      Debentures contain a “Buy-In” liability to the Company in addition, should it
      fail to timely deliver certificates following delivery of a conversion notice,
      which effectively holds the Company liable for the loss the holder would incur
      in the event it sold any of the shares relating to a conversion notice and
      then
      was forced to buy the underlying shares to effect the trade due to the Company’s
      failure to timely deliver the certificate.




The
      Debentures also provide that in the event of a “Fundamental Transaction,” absent
      the successor in interest to the Company requiring that the Debenture holders
      receive cash for the satisfaction of the Debenture obligation, then the
      Debenture holders shall be entitled to comparable rights with respect to the
      securities of the successor entity arising from the Fundamental Transaction.
      “Fundamental Transactions” include: (i) mergers or consolidations of the Company
      with or into another entity; (ii) sale by the Company of all or substantially
      all of its assets; (iii) certain tender offers or exchange offers whereby the
      Company’s stockholders can exchange their shares for other securities, cash or
      property; and (iv) certain reclassifications of the Company’s Common Stock or
      compulsory share exchanges effectively converting the Company’s securities into
      those of another entity.




The
      Debentures contain certain negative covenants, which include: (i) amendments
      to
      the Company’s charter or bylaws in a manner that would adversely impact the
      Debenture holders; (ii) repurchases of stock of the Company with the exception
      of certain limited repurchases of stock owned by former employees; and (iii)
      payment of cash dividends or other distributions with respect to the Company’s
      securities.




The
      Debentures provide that the holders can accelerate the indebtedness evidenced
      by
      the Debentures in the event of the occurrence of an “Event of Default” and
      failure to cure within the applicable cure period (not to exceed 5 days) if
      any;
“Events of Default” include the breach by the Company of any of the obligations
      of the Company pursuant to the Debentures or any of the other transaction
      documents (i.e., the Purchase Agreement or the associated agreements in
      connection therewith), any representation or warranty being untrue or incorrect
      at the time made in any material respect; certain insolvency events with respect
      to the Company or material subsidiaries, or defaults with respect to obligations
      which remain uncured for up to 45 days, cessation of listing of the Company’s
      Common Stock for 5 consecutive trading days, a Change of Control transaction
      (including changes of beneficial ownership of the Company in excess of 50%
      or
      transfers of at least 33% of the Company’s assets), failure to effect the
      effectiveness of the registration statement within 210 days of the closing
      or
      failure to maintain its effectiveness for 30 consecutive days (subject to
      certain limited extensions) , and failure to timely deliver stock
      certificates.




Warrants .
      The
      Purchase Agreement calls for the issuance of two Warrants per Unit of
      investment, with each Warrant comprising the right to purchase up to 37.5%
      of
      the shares issuable per the Debenture (2,142,857 shares of Common Stock for
      each
      $100,000 of investment per Warrant, or 4,285,714 shares for both Warrants
      associated with a $100,000 investment) at an exercise price of $0.0225 per
      share
      (subject to adjustment as discussed below). The Two Year Warrant has a term
      of
      approximately two years, expiring March 31, 2009 and is not callable by the
      Company. The Three Year Warrant has a term of approximately three years,
      expiring March 31, 2010, and is callable in the event that the VWAP of the
      Company’s Common Stock for 30 consecutive trading days (following the
      declaration of effectiveness of a registration statement for the underlying
      Common Stock) exceeds $0.06 per share (subject to adjustment for splits and
      other extraordinary transactions) and provided that: (i) the holder is not
      in
      possession of material nonpublic information; (ii) the Company has honored
      all
      prior notices of exercise under the Warrant; (iii) the registration statement
      is
      effective for the duration of the exercise period following the delivery of
      the
      call notice; the Common Stock continues to be listed on a trading market (which
      can include trading on the OTC Bulletin Board or in the Pink Sheets); (iv)
      there
      continues to be sufficient reserved shares of Common Stock underlying the Units;
      and (v) after exercise of the Warrant the holder would not hold in excess of
      4.99% of the Company’s outstanding capital stock. In such event, the Company
      shall have the right to call initially 50% of the remaining shares underlying
      the Warrant for nominal consideration provided the call notice is delivered
      within 2 trading days of such 30 day period, and in such event the holder will
      have a 20 trading days following the receipt of the notice to exercise the
      Warrant before the right to purchase the called shares shall be cancelled.
      In
      the event the call is effectively exercised, then the remaining shares
      underlying the Three Year Warrant will be subject to a second call right
      provided the VWAP for the Common Stock thereafter meets the 30 trading day
      threshold for another 30 consecutive trading days and the other conditions
      to
      the call are also met (as enumerated above) for the subsequent period following
      the delivery of the call notice.




17




Exercise
      of the Warrants is for cash only, provided however, if by the first anniversary
      following their date of issuance an effective registration statement is not
      in
      place for the underlying shares, then the holders shall have a right to exercise
      the Warrants on a cashless basis. Upon exercise of a Warrant, the Company has
      an
      obligation to promptly deliver the underlying shares and is subject to a
      liquidated damages clauses comparable to those applicable to the Debentures,
      for: (i) failure to timely deliver the certificates for the purchased Common
      Stock as a result of exercise of the Warrants; or (ii) losses incurred by the
      Warrant holder as a result of having to effect a Buy-In of Common Stock to
      cover
      any sale of the shares corresponding to the Warrant exercise, where the Company
      failed to timely delivery to the holder the shares of Common Stock related
      to
      the Warrant exercise.




The
      $0.0225 per share exercise price for the Warrants is subject to adjustment
      for
      stock splits and other extraordinary corporate events. In addition, the Warrants
      contain a full ratchet adjustment mechanism for the applicable purchase price
      comparable to the full ratchet adjustment mechanism applicable to the exercise
      price for the conversion of Debenture indebtedness into equity of the Company,
      as well as a conversion modification to account for distributions of cash ,
      securities or other property to stockholders of the Company. The Company has
      an
      affirmative obligation to notify the Warrant holders of adjustments to the
      exercise price of the Warrants.




As
      with
      the Debentures, there is a limitation on the amount of Common Stock issuable
      to
      a Warrant holder to 4.99% of the outstanding Common Stock of the Company, absent
      waiver by the holder of that limitation. In addition, the Warrants call for
      similar rights in the event of Fundamental Transactions, provided that it the
      Fundamental Transaction is any of (i) an all cash transaction; (ii) a going
      private transaction under Rule 13e-3 of the Securities Exchange Act of 1934;
      or
      (iii) involving securities of a company whose shares are not traded on a
      national securities exchange, then at the Company’s option in lieu of a
      carryover of the Warrants to the successor entity, the holder shall be entitled
      to a the cash value of the Warrants keyed to a Black Scholes valuation.




18




Registration
      Rights Agreement .




The
      Company has agreed that it shall register 130% of the shares of Common Stock
      underlying the Units (“Registrable Securities”) promptly following the closing
      of the offering pursuant to the Purchase Agreement (“Closing Date”) . It is
      obligated to: (i) file a registration statement pursuant to the Securities
      Act
      of 1933 within 60 days following the Closing Date; (ii) respond to SEC comments
      and file pre-effective amendments within 10 days following receipt; and (iii)
      and cause it to be declared effective no later than 150 days following the
      Closing Date; (iv) telephonically request the declaration of effectiveness
      of
      the registration statement at 5:00 p.m. New York time on a trading day; (v)
      immediately notify the holders of Units of the declaration of effectiveness
      of
      the registration statement on the same day that it confirms such effectiveness
      with the SEC; (vi) file a prospectus with the SEC, as required by Rule 424
      within one day of the declaration of effectiveness; and (vii) following the
      declaration of effectiveness of the registration statement, the Company is
      obligated to maintain the effectiveness of the Registration Statement for 10
      consecutive calendar days or 15 calendar days during any 12 month. Failure
      to
      meet any of the foregoing obligations constitutes and “Event,” which subjects
      the Company to penalties of 2% for each month in which it occurs and on each
      monthly anniversary thereof, of a liquidated damages obligation equal to 2%
      of
      the original principal amount of the Debenture of the holder, subject to an
      aggregate cap of 15% of the original principal amount of the Debenture, payable
      in cash unless otherwise agreeable to the Company and the Debenture
      holder




The
      Company has an obligation during the registration process to provide to each
      Debenture holder no less than 5 trading days prior to the filing of each
      registration statement and no less than one trading day prior to the filing
      of
      any related prospectus or amendment or supplement thereto, with a copy of the
      proposed filing, and shall have an obligation to address any reasonable
      objections provided by holders of a majority of the Registrable Securities.
      A
      mechanism has been provided in the Registration Rights Agreement to provide
      these copies to Basu Capital on behalf of the investors. The Company has an
      obligation to provide questionnaires to the holders relative to the information
      to be included in the registration statement regarding them, to be timely
      completed by the holders.




The
      Company has an obligation to: (i) file the necessary post effective amendments
      to the registration statement and prospectus to be used by the holders of the
      Registrable Securities to keep the registration statement continuously effective
      until all the Registrable Securities are eligible for resale pursuant to Rule
      144(k); (ii) file all required supplements; (iii) respond promptly to comments
      received from the Commission and provide copies of all applicable correspondence
      to the holders of the Registrable Securities; and (iv) comply in all material
      respects with the requirements of the Securities Act of 1933 for the legal
      methods of disposition by the holders of the Registrable Securities.




There
      is
      an obligation to file a new registration statement at such point in time as
      the
      amount of Registrable Securities exceeds the amount of securities then
      registered. There are obligations to notify the holders of Registrable
      Securities of the occurrence of numerous events which in certain events will
      include the need to suspend trading on the occurrence of certain events,
      including: (i) (A) when a prospectus or prospectus supplement is proposed to
      be
      filed; (B) when the SEC advises that a review will be effected or when comments
      are received; and (C) on the effectiveness of a registration statement or post
      effective amendment thereto; (ii) of any request by the SEC or other applicable
      government authority for amendments or supplements to the foregoing; (iii)
      the
      issuance of stop orders or similar proceedings; (iv) the receipt of
      notifications of suspension of permission for sale of securities; (v) the
      occurrence of an event or the passage of time where action must be taken to
      amend the registration statement to ensure that it does not misstate any
      material facts or omit to state any material facts; and (vi) the occurrence
      of
      material events regarding the Company under certain circumstances which the
      Company believes may not be in the Company’s best interest to continue the
      availability of the registration statement, provided that such information
      must
      be maintained on a confidential basis until publicly disclosed.




19




The
      Registration Rights Agreement contains detailed delivery requirements to the
      holders of the Registrable Securities as well as the obligation to meet
      applicable NASD and state blue sky requirements. The Company is obligated to
      cover all of the costs of registration of the Registrable Securities and to
      provide detailed indemnification to the holders of the Registrable Securities
      for loss, liability and legal expenses associated with the same. Piggyback
      registration rights also apply to any Registrable Securities that for whatever
      reason are not registered, except with respect to subsequent Form S-4 and Form
      S-8 registration statements.




Pandey
      Pledge Agreement .
      In
      order to induce the Purchasers to purchase the Units, Dr. Ramesh Pandey, the
      CEO
      of the Company, agreed to pledge to the Unit holders, effective as of the date
      that the indebtedness of the Company to Alembic, Limited is satisfied, 100%
      of
      the beneficial ownership in PRC Holdings, LLC and PCR Holding Company, Inc.
      (collectively, the “Pledged Interests”), which hold, collectively, 25% of the
      beneficial ownership in Vineyard Productions, LLC (“Vineyard”). Vineyard is the
      entity that owns the office building complex in which the Company’s offices and
      laboratory are located. Dr. Pandey shall be entitled to a release of the Pledged
      Interests at such time, if any, as the Company either pays off the Debentures,
      or posts cash collateral (or the substantial equivalent thereof) of $1,500,000
      to the holders of the Debentures. The Company has agreed to indemnify Dr. Pandey
      for any loss he may incur in the event he loses any of the Pledged Interests
      to
      the Debenture holders as well as to compensate him or a charity of his
      designation, in consideration for providing this collateral. The Pledge
      Agreement also provides to Dr. Pandey the right to pledge the Pledged Interests
      to secure the remaining obligations of the Company to Alembic,
      Limited.




Chassman
      Pledge Agreement .
      The
      Purchasers required a pledge of additional collateral to consummate the Purchase
      Agreement from Marjorie Chassman, the wife of David Blech. She agreed to pledge
      to the Purchasers the following promissory notes which are convertible into
      Common Stock of the Company at the prices set forth below, to be released upon
      the occurrence of one of the Release Conditions (enumerated above) prior to
      an
      event of default with respect to the Debentures: (i) $30,000 principal amount
      dated April 5, 2006, convertible at $0.005 per share; (ii) $200,000 principal
      amount dated June 5, 2006, convertible at $0.01 per share; and $1,025,000 dated
      June 20, 2006, convertible at $0.015 per share. In order to induce Ms. Chassman
      to pledge the foregoing notes, the Company agreed to lower the conversion price
      from $0.03 per share to $0.0175 per share with respect to another promissory
      note that she holds in the original principal amount of $500,000.




Intercreditor
      Agreement .
      The
      holders of the Debentures have entered into an intercreditor agreement amongst
      themselves so as to equitably allocate any of the Pledged Interests or proceeds
      therefrom in the event that such collateral is foreclosed upon to satisfy any
      of
      the Debenture indebtedness.




(7)
      On
      April 3, 2007 Xechem Nigeria closed on its 500,000,000 Naira loan with the
      Nigerian Export Import Bank (“Nexim”), which represented a consolidation of the
      existing 150,000,000 Naira loan of Xechem Nigeria with an increase in the loan
      by an additional 350,000,000 Naira (approximately $2,600,000 US dollars of
      additional funding). The loan is for a five year duration, inclusive of one
      year’s moratorium of debt service, but subject to biannual payments of interest
      during the moratorium period. Interest accrues on the loan at the rate of 16%
      per annum. Principal thereafter is due in 8 equal semiannual payments, with
      the
      first payment due on the first anniversary of the closing of the loan. A special
      condition to the loan was the reservation by Nexim of the right to amend, alter,
      cancel or waive the conditions of the facility should it determine that
      circumstances warrant such a change.





On
      closing of the loan a facility fee of 0.5% was charged as against the increased
      amount of funding with respect to the loan. Additional fees with respect to
      the
      loan include a 0.5% annual management fee (based on outstanding principal
      amount) due on each anniversary of the loan, a 100,000 Naira annual monitoring
      fee payable on each anniversary of the loan and the obligation to reimburse
      Nexim for its legal fees. The loan is secured by a debenture trust deed on
      the
      assets of Xechem Nigeria and the personal guarantee delivered by Dr. Pandey.
      The
      loan contains customary affirmative and negative covenants, which include:
      (i)
      prohibitions against the granting of additional liens against the collateral
      or
      disposal of assets without Nexim’s consent; (ii) compliance with applicable laws
      and regulations; (iii) prohibition on the declaration of dividends unless the
      face value of due and payable obligations under the facility for the year in
      question have been paid; (iv) provide regular quarterly unaudited and annual
      audited financial statements; (v) provide proof of adequate insurance; and
      (vi)
      throughout the life of the facility Nexim has reserved the right to appoint
      a
      director to the board of directors of Xechem Nigeria.




**Historical
      Merger and Spin off**


***CepTor
        Acquisition***
  On
        January 27, 2004, we acquired CepTor Corporation. CepTor is a research drug
        company focusing on neuromuscular diseases, which includes therapeutics for
        muscular dystrophy, multiple sclerosis, ALS and epilepsy.
  The
        form
        of the transaction was a reverse triangular merger in which a newly created,
        wholly-owned subsidiary of ours merged with and into CepTor, with CepTor
        being
        the surviving and continuing corporation. We issued to the CepTor shareholders
        5,855 shares of Class C Series 7 Convertible Preferred Stock in exchange
        for
        their CepTor stock. Each share of Preferred Stock is convertible into 5,000
        shares of common stock. This conversion rate is subject to adjustment in
        the
        event of a reorganization, consolidation, merger, sale of assets or similar
        corporate occurrences.
  We
        also
        agreed to award additional shares of our common stock to former CepTor
        shareholders contingent upon the occurrence of one of the following with
        respect
        to a development drug that is substantially derived from CepTor’s patents,
        technology and compounds: (i) a filing of a Phase II Application within 36
        months of the closing of the transaction; (ii) a filing of a Phase III
        Application within 60 months of the closing date of the transaction; or (iii)
        a
        new drug application filing is made within 72 months of the closing of the
        transaction. Only one such award was to be paid per developmental drug even
        if
        such developmental drug satisfies one or more of the conditions in (i) through
        (iii) above. Each contingent award was worth $1,000,000, payable in shares
        of
        our common stock, valued at the lower of (i) $0.20 and (ii) the average closing
        price per share of common stock as reported on the OTC bulletin board (or
        such
        other market on which our common stock was then listed) for the 25 trading
        days
        immediately preceding the date of an award event, subject to adjustment in
        the
        event of a stock split, recapitalization, stock dividend, distribution or
        reclassification. In connection with the spin-off of CepTor, the shareholders
        holding in excess of 80% of these shares agreed to waive their rights to
        these
        additional grants.
  20
  The
          consideration for this transaction was determined at arms-length and included
          a
          premium over the net book value of the assets acquired based upon our assessment
          of the market value of CepTor’s assets and the benefits of combining with
          CepTor.
 We
          also
          granted piggyback registration rights to the shareholders of CepTor pursuant
          to
          separate agreements.
  ***CepTor
          Spin Off***
  On
          March
          31, 2004, we entered into an agreement with CepTor and William Pursley,
          a former
          director and executive officer of ours, intending to provide a framework
          for the
          independent financing of CepTor. As part of the agreement, William Pursley
          agreed to serve as the chief executive officer of CepTor pursuant to a
          two-year
          employment agreement, subject to automatic renewal, and base compensation
          comparable to that previously earned by Mr. Pursley while an officer of
          Xechem.
          Mr. Pursley resigned from his positions as president, chief operating officer,
          vice chairman and member of the board of directors as part of this
          agreement.
 In
        connection with the foregoing, Mr. Pursley also agreed to reduce the number
        of
        shares of Xechem common stock to which he holds or could hold options by
        amending and restating his existing option agreement (which called for a
        formula
        as to aggregate options grantable) to provide for an option to purchase
        43,000,000 shares of common stock in the aggregate, exercisable for nominal
        consideration.
  The
        agreement further contemplated that CepTor would seek to obtain bridge funding
        to be followed by a subsequent round of capital infusion. Xechem agreed to
        fund
        $125,000 on or before April 1, 2004, and subject to the full funding by Marjorie
        Chassman of her loan obligations to Xechem for the months of April and May
        of
        2004, Xechem agreed to fund an additional $125,000 on May 1, 2004 and June
        1,
        2004 to CepTor. All such fundings were in the form of capital
        contributions.
  The
        agreement also contemplated that CepTor would take the necessary steps to
        effect
        a stock split so that after the split, Xechem would own 1,406,250 shares
        of
        CepTor $0.00001 per share par value common stock, constituting all of its
        then
        issued and outstanding stock. CepTor also agreed to issue to Mr. Pursley
        and his
        designees (intended to comprise CepTor management team members) options to
        purchase in the aggregate 1,093,750 shares of common stock, fully vested
        and
        exercisable at par value for a period of 10 years from the date of grant.
        CepTor
        also agreed to pay Xechem a royalty of 2% of gross revenues received by it
        on
        the licensing of CepTor products.
  Finally,
        the Agreement provided that Xechem would sell back to CepTor over time up
        to
        625,000 shares of its common stock in CepTor for an aggregate of $2,000,000,
        payable from 25% of the proceeds of financings received by CepTor other than
        the
        contemplated bridge financing. At the end of two years if the full $2,000,000
        had not been paid to Xechem, it had the right to put the remaining portion
        of
        the shares held for sale back to CepTor to cover the deficiency. In order
        to
        induce the funding of a bridge loan, Xechem agreed that in the event such
        a loan
        was funded and was not paid off when due, it would permit the bridge lender
        to
        convert the unpaid indebtedness owing with respect to the bridge loan into
        Xechem common stock at the lesser of $0.07 per share or seventy five percent
        (75%) of the average closing price of Xechem's common stock for the ten trading
        days preceding the date of funding of the bridge loan. Xechem was granted
        piggyback registration rights with respect to the shares in CepTor it may
        hold
        from time to time, subject to its agreement to lock up the sale of the shares
        on
        the open market for a period of 180 days following the initial registration
        of
        any CepTor shares pursuant to a registration statement.
  On
        December 9, 2004, Xechem, Mr. Pursley and CepTor entered into a second amendment
        to the CepTor agreement. The parties entered into the second amendment as
        part
        of a merger between Medallion Crest Management, Inc., a Florida corporation,
        CepTor and CepTor Acquisition Corp., a Delaware corporation and wholly owned
        subsidiary of Medallion. Pursuant to the merger, CepTor merged with and into
        Acquisition Corp, with CepTor surviving as the wholly-owned subsidiary of
        Medallion. Pursuant to the merger agreement, Medallion acquired all of the
        outstanding capital stock of CepTor in exchange for issuing shares of
        Medallion’s common stock, par value $0.0001 per share to CepTor’s shareholders
        at a ratio of 2.165674 shares of Medallion common stock for each share of
        CepTor
        common stock outstanding at the effective time of the merger, and assumed
        certain obligations of CepTor to holders of its outstanding indebtedness
        and
        others. As a result, the former shareholders of CepTor became shareholders
        of
        Medallion. Medallion then changed its name to CepTor. Xechem was the record
        holder of 1,800,000 issued and outstanding shares of common stock of CepTor,
        which following the merger converted into 3,898,213 shares of Medallion/CepTor
        common stock.
  21
  As
        a
        condition to closing the merger, Medallion/CepTor initiated an offering.
        The
        second amendment modified the put obligation with respect to the capital
        raised
        through offerings by CepTor. Xechem could put back to CepTor that number
        of its
        shares of CepTor stock in an amount equal to the quotient of: (a) ten percent
        (10%) of the gross cash raised (before any commissions or other expenses)
        in
        each tranche of equity financing, divided by (b) the price per share of CepTor
        common stock, at which such equity tranche was raised.
  Medallion/CepTor
        planned to raise a minimum of $2,500,000 and a maximum of $6,000,000 from
        the
        offering of units. Each unit consisted of one share of Series A Convertible
        Preferred Stock and a warrant for 5,000 shares of Medallion/CepTor common
        stock,
        exercisable at $2.50 per share. Units were offered by the placement agent
        for
        sale at $25,000 per Unit. Shares of Series A Convertible Preferred Stock
        were
        convertible into 10,000 shares of Medallion/CepTor common stock. The offering
        was subsequently supplemented to accommodate increased demand, and an aggregate
        of $12,791,250 of gross proceeds was raised.
  In
        February 2005, CepTor completed its offering for $12,791,250. Xechem exercised
        its put for $1,279,125 in cancellation of 511,650 shares ($12,791,250 x .10
        =
        $1,279,125 / $2.50 = 511,650). Following the put/redemption, Xechem owned
        3,386,563 shares of CepTor stock.
  Pursuant
        to the terms of the second amendment, Xechem continued to be entitled to
        a
        royalty of two percent (2%) of gross revenues received by CepTor with respect
        to
        the sale or licensing of products incorporating any of the CepTor intellectual
        property owned by CepTor on the effective date of the CepTor
        agreement.
  On
        June
        17, 2005, we entered into a Securities Purchase Agreement with CepTor. The
        Securities Purchase Agreement provided for, among other things: (1)
        redemption/purchase of 2,886,563 shares of CepTor common stock from Xechem,
        at
        $0.80 per share for an aggregate purchase price of $2,309,250.40; (2) the
        surrender by William Pursley (the former President of Xechem and current
        Chairman and CEO of CepTor) of the William Pursley stock option to purchase
        43,000,000 shares of Xechem’s common stock; (3) restriction on sale of Xechem’s
        remaining 500,000 shares, as described more fully below, of CepTor common
        stock
        (the “Remaining CepTor Shares”); and (4) termination of the CepTor Agreement,
        the First Amendment and the Second Amendment.
  Xechem’s
        CepTor shares are subject to a lock-up agreement which was modified per the
        second amendment: Xechem cannot sell its CepTor Shares for a period of six
        months following the effective date of the registration of the securities
        sold
        through the offering; thereafter, Xechem may sell an amount equal to up to
        fifty
        percent (50%) of the CepTor Shares until the first anniversary of the effective
        date of the registration, at which time Xechem will be free to sell all its
        CepTor Shares. The CepTor Shares were registered on July 27, 2005. If the
        CepTor
        Shares were not registered within six months following the termination of
        the
        offering, then the CepTor Shares would be under a lock up agreement for a
        period
        of one year following the termination of the offering, at which time Xechem
        could sell up to fifty percent (50%) of its CepTor Shares, with the ability
        to
        sell all of its CepTor Shares eighteen months following the termination of
        the
        offering. Notwithstanding anything herein to the contrary, Xechem may transfer
        the CepTor Shares in a privately negotiated transaction to any person or
        entity
        who agrees to be bound by the lock up agreement. We have pledged our CepTor
        shares as part of the Alembic settlement.
  Although
        still a shareholder, we no longer have the ability to control CepTor’s
        operations. None of our directors remain on the CepTor board. CepTor’s success
        will be dependent upon further development of its products and attainment
        of the
        necessary capital to finance the successful movement of its products through
        the
        FDA regulatory approval process.


22




**Factors
      Affecting Future Performance**




The
      following are important factors which relate to our business:




*Volatility
      of Stock Price*




The
      securities of biotechnology companies have experienced extreme price and volume
      fluctuations, which have often been unrelated to the companies' operating
      performance. Announcements of technological innovations for new commercial
      products by us or our competitors, developments concerning proprietary rights
      or
      general conditions in the biotechnology and health industries may have a
      significant effect on our business and on the market price of our securities.
      Sales of shares of common stock by existing security holders could also have
      an
      adverse effect on the market price of our securities given the limited trading
      and low price of our securities.




Our
      board
      of directors executed a one share for 3,000 share reverse split of our shares
      of
      common stock. The first day of trading, post split, was May 28, 2003. Our stock
      has experienced volatility in the past.




*Amount
      of Stock*




As
      of
      April 1, 2007, we have outstanding 1,552,467,965 shares of our common stock.
      If
      convertible note holders and warrant holders convert their notes into common
      stock and exercise their warrants and options, there will be a sufficient number
      of authorized shares of common stock to satisfy the conversions and exercises.




In
      October 2006, at the Annual Meeting, shareholders approved to increase the
      number of authorized shares of common stock to 5 billion shares.




The
      Board
      of Directors held a special meeting immediately following the conclusion of
      the
      Annual Meeting and passed a resolution restricting the ability of the Company
      to
      issue more than 3.5 billion shares of common stock without a further vote of
      the
      shareholders.




*No
      Developed or Approved Products; Early Stage of Development*




We
      are a
      development stage company. Our primary new product is
      NICOSANTM/HEMOXIN TM ,
      our
      Sickle Cell Disease (SCD) drug, which we began to market in Nigeria in 2006.
      Paclitaxel and its analogs are in the development stage. Although we have
      isolated paclitaxel in a substantially pure state and obtained several patents,
      there can be no assurance that such compound(s) will pass the necessary
      regulatory requirements for approval for sale in the United States or abroad.
      In
      addition, Bristol-Myers maintains a dominant market share in the paclitaxel
      business and may choose to take legal action to impair the entry of additional
      competitors in the market. Although we have the capability to, and may, sell
      paclitaxel for research purposes, to date, we have not received any revenues
      from sales of paclitaxel for human consumption and have received only minimal
      revenues from other product sales or sales of paclitaxel for research and
      development. In July 2006, NAFDAC approved the marketing and sale of NICOSANTM
for the prophylactic management of SCD. The approval is for an initial term
      of
      two years; however, our facilities can only produce limited quantities, thus
      limiting our market presence and our profitability. Our principal revenues
      have
      been contract research and testing and consulting services for other companies,
      which are not expected to continue, and which have historically been minimal.
      To
      achieve profitable operations, we, along with others, must successfully develop,
      obtain regulatory approval for, introduce, and market our potential
      pharmaceutical products. No assurance can be given that our product research
      and
      development efforts will be successfully completed, that required regulatory
      approvals will be obtained, or that any products, if developed and introduced,
      will be successfully marketed or achieve market acceptance.




23




*History
      of Operating Losses; Future Profitability Uncertain*




We
      have
      experienced significant operating losses since inception and have generated
      minimal revenues from our operations. As of December 31, 2006, our accumulated
      deficit was approximately $82,410,000, which included losses from operations
      of
      $6,654,000 and $4,260,000 for the years ended December 31, 2006 and 2005
      respectively. To date, we have been dependent on capital infusions and sale
      of
      credits (tied to losses from operations) for financing. Our ability to achieve
      a
      profitable level of operations is dependent in large part on our completing
      product development, obtaining regulatory approvals for our potential products
      and making the transition to commercializing such products. No assurance can
      be
      given that our product research and development efforts will be completed,
      that
      required regulatory approvals will be obtained, that any products will be
      manufactured or marketed or that profitability will be achieved. We will require
      additional funds to bring pharmaceutical products to market and to achieve
      profitable operations.




*Going
      Concern*




As
      a
      result of our losses to date, working capital deficiency, and accumulated
      deficit, the independent auditors report on our financial statements for each
      of
      the years ended December 31, 1994 through 2006, contain an explanatory paragraph
      indicating that there is substantial doubt about our ability to continue as
      a
      going concern. Our continuation is dependent upon infusions of capital and
      our
      ability to generate sufficient cash flow to meet our obligations on a timely
      basis and ultimately to attain profitable operations. We anticipate that we
      will
      continue to incur significant losses until successful commercialization of
      one
      or more products generates sufficient net revenues to cover all costs of
      operation. As a development stage company, we have a limited relevant operating
      history upon which an evaluation of our prospects can be made. Our prospects
      must, therefore, be evaluated in light of the problems, expenses, delays and
      complications associated with a new business. As a result of the
      development-stage nature of our business, additional operating losses can be
      expected. There can be no assurance that we can operate profitably in the
      future.




*Ex-Im
      Bank Transaction*




We
      are in
      negotiations with UPS Capital Business Credit to obtain financing in the sum
      of
      $8,253,000 for our pharmaceutical project in Nigeria. A portion of those loan
      proceeds are anticipated to be applied to reimburse us for expenditures already
      made for certain of the line items covered by the proposal. In March 2006,
      we
      paid a $50,000 non-refundable good-faith deposit to UPS and the loan facility.
      The loan facility proposal is being processed under the U.S. Ex-Im Bank Loan
      Guarantee Program. One requirement, among others, of the loan facility is the
      provision of a Nigerian bank guarantee in the amount of the proposed loan,
      from
      an identified Nigeria-based bank.




24




Two
      Nigeria-based banks have been identified which are qualified to provide the
      Nigerian bank guarantee required by UPS Capital and Ex-Im Bank. UPS has provided
      a loan offer to us, which we have approved in principle. The two Nigerian banks
      must also review and approve the UPS offer. Upon the banks’ acceptance of the
      loan offer, they will undergo discussions with UPS regarding the final terms.
      If
      UPS completes the negotiation to its satisfaction, a formal request will be
      submitted by UPS Capital to Ex-Im Bank for the credit guarantee approval. If
      Ex-Im Bank provides the loan guarantee, UPS Capital will be authorized to
      disburse the funds to us.




There
      is
      no way to predict whether UPS will provide its approval to fund the loan to
      us.
      Without this loan, or alternative capitalization, we have not identified
      alternative sources to fund the construction of the full-scale production
      facility in Nigeria. In the event the loan is obtained, we estimate that there
      will be additional expenses associated with the completion of the Nigerian
      facility and start-up of production. We are hopeful that these additional monies
      can come from potential local financings in Nigeria (debt and/or equity) and/or
      from potential domestic funding sources, although no commitments have been
      obtained for such funding. In the event all of such financing can be obtained,
      we have the further risk that cost overruns and/or delays in bringing the
      product to market could adversely impact execution of our business
      plan.




*Limited
      Marketing Experience and Capacity*




Although
      we may market certain of our potential products through a direct sales force
      if
      and when regulatory approval is obtained, currently we have minimal sales and
      marketing employees. To the extent that we determine not to, or are unable
      to,
      enter into collaborative agreements or to arrange for third party distribution
      of our potential products, significant additional resources will be required
      to
      develop a marketing and sales force. Should we elect to license or sell products
      to distributors, a significant portion of the profits from such products may
      be
      realized by such licensees or distributors, rather than by us.




*Dependence
      upon Dr. Pandey and Other Key Personnel*




Our
      ability to develop the business depends upon our attracting and retaining
      qualified management and scientific personnel, including consultants and members
      of our SAB. As the number of qualified scientists is limited and competition
      for
      such personnel is intense, there can be no assurance that we will be able to
      attract or retain such persons. In particular, we will be dependent upon the
      continued services of Dr. Ramesh C. Pandey, our Chairman of the Board and Chief
      Executive Officer. The loss of key personnel, such as Dr. Pandey, or the failure
      to recruit additional key personnel could significantly impede attainment of
      our
      objectives and have a material adverse affect on our financial condition and
      results of operations. We currently have in place a $2,000,000 key man life
      insurance policy on Dr. Pandey. Dr. Pandey originally entered into an employment
      agreement with us for a ten-year term, which commenced in 1994 and expired
      in
      February 2004. We are in the process of negotiating with Dr. Pandey for the
      adoption of a similar employment agreement for a five year term based upon
      increased compensation, but which agreement has not yet been finalized. It
      is
      anticipated that the employment agreement will provide for substantial benefits
      to Dr. Pandey, including one or more of the following: (i) increased salary
      on
      attainment of $1,500,000 of sales per month to a base salary of $500,000; (ii)
      severance compensation if terminated without cause; (iii) issuance on an
      evergreen basis of nominally priced stock options designed to retain a 20%
      equity interest in Xechem, as well as, additional Class C Series 6 Voting
      Preferred Stock, or an equivalent stock, so that he may maintain a corresponding
      voting interest in Xechem; (iv) a minority position in the equity of Xechem
      Nigeria; (v) a royalty payment for sales of product by us and our subsidiaries,
      including Xechem Nigeria; and (vi) issuance of a minority ownership interest
      in
      Xechem India, which presently has no independent operations other than providing
      raw materials, personnel and facilities to us. The
      employment agreement is subject to negotiation, documentation and board
      approval.




25




It
      is
      contemplated that the new employment agreement if entered into with Dr. Pandey
      would require certain payments in the event of certain changes in control.
      We
      may have to record significant charges to the results of operations if this
      occurs. Further, a portion of such payments may constitute excess employment
      severance payments, which would not be deductible by us for income tax purposes.
      In addition, under recently adopted legislation, we may not be permitted to
      deduct that portion of an executive's compensation, which exceeds $1,000,000
      in
      any year, excluding certain performance-based compensation. There can be no
      assurance that options or warrants issued or which may be issued to Dr. Pandey
      would qualify as performance based compensation, or that we will be able to
      deduct the entire amount earned by Dr. Pandey in any year. Should we fail to
      enter into a new employment agreement with Dr. Pandey, we may have difficulty
      in
      enforcing the restrictive covenants which apply to his old employment
      agreement.




In
      addition, we rely on members of the SAB to assist us in formulating our product
      discovery strategy and therapeutic targets. We do not employ the members of
      the
      SAB and each of these members has commitments to other entities that limit
      their
      availability to us. Some of the members of the SAB are consultants for companies
      that may be our competitors. There is no assurance that we will be able to
      retain key members of the SAB.




*Management
      of Staff Growth and Retention*




We
      expect
      to increase our staffing levels in the future. Our ability to execute our
      strategies will depend in part upon our ability to integrate such new employees
      into our operations and fund such additional cost. It is anticipated that this
      will include the provision of significant new stock option positions to our
      current and future executive employees, as well as, our directors. Our planned
      activities will require the addition of new personnel, including management,
      and
      the development of additional expertise by existing management personnel in
      areas such as preclinical testing, clinical trial management, regulatory
      affairs, manufacturing, and marketing. The inability to acquire such services
      or
      to develop such expertise could have a material adverse impact on our
      operations. Late in 2004, our controller left the company. We have not filled
      this position and must do so in order to ensure the proper and timely filing
      of
      reports. W e
      have
      completed our filings in a timely manner through the use of outside
      consultants.




*Reliance
      on Collaborative Relationships*




We
      believe that we will need to enter into collaborative arrangements with other
      companies due to our limited staff and funding. There is no assurance that
      any
      collaborations will be completed, or if completed, that they will be successful.
      Should any collaborative partner fail in its contribution to the discovery,
      development, manufacture or distribution of a marketable product, our business
      may be adversely affected.




*Uncertainty
      Regarding Drug Development*




One
      of
      our principal strategies is to develop generic equivalents of niche off-patent
      drugs that enjoy limited competition. There can be no assurance that such
      strategy will prove successful or that any proposed products will be
      commercially viable. Even if we successfully develop and market such products,
      with time, other competitors will likely enter the market for these products,
      which could adversely affect our business. There can be no assurance that we
      will be able to replicate products that come off patent, or that we will be
      able
      to obtain regulatory approval for the sale of such compounds.




26




*Product
      and Professional Liability Exposure*




We
      face
      an inherent business risk of exposure to product liability claims if the use
      of
      products manufactured by us results in adverse effects. While we will continue
      to attempt to take appropriate precautions, there can be no assurance that
      we
      will avoid significant exposure to such liabilities. While management intends
      to
      obtain product liability insurance at such time as our operations require it,
      subject to our ability to pay for such insurance, we do not currently intend
      to
      obtain professional liability insurance. There can be no assurance that any
      coverage that we may obtain will be adequate or that adequate insurance coverage
      will be available at acceptable cost, if at all, or that a product or
      professional liability claim would not materially adversely affect our business
      or financial condition. We may lack the resources to defend ourselves, our
      employees, officers or directors against any product liability or professional
      liability claims.




*Risk
      Associated with Xechem Pharmaceuticals Nigeria Project*




Xechem
      Pharmaceuticals Nigeria Limited (Xechem Nigeria) was formed in 2002, under
      the
      Companies and Allied Matters Act of 1992 of the Federal Republic of Nigeria.
      The
      majority of our business is being conducted through Xechem Nigeria. Currently,
      Xechem Nigeria is wholly-owned by us. A former employee of ours has given us
      notice that he believes he owns a percentage of the Xechem Nigeria stock and
      has
      asked for compensation for such stock although he has refused to produce any
      documentation establishing his claim. Xechem Nigeria has no copies of executed
      subscription agreements on behalf of this former employee, no consideration
      was
      ever received by Xechem Nigeria from this former employee for Xechem Nigeria
      stock and no Xechem Nigeria stock was issued to this former employee. If this
      former employee files suit, the cost of defending this litigation in the
      Nigerian courts could be high and detrimental to the operations of Xechem
      Nigeria and the outcome of litigation is uncertain.




Xechem
      Nigeria was formed in order to manufacture, market and distribute a number
      of
      pharmaceuticals and prescription nutraceuticals originating from the African
      continent. On July 18, 2002, we signed an exclusive worldwide license for the
      manufacture, marketing, distribution and sale of NICOSANTM from the National
      Institute of Pharmaceutical Research and Development (NIPRD), government of
      Nigeria, for the treatment of Sickle Cell Disease. NICOSAN/HEMOXINTM are our
      names for the non-toxic phyto-pharmaceutical product formerly named NIPRISANTM.
      In August, 2003, we received an orphan drug designation for NICOSANTM/HEMOXINTM.
      In October 2005, we also obtained the orphan drug designation for
      NICOSANTM/HEMOXINTM from the European Medicine Evaluation Agency, which is the
      drug regulating agency overseeing all 25 countries comprising the European
      Union.




In
      February 2005, Xechem Nigeria signed a long-term lease at nominal cost, for
      a
      production facility to be built on approximately nine acres of land owned by

      Sheda Science and Technology Complex, Abuja, a parastatal of the Federal
      Ministry of Science and Technology, Abuja, Nigeria. Xechem Nigeria is in the
      process of developing this facility into a self-sufficient four-building complex
      for the commercial production of NICOSANTM/HEMOXINTM. Xechem Nigeria has developed
      small-scale formulations which have shown efficacy in the treatment of Sickle
      Cell Disease and must further refine and standardize this formulation for
      consistent production scale quantities sharing uniform active ingredients.
      The
      cost of refining these formulations and completing the build out, equipping
      and
      opening the facility are projected to be in excess of $14,000,000. We have
      not
      yet obtained the financing necessary to support this development, and we may
      be
      unable to do so.




27




In
      addition, social, political and economic instability may be significantly
      greater in Nigeria and many of the other African countries than that typically
      associated with the United States and other industrialized countries. Varying
      degrees of social, political and economic instability could significantly
      disrupt our ability to raise capital and conduct business in Nigeria, or to
      maintain our existing contractual relations.




The
      currency of Nigeria has experienced significant fluctuations against the U.S.
      dollar. Xechem Nigeria maintains its books in the Nigerian currency, the Naira,
      and reports its Nigerian income taxes with Naira financial reports. We may
      experience foreign currency exchange volatility which could cause us to incur
      significant income tax adjustments in the future.




In
      the
      past, interest rates in many African countries, including Nigeria, are heavily
      dependent upon international trade and are accordingly affected by protective
      trade barriers and the economic conditions of their trading partners,
      principally, the United States. The enactment by the United States or other
      principal trading partners of protectionist trade legislation, reduction of
      foreign investment in the local economies and general declines in the
      international securities markets could have a significant adverse effect upon
      the economies of the African countries.




Governments
      in certain of the African countries, including Nigeria, participate to a
      significant degree, through ownership interests and/or regulation, in their
      respective economies. Action by these governments could have a significant
      adverse effect on the economies of such countries.




*Sarbanes-Oxley
      Compliance*




We
      will
      be required to comply with the Sarbanes-Oxley Act. Compliance requires the
      establishment, monitoring and testing of internal controls, among other things.
      Although we plan to implement such controls and procedures, there can be no
      assurances that we will have adequate personnel and finances to meet the
      stringent requirements of these controls and procedures in full.




*Anti-Takeover
      Provisions*




The
      board
      of directors has the authority to issue up to 49,996,350 shares of Class C
      Preferred Stock in one or more series, and to fix the number of shares
      constituting any such series, the voting powers, designations, preferences,
      and
      relative participating, optional, or other special rights and qualifications,
      limitations, or restrictions thereof, including the dividend rights, terms
      of
      redemption (including sinking fund provisions), conversion rights, and
      liquidation preferences of the shares constituting any series, without any
      further vote or action by stockholders. The board of directors may, therefore,
      in the future issue Class C Preferred Stock with voting and conversion rights
      that could adversely affect the voting power of the holders of common stock.
      In
      addition, the issuance of Class C Preferred Stock as well as certain statutory
      provisions of Delaware law could potentially be used to discourage attempts
      by
      others to obtain control of us through merger, tender offer, proxy contest,
      or
      otherwise by making such attempts more difficult to achieve or more
      costly.




*Absence
      of Dividends; Dividend Policy*




We
      have
      not paid any dividends upon our common stock since our formation. We do not
      currently intend to pay any dividends upon the common stock in the foreseeable
      future and anticipate that earnings, if any, will be used to finance the
      development and expansion of our business. Our ability to pay dividends on
      our
      common stock will be limited by the preferences of any Class C Preferred Stock,
      which may be outstanding from time to time and may be limited by future
      indebtedness. Any payment of future dividends and the amounts thereof will
      be
      dependent upon our earnings, financial requirements and other factors deemed
      relevant by our board of directors, including our contractual
      obligations.




28




*Other
      Loans*




As
      of
      March 31, 2007, we owe approximately $6,013,000 (principal only). Of the monies
      we have borrowed from various lenders (including related parties, Alembic and
      others), approximately $1,946,000 is due by the end of the year, including
      $1,000,000 plus interest which is due to Alembic. Should we fail to repay those
      loans, such lenders could take actions adverse to us. We are also obligated
      to
      file a registration statement to register the shares of common stock underlying
      some of the loans funded to us previously.




**Item
      2. Description Of Property**




We
      conduct our operations in a state-of-the-art laboratory facility in New
      Brunswick, New Jersey. As a developer and producer of pharmaceuticals, we must
      meet certain Federal and State standards. For each facility subject to such
      standards, specific operating procedures are developed to meet these standards,
      and compliance with those procedures is monitored on a regular basis by both
      the
      FDA and state regulators. Compliance with these standards and procedures is
      known as current Good Laboratory Practices, or "cGLP" for research operations,
      and current Good Manufacturing Practices, or "cGMP" for manufacturing
      operations. Although we believe that we operate our facility in accordance
      with
      cGLP and cGMP; we have not yet received the FDA certification for
      cGMP.




We
      lease
      our office and laboratory space at New Brunswick Technology Center, 100 Jersey
      Avenue, Building B, Suite 310, New Brunswick, New Jersey 08901. The facility
      consists of approximately 25,000 square feet and at original execution of the
      lease the lessor was unaffiliated. Ownership of the lessor was subsequently
      transferred to a new investment group and Dr. Pandey, our President, Chief
      Executive Officer and Chairman of the board, invested personal funds to acquire
      an approximately 25% interest in the lessor. Our base rent is approximately
      $14,217 per month, subject to annual increases, which commenced July 1, 2002,
      and continues for five years with base rent of approximately $15,700 per month
      in year five. In addition to base rent, we are responsible for our proportionate
      share of taxes and all other expenses of the building. We are not up to date
      with our current monthly rent.




As
      part
      of the negotiated terms of the July 2002 lease agreement, past due rental
      payments totaling approximately $88,000 would have been reduced to approximately
      $52,000, provided all rent and additional rent was paid on a timely basis.
      We
      did not fulfill our obligations fully under the lease agreement in 2003, and
      are
      in arrears for $89,000 due under the lease agreement during the year ended
      December 31, 2006. As of December 31, 2006, $15,000 remains due to the landlord
      for failure to perform certain obligations under the agreement. As of December
      31, 2006, $104,000 remains due and payable to landlord and is included in
      accounts payable.




Through
      our subsidiary, Xechem Pharmaceuticals Nigeria Limited, we signed a long-term
      lease for a production facility on approximately nine acres of land at nominal
      cost on land owned by Sheda Science and Technology Complex, Abuja, a parastatal
      of the Federal Ministry of Science and Technology, Abuja, Nigeria. Xechem
      Nigeria is in the process of expanding this site into a self-sufficient five
      to
      six-building complex for the commercial production of NICOSANTM / HEMOXINTM. While
      production is currently in a pilot scale facility, much of the equipment
      necessary for expanded production has been purchased or is in the process of
      fabrication for increased sales of product in the Nigerian market.




29





**Item
      3. Legal Proceedings**




There
      are
      no pending legal proceedings.




**Item
      4. Submission Of Matters To A Vote Of Stockholders**




On
      October 24, 2006, the Company held its Annual Stockholder Meeting at its
      headquarters in New Brunswick, NJ. Proxies representing approximately 82% of
      the
      shares voted were cast as follows:





**Election
      of Directors**





For
            
            WithheldRamesh
                C. Pandey, Ph.D.
            
            
            1,419,644,689
            
            
            22,291,193Stephen
                F. Burg
            
            
            1,412,025,886
            
            
            29,909,996Adesoji
                Adelaja, Ph.D.
            
            
            1,418,129,352
            
            
            23,807,530




**Ratify
      Appointment of Moore Stephens, PC**





For
            
            Against
            
            Withheld1,414,639,848
            
            
            11,177,365
            
            
            16,118,669




**Approve
      2006 Stock Award Plan**




For
            
            Against
            
            Withheld174,825,512
            
            
            64,678,079
            
            
            12,987,887





**Approval
      to Increase the Number of Shares of Common Stock**


**Authorized
      for Issuance to 5 Billion Shares**





For
            
            Against
            
            Withheld1,292,319,840
            
            
            142,914,401
            
            
            6,701,641





Xechem’s
      board of directors held a special meeting immediately following the conclusion
      of the Annual Meeting and passed a resolution restricting the ability of the
      Company to issue more than 3.5 billion shares of common stock without a further
      vote of the shareholders.




30




**Item
      5. Market For Common Equity And Related Stockholder
      Matters**




Market
      Information




Our
      Common Stock is traded on the OTC Bulletin Board under the trading symbol
“XKEM.” The following table shows the high and low bid quotations, on a
      quarterly basis, of our common stock from January 1, 2005 through March 31,
      2007:




Common
                Stock2005
              First
              Quarter
            
            2005
              Second
              Quarter
            
            2005
              Third
              Quarter
            
            2005
              Fourth
              QuarterHigh
                Bid
            
            $
            0.029
            
            $
            0.017
            
            $
            0.0165
            
            $
            0.029Low
                Bid
            
            $
            0.013
            
            $
            0.007
            
            $
            0.01
            
            $
            0.012006
              First
              Quarter
            
            
            2006
              Second
              Quarter
            
            
            2006
              Third
              Quarter
            
            
            2006
              Fourth
              Quarter
            
            
            2007
              First
              QuarterHigh
                Bid
            
            $
            0.0297
            
            $
            0.227
            
            $
            0.495
            
            $
            0.0345
            
            $
            0.0272Low
                Bid
            
            $
            0.0036
            
            $
            0.0034
            
            $
            0.0026
            
            $
            0.0165
            
            $
            0.018




Quotations
      reflect inter-dealer prices, without retail mark-up, mark-down or commissions
      and may not represent actual transactions.




Dividends




We
      have
      not declared or paid any dividends on our common stock since our inception
      and
      our board of directors does not contemplate doing so in the near future. Any
      decisions as to future payments of dividends will depend on our earnings and
      financial position and such other factors, as our board of directors deems
      relevant.




Holders




As
      of
      March 31, 2007, there were 356 record holders and approximately 7,000 beneficial
      owners of our common stock. Dividends on the common stock are subordinated
      to
      the payment of dividends on our outstanding Class A Voting Preferred Stock
      (the
      "Class A Preferred Stock"). The Class A Preferred Stock has a dividend
      preference of $.00001 per annum per share on the liquidation preference of
      $.00001 per share on a cumulative basis. As of March 31, 2007 there were 2,500
      outstanding shares of Class A Preferred Stock. As of March 31, 2007 there were
      38,079 outstanding shares of Class C, Series 6 Preferred Stock with a par value
      of $.00001 with voting rights of 1 share of Class C, Series 6 equal to 10,000
      shares. All of the Class C Series 6 shares are held by Dr. Pandey. As of March
      31, 2007, there were 666 outstanding shares of Class C Series 7 Preferred Stock
      and 6 holders of record.




31




Equity
      Compensation Plan Information




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
              (a)
            
            Weighted
                average exercise price of outstanding options, warrants and
                rights
              (b)
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a)
              (c)Equity
                compensation plans approved by security holders
            
            
            69,542,983
            
            $
            0.035
            
            
            85,500,000Equity
                compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            69,542,983
            
            $
            0.035
            
            
            85,500,000




During
      the fiscal year ended December 31, 2006, we converted approximately $4,075,000
      of convertible debt plus $242,000 of accrued interest into approximately
      989,114,600 shares of our common stock at conversion rates from $0.005 to
      $0.0075.




Recent
      Sales of Unregistered Securities




The
      following sets forth securities sold by us in the last two years without
      registration under the Securities Act. Unless otherwise noted, in each case
      we
      sold shares of our common stock or warrants to acquire common stock in private
      transactions to persons we believed were “accredited investors” and/or
“sophisticated investors” not affiliated with us unless otherwise noted, and
      purchasing the shares with an investment intent. Each of the transactions
      involved the offering of such securities to a substantially limited number
      of
      persons. Each person took the securities as an investment for his/her/its own
      account, and not with a view to distribution. We relied upon exemptions
      contained in Section 4(2) of the Securities Act or Regulation D promulgated
      thereunder in each of these instances. In each case, we did not engage in
      general solicitation and advertising and the shares were purchased by investors
      with whom we, through our officers and directors, had preexisting relationships.
      Each person had access to information equivalent to that which would be included
      on a registration statement on the applicable form under the Securities Act.
      We
      did not use underwriters for any of the transactions described below; therefore,
      these transactions did not involve underwriter discounts or
      commissions.




In
      June
      2006, we reached final agreement with Marjorie Chassman (“Chassman”) regarding a
      bridge loan financing, whereby Chassman agreed to loan $1,025,000 to Xechem,
      in
      two tranches, one in the amount of $500,000 and the other in the amount of
      $525,000. The note was negotiated to convert into shares of our common stock
      at
      $0.015 per share (approximately 66,666,667 shares, excluding interest). The
      note
      bears interest at 8% and is due May 31, 2008. As additional consideration for
      infusion of the capital, Xechem issued Chassman 66,666,667 warrants, exercisable
      at $0.02 per share for a period of 5 years. The warrants were exercised in
      October 2006 and a net total of 25.0 million shares were issued in a cashless
      exercise. In addition, Chassman has agreed to extend the due date on all
      existing notes held by the Company to May 31, 2008.




32




Over
      the
      period from February 2006 through May 2006, Chassman infused $780,000 into
      Xechem. A note will be issued to Chassman in the amount of $780,000, it will
      bear interest at 8% and is due May 31, 2008. The note is convertible into shares
      of our common stock at $0.005 per share (approximately 156,000,000 shares,
      excluding interest). The loan has not been documented at this time.




In
      June
      2006, Chassman infused $200,000 into Xechem. A note will be issued to Chassman
      in the amount of $200,000, it will bear interest at 8% and is due May 31, 2008.
      The note is convertible into shares of our common stock at $0.01 per share
      (20,000,000 shares, excluding interest). The loan has not been documented at
      this time.




In
      October 2006, Chassman agreed to loan $500,000 to Xechem. A note will be issued
      in the amount of $500,000, it will bear interest at 8% and is due May 31, 2008.
      The note is convertible into shares of our common stock at $0.03 per share
      (approximately 16,666,667 shares, excluding interest). Xechem may prepay the
      note any time within six months of receipt of $500,000 during which six month
      prepayment period, Chassman agrees not to convert the note. As additional
      consideration for infusion of the capital and if Xechem does not repay the
      loan
      within six months of receipt of the full $500,000, Xechem will issue Chassman
      an
      additional 8,333,333 warrants, exercisable at $0.04 per share for a period
      of 5
      years,. The loan has not been documented at this time.




In
      2006,
      we received $332,000 from related parties and $95,000 from non-related parties
      in the form of ten short-term notes. The due dates of the notes range one month
      to one year with interest at 8% - 15%. The notes are convertible into shares
      of
      our common stock at market value at the date of loan (approximately 33,077,000
      shares excluding interest). The holders were also granted a five-year option
      to
      purchase shares of common stock at market value at the date of grant
      (approximately 19,832,000 options). At December 31, 2006, accrued interest
      totaled $13,200.




On
      February 28, 2005, we entered into a series of agreements (February 2005
      Financing), pursuant to which investors infused $1,567,639. Investors, including
      Margie Chassman, purchased approximately 1,568 units. Ms. Chassman is the spouse
      of David Blech. Each unit is comprised of $1,000 principal amount of secured
      convertible promissory notes and five year warrants to purchase approximately
      33,333.33 shares of our common stock at $0.015 per share (for warrants to
      purchase a total of approximately 52,266,661 shares of common stock for 1,568
      units). Furthermore, each of the notes was convertible into our common stock
      at
      $0.015 per share. This debt has subsequently been paid in full. The original
      52,266,661 warrants, which contained non-dilution features related to the number
      of shares to be exercised as well as the exercise price, were exercised in
      July
      2006. A net total of 77,725,836 shares were issued at $0.0099 per share in
      a
      cashless exercise.




In
      August
      2005, pursuant to the Term Sheet (August 2005 Financing), Ms. Chassman and
      certain other investors introduced to us through Chassman, agreed to invest
      $1,000,000 over the course of 50 days as follows: (a) $100,000 within 24 hours
      of execution of the Term Sheet; (b) $400,000 on or before September 6, 2005;
      and
      (c) $500,000 on or before October 6, 2005, provided however, that the investors
      could extend the date for full funding of the September and October installments
      by seven days each. The terms of this financing were amended on September 30,
      2005. A total of $1,000,000 was funded.




We
      issued
      convertible notes in the amounts funded and agreed to issue 1,500,000 shares
      of
      our $0.00001 par value per share common stock for each $100,000 of principal
      amount of notes funded, for a total of 15,000,000 shares of common stock. These
      shares were issued in June 2006.




The
      notes
      are due and payable on May 31, 2008 and bear simple interest at the rate of
      8%
      per annum, which shall accrue and be due and payable on maturity. The notes
      were
      prepayable in whole or part without penalty at any time through January 31,
      2006. The notes plus accrued and unpaid interest are convertible into our
      $0.00001 par value per share common stock at $0.005 per share (approximately
      200,000,000 shares, with no accrued interest). In June 2006, $600,000 and
      $50,000 in principal and accrued interest was converted into 130,069,984 shares
      of common stock.




33




Upon
      the
      full and timely funding of the August 2005 Financing notes, the conversion
      price
      on all previously existing and outstanding loans (principal plus accrued
      interest) owing from us to Chassman, the Harbor Trust, or any of their
      respective affiliates (approximately $3,800,000 in the principal amount) was
      reset to $0.005 per share, subject to adjustment.




In
      2005,
      we received $445,000 from related parties and $50,000 from non-related parties
      in the form of nine short-term notes. The due dates of the notes range from
      six
      months to one year with interest at 8%-12% with accrued interest at December
      31,
      2006 of $13,500. New terms are being negotiated for past due notes.




In
      2005,
      prior year notes for related and non-related parties totaling $551,000 were
      extended from six months to one year and the holders were granted a five-year
      option to purchase shares of common stock at market value at the date of grant.
      These options were also given to the parties whose notes were issued in 2005.
      In
      2006, an additional 6,000,000 options were granted for the extension of two
      loans. At December 31, 2006, a total of 38,626,000 options were granted to
      purchase shares of our common stock.




In
      2005,
      we established a Sickle Cell Advisory Board to assist management in creating
      public awareness of our efforts to bring an effective treatment for Sickle
      Cell
      Disease to market in the United States and the world. Members will collectively
      receive up to a total of 20,000,000 shares of our common stock in consideration
      for their services. We have issued 4,000,000 shares as of December 31, 2006.




We
      have
      agreed to provide to Dr. Pandey the amount of voting stock necessary for him
      to
      maintain 20% of the outstanding voting stock of our company. On December 31,
      2006, we issued Dr. Pandey 28,003 shares of Class C, Series 6 Preferred Stock,
      so that he may maintain his 20% voting interest. On December 31, 2005, we issued
      Dr. Pandey 3,587 shares of Class C, Series 6 Preferred Stock, so that he may
      maintain his 20% voting interest. On December 31, 2004, we issued Dr. Pandey
      5,566 shares of Class C, Series 6 Preferred Stock, so that he may maintain
      his
      20% voting interest. The shares were issued to Dr. Pandey at par value. Each
      share of Class C, Series 6 Preferred Stock is equivalent to 10,000 shares of
      voting stock, but has no economic rights other than to be redeemed at par or
      to
      participate pro rata with common stock.




From
      January through April 6, 2006, we received $605,000 in the aggregate in
      convertible bridge loan financings. Ms. Chassman loaned us $580,000 and a
      related party to us loaned us the other $25,000. The notes for the loans are
      in
      negotiation and will include an interest rate, a conversion rate to common
      stock
      of approximately $0.005 per share and will have a maturity date within six
      months to two years. This financing is subject to final negotiation,
      documentation and board approval.




For
      the
      period from November 11, 2003 through June 30, 2004, Marjorie Chassman advanced
      $2,800,000 of convertible debt to us. She received warrants to purchase
      14,000,000 shares of common stock at $0.0025 per share. On June 17, 2005, as
      part of a debt restructuring, Ms. Chassman agreed to: (1) eliminate her
      registration rights with respect to the $2,800,000 debt; and (2) eliminate
      Chassman’s first priority interest in the remaining CepTor shares owned by us
      (500,000). We agreed to assist Chassman in obtaining 144(K) eligibility opinions
      of her outstanding debt conversions. In December 2005, $35,000 was advanced
      to
      us by Chassman which was subsequently converted to exercise warrants to purchase
      14 million shares of common stock in 2006. At December 31, 2005 we had a balance
      of $2,659,000 from this loan and recorded $59,000 in accrued interest. In the
      twelve months ended December 31, 2006, $2,659,000 in principal and $161,000
      in
      accrued interest was converted into 734,505,264 shares of common stock
      (exercised at conversion rated between $.0025 - $.005 per share). At December
      31, 2006, we have a balance of $0.0 from this loan and $0.0 in accrued
      interest.




34




***Item
      6.*** ***Management's
      Discussion And Analysis***




THE
      FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION SHOULD
      BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
      THERETO INCLUDED ELSEWHERE IN THIS REPORT.





General




Xechem
        International, Inc. (“Xechem”), a Delaware corporation formed in 1994, is a
        holding company which owns all of the capital stock of Xechem, Inc., a
        development stage biopharmaceutical company engaged in the research, development
        and production of niche generic and proprietary drugs from natural sources.
        Xechem, Inc. was a subsidiary of LyphoMed, Inc. (later known as
        Fujisawa/LyphoMed, Inc.), a publicly traded company before it was acquired
        with
        all of its assets by Dr. Ramesh C. Pandey in 1990. Xechem Laboratories, Inc.
        (formed in 1993), XetaPharm, Inc. (formed in 1996), Xechem (India) Pvt. Ltd.
        (acquired in 1996), and Xechem UK Ltd. (formed in 2005) are all our
        subsidiaries. Xechem Pharmaceutical China Ltd. (formed in 2000) is an inactive
        affiliate. Xechem Pharmaceuticals Nigeria Limited (formed in 2002) is currently
        wholly-owned by us. Xechem’s principal product under development is
        NICOSANTM/HEMOXINTM which has shown efficacy in the prophylactic management of
        Sickle Cell Disease (SCD). The development and production of NICOSANTM/HEMOXINTM
at this time is being conducted through Xechem Nigeria, Xechem Research
        Laboratories of Xechem, Inc. and Children’s Hospital of Philadelphia (CHOP). In
        July 2006, Xechem Nigeria received approval for the marketing and sale of
        NICOSANTM in Nigeria.


We
      are in
      the process of expanding our production facility in Nigeria for our Sickle
      Cell
      drug, NICOSANTM, and preparing for the clinical testing and trials of HEMOXINTM in
      the United States. We anticipate that expenses will increase, with the expansion
      of our operations and marketing efforts, as described more fully herein. Our
      planned activities will require the addition of new personnel, including
      management, and the development of additional expertise in areas such as
      preclinical testing, clinical trial management, regulatory affairs,
      manufacturing and marketing. In order to pursue these activities, we must obtain
      additional financing, whether in the form of loans or equity infusions. There
      can be no certainty that we will be able to obtain the financing in the amounts
      or at the times required.




35




Results
      of Operations




***The
      Year Ended December 31, 2006 vs. The Year Ended December 31,
      2005***




The
      following table sets forth certain statement of operations data of Xechem for
      each of the years ended December 31, 2006 and December 31, 2005 and for the
      cumulative period from inception (March 15, 1990) to December 31,
      2006.





**Years
                Ended**
              **December
                31**
            
            **Cumulative**
              **from**
              **Inception
                to December 31, 2006**(in
                thousands)2006
            
            2005Revenue
            
            $
            202
            
            $
            6
            
            $
            2,323Cost
                of Sales
            
            $
            79
            
            $
            —
            
            $
            79Research
                and development expense
            
            $
            826
            
            $
            1,111
            
            $
            15,478General
                and administrative expenses
            
            $
            5,676
            
            $
            3,155
            
            $
            29,928Sales
                and Marketing
            
            $
            275
            
            $
            —
            
            $
            275Write
                down of inventory and intangibles
            
            $
            —
            
            $
            —
            
            $
            1,861Loss
                from operations
            
            $
            (6,654
            )
            $
            (4,260
            )
            $
            (45,298
            )Other
                expense
            
            $
            (4,476
            )
            $
            (6,345
            )
            $
            (39,748
            )Sale
                of New Jersey net operating loss carry forwards
            
            $
            —
            
            $
            566
            
            $
            2,636Net
                Loss
            
            $
            (11,130
            )
            $
            (10,039
            )
            $
            (82,410
            )




Revenue




Xechem
      Nigeria received approval on July 3, 2006 from Nigeria’s drug regulatory
      authority, the National Agency for Food and Drug Administration and Control
      (NAFDAC), for the marketing and sale of NICOSANTM, for the prophylactic
      management of Sickle Cell Disease (SCD). The approval is for an initial term
      of
      two years, which we believe will allow Xechem to complete confirmatory Phase
      III
      clinical trials in Nigeria. During the two year term, the company faces no
      restrictions on its ability to market and sell the drug in Nigeria. However,
      currently Xechem Nigeria can produce the product only in limited quantities
      at
      its pilot-scale facility in Abuja, Nigeria.




We
      had
      revenues of $202,000 for the year ended December 31, 2006 as compared to $6,000
      for the year ended December 31, 2005. This represents $197,000 from the sales
      of
      NICOSANTM by our subsidiary Xechem Nigeria and $5,000 from the product sales by
      our subsidiary Xetapharm, Inc for the twelve months ended December 31, 2006
      as
      compared to $6,000 from the product sales by our subsidiary Xetapharm, Inc.
      for
      the twelve months ended December 31, 2005.




Research
      and Development




Our
      research and development expenditures have been directed primarily toward the
      development of our new Sickle Cell treatment drug NICOSANTM/HEMOXINTM, which is
      being developed by our wholly-owned subsidiary, Xechem Nigeria. Our research
      and
      development expenditures are also made in conjunction with the development
      of
      compounds to make niche generic anticancer, antiviral and antibiotic products
      that enjoy significant market demand but are no longer subject to patent
      protection.




36




Research
      and development expenditures decreased $286,000 or 35% from $1,111,000 for
      the
      year ended December 31, 2005 to $826,000 for the year ended December 31, 2006.
      In the year ended December 31, 2006, our costs associated with the development
      of our Sickle Cell Disease drug NICOSANTM totaled
      $382,000, a decrease of $197,000, as compared to the same period for 2005.
      Other
      major expenses of 2006 were: (a) salaries and wages of our research personnel
      which were approximately $207,000 for the year ended December 31, 2006, as
      compared to approximately $245,000 for the year ended December 31, 2005; (b)
      depreciation expense of approximately $327,000 for the year ended December
      31,
      2006, as compared to $93,000 for the year ended December 31, 2005; (c)
      consulting fees which decreased to $3,000 for the year ended December 31, 2006
      as compared to $11,000 for the year ended December 31, 2005; (d) repairs
      and lab materials and supplies decreased $25,000 from $88,000 for the year
      ended
      December 31, 2005 to $63,000 for the year ended December 31, 2006; (e)
      professional development decreased $5,000 from $5,000 for the year ended
      December 31, 2005 to $0 for the year ended December 31, 2006; (f) purchase
      discount was $0 for the year ended December 31, 2006 as compared to $16,000
      for
      the year ended December 31, 2005; and (g) other expenses increased $16,000
      from
      $15,000 for the year ended December 31, 2005 to $31,000 for the year ended
      December 31, 2006.




We
      anticipate expenses to increase with the expansion of our production facility
      in
      Nigeria for our Sickle Cell drug, NICOSANTM, and the clinical testing and trials
      of HEMOXINTM in the United States. In order to pursue these activities, we must
      obtain additional financing. There can be no certainty that we will be able
      to
      obtain the financing in the amounts or at the times required.




General
      and Administrative




General
      and administrative expenses increased by $2,521,000 or 80% to $5,676,000 for
      the
      year ended December 31, 2006 as compared to $3,155,000 for the year ended
      December 31, 2005. The increase was primarily due to legal costs of
      approximately $1,485,000 paid as part of the Xechem,
      Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C
      1920 lawsuit
      settlement. In return for Xechem’s full release of all claims that were or could
      have been asserted against BMS in connection with the case, BMS agreed to pay
      us
      $4,200,000 and further agreed to release us from all claims BMS could have
      asserted against us in the case. Legal fees and costs totaled approximately
      $1,955,000.




The
      other
      major expenses of 2006 were: (a) salaries and wages of approximately
      $1,159,000 an increase of approximately $220,000 or 23% as compared to 2005;
      (b) consulting fees which decreased to $172,000 for the year ended December
      31, 2006 as compared to $546,000 for the year ended December 31, 2005; (c) 
rent expense increased $17,000 from $178,000 for the year ended December 31,
      2005 to $195,000 for the year ended December 31, 2006; (d) legal fees
      totaled $1,955,000 in 2006, as compared to $389,000 in 2005, an increase of
      $1,566,000 or 403%; (e) directors and officers insurance decreased $11,000
      from $113,000 for the year ended December 31, 2005 to $102,000 for the year
      ended December 31, 2006; (f) medical and property insurance decreased
      $22,000 from $159,000 for the year ended December 31, 2005 to $137,000 for
      the
      year ended December 31, 2006; (g) advertising expense increased
      approximately $41,000 from $16,000 for 2005 as compared to $57,000 in 2006;
      (h)
      private placement cost decreased approximately $179,000 from $179,000 in 2005
      to
      $0 in 2006; (i) accounting fees increased approximately $63,000 from $57,000
      in
      2005 to $120,000 in 2006; (j) travel expenses increase $25,000 from $197,000
      in
      2005 to $222,000 in 2006; (k) professional services decreased $15,000 from
      $56,000 in 2005 to $41,000 in 2006; (l) utilities and office expenses increased
      $13,000 from $121,000 in 2005 to $108,000 in 2006; (m) stock options expense
      was
      $1,387,000 for the year ended December 31, 2006 as compared to $0 in 2005;
      (n)
      annual meeting expense was $50,000 in 2006 as compared to $0 in 2005; (o) prior
      year expense adjustment was $321,000 for 2006 as compared to $0 in 2005; and
      (p)
      other expenses increased $87,000 from $205,000 for the year ended December
      31,
      2005 to $292,000 for the year ended December 31, 2006.




37




Our
      share
      of net loss from CepTor stock was $4,287,000, calculated on the basis of our
      approximately 4% ownership, for the twelve months ended December 31, 2005 as
      compared to $0 for the twelve months ended December 31, 2006.




Other




Interest
      expense for non-related parties equaled approximately $8,647,000 for the year
      ended December 31, 2006, an increase of approximately $3,925,000 as compared
      to
      $4,722,000 for the year ended December 31, 2005. The increase in expense was
      the
      result of additional debt incurred in 2006 and approximately $6,958,000 was
      non-cash in nature due to borrowings evidenced by debentures and notes and
      the
      beneficial conversion feature of said debentures. Interest expense for related
      parties was approximately $133,000 for the year ended December 31, 2006 as
      compared to $97,000 for the year ended December 31, 2005 due to increased
      indebtedness. For the year ended December 31, 2006, we had $4,305,000 of other
      income, as compared of $169,000 of other expense for the year ended December
      31,
      2005, which was mainly a result of Xechem,
      Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C
      1920 lawsuit
      settlement. In return for Xechem’s full release of all claims that were or could
      have been asserted against BMS in connection with the case, BMS agreed to pay
      us
      $4,200,000 and further agreed to release us from all claims BMS could have
      asserted against us in the case.




***New
      Jersey Economic Development Authority***





In
      prior
      years, we received cash from the sale of our New Jersey net operating losses
      (“NOLs”), under a program sponsored by the State of New Jersey, which ranged
      from $300,000 to $500,000 annually. Under new guidelines adopted by the State
      of
      New Jersey, Xechem fails to qualify in 2006 for the sale of NOL’s because fewer
      than 75% of our employees, including subsidiaries, are based in New
      Jersey




Liquidity
      and Capital Resources




On
      December 31 2006, we had cash and cash equivalents of $105,000, negative working
      capital of $5,794,000 and stockholders’ deficit of $6,070,000.




As
      a
      result of our net losses through December 31, 2005 and accumulated deficit
      since
      inception, our accountants, in their report on our financial statements for
      the
      year ended December 31, 2005, included an explanatory paragraph indicating
      there
      is substantial doubt about our ability to continue as a going concern. This
      condition has not changed as of December 31, 2006. With respect to
      NICOSAN TM /HEMOXIN TM ,
      the
      Company commenced the commercial launch of the drug in Nigeria on a limited
      basis in the third quarter 2006 and is planning to begin pursuit of the
      pre-clinical and clinical trials in the United States as required for Food
      and
      Drug Administration (FDA) approval. These planned activities are entirely
      dependent on financings. There can be no assurances that the required funding
      will be obtained or that the Company will succeed in its efforts to launch
      the
      drug in Nigeria or the United States.




38




In
      order
      to meet these cash needs, we have entered into the following recent financing
      agreements.





(1)  On
      December 13, 2005, we entered into an agreement in principle concerning the
      settlement of the Xechem,
      Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C
      1920 lawsuit.
      ( *See
      Note 6 and 11A)*





In
      return
      for Xechem’s full release of all claims that were or could have been asserted
      against BMS in connection with the case, BMS agreed to pay us $4,200,000 and
      further agreed to release us from all claims BMS could have asserted against
      us
      in the case. Each party agreed to bear their own costs, fees and expenses.
      Further, BMS agreed to waive the $29,599 fee award granted by the Court on
      September 7, 2005. BMS made the settlement payment to us in January
      2006.





After
      payment of legal fees, costs, interest due on prior financings and prorations,
      we received approximately $1,700,000 from this settlement.





(2)
      The
      agreement with Alembic Limited was restructured in December 2005 ( *See
      Note 11D* ).
      In
      accordance with the terms of the loan, in January 2006, from the proceeds from
      the BMS settlement, $1,000,000 of principal and $190,700 of accrued interest
      was
      paid. The remaining principal balance of $2,000,000 due on the Alembic
      Promissory Note, together with unpaid interest, is due and payable December
      31,
      2006.





Xechem
      did not pay the amounts due Alembic on December 31, 2006. Xechem and Alembic
      have extended the Maturity Date, pursuant to a Letter Agreement, dated January
      4, 2007 to January 31, 2007. Pursuant to a second Letter Agreement, dated
      January 31, 2007, the parties agreed to extend the Maturity Date to February
      24,
      2007. As consideration for this extension, Xechem agreed to pay to Alembic,
      in
      reduction of the indebtedness due under the Note, the sum of $100,000. Pursuant
      to a third Letter Agreement, dated as of February 24, 2007 (executed March
      1,
      2007), the parties agreed to extend the Maturity Date to March 31, 2007. As
      consideration for the third extension, Xechem paid Alembic, in reduction of
      the
      indebtedness due under the Note, the sum of $100,000 on March 1, 2007, which
      payment was a condition to the extension.





Furthermore,
      the parties agreed that if Xechem made a principal payment to Alembic in
      reduction of the Note of not less than $1,000,000, together with accrued
      interest, on or before March 31, 2007, then the Maturity Date will be extended
      for an additional six months. Due to finalization of new funding (See Note
      2(12)), Alembic agreed to extend the payment date five days and payment was
      made
      on April 5, 2007.




(3)  On May
      31, 2006, Nigeria Export-Import Bank (NEXIM) funded a direct loan to our
      wholly-owned subsidiary, Xechem Pharmaceuticals Nigeria, Ltd. (Xechem
      Nigeria).




The
      loan
      is in the principal amount of 150,000,000 Naira or approximately One Million
      Two
      Hundred Thousand Dollars (US) ($1,179,000). The loan proceeds are being used
      primarily to facilitate the full-scale commercial production of NICOSANTM through
      the expansion and integration of existing production facilities at Sheda Science
      and Technology Complex, Gwagwalada-Abuja. The loan facility will extend for
      a
      period of up to three years, with no principal payments due during the first
      year. The loan facility bears interest at the rate of 15% per year, payable
      during the first year in installments in November 2006 and May 2007. Thereafter,
      the loan facility is to be repaid through four consecutive semi-annual
      installments of principal and interest with the first repayment (of
      approximately $400,000 US) occurring on November 29, 2007. The loan facility
      is
      secured by: (a) an all assets debenture on the assets of the company which
      has
      been incorporated into a trust for all lenders to be managed by Diamond Trustees
      Company; (b) personal guaranty issued by the CEO, Dr. Ramesh Pandey, backed
      by a
      notarized statement of net worth; and (c) promissory notes.





Xechem
      Nigeria is obligated to pay the following fees: (a) a facility fee of 1% flat
      on
      the facility amount or 1,500,000 Naira (approximately $12,500 US); (b) a
      management fee of 0.5% flat on the principal amount outstanding from time to
      time, payable annually on the anniversary of the facility; and (c) a monitoring
      fee of 100,000 Naira (approximately $800 US), payable annually on the
      anniversary of the facility. Nexim reserves the right to vary the rates as
      dictated by market realities. Nexim is also entitled to name a director to
      the
      Xechem Nigeria board of directors pending the repayment of the facility.




39




(4)  We
      have
      been in extended negotiations with UPS Capital Business Credit (“UPS Capital”)
      to obtain financing to cover the cost of acquiring the plant equipment and
      machinery needed to establish a commercial scale production facility in Nigeria
      under the U.S. Ex-Im (“Ex-Im”) Bank Loan Guarantee Program. Based on the
      estimated cost of the project, as well as the criteria utilized under Ex-Im’s
      guidelines, the Ex-Im statutory fees, etc., the total amount sought by our
      subsidiary, Xechem Pharmaceuticals Nigeria, Ltd. (“XPNL”) from UPS Capital is
      $9.38 million. In March 2006, we paid a $50,000 non-refundable good faith
      deposit to UPS Capital.





On
      October 17, 2006, we received notification from UPS Capital that Ex-Im has
      approved a comprehensive credit guarantee to support UPS Capital’s $9.38 million
      loan to XPNL, and that UPS has approved XPNL for a $9.38 million credit facility
      on the following principal terms:





(i)
            Proceed
                to be used to fund up to 85% of XPNL’s cost (i.e, $8,538,542) of the US
                manufactured equipment and machinery needed for the establishment
                of a
                commercial scale pharmaceutical plant in Nigeria, plus certain local
                costs, fees, etc., for a total credit facility of
                $9,388,981;





(ii)
            Principal
                plus interest at a rate of LIBOR + 2.75% repayable semi-annually
                in
                arrears over five years;





(iii)
            Loan
                to be supported by a 100% Ex-Im guarantee, which has been approved,
                together with local bank guarantees from two Nigerian banks, Access
                Bank,
                Plc, and Diamond Bank, Plc. (Subsequently,Bank
                PHB Plc replaced Access Bank).





(iv)
            Part
                of UPS Capital loan will be used to cover 100% of the cost of Ex-Im
                Statutory Exposure Fee of $850,439.





(v)
            Total
                up-front fees payable to UPS Capital are $190,795 (net of the $50,000
                good
                faith deposit).




Upon
      payment by XPNL of the UPS Capital Fees and the receipt by UPS Capital of the
      final commitments from Access Bank and Diamond Bank, the loan documents will
      be
      finalized and the proceeds released in accordance with the terms of the loan.
      Both local Nigerian banks have issued letters of intent to provide the required
      guarantees, and XPNL is in the midst of negotiations regarding the final terms
      of local Nigerian bank commitments regarding the guarantees. Though there is
      no
      certainty that Diamond Bank and Access Bank will issue the final guarantees
      required to complete the UPS loan, we believe that such guarantees will be
      issued. If for any reason such guarantees do not materialize, we will
      immediately turn to identifying a suitable alternative Nigerian bank or banks
      to
      provide the required guarantee(s), though there can be no assurance we would
      be
      successful in doing so. If for any reason the UPS loan does not close, including
      because of the failure to procure the required local bank guarantee(s), and
      in
      the absence of alternative capitalization, including possible additional local
      financing from Nexim Bank in Nigeria, we have not identified alternative sources
      to fully fund the Nigerian Pharmaceutical Project or our ongoing
      operations.





If
      and
      when the UPS loan closes, there will be additional expenses associated with
      the
      completion of the Nigerian facility and start-up of production. We are hopeful
      that these additional monies will be obtained from potential local financing
      in
      Nigeria (debt, equity and/or possible prepayment for product or other product
      sales) and/or from potential domestic funding sources, although no commitments
      have been obtained for such funding. In the event all of such financing can
      be
      obtained, we have the further risk that cost overruns and/or delays in bringing
      the product to market could adversely impact execution of our business plan.





(5)
      In
      the twelve months ended December 31, 2006, holders of Xechem debt converted
      Xechem debt (in the form of principal and interest) in the aggregate amount
      of
      $4,317,000 ($4,075,000 of which is principal and $242,000 of which is interest)
      into 989,114,600 shares of Xechem’s common stock (exercised at conversion rates
      between $0.0025 - $0.0075 per share) representing approximately 65% of Xechem’s
      then issued and outstanding stock.




40





(6)
      Over
      the period from February 22, 2006 through May 10, 2006, Marjorie Chassman
      (“Chassman”) infused $780,000 into Xechem. The note will be issued to Chassman
      in the amount of $780,000, it will bear interest at 8% and is due May 31, 2008.
      The note is convertible into shares of common stock at $0.005 per share
      (approximately 156,000,000 shares, excluding interest, which is also convertible
      into stock at $0.005 per share). The loan has not been documented at this
      time.





Over
      the
      period from June 2, 2006 through June 5, 2006, Chassman infused $200,000 into
      Xechem. The note will be issued to Chassman in the amount of $200,000, it will
      bear interest at 8% and is due May 31, 2008. The note is convertible into shares
      of common stock at $0.01 per share (20,000,000 shares, excluding interest,
      which
      is also convertible into stock at $0.01 per share). The loan has not been
      documented at this time.





Chassman
      agreed to loan $1,025,000 to Xechem, in two tranches, one in the amount of
      $500,000 and the other in the amount of $525,000, which were received by June
      20, 2006. The note is convertible into shares of common stock at $0.015 per
      share (approximately 66,666,667 shares, excluding interest). The note bears
      interest at 8% and is due May 31, 2008. As additional consideration for infusion
      of the capital, Xechem issued Chassman 66,666,667 warrants, exercisable at
      $0.02
      per share for a period of 5 years. In addition, Chassman has agreed to extend
      the due date on all existing notes held by the company to May 31, 2008. The
      loan
      has not been documented at this time.





In
      October 2006, Chassman agreed to infuse $500,000 into Xechem. A note will be
      issued to Chassman in the amount of $500,000, it will bear interest at 8% and
      is
      due May 31, 2008. The note will be convertible into shares of common stock
      at
      $.03 per share (16,666,667 shares, excluding interest). As additional
      consideration for infusion of the capital and if Xechem does not repay the
      loan
      within six months of receipt of the full $500,000, Xechem will issue Chassman
      an
      additional 8,333,333 warrants, exercisable at $0.04 per share for a period
      of 5
      years. The loan has not been documented at this time.





(7)  In
      the
      second quarter 2006, loans totaling $157,200 and $30,000 were made to the
      Companyby four related parties and one unrelated party, respectively. The notes
      issued for these loans are convertible into shares of common stock at $0.0103
      -
      $0.0125 per share (28,990,093 shares, excluding interest). The terms of these
      notes range from one month to one year with extensions and interest rates of
      10-12%. The individuals also received five year stock options to purchase a
      total of 14,800,000 shares of common stock at market prices ranging from $0.0103
      to $0.0125 per share.





In
      the
      fourth quarter 2006, loans totaling $170,200 and $65,000 were made to the
      Company by three related and two unrelated parties, respectively. The notes
      issued for these loans are convertible into shares of common stock at $0.019
      -
      $0.024 per share (4,087,563 shares, excluding interest). The terms of these
      notes range from three month to six months with extensions and interest rates
      of
      8-15%. The individuals also received five year stock options to purchase a
      total
      of 5,031,744 shares of common stock at market prices ranging from $0.019 to
      $0.024 per share.





(8)
      Sales
      of our product NICOSANTM, a sickle cell drug, commenced in Nigeria in the second
      quarter 2006 and for the six months ended December 31, 2006 totaled $197,000.
      While revenues are not significant, they should help in covering the costs
      of
      the operation until the full scale production facility is
      completed.





(9)  In
      October 2006, we received a Small Business Innovation Research (SBIR) grant
      for
      $473,000 from the National Institutes of Health, National Heart, Lung and Blood
      institute to carry out toxicity studies on the five-membered heterocyclic
      anti-sickling compound known as 5-HMF. Researchers from both Virginia
      Commonwealth University (VCU) and Children’s Hospital of Philadelphia (CHOP),
      University of Pennsylvania are expected to participate in the 5-HMF
      trials.





(10)  In the
      period January 1, 2007 through March 6, 2007, a holder of Xechem debt converted
      Xechem debt (in the form of principal and interest) in the aggregate amount
      of
      $162,600 ($116,900 of which is principal and $45,700 of which is interest)
      into
      32,515,556 shares of Xechem’s common stock (exercised at the conversion rate of
      $0.005 per share) representing approximately 2% of Xechem’s then issued and
      outstanding stock.




41





(11)  In the
      period January 1, 2007 through March 28, 2007, Xechem received loans totaling
      $100,000 from Ms. Chassman and $569,600 from eight unrelated parties. Notes
      are
      to be issued with terms of six months and a per annum interest rate of
      8%.





(12)  On
      April
      4, 2007, the Company completed a private placement of $4,959,963 of Units
      pursuant to a securities purchase agreement (“Purchase Agreement”) with a number
      of investors (“Purchasers”). The Units are comprised of (i) 8% convertible
      debentures (“Debentures”) in an aggregate principal amount of $4,959,963;
      convertible into Common Stock of the Company at $0.0175 per share (representing
      283,426,449 shares of common stock on an as converted basis, subject to possible
      adjustment as discussed below); and (ii) two warrants per Debenture, each
      providing a right to purchase 37.5% of the number of shares of Common Stock
      purchasable with the original principal amount of the Debentures (i.e. up to
      75%
      of the Common Stock in the aggregate), at a price of $0.0225 per share (subject
      to possible adjustment as discussed below); the first warrant has a term ending
      March 31, 2009 and is not callable (the “Two Year Warrant”), and the second
      warrant has a term ending March 31, 2010 and is callable by the Company at
      a
      purchase price of $0.06 per share provided the volume weighted average price
      (“VWAP”) of the Company’s Common Stock exceeds $0.06 for 30 consecutive trading
      days (the “Three Year Warrant”—together with the Two Year Warrant, collectively,
      the “Warrants”). The Company has entered into a “Registration Rights Agreement,”
pursuant to which it is obligated to file a registration statement to register
      the Common Stock of the Company underlying the Debentures and Warrants, which
      contains certain penalties if not timely filed. In connection with the
      transaction the principal officers and directors of the Company were required
      to
      lock up their shares of the Company for a period ending 6 months after the
      registration of the common stock underlying the Debentures and Warrants and
      in
      addition, the Company’s CEO pledged certain personal assets (his 25% beneficial
      ownership in the entity that owns the New Brunswick, NJ facility leased to
      the
      Company) to secure the Debentures. The Company has agreed to grant to the
      advisor on the transaction an option to purchase 12% of the shares of Common
      Stock of the Company issuable upon the immediate conversion of the Debentures
      (i.e., 34,011,173 shares ) at a price of $0.001 per share, expiring March 31,
      2009 for advising it in connection with the transaction. In addition, in the
      event of the exercise of any of the warrants issued as part of the offering,
      it
      is entitled to a 5% fee for the amount of the warrant exercise. The Company
      has
      also agreed to reimburse the Purchasers for interest at the rate of 8% per
      annum
      for the monies deposited by them in escrow pending the initial closing of the
      Purchase Agreement and to reimburse the advisor for $75,000 of its legal fees
      in
      connection with the transaction. ( *See
      Note 13E)*





(13)  On
      April
      3, 2007 Xechem Nigeria closed on its 500,000,000 Naira loan with the Nigerian
      Export Import Bank (“Nexim”), which represented a consolidation of the existing
      150,000,000 Naira loan of Xechem Nigeria with an increase in the loan by an
      additional 350,000,000 Naira (approximately $2,600,000 US dollars of additional
      funding). The loan is for a five year duration, inclusive of one year’s
      moratorium of debt service, but subject to biannual payments of interest during
      the moratorium period. Interest accrues on the loan at the rate of 16% per
      annum. *(See
      Note 13F)*





We
      expect
      to continue our development efforts with respect to antifungal, anticancer,
      antiviral (including anti-AIDS) and anti-inflammatory compounds, as well as
      antiaging and memory enhancing compounds. Although we do not expect product
      revenues from these sources in 2006, we anticipate that these development
      activities may allow us to enter into more favorable licensing and/or investment
      arrangements.





We
      plan
      to secure financing through various loans and bridge financing, which we feel
      will meet our current needs, provided the funding of such loans is fully adhered
      to. We will need to generate funds from operations and/or debt and equity
      funding sources to enable us to repay such loans and our other outstanding
      debt.




We
      are
      attempting to raise outside financing through the issuance of equity securities
      or other instruments, although no agreements are currently in
      place.




42





In
      addition, we have issued, and plan to continue issuing equity securities, where
      possible, to obtain services, without expending cash.




Critical
      Accounting Policies and Estimates




Management's
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these financial statements requires management
      to
      make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses, and the related disclosure of contingent
      assets and liabilities. On an on-going basis, management evaluates its estimates
      and judgments, including those related to revenue recognition, research and
      development costs, inventory valuation and equity financing. Management bases
      its estimates and judgments on historical experience and on various other
      factors that are believed to be reasonable under the circumstances, the results
      of which form the basis for making judgments about the carrying values of assets
      and liabilities that are not readily apparent from other sources. Actual results
      may differ from these estimates under different assumptions or conditions
      Management believes the following critical accounting policies, among others,
      affect its more significant judgments and estimates used in the preparation
      of
      its consolidated financial statements




***Patents,
      Trademarks, and other Intellectual or Intangible
      Assets***




The
      costs
      of patents, trademarks, and other intellectual or intangible assets are
      currently expensed in the period in which they are incurred. It is our opinion
      that while we realize there is an intrinsic value to these assets, the fair
      market value is not easily discernable because of the uncertainty of success
      and
      the time it takes to bring certain of these assets to market.




***Beneficial
      Conversions***




Our
      policy for recognizing interest expense in connection with the issuance of
      any
      convertible debt is to capitalize the intrinsic value of the beneficial
      conversion feature and allocate it to paid-in capital. The debt discount is
      then
      amortized over the life of the debt. As amounts are converted the unamortized
      intrinsic value is charged to interest expense.




***Recent
      Accounting Policies***




In
      February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial
      Instruments an amendment to FASB 133, Accounting for Derivative Instruments
      and
      Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities. FASB 155, provides the
      framework for fair value remeasurement of any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation as
      well
      as establishes a requirement to evaluate interests in securitized financial
      assets to identify interests. FASB 155 further amends FASB 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. The FASB 155 guidance also clarifies which
      interest-only strips and principal-only strips are not subject to the
      requirement of FASB 133 and concentrations of credit risk in the form of
      subordination are not embedded derivatives. This statement is effective for
      all
      financial instruments acquired or issued after the beginning of an entity's
      first fiscal year that begins after September 15, 2006. FASB 155 is not expected
      to have a material impact on our consolidated financial statements.




43




In
      March
      2006, FASB issued FASB 156, Accounting for Servicing of Financial Assets--an
      amendment of FASB Statement No. 140. FASB 156 requires the recognition of a
      servicing asset or servicing liability under certain circumstances when an
      obligation to service a financial asset by entering into a servicing contract.
      FASB 156 also requires all separately recognized servicing assets and servicing
      liabilities to be initially measured at fair value utilizing the amortization
      method or fair market value method. FASB 156 is effective the beginning of
      the
      first fiscal year that begins after September 15, 2006. FASB 156 is not expected
      to have a material impact on our consolidated financial statements.




FIN
      48,
      which is effective January 1, 2007, clarifies the accounting for the uncertainty
      in tax positions by requiring companies to recognize in their financial
      statements, the impact of a tax position, if that position is more likely than
      not of being sustained on audit based on the technical merits of the position.
      Among other provisions, FIN 48 also requires expanded disclosures at the end
      of
      each annual period presented. The Company continues to evaluate the impact
      of
      FIN 48 on its financial position and results of operations. At this time, the
      effects of adoption have not yet been determined.




FAS
      157,
      which will be effective January 1, 2008, clarifies the definition of fair value,
      establishes a framework for measuring fair value, and expands the disclosures
      on
      fair value measurements. The effect of adoption of FAS 157 on the Company’s
      financial position and results of operations is not expected to be
      material.




For
      further information concerning accounting policies, refer to Note 1 of
      consolidated financial statements.




44





**Item
      7.****Financial
      Statements**




The
      following financial statements of Xechem International, Inc. and subsidiaries
      are separately prepared and numbered independently of the other narrative
      portions of this Form 10-KSB.




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Report
                of Independent Registered Public Accounting Firm
            
            
            F-1Report
                of predecessor Independent Registered Public Accounting
                Firm
            
            
            F-2Consolidated
                Balance Sheet
            
            
            F-3Consolidated
                Statements ofOperations
            
            
            F-4Stockholders’
                Deficiency
            
            
            F-5
                - F-12Cash
                Flows
            
            
            F-13
                - F-14Notes
                to Consolidated Financial Statements
            
            
            F-15
                - F-54




45


To
        the
        Board of Directors and Shareholders of
 Xechem
        International, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of Xechem International,
        Inc. and subsidiaries (the “Company”) as of December 31, 2006, and the related
        consolidated statements of operations, changes in shareholders’ 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. The financial
        statements of the Company for the period from March 15, 1990 (inception)
        to
        December 31, 2005 were audited by another independent registered public
        accounting firm whose report dated March 18, 2006 is presented
        herewith.
 
 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. 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 do not express such an opinion. 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 consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of the 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 consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 2, the
        Company has incurred significant losses from operations since its inception
        and
        has limited capital resources. These conditions raise substantial doubt about
        the Company’s ability to continue as a going concern. Management’s plans in
        regard to these matters are also discussed in Note 2. The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
 
 /S/ *Bernstein
        & Pinchuk LLP*
 New
        York,
        New York
 March
        27,
        2007
 
 F-1
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 To
          the
          Board of Directors and Stockholders of
 Xechem
          International, Inc. and Subsidiaries
 
 
 We
          have
          audited the accompanying consolidated statements of operations, stockholders'
          equity (deficit) and cash flows of Xechem International, Inc. and Subsidiaries
          (a development state enterprise) for each of the two years in the period
          ended
          December 31, 2005. These consolidated financial statements are the
          responsibility of the Company's management. Our responsibility is to express
          an
          opinion on these consolidated financial statements based on our audits.
 
 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
          consolidated 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 consolidated financial statements, assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall consolidated financial statement presentation. We
          believe
          that our audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the results of operations and cash flows of Xechem
          International, Inc. and Subsidiaries for each of the two years in the period
          ended December 31, 2005, in conformity with accounting principles generally
          accepted in the United States of America.
 
 The
          accompanying consolidated financial statements have been prepared assuming
          that
          the Company will continue as a going concern. As discussed in Note 2 to
          the
          consolidated financial statements, the Company has suffered recurring losses
          and
          negative cash flows from operations that raise substantial doubt about
          its
          ability to continue as a going concern. Management's plans in regard to
          these
          matters are also discussed in Note 2. The consolidated financial statements
          do
          not include any adjustments that might result from the outcome of this
          uncertainty.
 
 
 MOORE
                    STEPHENS, P. C.
                  Certified
                    Public Accountants.
 
 
 New
          York,
          New York
 March
          18,
          2006
  F-2
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **(A
        DEVELOPMENT STAGE ENTERPRISE)**
 **CONSOLIDATED
        BALANCE SHEET** **December
          31, 2006**
 **ASSETS****CURRENT
                    ASSETS**Cash
                    and cash equivalents
                
                $
                105,000Prepaid
                    expenses and other current assets
                
                
                197,000Inventories
                
                
                710,000**Total
                    Current Assets**
                
                
                1,012,000**Property
                    and Equipment**Land
                    and building
                
                
                674,000Furniture
                    and equipment
                
                
                3,429,000Leasehold
                    improvements
                
                
                1,015,000Less
                    accumulated depreciation and amortization
                
                
                2,441,0002,677,000**Deposits**
                
                
                31,000**TOTAL
                    ASSETS**
                
                $
                3,720,000**LIABILITIES
                    & STOCKHOLDERS' DEFICIENCY****CURRENT
                    LIABILITIES**Accounts
                    payable
                
                $
                1,368,000Accrued
                    expenses to related parties
                
                
                449,000Accrued
                    expenses to others
                
                
                1,365,000Note
                    payable to bank
                
                
                55,000Notes
                    payable to related parties
                
                
                1,346,000Notes
                    payable others
                
                
                2,160,000Other
                    current liabilities
                
                
                63,000**Total
                    Current Liabilities**
                
                
                6,806,000**Notes
                    payable to related parties**
                
                
                265,000**Notes
                    payable, net of discount of $1,395,000**
                
                
                2,689,000**Other
                    liabilities**
                
                
                30,000**TOTAL
                    LIABILITIES**
                
                
                9,790,000**COMMITMENTS
                    AND CONTINGENCIES**
                
                
                -**STOCKHOLDERS'
                    DEFICIENCY**Class
                    A voting preferred stock, $.00001 par value, 2,500 sharesauthorized;
                    2,500 shares issued and outstanding
                
                
                -Class
                    B 8% convertible preferred stock, $.00001 par value, 1,150 sharesauthorized;
                    none outstanding
                
                
                -Class
                    C preferred stock, $ .00001 par value, 49,996,350 shares authorized;38,745
                    issued and outstanding.
                
                
                -Common
                    stock, $.00001 par value 3,500,000,000 shares authorized;1,519,952,409
                    issued and outstanding
                
                
                15,000Additional
                    paid in capital
                
                
                76,325,000Deficit
                    accumulated during development stage
                
                
                (82,410,000
                )**Total
                    Stockholders' Deficiency**
                
                
                (6,070,000
                )**TOTAL
                    LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**
                
                
                3,720,000
  See
          accompanying notes to consolidated financial statements
 F-3
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES** **(A
            DEVELOPMENT STAGE ENTERPRISE)** **CONSOLIDATED
              STATEMENTS OF OPERATIONS**
  **Years
                    Ended December 31,**
                
                **Cumulative
                    from March 15, 1990 (Inception) to December 31,****2006**
                
                **2005**
                
                **2006****Revenues**
                
                $
                202,000
                
                $
                6,000
                
                $
                2,323,000**Costs
                    and expenses:**Cost
                    of Sales
                
                
                79,000
                
                
                -
                
                
                79,000Research
                    and development
                
                
                826,000
                
                
                1,111,000
                
                
                15,478,000General
                    and administrative
                
                
                5,676,000
                
                
                3,155,000
                
                
                29,928,000Sales
                    and Marketing
                
                
                275,000
                
                
                -
                
                
                275,000Writedown
                    of inventoryand
                    intangibles
                
                
                -
                
                
                -
                
                $
                1,861,0006,856,000
                
                
                4,266,000
                
                $
                47,621,000**Loss
                    from Operations**
                
                
                **(6,654,000**
                **)**
                
                **(4,260,000**
                **)**
                
                **(45,298,000**
                **)****Other
                    Income(Expense)**Interest
                    expense - related parties
                
                
                (133,000
                )
                
                (97,000
                )
                
                (9,215,000
                )Interest
                    expense - others
                
                
                (8,647,000
                )
                
                (4,722,000
                )
                
                (24,208,000
                )BMS
                    Settlement
                
                
                4,200,000
                
                
                -
                
                
                4,200,000Other
                
                
                104,000
                
                
                (169,000
                )
                
                132,000Gain
                    from sale of affiliate's stock
                
                
                -
                
                
                2,930,000
                
                
                2,930,000Share
                    of Net Loss from Affiliate
                
                
                -
                
                
                (4,287,000
                )
                
                (13,587,000
                )(4,476,000
                )
                
                (6,345,000
                )
                
                (39,748,000
                )**Loss
                    before Income Tax Benefit**
                
                
                **(11,130,000**
                **)**
                
                **(10,605,000**
                **)**
                
                **(85,046,000**
                **)****Income
                    Tax Benefit**
                
                
                -
                
                
                566,000
                
                
                2,636,000**NET
                    LOSS**
                
                **$**
                **(11,130,000**
                **)**
                **$**
                **(10,039,000**
                **)**
                **$**
                **(82,410,000**
                **)****Net
                    loss per share - basic and diluted**
                
                **$**
                **(0.01**
                **)**
                **$**
                **(0.04**
                **)****Weighted
                    average number of common shares outstanding - basic &
                    diluted**
                
                
                **1,111,097,997**
                
                
                **269,127,103**
  See
          accompanying notes to consolidated financial statements
 F-4
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]**Common
                  stock issued to Dr. Pandey in 1990 inexchange
                  for equipment recorded attransferor's
                  cost
              
              
              —
              
              $
              —
              
              $
              —
              
              $
              125,000
              
              $
              —
              
              $
              125,000Laboratory
                    and research equipment contributed to
                  capitalby
                    Dr. Pandey in 1990 and 1991
              
              
              —
              
              
              —
              
              
              —
              
              
              341,000
              
              
              —
              
              
              341,000Contribution
                  to capital relating tounconsummated
                  acquisition in 1992
              
              
              —
              
              
              —
              
              
              —
              
              
              95,000
              
              
              —
              
              
              95,000Exchange
                  of securities of newly formed parent foroutstanding
                  securities of entities owned byDr.
                  Pandey
              
              
              1,000
              
              
              —
              
              
              —
              
              
              13,840,000
              
              
              —
              
              
              13,840,000Initial
                  public offering in 1995 at $5.00 per share,less
                  related expenses
              
              
              1,000
              
              
              —
              
              
              —
              
              
              4,543,000
              
              
              —
              
              
              4,543,000Stock
                  options granted at exercise prices below market:1994
              
              
              —
              
              
              —
              
              
              —
              
              
              51,000
              
              
              —
              
              
              51,0001995
              
              
              —
              
              
              —
              
              
              —
              
              
              1,110,000
              
              
              —
              
              
              1,110,0001996
              
              
              —
              
              
              —
              
              
              —
              
              
              18,000
              
              
              —
              
              
              18,0001997
              
              
              —
              
              
              —
              
              
              —
              
              
              31,000
              
              
              —
              
              
              31,000Private
                  placements, less related expenses:In
                  1995 at $3.00 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              389,000
              
              
              —
              
              
              389,000In
                  1996 at $3.00 per share, net of a related66,000
                  shares returned by Dr. Pandey
              
              
              —
              
              
              —
              
              
              —
              
              
              53,000
              
              
              —
              
              
              53,000In
                  1997 at $0.05 per share
              
              
              15,000
              
              
              —
              
              
              —
              
              
              2,291,000
              
              
              —
              
              
              2,291,000Stock
                  issued in 1996 at $0.38 per share upontermination
                  of agreement to sell a minorityinterest
                  in a subsidiary
              
              
              —
              
              
              —
              
              
              —
              
              
              100,000
              
              
              —
              
              
              100,000Totals
                  - Forward
              
              
              17,000
              
              $
              —
              
              $
              —
              
              $
              22,987,000
              
              $
              —
              
              $
              22,987,000
  F-5
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY - (continued)**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]**Totals
                  - Forwarded
              
              
              17,000
              
              $
              —
              
              $
              —
              
              $
              22,987,000
              
              $
              —
              
              $
              22,987,000Conversion
                  of preferred stock into common stockat
                  $1.25 to $1.75 per share less related costs:In
                  1996
              
              
              1,000
              
              
              —
              
              
              —
              
              
              1,995,000
              
              
              —
              
              
              1,995,000In
                  1997
              
              
              15,000
              
              
              1,000
              
              
              —
              
              
              2,131,000
              
              
              —
              
              
              2,132,000Conversion
                  of debt into common stock in 1996 at$0.25
                  per share
              
              
              —
              
              
              —
              
              
              —
              
              
              369,000
              
              
              —
              
              
              369,000Stock
                  issued in settlement of a lawsuit in 1996valued
                  at $1.31 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              33,000
              
              
              —
              
              
              33,000Conversion
                  of Dr. Pandey's preferred stock anddebt
                  into common stock in 1997 at $0.0625 per share
              
              
              6,000
              
              
              —
              
              
              —
              
              
              1,214,000
              
              
              —
              
              
              1,214,000Other
              
              
              —
              
              
              —
              
              
              —
              
              
              16,000
              
              
              —
              
              
              16,000Private
                  placement at $0.05 per share
              
              
              4,000
              
              
              —
              
              
              —
              
              
              559,000
              
              
              —
              
              
              559,000Contribution
                  to capital by stockholders of equityinterest
                  in Xechem India
              
              
              —
              
              
              —
              
              
              —
              
              
              79,000
              
              
              —
              
              
              79,000Conversion
                  of debt into common stock at$0.05
                  per share
              
              
              3,000
              
              
              —
              
              
              —
              
              
              440,000
              
              
              —
              
              
              440,000Return
                  of capital to David Blech or his designees
              
              
              —
              
              
              —
              
              
              —
              
              
              (261,000
              )
              
              —
              
              
              (261,000
              )Sale
                  of common stock in 1999 pursuant to Blechagreement
                  at $0.01 per share
              
              
              15,000
              
              
              1,000
              
              
              —
              
              
              444,000
              
              
              —
              
              
              445,000Conversion
                  of debt due related parties in 1999 at$0.01
                  per share
              
              
              15,000
              
              
              —
              
              
              —
              
              
              360,000
              
              
              —
              
              
              360,000Stock
                  issued to directors, employees andconsultants
                  in 1999 for services valued at $0.037 per share
              
              
              4,000
              
              
              —
              
              
              —
              
              
              410,000
              
              
              —
              
              
              410,000Capital
                  arising from issuance of Class C Stock (Note 7):Series
                  4
              
              
              —
              
              
              —
              
              
              —
              
              
              400,000
              
              
              —
              
              
              400,000Series
                  5
              
              
              
              
              
              —
              
              
              —
              
              
              1,564,000
              
              
              —
              
              
              1,564,000Net
                  loss from inception to December 31, 1999
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (32,493,000
              )
              
              (32,493,000
              )**Balances
                  At December 31, 1999 - Forward**
              
              
              80,000
              
              $
              2,000
              
              $
              —
              
              $
              32,740,000
              
              $
              (32,493,000
              )
              $
              249,000
 
  F-6
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY - (continued)**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]****Balances
                  At December 31, 1999 - Forwarded**
              
              
              80,000
              
              $
              2,000
              
              $
              —
              
              $
              32,740,000
              
              $
              (32,493,000
              )
              $
              249,000Stock
                  options exercised at $.01 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              4,000
              
              
              —
              
              
              4,000Issuance
                  of 1,500,000 options at $.01 per sharewith
                  a FMV of $ .06 per share for services rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              75,000
              
              
              —
              
              
              75,000Conversion
                  of Class C preferred stock to commonStock
              
              
              27,000
              
              
              1,000
              
              
              —
              
              
              (1,000
              )
              
              —
              
              
              —Conversion
                  of debt to Stock of Common Stockat
                  $0.01 per share
              
              
              5,000
              
              
              —
              
              
              —
              
              
              164,000
              
              
              —
              
              
              164,000Private
                  placement of Stock of Common Stockat
                  $0.08 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              80,000
              
              
              —
              
              
              80,000Issuance
                  of Common Stock at $0.096 per sharefor
                  services rendered
              
              
              1,000
              
              
              —
              
              
              —
              
              
              107,000
              
              
              —
              
              
              107,000Stock
                  options exercised at $.01 per share with aFMV
                  of $0.076 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              5,000
              
              
              —
              
              
              5,000Conversion
                  of debt to Stock of Common Stockat
                  $0.01 per share
              
              
              1,000
              
              
              —
              
              
              —
              
              
              22,000
              
              
              —
              
              
              22,000Stock
                  options exercised at $.01 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              1,000
              
              
              —
              
              
              1,000Beneficial
                  Conversion feature of notes payable
              
              
              —
              
              
              —
              
              
              —
              
              
              286,000
              
              
              —
              
              
              286,000Charge
                  to operations resulting from Optionsgranted
                  to Directors, Consultants and Employees
              
              
              —
              
              
              —
              
              
              —
              
              
              192,000
              
              
              —
              
              
              192,000Unearned
                  Stock Compensation Expense Relatedto
                  Options granted to Directors, Consultantsand
                  Employees
              
              
              —
              
              
              —
              
              
              (406,000
              )
              
              406,000
              
              
              —
              
              
              —Increase
                  in Equity Interest in Xechem India
              
              
              —
              
              
              —
              
              
              —
              
              
              19,000
              
              
              —
              
              
              19,000Net
                  loss for year ended December 31, 2000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,971,000
              )
              
              (1,971,000
              )**Balances
                  At December 31, 2000 - Forward**
              
              
              114,000
              
              $
              3,000
              
              $
              (406,000
              )
              $
              34,100,000
              
              $
              (34,464,000
              )
              $
              (767,000
              )
  F-7
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]****Balances
                  At December 31, 2000 - Forwarded**
              
              
              114,000
              
              $
              3,000
              
              $
              (406,000
              )
              $
              34,100,000
              
              $
              (34,464,000
              )
              $
              (767,000
              )Stock
                  issued for services rendered
              
              
              2,000
              
              
              —
              
              
              —
              
              
              68,000
              
              
              —
              
              
              68,000Amortization
                  of unearned stock compensation
              
              
              —
              
              
              —
              
              
              197,000
              
              
              —
              
              
              —
              
              
              197,000Stock
                  options exercised at $.01 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              6,000
              
              
              —
              
              
              6,000Beneficial
                  Conversion feature of notes payable
              
              
              —
              
              
              —
              
              
              —
              
              
              216,000
              
              
              —
              
              
              216,000Unearned
                  Stock Compensation Expense Relatedto
                  Options granted to Directors and Employees
              
              
              —
              
              
              —
              
              
              (75,000
              )
              
              76,000
              
              
              —
              
              
              1,000Stock
                  Options Granted to Consultants
              
              
              —
              
              
              —
              
              
              —
              
              
              16,000
              
              
              —
              
              
              16,000Stock
                  issued for cancellation of indebtedness
              
              
              1,000
              
              
              —
              
              
              —
              
              
              15,000
              
              
              —
              
              
              15,000Stock
                  issued upon conversion of debentures
              
              
              9,000
              
              
              1,000
              
              
              —
              
              
              68,000
              
              
              —
              
              
              69,000Net
                  loss for year ended December 31, 2001
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,744,000
              )
              
              (1,744,000
              )**Balances
                  At December 31, 2001**
              
              
              126,000
              
              
              4,000
              
              
              (284,000
              )
              
              34,565,000
              
              
              (36,208,000
              )
              
              (1,923,000
              )Stock
                  issued upon conversion of debenturesat
                  $.001 per share
              
              
              44,000
              
              
              1,000
              
              
              —
              
              
              188,000
              
              
              —
              
              
              189,000Stock
                  issued for services renderedat
                  $.007 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              10,000
              
              
              —
              
              
              10,000Amortization
                  of unearned stock compensation
              
              
              —
              
              
              —
              
              
              45,000
              
              
              —
              
              
              —
              
              
              45,000Beneficial
                  conversion feature of notes payable
              
              
              
              
              
              
              
              
              
              
              
              52,000
              
              
              —
              
              
              52,000Stock
                  issued upon conversion of debenturesat
                  $.001 per share
              
              
              20,000
              
              
              1,000
              
              
              —
              
              
              74,000
              
              
              —
              
              
              75,000Amortization
                  of unearned stock compensation
              
              
              —
              
              
              —
              
              
              44,000
              
              
              —
              
              
              —
              
              
              44,000Stock
                  options issued at $.006/share:16,000,000
                  options
              
              
              —
              
              
              —
              
              
              (160,000
              )
              
              160,000
              
              
              —
              
              
              —Amortization
                  of stock options compensatorycharge
                  over service period
              
              
              —
              
              
              —
              
              
              40,000
              
              
              —
              
              
              —
              
              
              40,000Stock
                  options exercised at $.006/share
              
              
              2,000
              
              
              —
              
              
              —
              
              
              30,000
              
              
              —
              
              
              30,000Totals
                  - Forward
              
              
              192,000
              
              $
              6,000
              
              $
              (315,000
              )
              $
              35,079,000
              
              $
              (36,208,000
              )
              $
              (1,438,000
              )
 
  F-8
 
 **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY - (continued)**
 
 **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]**Totals
                  - Forwarded
              
              
              192,000
              
              $
              6,000
              
              $
              (315,000
              )
              $
              35,079,000
              
              $
              (36,208,000
              )
              $
              (1,438,000
              )Beneficial
                  conversion feature of debentures
              
              
              —
              
              
              —
              
              
              —
              
              
              148,000
              
              
              —
              
              
              148,000Record
                  value of warrants issued
              
              
              —
              
              
              —
              
              
              —
              
              
              272,000
              
              
              —
              
              
              272,000Beneficial
                  conversion feature of notes payable
              
              
              —
              
              
              —
              
              
              —
              
              
              35,000
              
              
              —
              
              
              35,000Stock
                  issued upon conversion of debenturesat
                  $.001 per share
              
              
              95,000
              
              
              3,000
              
              
              —
              
              
              318,000
              
              
              —
              
              
              321,000Stock
                  issued for services renderedat
                  $.003 per share
              
              
              7,000
              
              
              —
              
              
              —
              
              
              60,000
              
              
              —
              
              
              60,000Amortization
                  of unearned stock compensation
              
              
              —
              
              
              —
              
              
              45,000
              
              
              —
              
              
              —
              
              
              45,000Amortization
                  of beneficial conversion featureof
                  notes payable
              
              
              —
              
              
              —
              
              
              —
              
              
              104,000
              
              
              —
              
              
              104,000Amortization
                  of stock options compensatorycharge
                  over service period
              
              
              —
              
              
              —
              
              
              40,000
              
              
              —
              
              
              —
              
              
              40,000Stock
                  issued upon conversion of debenturesat
                  $.0005 per share
              
              
              362,000
              
              
              11,000
              
              
              —
              
              
              533,000
              
              
              —
              
              
              544,000Stock
                  issued for services renderedat
                  $.0007 per share
              
              
              3,000
              
              
              —
              
              
              —
              
              
              7,000
              
              
              —
              
              
              7,000Amortization
                  of unearned stock compensation
              
              
              —
              
              
              —
              
              
              32,000
              
              
              —
              
              
              —
              
              
              32,000Amortization
                  of beneficial conversion featureof
                  notes payable
              
              
              —
              
              
              —
              
              
              —
              
              
              662,000
              
              
              —
              
              
              662,000Amortization
                  of stock options compensatorycharge
                  over service period
              
              
              —
              
              
              —
              
              
              40,000
              
              
              —
              
              
              —
              
              
              40,000Finders
                  fee for convertible debt issuance
              
              
              —
              
              
              —
              
              
              —
              
              
              (130,000
              )
              
              —
              
              
              (130,000
              )Record
                  debt discount on notes and debentures
              
              
              —
              
              
              —
              
              
              —
              
              
              1,068,000
              
              
              —
              
              
              1,068,000Cost
                  incurred with stock options issued for service
              
              
              —
              
              
              —
              
              
              —
              
              
              18,000
              
              
              —
              
              
              18,000Net
                  loss for the year ended December 31, 2002
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,599,000
              )
              
              (3,599,000
              )**Balances
                  At December 31, 2002 - Forward**
              
              
              659,000
              
              $
              20,000
              
              $
              (158,000
              )
              $
              38,174,000
              
              $
              (39,807,000
              )
              $
              (1,771,000
              )
  F-9
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY- (continued)**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]****Balances
                  At December 31, 2002 - Forwarded**
              
              
              659,000
              
              $
              20,000
              
              $
              (158,000
              )
              $
              38,174,000
              
              $
              (39,807,000
              )
              $
              (1,771,000
              )Effect
                  of Reverse Stock Split
              
              
              —
              
              
              (19,000
              )
              
              —
              
              
              19,000
              
              
              —
              
              
              —Stock
                  issued upon conversion of notesat
                  an average of $.0002 per share
              
              
              422,000
              
              
              —
              
              
              —
              
              
              254,000
              
              
              —
              
              
              254,000Stock
                  issued upon conversion of notesat
                  an average of $.00006 per share
              
              
              972,000
              
              
              —
              
              
              —
              
              
              171,000
              
              
              —
              
              
              171,000Stock
                  issued upon conversion of notes&
                  debentures at $.000025 per share
              
              
              1,091,000
              
              
              —
              
              
              —
              
              
              84,000
              
              
              —
              
              
              84,000Stock
                  issued upon conversion of notesat
                  an average of $.06 per share
              
              
              789,000
              
              
              —
              
              
              —
              
              
              47,000
              
              
              —
              
              
              47,000Stock
                  issued upon conversion of notesat
                  an average of $.055 per share
              
              
              63,000
              
              
              —
              
              
              —
              
              
              3,000
              
              
              —
              
              
              3,000Stock
                  issued upon conversion of notesat
                  an average of $.03 per share
              
              
              10,673,000
              
              
              —
              
              
              —
              
              
              320,000
              
              
              —
              
              
              320,000Stock
                  issued upon conversion of notesat
                  an average of $.0025 per share
              
              
              49,571,000
              
              
              —
              
              
              —
              
              
              125,000
              
              
              —
              
              
              125,000Amortization
                  of unearned stock compensation
              
              
              —
              
              
              —
              
              
              158,000
              
              
              —
              
              
              —
              
              
              158,000Fair
                  value of Stock to be issued in conjunctionwith
                  loans
              
              
              —
              
              
              —
              
              
              —
              
              
              78,000
              
              
              —
              
              
              78,000Fair
                  value of Stock to be issued in conjunctionwith
                  consulting
              
              
              —
              
              
              —
              
              
              —
              
              
              25,000
              
              
              —
              
              
              25,000Issuance
                  of warrants
              
              
              —
              
              
              —
              
              
              —
              
              
              2,647,000
              
              
              —
              
              
              2,647,000Beneficial
                  conversion feature of loans
              
              
              —
              
              
              —
              
              
              —
              
              
              70,000
              
              
              —
              
              
              70,000Net
                  loss for the year ended December 31, 2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,828,000
              )
              
              (3,828,000
              )**Balances
                  At December 31, 2003 - Forward**
              
              
              64,240,000
              
              $
              1,000
              
              $
              —
              
              $
              42,017,000
              
              $
              (43,635,000
              )
              $
              (1,617,000
              )
  F-10
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' - (continued)**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **[Deficit]****Balances
                  At December 31, 2003 - Forwarded**
              
              
              64,240,000
              
              $
              1,000
              
              $
              —
              
              $
              42,017,000
              
              $
              (43,635,000
              )
              $
              (1,617,000
              )During
                  the 1st quarter of 2004, Stock issued uponconversion
                  of notes at an average of $.0025per
                  share
              
              
              185,886,000
              
              
              2,000
              
              
              —
              
              
              461,000
              
              
              —
              
              
              463,000In
                  March 2004 Stock issued pursuant to privateplacement
                  for cash at $.07 per share
              
              
              9,143,000
              
              
              —
              
              
              —
              
              
              640,000
              
              
              —
              
              
              640,000In
                  March 2004 Stock issued for services renderedat
                  an average of $.12 per share
              
              
              200,000
              
              
              —
              
              
              —
              
              
              24,000
              
              
              —
              
              
              24,000In
                  January 2004 Stock issued for servicesrendered
                  and charged in prior year
              
              
              200,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Stock
                  of Preferred Class C issued for Ceptorpurchase
              
              
              —
              
              
              —
              
              
              —
              
              
              4,760,000
              
              
              —
              
              
              4,760,000Beneficial
                  conversion feature of loan
              
              
              —
              
              
              —
              
              
              —
              
              
              1,500,000
              
              
              —
              
              
              1,500,000Capitalization
                  of deferred finance charges
              
              
              —
              
              
              —
              
              
              —
              
              
              2,065,000
              
              
              —
              
              
              2,065,000Stock
                  sale by CepTor
              
              
              —
              
              
              —
              
              
              —
              
              
              9,135,000
              
              
              —
              
              
              9,135,000Net
                  loss for the year ended December 31, 2004
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (17,606,000
              )
              
              (17,606,000
              )**Balances
                  At December 31, 2004**
              
              
              259,669,000
              
              $
              3,000
              
              $
              —
              
              $
              60,602,000
              
              $
              (61,241,000
              )
              $
              (636,000
              )Beneficial
                  conversion feature of loan
              
              
              —
              
              
              —
              
              
              —
              
              
              3,986,000
              
              
              —
              
              
              3,986,000Shares
                  issued upon conversion of notes @$
                  .005 - $ .0075 per share
              
              
              99,500,000
              
              
              1,000
              
              
              —
              
              
              775,000
              
              
              —
              
              
              776,000Shares
                  issued to Sickle Cell Advisory Board @$
                  .013 per share
              
              
              4,000,000
              
              
              —
              
              
              —
              
              
              52,000
              
              
              —
              
              
              52,000Shares
                  issued for services rendered@
                  $.013 per share
              
              
              10,000,000
              
              
              —
              
              
              —
              
              
              130,000
              
              
              —
              
              
              130,000Totals
                  - Forward
              
              
              373,169,000
              
              $
              4,000
              
              $
              —
              
              $
              65,545,000
              
              $
              (61,241,000
              )
              $
              4,308,000
 
  F-11
 
 **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIENCY - (continued)**
 
  **Deficit
                  Accumulated****Common
                  Stock**
              
              **Unearned**
              
              **Additional**
              
              **During**
              
              **Total****Number
                  of**
              
              
              
              **Compensation**
              
              **Paid-in**
              
              **Development**
              
              **Stockholders'****Shares
                  Issued**
              
              **Par
                  Value**
              
              **Expense**
              
              **Capital**
              
              **Stage**
              
              **Deficiency**Totals
                  - Forward
              
              
              373,169,000
              
              $
              4,000
              
              $
              —
              
              $
              65,545,000
              
              $
              (61,241,000
              )
              $
              4,308,000Net
                  loss for the year ended Dec. 31, 2005
              
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              (10,039,000
              )
              
              (10,039,000
              )**Balances
                  At December 31, 2005**
              
              
              373,169,000
              
              
              4,000
              
              
              —
              
              
              65,545,000
              
              
              (71,280,000
              )
              
              (5,731,000
              )Beneficial
                  conversion feature of loan
              
              
              —
              
              
              —
              
              
              —
              
              
              4,868,000
              
              
              —
              
              
              4,868,000Shares
                  issued upon conversion of notes @$
                  .0025 - $ .0075 per share
              
              
              1,004,114,000
              
              
              11,000
              
              
              —
              
              
              4,490,000
              
              
              —
              
              
              4,501,000Conversion
                  of Class C Preferred Stock toCommon
                  Stock
              
              
              25,943,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Exercise
                  of warrants
              
              
              116,726,000
              
              
              —
              
              
              —
              
              
              1,422,000
              
              
              —
              
              
              1,422,000Net
                  loss for the year ended Dec. 31, 2006
              
              
              
              
              
              —
              
              
              —
              
              
              
              
              
              (11,130,000
              )
              
              (11,130,000
              )**Balances
                  At December 31, 2006**
              
              
              1,519,952,000
              
              $
              15,000
              
              $
              —
              
              $
              76,325,000
              
              $
              (82,410,000
              )
              $
              (6,070,000
              )
 
 See
        accompanying notes to consolidated financial statements
  F-12
  **XECHEM
                  INTERNATIONAL, INC. AND SUBSIDIARIES****(A
                  DEVELOPMENT STAGE ENTERPRISE)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
  **Years
                  Ended December 31,**
              
              **Cumulative
                  from March 15, 1990 (inception) to December 31,****2006**
              
              **2005**
              
              **2006****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (11,130,000
              )
              $
              (10,039,000
              )
              $
              (82,410,000
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Share
                  of Net loss from unconsolidated affiliate
              
              
              -
              
              
              4,287,000
              
              
              13,587,000Depreciation
              
              
              327,000
              
              
              93,000
              
              
              1,697,000Amortization
              
              
              68,000
              
              
              68,000
              
              
              1,081,000Amortization
                  of debt discount and beneficialconversion
                  features
              
              
              8,496,000
              
              
              3,861,000
              
              
              15,823,000Amortization
                  of warrants issued
              
              
              -
              
              
              -
              
              
              215,000Value
                  of stock and stock options issued
              
              
              
              
              
              548,000
              
              
              708,000Unearned
                  compensation
              
              
              
              
              
              
              
              
              284,000Interest
                  and compensation expense in connectionwith
                  issuance of equity securities
              
              
              
              
              
              130,000
              
              
              19,036,000Write
                  down of inventories
              
              
              -
              
              
              -
              
              
              1,344,000Write
                  down of patents
              
              
              -
              
              
              -
              
              
              517,000Loss
                  on investment in related party
              
              
              -
              
              
              -
              
              
              89,000Amortization
                  of deferred consulting charge
              
              
              -
              
              
              -
              
              
              1,330,000Gain
                  from sale of affiliate's stock
              
              
              -
              
              
              (2,930,000
              )
              
              (2,930,000
              )Changes
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              -
              
              
              (26,000
              )
              
              (67,000
              )Inventories
              
              
              (710,000
              )
              
              -
              
              
              (2,049,000
              )Prepaid
                  expenses and other current assets
              
              
              11,000
              
              
              (48,000
              )
              
              (2,000
              )Other
                  assets
              
              
              22,000
              
              
              -
              
              
              2,000Accounts
                  payable
              
              
              621,000
              
              
              393,000
              
              
              1,390,000Other
                  current liabilities
              
              
              (31,000
              )
              
              -
              
              
              (66,000
              )Accrued
                  expenses
              
              
              477,000
              
              
              18,000
              
              
              1,808,000**Net
                  cash used in operating activities:**
              
              
              (1,849,000
              )
              
              (3,645,000
              )
              
              (28,613,000
              )**Cash
                  flows from investing activities:**Patent
                  issuance costs
              
              
              -
              
              
              -
              
              
              (548,000
              )Purchases
                  of equipment and leasehold improvements
              
              
              (1,631,000
              )
              
              (999,000
              )
              
              (4,794,000
              )Return
                  of Investment in unconsolidated affiliate
              
              
              -
              
              
              3,225,000
              
              
              3,669,000Other
              
              
              -
              
              
              1,000
              
              
              (7,000
              )**Net
                  cash used in investing activities:**
              
              
              (1,631,000
              )
              
              2,227,000
              
              
              (1,680,000
              )**Cash
                  flows from financing activities:**Proceeds
                  from related party loans
              
              
              362,000
              
              
              450,000
              
              
              3,009,000Proceeds
                  from notes payable and convertible notes
              
              
              3,799,000
              
              
              2,603,000
              
              
              15,025,000Proceeds
                  from short term loans
              
              
              -
              
              
              105,000
              
              
              4,271,000Capital
                  contribution
              
              
              -
              
              
              -
              
              
              95,000Net
                  payments on capital leases
              
              
              (40,000
              )
              
              (39,000
              )
              
              (122,000
              )Payments
                  on interim loans
              
              
              -
              
              
              -
              
              
              (808,000
              )Payments
                  on notes payable - others
              
              
              (1,000,000
              )
              
              (1,714,000
              )
              
              (3,348,000
              )Payments
                  on stockholder loans
              
              
              -
              
              
              -
              
              
              (773,000
              )Proceeds
                  from issuance of capital stock
              
              
              35,000
              
              
              -
              
              
              12,949,000**Net
                  cash provided by financing activities****:**
              
              
              3,156,000
              
              
              1,405,000
              
              
              30,298,000**Net
                  decrease in cash and cash equivalents**
              
              
              (324,000
              )
              
              (13,000
              )
              
              5,000Effect
                  of exchange rate translation
              
              
              100,000
              
              
              -
              
              
              100,000**Cash
                  and cash equivalents,**beginning
                  of period
              
              
              329,000
              
              
              342,000
              
              
              -**Cash
                  and cash equivalents,**end
                  of period
              
              $
              105,000
              
              $
              329,000
              
              $
              105,000
 (continued)
  F-13
 **XECHEM
                  INTERNATIONAL, INC. AND SUBSIDIARIES****(A
                  DEVELOPMENT STAGE ENTERPRISE)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS - (continued)**
  **Years
                  Ended December 31,**
              
              **Cumulative
                  from March 15, 1990 (inception) to December 31,****2006**
              
              **2005**
              
              **2006****Supplemental
                  Disclosures of Non-cash Financing and Investing Activities:**Cash
                  paid during the periods for:Interest
                  - related party
              
              $
              78,000
              
              $
              82,000
              
              $
              488,000Interest
                  - other
              
              $
              1,212,000
              
              $
              547,000
              
              $
              1,938,000Income
                  Taxes
              
              $
              -
              
              $
              -
              
              $
              -**Supplemental
                  disclosures of Non-cash financing and investing activities in 2006
                  and
                  2005:**Net
                  assets of Xechem India contributed to capital andminority
                  interest.
              
              $
              -
              
              $
              -
              
              $
              118,000Liabilities
                  exchanged for preferred and common stock
              
              $
              -
              
              $
              -
              
              $
              1,270,000Equipment
                  purchased through financing
              
              $
              -
              
              $
              -
              
              $
              134,000Securities
                  issued as payment on related party note
              
              $
              -
              
              $
              -
              
              $
              20,000Common
                  stock issued upon conversion of debentures, notesand
                  related accrued interest
              
              $
              3,976,000
              
              $
              99,500,000
              
              $
              3,976,000Common
                  stock issued for services
              
              
              
              
              $
              14,000,000
              
              $
              14,417,000Convertible
                  notes refinanced by notes payable
              
              $
              -
              
              $
              -
              
              $
              367,000Warrants
                  Issued
              
              $
              -
              
              $
              -
              
              
              193,000Warrants
                  Issued for services
              
              $
              -
              
              $
              -
              
              
              1,330,000Beneficial
                  Conversion Features to financing agreements
              
              $
              8,496,000
              
              $
              3,793,000
              
              
              12,998,000Common
                  stock of subsidiary issued in conjunction withfinancing
                  agreement
              
              $
              -
              
              $
              -
              
              $
              16,662,000Preferred
                  Stock issued in Ceptor acquisition
              
              $
              -
              
              $
              -
              
              $
              4,760,000Assets
                  acquired & Liabilities assumed in Asset acquisition:Long
                  Term Debt
              
              $
              -
              
              $
              -
              
              $
              275,000Prepaid
                  Expenses
              
              $
              -
              
              $
              -
              
              $
              18,000Accrued
                  Expenses
              
              $
              -
              
              $
              -
              
              $
              36,000
  See
          accompanying notes to consolidated financial statements
  F-14
 **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 ***(1)
          Nature of the Business and Summary of Significant Accounting
          Policies***
 
 ***Nature
          of the Business -*** We
          are
          engaged in the research and technology development of generic and proprietary
          drugs from natural sources. Research and development efforts focus principally
          on antifungal, anticancer, antiviral (including anti-AIDS) and anti-inflammatory
          compounds, as well as antiaging and memory enhancing compounds. We are
          also
          focusing on phytopharmaceuticals and other proprietary technologies for
          orphan
          diseases. An orphan disease is defined in the U.S. as: (1) a rare disease
          that
          affects fewer than 200,000 people; or (2) a common disease that has been
          ignored
          because it is less prominent in the U.S. compared with developing nations.
          The
          Company's lead project involves the development of a phytopharmaceutical
          product, NICOSANTM (HEMOXINTM), which has received Food and Drug Administration
          (FDA)-designated orphan drug status as the first definitive therapy for
          sickle
          cell disease (SCD). SCD is an inherited disease characterized by the deformation
          of red blood cells (RBCs) **** and
          their
          subsequent inability to transport oxygen throughout the body, resulting
          in
          episodes of excruciating pain and decreased life expectancy. In the U.S.,
          most
          cases of SCD occur among African-Americans and Hispanics of Caribbean ancestry,
          with approximately one in every 400 African-Americans suffering with the
          disease.
 
 We
          are a
          development stage company, with limited history of operations and have
          earned
          minimal revenues from operations to date. Operations from inception have
          consisted primarily of financial planning, raising capital, and research
          and
          development activities. Xechem’s principal product under development is
          NICOSANTM/HEMOXINTM which has shown efficacy in the treatment of Sickle Cell
          Disease. The development and production of NICOSANTM/HEMOXINTM is being conducted
          through Xechem Nigeria. In July 2006, Xechem Nigeria received approval
          by the
          National Agency for Food and Drug Administration and Control (NAFDAC),
          which is
          Nigeria’s drug regulatory agency, for the limited marketing and sale of NICOSANTM
in Nigeria, on a limited term basis. The approval was for an initial term
          of two
          years, during which time, the Company will work toward completing confirmatory
          Phase III trials in Nigeria. There can be no assurance that we will be
          successful in obtaining regulatory clearance for the sale of existing or
          any
          future products or that any of the Company's products will be commercially
          viable.
 
 ***Principles
          of Consolidation -*** The
          accompanying consolidated financial statements include the accounts of
          Xechem
          International, Inc. (“Xechem”) and its wholly-owned subsidiaries, Xechem, Inc.,
          Xechem Laboratories, Inc., XetaPharm, Inc., Xechem (India) Pvt. Ltd. and
          Xechem
          Pharmaceuticals Nigeria Ltd. which are substantially owned by Xechem
          (collectively the "Company"). We also own 45% of Xechem Pharmaceutical
          China
          Ltd., a joint venture in The People’s Republic of China, which has been inactive
          since 2001 ( *See
          Note 9* ).
          Investments in unconsolidated affiliates in which the Company owns 20%
          to 50%
          interest and/or otherwise exercises significant influence are accounted
          for
          under the equity method. The consolidated financial statements have been
          prepared in accordance with accounting principles generally accepted in
          the
          United States of America.
 
 All
          inter-company transactions and balances have been eliminated in
          consolidation.
 
 ***Development
          Stage Corporation*** - The
          accompanying consolidated financial statements have been prepared in accordance
          with the provisions of Statement of Financial Accounting Standard ("SFAS")
          No.
          7, "Accounting and Reporting by Development Stage Enterprises."
  ***Revenue
          Recognition*** - We
          record revenue when all contracted services have been performed or when
          products
          have been shipped to the customer.
 
 F-15
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(1)
          Nature of the Business and Summary of Significant Accounting Policies
          (Continued)***
 
 ***Foreign
          Operations*** -
          Operations outside the United States include subsidiaries in India and
          Nigeria.
          Foreign operations are subject to risks inherent in operating under different
          legal systems and various political and economic environments. Among the
          risks
          are changes in existing tax laws, possible limitations on foreign investment
          and
          income repatriation, government price or foreign exchange controls, and
          restrictions on currency exchange.
 
 Results
          of operations for the Company’s Nigerian and Indian subsidiaries are translated
          from the local (functional) currency to the U.S. dollar using average exchange
          rates during the period, while assets and liabilities are translated at
          the
          exchange rate in effect at the reporting date. Resulting gains or losses
          from
          translating foreign currency financial statements are recorded as other
          comprehensive income (loss). Foreign currency transaction gains (losses)
          resulting from exchange rate fluctuations on transactions denominated in
          a
          currency other than the Naira and Rupee are included in other income and
          expenses. As a result, the transactions of those operations that are denominated
          in foreign currencies are remeasured into U.S. dollars, and any resulting
          gains
          or losses are included in other income and expenses. The net foreign currency
          translation was not material.
  ***Financial
          Instruments -*** Financial instruments include cash, accounts receivable, accounts payable,
          accrued expenses, notes and loans payable. Generally accepted accounting
          principles require disclosing the fair value of financial instruments to
          the
          extent practicable for financial instruments, which are recognized or
          unrecognized in the balance sheet. The fair value of the financial instruments
          disclosed herein is not necessarily representative of the amount that could
          be
          realized or settled, nor does the fair value amount consider the tax
          consequences of realization or settlement. In assessing the fair value
          of these
          financial instruments, the Company used a variety of methods and assumptions,
          which were based on estimates of market conditions and risks existing at
          that
          time. For certain instruments, including cash and cash equivalents, accounts
          receivable, accounts payable, accrued expenses and other current liabilities,
          it
          was estimated that the carrying amount approximated fair value for the
          majority
          of these instruments because of their short maturity. The fair value of
          capital
          lease and note payable obligations as recorded approximate their fair values
          as
          represented by the net present value of the future payments on the underlying
          obligations.
 
 We
          follow
          the provisions of SFAS No. 133, "Accounting for Derivative Instruments
          and
          Hedging Activities." This statement requires companies to record derivatives
          on
          the balance sheet as assets or liabilities, measured at their fair value.
          The
          accounting for the gains or losses resulting from changes in the values
          of those
          derivatives would be dependent on the use of the derivative and whether
          it
          qualifies for hedge accounting.
 
 ***Concentration
          of Credit Risk*** -
          Financial instruments that potentially subject the Company to concentrations
          of
          credit risk consist principally of cash and cash equivalents.
 
 We
          maintain cash balances in financial institutions which are insured by the
          Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per account.
          At
          times, such balances may be in excess of the FDIC insurance limit. Management
          monitors the soundness of these institutions and considers the Company's
          risk
          negligible.
 
 Our
          foreign operations are subject to risks inherent in operating under different
          legal systems and various political and economic environments. Among the
          risks
          are changes in existing tax laws, possible limitations on foreign investment
          and
          income repatriation, government price or foreign exchange controls, and
          restrictions on currency exchange. As of December 31, 2006, we had approximately
          $0.0 cash subject to credit risk.
  F-16
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(1)
          Nature of the Business and Summary of Significant Accounting Policies
          (Continued)***
 
 ***Cash
          and Cash Equivalents -*** The
          Company considers all highly liquid instruments purchased with an original
          maturity date of three months or less to be cash equivalents. As of December
          31,
          2006, all of the Company's cash represents bank deposits
 
 ***Inventories
          -*** Inventories are stated at the lower of cost or market  on
          a
          first-in, first-out basis. Inventory at December 31, 2006 is principally
          comprised of NICOSANTM finished goods, work-in-progress and raw materials located
          in Nigeria.
 
 ***Long-Lived
          Assets***  ***-*** We
          assess the impairment of long-lived assets under SFAS No. 144, "Accounting
          for
          the Impairment or Disposal of Long-lived Assets." Long-lived assets, if
          impaired, are written down to fair value, if lower than the carrying cost,
          whenever events or changes in circumstances indicate that the carrying
          amount of
          the asset may not be recoverable. Management also reevaluates the periods
          of
          amortization of long-lived assets to determine whether events and circumstances
          warrant revised estimates of useful lives.
 
 ***Foreign
            Currency Translation -*** The
            consolidated financial statements of the foreign affiliates have been
            translated
            at current exchange rates for balance sheet items and at average rates
            for
            income and expense items. The effect of foreign currency translation,
            included
            in the consolidated statements of operations, amounted to approximately
            $100,000
            for the year ended December 31, 2006. The effect of foreign currency
            translation, included in the consolidated statements of operations for
            the year
            ended December 31, 2005 was not material.
  ***Property
          and Equipment -*** Property
          and equipment are recorded at stated cost less accumulated
          depreciation ***.*** The
          cost
          of equipment held under capital leases is equal to the lower of the net
          present
          value of the minimum lease payments or the fair market value of the leased
          property at the inception of the lease. Depreciation is computed generally
          by
          the straight-line method at rates adequate to allocate the cost of applicable
          assets over their expected useful lives which ranges from 5 -10 years for
          furniture, fixtures and equipment. Leasehold improvements are amortized
          over
          periods not in excess of applicable lease terms. Amortization of capitalized
          leases and leasehold improvements is included with depreciation expense.
          Depreciation and amortization expense for equipment and leasehold improvements
          for the years ended December 31, 2006 and 2005 was approximately $139,000
          and
          $161,000, respectively. 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. Certain
          equipment is leased from third parties through lease agreements and are
          treated
          as capital leases. The Company anticipates acquiring the machines at the
          stated
          bargain purchase option prices at the end of the lease terms. These assets
          are
          included in equipment.
 
 ***Investments
          in Unconsolidated Affiliates -***  Investments
          in unconsolidated affiliates, jointly owned companies and other investees
          in
          which the Company owns 20% to 50% interest and or exercises significant
          influence are carried at equity, adjusted for the company's proportionate
          share
          of their undistributed earnings or losses *(See
          Note 9).*
 
 ***Debt
          Discount*** *-* Debt
          discount, which represent costs associated with obtaining long-term financing,
          are capitalized. The costs generally represent the value of warrants issued
          in
          connection with financing arrangements and the intrinsic value of any beneficial
          conversion feature associated with the underlying debt. The charges are
          amortized over the lesser of the life of the loan or over the time period
          until
          the loan may be converted into stock. Amortization expense relating to
          deferred
          financing charges amounted to approximately $3,868,000 and $3,861,000 for
          the
          years ended December 31, 2006 and 2005, respectively.
 
 ***Patents*** - The
          cost of patents is charged to operations when incurred, as no value is
          assigned
          to the patents due to the uncertainty of realization of value.
  F-17
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(1)
          Nature of the Business and Summary of Significant Accounting Policies
          (Continued)***
  ***Concentration
          of Debt*** - We
          have a concentration of debt with one creditor (Marjorie Chassman and certain
          other investors, "Chassman"). Under the terms of the agreements, we received
          significant advances during 2006 and 2005 which were necessary to fund
          our
          current operations and have issued to Chassman options to convert various
          debt
          into common stock. In addition, this investor and certain other investors
          hold
          the outstanding convertible notes *(see
          Note 11)* as
          of
          December 31, 2006.
 
 ***Research
          and Development Costs*** -
          Expenditures for research and development activities are charged to operations
          as incurred.
 
 ***Stock-Based
          Compensation -*** We
          account for stock-based compensation utilizing the intrinsic value method
          in
          accordance with the provisions of Accounting Principles Board Opinion No.
          25
          (APB 25), “Accounting for Stock Issued to Employees” and related
          Interpretations. Compensation cost for the stock options issued in 2006
          and
          prior years has been determined based on the intrinsic value at the grant
          dates
          for awards under the plan which resulted in compensation expense of
          approximately $1,537,000 and $0 in 2006 and 2005, respectively.
 
 In
          December 2004, the Financial Accounting Standards Board (“FASB”) issued
          Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
          Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock
          Based Compensation”, and supersedes APB 25. Among other items, SFAS 123R
          eliminates the use of APB 25 and the intrinsic value method of accounting,
          and
          requires companies to recognize the cost of employee service received in
          exchange for awards of equity instruments, based on the grant annual date
          fair
          value of those awards, in the financial statements. The effective date
          of SFAS
          123R is the first reporting period beginning after June 15, 2005, which
          is first
          quarter 2006 for calendar year companies, although early adoption is allowed.
          SFAS 123R requires companies to adopt its requirements using a “modified
          prospective” method. Under the “modified prospective” method, compensation cost
          is recognized in the financial statements beginning with the effective
          date,
          based on the requirements of SFAS 123R for all share-based payments granted
          after that date, and based on the requirements of SFAS 123 for all unvested
          awards granted prior to then effective date of SFAS 123R. The “modified
          retrospective” method also permits entities to restate financial statements of
          previous periods based on proforma disclosures made in accordance with
          SFAS
          123.
 
 We
          currently utilize a standard option pricing model (i.e., Black-Scholes)
          to
          measure the fair value of stock options granted to employees. While SFAS
          123R
          permits entities to continue to use such a model, the standard also permits
          the
          use of a “Lattice” model.
 
 SFAS
          123R
          also requires that the benefits associated with the tax deductions in excess
          of
          recognized compensation cost be reported as a financing cash flow, rather
          then
          as an operating cash flow as required under prior literature.
 
 We
          are
          following the guidelines of the pronouncement.
  ***Income
          Taxes -*** Income
          taxes are provided based on the asset and liability method of accounting
          pursuant to SFAS No. 109, "Accounting for Income Taxes." Deferred income
          taxes
          are recorded for temporary differences between financial statement carrying
          amounts and the tax basis of assets and liabilities. Deferred tax assets
          and
          liabilities reflect the tax rates expected to be in effect for the years
          in
          which the differences are expected to reverse. A valuation allowance is
          provided
          if it is more likely than not that some or the entire deferred tax asset
          will
          not be realized. Prior to the consummation of Xechem's initial public offering
          (in May 1994), we were an "S" corporation, and, as such, losses incurred
          from
          the date of inception to April 26, 1994 are not available to us as tax
          loss
          carryforwards.
  F-18
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(1)
          Nature of the Business and Summary of Significant Accounting Policies
          (Continued)***
  ***Advertising
          Costs*** -
          Advertising costs are expensed as incurred. During 2006 and 2005, advertising
          expense was approximately $56,000 and $9,000, respectively.
 
 ***Estimates
          -*** In
          preparing financial statements in conformity with accounting principles
          generally accepted in the United States of America management is required
          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.
 
 **Net
          Income (Loss) Per Share -** Net
          income (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
          that
          would occur upon the exercise or conversion of all dilutive securities
          into
          common stock. Under SFAS No. 128, net income per share is computed by dividing
          net income available to common stock shareholders by the weighted average
          share
          of common stock outstanding for the period and including dilution that
          would
          occur upon the exercise of conversion of all dilutive securities into common
          stock. As of December 31, 2006, the potentially dilutive securities totaled
          approximately 2.148 billion shares of common stock.
 
 ***Effects
          of Recent Accounting Pronouncements*** *-* In
          May
          2005, the FASB issued SFAS No. 154, “Accounting for Changes and Error
          Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No.
          3”
(“SFAS 154”). SFAS 154 requires retrospective application of voluntary changes
          in accounting principles, unless impracticable. SFAS 154 supersedes the
          guidance
          in APB Opinion No. 20 and SFAS No. 3, but does not change any transition
          provisions of existing pronouncements. Generally, elective accounting changes
          will no longer result in a cumulative effect of a change in accounting
          in the
          income statement, because the effects of any elective changes will be reflected
          as prior period adjustments to all periods presented. SFAS 154 was effective
          beginning in 2006 and will affect any accounting changes that we elect
          to make
          thereafter.
 
 In
          March
          2005, the FASB Interpretation No. 47, “Accounting for Conditional Asset
          Retirement Obligations, and interpretation of FASB Statement No. 143” (“FIN
          47”). FIN 47 clarifies that conditional asset retirement obligations meet
          the
          definition of liabilities and should be recognized when incurred if their
          fair
          values can be reasonably estimated. The cumulative effect of initially
          applying
          FIN 47 would be recognized as a change in accounting principle. FIN 47
          is
          effective no later than the end of fiscal years ending after December 15,
          2005.
          Adoption of FIN 47 did not have a material impact on our financial condition
          or
          results of operations.
 
 In
          June
          2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
          Period for Leasehold Improvements, and (“EITF 05-6”). EITF 05-6 provides
          guidance on determining the amortization period for leasehold improvements
          acquired in a business combination or acquired subsequent to lease inception.
          The guidance on EITF 05-6 will be applied prospectively and is effective
          for
          periods after June 29, 2005. EITF 05-6 did not impact on the Company’s
          consolidated financial statements.
  F-19
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(1)
          Nature of the Business and Summary of Significant Accounting Policies
          (Continued)***
 
 In
          February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial
          Instruments an amendment of FASB 133, Accounting for Derivative Instruments
          and
          Hedging Activities, and FASB 140, Accounting for Transfers and Servicing
          of
          Financial Assets and Extinguishments of Liabilities. FASB 155, provides
          the
          framework for fair value remeasurement of any hybrid financial instrument
          that
          contains an embedded derivative that otherwise would require bifurcation
          as well
          as establishes a requirement to evaluate interests in securitized financial
          assets to identify interests. FASB 155 further amends FASB 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. The FASB 155 guidance also clarifies which
          interest-only strips and principal-only strips are not subject to the
          requirement of FASB 133 and concentrations of credit risk in the form of
          subordination are not embedded derivatives. This Statement is effective
          for all
          financial instruments acquired or issued after the beginning of an entity’s
          first fiscal year that begins after September 15, 2006. FASB 155 is not
          expected
          to have a material impact on the Company’s consolidated financial
          statements.
 
 In
          March
          2006, FASB issued FASB 156, Accounting for Servicing of Financial Assets
          - an
          amendment of FASB Statement No. 140. FASB 156 requires the recognition
          of a
          servicing asset or servicing liability under certain circumstances when
          an
          obligation to service a financial asset by entering into a servicing contract.
          FASB 156 also requires all separately recognized servicing assets and servicing
          liabilities to be initially measured at fair value utilizing the amortization
          method or fair market value method. FASB 156 is effective the beginning
          of the
          first fiscal year that begins after September 15, 2006. FASB 156 is not
          expected
          to have a material impact on the Company’s consolidated financial
          statements.
  FIN
          48,
          which is effective January 1, 2007, clarifies the accounting for the
          uncertaintly in tax positions by requiring companies to recognize in their
          financial statements, the impact of a tax position, if that position is
          more
          likely than not of being disallowed on audit based on the technical merits
          of
          the position. Among other provisions, FIN 48 also requires expanded disclosures
          at the end of each annual period presented. The Company continues to evaluate
          the impact of FIN 48 on its financial position and results of operations.
          At
          this time, the effects of adoption have not yet been determined.
 
 FAS
          157,
          which will be effective January 1, 2008, clarifies the definition of fair
          value,
          establishes a framework for measuring fair value, and expands the disclosures
          on
          fair value measurements. The effect of adoption of FAS 157 on the Company’s
          financial position and results of operations is not expected to be
          material.
 
 ***(2)
          Operating and Liquidity Difficulties and Management's Plans To Overcome
          Them***
 
 The
          accompanying consolidated financial statements have been prepared on a
          going
          concern basis, which contemplates the realization of assets and the satisfaction
          of liabilities and commitments in the normal course of business. As shown
          in the
          consolidated financial statements, we have incurred net losses for the
          years
          ended December 31, 2006 and 2005, and we have a working capital deficit,
          an
          accumulated deficit, and cumulative negative cash flows from operations
          since
          inception. These conditions raise substantial doubt about our ability to
          continue as a going concern. We are in the development stage and have realized
          minimal revenues to date. Through the end of the current reporting period,
          the
          resources and attention of the Company were being directed primarily toward
          efforts of its subsidiary, Xechem Pharmaceuticals Nigeria Ltd. (Xechem
          Nigeria)
          to launch and commercialize our drug NICOSANTM/HEMOXINTM (formerly named
          NIPRISAN), which has shown efficacy in the treatment of Sickle Cell Disease
          (SCD). On July 3, 2006, the drug was approved by the National Agency for
          Food
          and Drug Administration and Control (NAFDAC), which is Nigeria’s drug regulatory
          agency, on a limited term basis. The approval was for an initial term of
          two
          years, during which time, the Company will work toward completing confirmatory
          Phase III clinical trials in Nigeria. In the meantime, Xechem Nigeria faces
          no
          restrictions on its ability to market and sell the drug in Nigeria. Three
          days
          following the drug’s approval, on July 6, 2006, Xechem Nigeria officially
          launched the drug in Nigeria, The drug is being produced and a modern,
pilot
          facility operated by Xechem Nigeria at Sheda Science and Technology Complex
          (SHESTCO), Abuja, Nigeria. Construction of a full scale production facility
          recently began adjacent to Xechem Nigeria’s pilot facility at SHESTCO. The
          Company is also planning to embark upon the stringent U.S. FDA approval
          process,
          which includes conducting pre-clinical and clinical trials in the United
          States
          in anticipation of the sale of the drug in this country. Substantial cash
          expenditures over a considerable period of time will be required to complete
          construction of the scale-up facility, to produce, market and sell large
          scale
          quantities of NICOSANTM/HEMOXINTM and to fund the cost of the clinical trials, and
          the Company is in the process of identifying potential sources of financing,
          including loans and equity infusions, that will allow it to accomplish
          these
          objectives. There can be no assurance that the necessary funds will be
          obtained
          to complete construction of its full scale production facility in Nigeria,
          to
          successfully produce, market and sell the drug in large quantities in Nigeria
          or
          to successfully launch the drug in the United States. Our research and
          development activities are at an early stage and the time and money required
          to
          develop the commercial value and marketability of our proposed products
          will
          require significant cash expenditures for an indefinite period in the future.
          In
          order to meet these cash needs, we have entered into the following recent
          financing agreements.
  F-20
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(2)
          Operating and Liquidity Difficulties and Management's Plans To Overcome
          Them
          (Continued)***
  (1)  On
          December 13, 2005, we entered into an agreement in principle concerning
          the
          settlement of the Xechem,
          Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03
          C
          1920 lawsuit.
          ( *See
          Note 6 and 11A)*
 
 In
          return
          for Xechem’s full release of all claims that were or could have been asserted
          against BMS in connection with the case, BMS agreed to pay us $4,200,000
          and
          further agreed to release us from all claims BMS could have asserted against
          us
          in the case. Each party agreed to bear their own costs, fees and expenses.
          Further, BMS agreed to waive the $29,599 fee award granted by the Court
          on
          September 7, 2005. BMS made the settlement payment to us in January
          2006.
 
 After
          payment of legal fees, costs, interest due on prior financings and prorations,
          we received approximately $1,700,000 from this settlement.
 
 (2)
          The
          agreement with Alembic Limited was restructured in December 2005 ( *See
          Note 11D* ).
          In
          accordance with the terms of the loan, in January 2006, from the proceeds
          from
          the BMS settlement, $1,000,000 of principal and $190,700 of accrued interest
          was
          paid. The remaining principal balance of $2,000,000 due on the Alembic
          Promissory Note, together with unpaid interest, is due and payable December
          31,
          2006.
 
 Xechem
          did not pay the amounts due Alembic on December 31, 2006. Xechem and Alembic
          have extended the Maturity Date, pursuant to a Letter Agreement, dated
          January
          4, 2007 to January 31, 2007. Pursuant to a second Letter Agreement, dated
          January 31, 2007, the parties agreed to extend the Maturity Date to February
          24,
          2007. As consideration for this extension, Xechem agreed to pay to Alembic,
          in
          reduction of the indebtedness due under the Note, the sum of $100,000.
          Pursuant
          to a third Letter Agreement, dated as of February 24, 2007 (executed March
          1,
          2007), the parties agreed to extend the Maturity Date to March 31, 2007.
          As
          consideration for the third extension, Xechem paid Alembic, in reduction
          of the
          indebtedness due under the Note, the sum of $100,000 on March 1, 2007,
          which
          payment was a condition to the extension.
 
 Furthermore,
          the parties agreed that if Xechem made a principal payment to Alembic in
          reduction of the Note of not less than $1,000,000, together with accrued
          interest, on or before March 31, 2007, then the Maturity Date will be extended
          for an additional six months. Due to finalization of new funding (See Note
          2(12)), Alembic agreed to extend the payment date five days and payment
          was made
          on April 5, 2007.
  (3)  On May
          31, 2006, Nigeria Export-Import Bank (NEXIM) funded a direct loan to our
          wholly-owned subsidiary, Xechem Pharmaceuticals Nigeria, Ltd. (Xechem
          Nigeria).
  The
          loan
          is in the principal amount of 150,000,000 Naira or approximately One Million
          Two
          Hundred Thousand Dollars (US) ($1,179,000). The loan proceeds are being
          used
          primarily to facilitate the full-scale commercial production of NICOSANTM through
          the expansion and integration
          of existing production facilities at Sheda Science and Technology Complex,
          Gwagwalada-Abuja. The loan facility will extend for a period of up to three
          years, with no principal payments due during the first year. The loan facility
          bears interest at the rate of 15% per year, payable during the first year
          in
          installments in November 2006 and May 2007. Thereafter, the loan facility
          is to
          be repaid through four consecutive semi-annual installments of principal
          and
          interest with the first repayment (of approximately $400,000 US) occurring
          on
          November 29, 2007. The loan facility is secured by: (a) an all assets debenture
          on the assets of the company which has been incorporated into a trust for
          all
          lenders to be managed by Diamond Trustees Company; (b) personal guaranty
          issued
          by the CEO, Dr. Ramesh Pandey, backed by a notarized statement of net worth;
          and
          (c) promissory notes.
  F-21
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 ***(2)
          Operating and Liquidity Difficulties and Management's Plans To Overcome
          Them
          (Continued)***
  Xechem
          Nigeria is obligated to pay the following fees: (a) a facility fee of 1%
          flat on
          the facility amount or 1,500,000 Naira (approximately $12,500 US); (b)
          a
          management fee of 0.5% flat on the principal amount outstanding from time
          to
          time, payable annually on the anniversary of the facility; and (c) a monitoring
          fee of 100,000 Naira (approximately $800 US), payable annually on the
          anniversary of the facility. Nexim reserves the right to vary the rates
          as
          dictated by market realities. Nexim is also entitled to name a director
          to the
          Xechem Nigeria board of directors pending the repayment of the facility.
  (4)  We
          have
          been in extended negotiations with UPS Capital Business Credit (“UPS Capital”)
          to obtain financing to cover the cost of acquiring the plant equipment
          and
          machinery needed to establish a commercial scale production facility in
          Nigeria
          under the U.S. Ex-Im (“Ex-Im”) Bank Loan Guarantee Program. Based on the
          estimated cost of the project, as well as the criteria utilized under Ex-Im’s
          guidelines, the Ex-Im statutory fees, etc., the total amount sought by
          our
          subsidiary, Xechem Pharmaceuticals Nigeria, Ltd. (“XPNL”) from UPS Capital is
          $9.38 million. In March 2006, we paid a $50,000 non-refundable good faith
          deposit to UPS Capital.
 
 On
          October 17, 2006, we received notification from UPS Capital that Ex-Im
          has
          approved a comprehensive credit guarantee to support UPS Capital’s $9.38 million
          loan to XPNL, and that UPS has approved XPNL for a $9.38 million credit
          facility
          on the following principal terms:
 
 (i)
                Proceed
                    to be used to fund up to 85% of XPNL’s cost (i.e, $8,538,542) of the US
                    manufactured equipment and machinery needed for the establishment
                    of a
                    commercial scale pharmaceutical plant in Nigeria, plus certain
                    local
                    costs, fees, etc., for a total credit facility of
                    $9,388,981;
 
 (ii)
                Principal
                    plus interest at a rate of LIBOR + 2.75% repayable semi-annually
                    in
                    arrears over five years;
 
 (iii)
                Loan
                    to be supported by a 100% Ex-Im guarantee, which has been approved,
                    together with local bank guarantees from two Nigerian banks,
                    Access Bank,
                    Plc, and Diamond Bank, Plc. (Subsequently,Bank
                    PHB Plc replaced Access Bank).
 
 (iv)
                Part
                    of UPS Capital loan will be used to cover 100% of the cost of
                    Ex-Im
                    Statutory Exposure Fee of $850,439.
 
 (v)
                Total
                    up-front fees payable to UPS Capital are $190,795 (net of the
                    $50,000 good
                    faith deposit).
  Upon
          payment by XPNL of the UPS Capital Fees and the receipt by UPS Capital
          of the
          final commitments from Access Bank and Diamond Bank, the loan documents
          will be
          finalized and the proceeds released in accordance with the terms of the
          loan.
          Both local Nigerian banks have issued letters of intent to provide the
          required
          guarantees, and XPNL is in the midst of negotiations regarding the final
          terms
          of local Nigerian bank commitments regarding the guarantees. Though there
          is no
          certainty that Diamond Bank and Access Bank will issue the final guarantees
          required to complete the UPS loan, we believe that such guarantees will
          be
          issued. If for any reason such guarantees do not materialize, we will
          immediately turn to identifying a suitable alternative Nigerian bank or
          banks to
          provide the required guarantee(s), though there can be no assurance we
          would be
          successful in doing so. If for any reason the UPS loan does not close,
          including
          because of the failure to procure the required local bank guarantee(s),
          and in
          the absence of alternative capitalization, including possible additional
          local
          financing from Nexim Bank in Nigeria, we have not identified alternative
          sources
          to fully fund the Nigerian Pharmaceutical Project or our ongoing
          operations.
  F-22
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(2)
          Operating and Liquidity Difficulties and Management's Plans To Overcome
          Them
          (Continued)***
  If
          and
          when the UPS loan closes, there will be additional expenses associated
          with the
          completion of the Nigerian facility and start-up of production. We are
          hopeful
          that these additional monies will be obtained from potential local financing
          in
          Nigeria (debt, equity and/or possible prepayment for product or other product
          sales) and/or from potential domestic funding sources, although no commitments
          have been obtained for such funding. In the event all of such financing
          can be
          obtained, we have the further risk that cost overruns and/or delays in
          bringing
          the product to market could adversely impact execution of our business
          plan.
 
 (5)
          In
          the twelve months ended December 31, 2006, holders of Xechem debt converted
          Xechem debt (in the form of principal and interest) in the aggregate amount
          of
          $4,317,000 ($4,075,000 of which is principal and $242,000 of which is interest)
          into 989,114,600 shares of Xechem’s common stock (exercised at conversion rates
          between $0.0025 - $0.0075 per share) representing approximately 65% of
          Xechem’s
          then issued and outstanding stock.
 
 (6)
          Over
          the period from February 22, 2006 through May 10, 2006, Marjorie Chassman
          (“Chassman”) infused $780,000 into Xechem. The note will be issued to Chassman
          in the amount of $780,000, it will bear interest at 8% and is due May 31,
          2008.
          The note is convertible into shares of common stock at $0.005 per share
          (approximately 156,000,000 shares, excluding interest, which is also convertible
          into stock at $0.005 per share). The loan has not been documented at this
          time.
 
 Over
          the
          period from June 2, 2006 through June 5, 2006, Chassman infused $200,000
          into
          Xechem. The note will be issued to Chassman in the amount of $200,000,
          it will
          bear interest at 8% and is due May 31, 2008. The note is convertible into
          shares
          of common stock at $0.01 per share (20,000,000 shares, excluding interest,
          which
          is also convertible into stock at $0.01 per share). The loan has not been
          documented at this time.
 
 Chassman
          agreed to loan $1,025,000 to Xechem, in two tranches, one in the amount
          of
          $500,000 and the other in the amount of $525,000, which were received by
          June
          20, 2006. The note is convertible into shares of common stock at $0.015
          per
          share (approximately 66,666,667 shares, excluding interest). The note bears
          interest at 8% and is due May 31, 2008. As additional consideration for
          infusion
          of the capital, Xechem issued Chassman 66,666,667 warrants, exercisable
          at $0.02
          per share for a period of 5 years. In addition, Chassman has agreed to
          extend
          the due date on all existing notes held by the company to May 31, 2008.
          The loan
          has not been documented at this time.
 
 In
          October 2006, Chassman agreed to infuse $500,000 into Xechem. A note will
          be
          issued to Chassman in the amount of $500,000, it will bear interest at
          8% and is
          due May 31, 2008. The note will be convertible into shares of common stock
          at
          $.03 per share (16,666,667 shares, excluding interest). As additional
          consideration for infusion of the capital and if Xechem does not repay
          the loan
          within six months of receipt of the full $500,000, Xechem will issue Chassman
          an
          additional 8,333,333 warrants, exercisable at $0.04 per share for a period
          of 5
          years. The loan has not been documented at this time.
 
 F-23
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(2)
          Operating and Liquidity Difficulties and Management's Plans To Overcome
          Them
          (Continued)***
 
 (7)
In
              the
              second quarter 2006, loans totaling $157,200 and $30,000 were made
              to the
              Companyby
              four
              related parties and one unrelated party, respectively. The notes issued
              for
              these loans are convertible into shares of common stock at $0.0103
              - $0.0125 per
              share (28,990,093 shares, excluding interest). The terms of these notes
              range
              from one month to one year with extensions and interest rates of 10-12%.
              The
              individuals also received five year stock options to purchase a total
              of
              14,800,000 shares of common stock at market prices ranging from $0.0103
              to
              $0.0125 per share.
 In
          the
          fourth quarter 2006, loans totaling $170,200 and $65,000 were made to the
          Company by three related and two unrelated parties, respectively. The notes
          issued for these loans are convertible into shares of common stock at $0.019
          -
          $0.024 per share (4,087,563 shares, excluding interest). The terms of these
          notes range from three month to six months with extensions and interest
          rates of
          8-15%. The individuals also received five year stock options to purchase
          a total
          of 5,031,744 shares of common stock at market prices ranging from $0.019
          to
          $0.024 per share.
 
 (8)
          Sales
          of our product NICOSANTM, a sickle cell drug, commenced in Nigeria in the second
          quarter 2006 and for the six months ended December 31, 2006 totaled $197,000.
          While revenues are not significant, they should help in covering the costs
          of
          the operation until the full scale production facility is
          completed.
 
 (9)  In
          October 2006, we received a Small Business Innovation Research (SBIR) grant
          for
          $473,000 from the National Institutes of Health, National Heart, Lung and
          Blood
          institute to carry out toxicity studies on the five-membered heterocyclic
          anti-sickling compound known as 5-HMF. Researchers from both Virginia
          Commonwealth University (VCU) and Children’s Hospital of Philadelphia (CHOP),
          University of Pennsylvania are expected to participate in the 5-HMF
          trials.
 
 (10)  In the
          period January 1, 2007 through March 6, 2007, a holder of Xechem debt converted
          Xechem debt (in the form of principal and interest) in the aggregate amount
          of
          $162,600 ($116,900 of which is principal and $45,700 of which is interest)
          into
          32,515,556 shares of Xechem’s common stock (exercised at the conversion rate of
          $0.005 per share) representing approximately 2% of Xechem’s then issued and
          outstanding stock.
 
 (11)  In the
          period January 1, 2007 through March 28, 2007, Xechem received loans totaling
          $100,000 from Ms. Chassman and $569,600 from eight unrelated parties. Notes
          are
          to be issued with terms of six months and a per annum interest rate of
          8%.
 
 (12)  On
          April
          4, 2007, the Company completed a private placement of $4,959,963 of Units
          pursuant to a securities purchase agreement (“Purchase Agreement”) with a number
          of investors (“Purchasers”). The Units are comprised of (i) 8%
          convertible debentures (“Debentures”) in an aggregate principal amount of
          $4,959,963; convertible into Common Stock of the Company at $0.0175 per
          share
          (representing 283,426,449 shares of common stock on an as converted basis,
          subject to possible adjustment as discussed below); and (ii) two warrants
          per
          Debenture, each providing a right to purchase 37.5% of the number of shares
          of
          Common Stock purchasable with the original principal amount of the Debentures
          (i.e. up to 75% of the Common Stock in the aggregate), at a price of $0.0225
          per
          share (subject to possible adjustment as discussed below); the first warrant
          has
          a term ending March 31, 2009 and is not callable (the “Two Year Warrant”), and
          the second warrant has a term ending March 31, 2010 and is callable by
          the
          Company at a purchase price of $0.06 per share provided the volume weighted
          average price (“VWAP”) of the Company’s Common Stock exceeds $0.06 for 30
          consecutive trading days (the “Three Year Warrant”—together with the Two Year
          Warrant, collectively, the “Warrants”). The Company has entered into a
“Registration Rights Agreement,” pursuant to which it is obligated to file a
          registration statement to register the Common Stock of the Company underlying
          the Debentures and Warrants, which contains certain penalties
          if not timely filed. In connection with the transaction the principal officers
          and directors of the Company were required to lock up their shares of the
          Company for a period ending 6 months after the registration of the common
          stock
          underlying the Debentures and Warrants and in addition, the Company’s CEO
          pledged certain personal assets (his 25% beneficial ownership in the entity
          that
          owns the New Brunswick, NJ facility leased to the Company) to secure the
          Debentures. The Company has agreed to grant to the advisor on the transaction
          an
          option to purchase 12% of the shares of Common Stock of the Company issuable
          upon the immediate conversion of the Debentures (i.e., 34,011,173 shares
          ) at a
          price of $0.001 per share, expiring March 31, 2009 for advising it in connection
          with the transaction. In addition, in the event of the exercise of any
          of the
          warrants issued as part of the offering, it is entitled to a 5% fee for
          the
          amount of the warrant exercise. The Company has also agreed to reimburse
          the
          Purchasers for interest at the rate of 8% per annum for the monies deposited
          by
          them in escrow pending the initial closing of the Purchase Agreement and
          to
          reimburse the advisor for $75,000 of its legal fees in connection with
          the
          transaction. (*See
          Note 13E)*
  F-24
 
 **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(2)
          Operating and Liquidity Difficulties and Management's Plans To Overcome
          Them
          (Continued)***
  (13)  On
          April
          3, 2007 Xechem Nigeria closed on its 500,000,000 Naira loan with the Nigerian
          Export Import Bank (“Nexim”), which represented a consolidation of the existing
          150,000,000 Naira loan of Xechem Nigeria with an increase in the loan by
          an
          additional 350,000,000 Naira (approximately $2,600,000 US dollars of additional
          funding). The loan is for a five year duration, inclusive of one year’s
          moratorium of debt service, but subject to biannual payments of interest
          during
          the moratorium period. Interest accrues on the loan at the rate of 16%
          per
          annum. *(See
          Note 13F)*
 
 We
          expect
          to continue our development efforts with respect to antifungal, anticancer,
          antiviral (including anti-AIDS) and anti-inflammatory compounds, as well
          as
          antiaging and memory enhancing compounds. Although we do not expect product
          revenues from these sources in 2006, we anticipate that these development
          activities may allow us to enter into more favorable licensing and/or investment
          arrangements.
  We
          plan
          to secure financing through various loans and bridge financing, which we
          feel
          will meet our current needs, provided the funding of such loans is fully
          adhered
          to. We will need to generate funds from operations and/or debt and equity
          funding sources to enable us to repay such loans and our other outstanding
          debt.
  We
          are
          attempting to raise outside financing through the issuance of equity securities
          or other instruments, although no agreements are currently in
          place.
 
 In
          addition, we have issued, and plan to continue issuing equity securities,
          where
          possible, to obtain services, without expending cash.
 
 In
          prior
          years, we received cash from the sale of our New Jersey net operating losses
          (“NOL’s”), which range from $300,000 to $500,000 annually. Under new guidelines
          adopted by the State of New Jersey, Xechem failed to qualify in 2006 for
          the
          sale of NOL’s because fewer than 75% of our employees, including subsidiaries,
          are based in New Jersey.
  ***(3)
          Income Taxes***
 
 We
          have
          not provided for income taxes since we have generated net operating losses
          for
          current tax purposes, and all deferred tax assets have been fully reserved.
          As
          of December 31, 2006, we had net operating loss carryforwards ("NOL") for
          federal income tax purposes of approximately $39.9 million, of which a
          portion
          begins to expire in 2007 and all fully expires in 2026. As Xechem continues
          to
          sell stock, we may undergo ownership changes within the meaning of Section
          382
          of the Internal Revenue Code of 1986 as amended (the "Code"). Internal
          Revenue
          Code Section 382
          places a limitation on the utilization of Federal net operating losses
          and other
          credit carryforwards when an ownership change, as defined by the tax law,
          occurs. Generally, this occurs when a greater than 50 percent change in
          ownership occurs. Accordingly, the actual utilization of the net operating
          loss
          carryforward and other deferred tax assets for tax purposes may be limited
          annually to a percentage, as defined in theCode,
          (approximately 4.22% at December 31, 2006) of the fair market value of
          the
          Company at the time of any such ownership changes.
  F-25
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(3)
          Income Taxes (continued)***
  As
          of
          December 31, 2006 and 2005, we have a deferred tax asset of approximately
          $14
          million and $13 million respectively, primarily arising from our net operating
          losses. A full valuation allowance has been provided because management
          believes
          it is more likely than not that the benefit of those losses it will not
          be
          realized.
 
 The
          provision for income taxes is summarized as follows:
 2006
                  
                  2005Federal:Current
                  
                  $
                  —
                  
                  $
                  —Deferred
                      (benefit), net
                  
                  
                  644,000
                  
                  
                  (1,323,000
                  )Valuation
                      allowance
                  
                  
                  (644,000
                  )
                  
                  1,323,000Total
                      Federal
                  
                  
                  —
                  
                  
                  —State:Current
                      (benefit)
                  
                  
                  —
                  
                  
                  (566,000
                  )Deferred
                      (benefit), net
                  
                  
                  187,000
                  
                  
                  (385,000
                  )Valuation
                      allowance
                  
                  
                  (187,000
                  )
                  
                  385,000Total
                      State
                  
                  
                  —
                  
                  
                  (566,000
                  )***Total
                      Income Tax Benefit***
                  
                  $
                  —
                  
                  $
                  (566,000
                  )
 Significant
              components of deferred tax assets and liabilities as of December 31,
              2006 and
              2005 are as follows:
 2006
                  
                  2005Deferred
                      tax assets:Net
                      operating loss carry forwards
                  
                  $
                  15,924,000
                  
                  $
                  12,862,000Valuation
                      Allowance
                  
                  
                  (15,924,000
                  )
                  
                  (12,862,000
                  )***Net
                      Deferred Tax Asset***
                  
                  $
                  —
                  
                  $
                  —
 A
              reconciliation from the Federal income tax benefit at the statutory
              rate to the
              effective rate is as follows:
 2006
                  
                  2005Tax
                      benefit at Federal statutory rate
                  
                  
                  (34.0
                  )%
                  
                  (34.0
                  )%State
                      income taxes, net of Federal benefit
                  
                  
                  (5.9
                  )%
                  
                  (5.9
                  )%Permanent
                      difference
                  
                  
                  32.4
                  %
                  
                  19.7
                  %Valuation
                      allowance
                  
                  
                  7.5
                  %
                  
                  14.9
                  %***Effective
                      tax rate***
                  
                  
                  —
                  %
                  
                  (5.3
                  )%
  F-26
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(3)
          Income Taxes (Continued)***
 
 Permanent
          differences consist primarily of share-based compensation and beneficial
          conversion feature charges deducted for financial statement purposes but
          not
          allowable for income tax purposes.
 
 As
          of
          December 31, 2006, we recorded no net deferred tax asset. The future expected
          benefit from the realization of the net operating losses was fully offset
          by a
          related valuation allowance. A full valuation allowance was recorded due
          to
          management's uncertainty about the realizability of the related tax benefits
          as
          of December 31, 2006. However, the amount of the deferred tax assets considered
          realizable could be adjusted in the future if estimates of taxable income
          are
          revised.
  During
          December of 2005, we received approval from the New Jersey Economic Development
          Authority ("NJEDA") to sell approximately $659,000 of tax benefits generated
          from NOL's. Under the terms of this NJEDA program, the proceeds of the
          sale had
          to be used for the purchase of fixed assets, working capital and any other
          expenses determined by the NJEDA to be in conformity with the New Jersey
          Emerging Technology and Biotechnology Financial Assistance Act. During
          2005,
          Xechem and its subsidiaries transferred the tax benefits of $659,000 in
          exchange
          for $566,000, pursuant to the New Jersey State Tax Credit Transfer program.
          We
          received $566,000 net of transfer fees pursuant to this program in December
          2005.
 
 Under
          new
          guidelines adopted by the State of New Jersey, Xechem failed to qualify
          in 2006
          for the sale of NOL’s because fewer than 75% of our employees, including
          subsidiaries, are based in New Jersey.
 
 Since
          1994, the Company has approximate net operating loss carryforwards for
          Federal
          income tax purposes, which expire as follows:
  Expiration
                      Date
                  
                  Amount2007
                  
                  $
                  2,102,0002009
                  
                  
                  1,068,0002010
                  
                  
                  3,183,0002011
                  
                  
                  3,218,0002012
                  
                  
                  3,762,0002018
                  
                  
                  1,992,0002019
                  
                  
                  2,257,0002020
                  
                  
                  1,863,0002021
                  
                  
                  1,605,0002022
                  
                  
                  3,508,0002023
                  
                  
                  2,568,0002024
                  
                  
                  6,429,0002025
                  
                  
                  4,276,0002026
                  
                  
                  2,080,000$
                  39,911,000
  F-27
  **XECHEM
          INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
          DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
  ***(4)
          Related Parties Transactions***
 
 Notes
          Payable - Related Parties consists of the following:
 Year
                      endedDecember
                      31,2006Loans
                      Payable - Dr. Renuka Misra (1)
                  
                  $
                  598,000Loans
                      Payable - Beverly Robbins (2)
                  
                  
                  390,000Loans
                      Payable - Xechem China (3)
                  
                  
                  140,000Loans
                      Payable - Dr. Pandey (4)
                  
                  
                  125,000Loans
                      Payable - Family Members of Dr. Pandey (5)
                  
                  
                  303,000Loans
                      Payable - Former Employee (6)
                  
                  
                  55,000Total
                      Notes Payable
                  
                  
                  1,611,000Less
                      Current Portion
                  
                  
                  1,346,000***Total
                      Long-Term Notes Payable***
                  
                  $
                  265,000
  (1)
          Xechem has three notes payable to Dr. Renuka Misra, director of Natural
          Products
          for approximately $298,000, $150,000 and $150,000. The notes require monthly
          interest payments at 12% - 15% per annum and are due August 22, 2006, July
          18,
          2006 and May 1, 2007, respectively. The note holder was granted an option
          to
          purchase 14,966,000 shares of common stock at a range of prices from $0.0106
          -
          $0.023 per share. New terms are being negotiated for past due
          notes.
 
 (2)
          Xechem has received funding from Beverly Robbins, a sales and marketing
          representative totaling $190,000 and $200,000. The notes require monthly
          interest payments at 10% per annum and are due on March 31, 2006 and July
          4,
          2006, respectively. The notes can be converted into common stock with a
          conversion price of $0.0057 per share. The noteholder was granted options
          to
          purchase 15,600,000 shares of common stock at a price of $0.0057 per share.
          New
          terms are being negotiated for past due notes.
 
 (3)
          We
          received $140,000 during the year ended December 31, 2000 from Xechem China
          pursuant to an interest free loan. Although an additional $340,000 was
          due
          Xechem under the original loan terms, no amounts have been received since
          2000
          and it is unlikely any additional amounts will be received. The loan advanced
          by
          Xechem China shall be repaid by Xechem out of its share in the dividends
          or
          distribution of Xechem China. Since Xechem China had no activity in 2006
          or 2005
          and no foreseeable profits in the near future there will not be any short-term
          repayment to Xechem China ( *see
          Note 9* ).
 
 (4)
          Xechem owes Dr. Pandey, Chairman of the Board, $804,000 as of December
          31, 2006
          from an interest bearing advance of $125,000 at 8% per annum, accrued interest
          of $230,000 and accrued salary of $449,000, which is included in accrued
          expenses to related parties. The advance will be due when Xechem is no
          longer a
          development stage entity. At December 31, 2006, Xechem owed Dr. Pandey
          $728,000.
 
 (5)
          In
          2003, we received $51,000 from members of Dr. Pandey's family in the form
          of six
          short-term notes and one unsecured loan in India. The due dates of the
          notes
          ranged from three months to one year with interest from 8% - 12%. These
          notes
          were restructured and extended to August 22, 2006. The accrued interest
          as of
          December 31, 2006 totaled $20,000. Three of the note holders are to be
          issued
          360,000 shares of our common stock; this resulted in a charge to operations
          in
          2004 of $77,800 for the fair value of the common stock on the date the
          agreement
          was entered into. As of December 31, 2006 the underlying 360,000 shares
          remain
          to be issued. New terms are being negotiated for past due notes.
  F-28
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(4)
        Related Parties Transactions (continued)***
  In
        2005,
        three new loans totaling $85,000 were made to the Company. The due dates
        of the
        notes ranged from six months to one year with interest from 10% - 12%. The
        accrued interest on these notes as of December 31, 2006 totaled $13,000.
        New
        terms are being negotiated for past due notes.
  In
        2006,
        a new loan totaling $10,000 was made to the Company. The due date of the
        loan is
        June 21, 2007 with an interest rate of 8%. The accrued interest on this loan
        as
        of December 31, 2006 totaled $100. The loan has not been documented at this
        time.
 
 Notes
        totaling $252,000 can be converted into common stock with a conversion price
        ranging $0.0057 - $0.021 per share. The note holders were granted options
        to
        purchase 27,691,744 shares of common stock at prices ranging from $0.0057
        -
        $0.021 per share.
 
 (6)
        In
        2005, we received $10,000 from a former employee in the form of a note at
        8% per
        annum and a due date of September 28, 2006. The note can be converted into
        common stock with a conversion price of $0.0115 per share. The note holder
        was
        granted an option to purchase 200,000 shares of common stock at a price of
        $0.0115 per share. New terms are being negotiated for past due
        notes.
 
 In
        2006,
        two new loans totaling $45,000 were made to the Company. The due dates of
        the
        loans range from three months to one year with interest at 8% per annum.
        The
        loans can be converted into common stock with a conversion price ranging
        from
        $0.240 - $0.253 per share. The note holder was granted an option to purchase
        550,000 shares of common stock at a price of $0.240 - $0.253 per share. The
        accrued interest in these loans as of December 31, 2006 totaled
        $3,300.
 
 Interest
        expense for related parties totaled approximately $133,000 and $97,000 for
        the
        years ended December 31, 2006 and 2005, respectively.
  The
        aggregate maturities of the Notes Payable - Related Parties are as
        follows:
 Year
                
                Amount2007
                
                $
                1,346,0002008
                
                
                —2009
                
                
                —2010
                    and Thereafter
                
                
                265,000Total
                
                
                1,611,000Less
                    Current Portion
                
                
                1,346,000***Long-Term
                    Portion***
                
                $
                265,000
  Xechem
        India - Xechem currently receives its supplies of plant extracts from India
        through informal collaborative relationships. Dr. Pandey and his brothers
        have
        incorporated a corporation in India, Xechem (India) Pvt. Ltd., ("Xechem India"),
        which was established to formalize such relationships by obtaining contracts
        for
        dependable supplies of plants and other raw materials. Based on its discussions
        with Indian sources for such materials, Xechem believed that an Indian
        corporation would obtain such contracts on significantly better terms than
        would
        a United States-based corporation. Xechem India may also conduct certain
        research, manufacturing, and marketing activities in India. In 1998, as a
        contribution to Xechem's capital, Dr. Pandey transferred his 66-2/3% interest
        in
        Xechem India to Xechem for no consideration other than reimbursement of amounts
        Dr. Pandey advanced for organizational expenses (approximately $5,000). Dr.
        Pandey's brothers own the remaining equity in Xechem India, some or all of
        which
        Xechem anticipates will be made available to other, unrelated, persons in
        India.
        The minority interest in Xechem India is not material.
  Leases
        -
        Dr. Pandey owns 25% of the lessor of our operating facility as a limited
        partner
        ( *see
        Note 6* ).
  F-29
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(5)
        Accounts Payable and Accrued Expenses***
 
 At
        December 31, 2006, accounts payable and accrued expenses consist of the
        following:
  General
                  Account Payable
              
              $
              1,368,000Accrued
                  Expense - Related Party (A)
              
              
              449,000Accrued
                  Interest - Related Party principally
              
              
              703,000Operating
                  Expenses
              
              
              562,000License
                  Agreement Fees
              
              
              100,000$
              3,182,000
 
 (A)
        Dr.
        Pandey agreed to defer a portion of compensation otherwise payable to him
        under
        these agreements until such time as Xechem has the available funds. At December
        31, 2006 and 2005 unpaid compensation totaled approximately $449,000 and
        $384,000, respectively. ******
 
 ***(6)
        Commitments and Contingencies***
 
 ***Employment
        Contracts −*** Dr.
        Pandey was employed pursuant to an employment agreement dated February 1994,
        which expired on its tenth anniversary. The Board of Directors, in 2004,
        approved an increase in his base compensation to $350,000 per annum and further
        agreed pursuant to the Chassman Agreement, part of the Bridge Financing Loans,
        to the grant of the common stock purchase option referenced below (yet to
        be
        codified in writing). The former agreement contained a provision which called
        for payment of a royalty payment in the amount of 2 1/2% of our net profits
        before taxes, as determined under generally accepted accounting principles,
        with
        respect to any products developed by Xechem during Dr. Pandey's tenure with
        Xechem whether prior to or after the term of the employment
        agreement.
 
 As
        set
        forth in the Chassman Agreement, Xechem has agreed that Dr. Pandey will be
        entitled to purchase at $0.0001 per share an amount of common stock for a
        five-year period from November 11, 2003 (fully-vested with piggyback
        registration rights) 20% of the fully-diluted common stock of the Company
        then
        outstanding, plus after giving effect to issuances that may result from the
        following: (i) shares issuable with respect to conversion of the debentures
        pursuant to the Chassman Agreement and the warrants issuable to Ms. Chassman;
        (iii) shares issuable with respect to conversion to equity, if any, regarding
        the $1,134,000 in loans previously secured by a portion of the proceeds of
        our
        lawsuit against Bristol-Myers-Squibb; and (iv) any additional shares issuable
        to
        the holders of loans funded per the Chassman Agreement upon conversion of
        such
        debt to equity, if any.
  Dr.
        Pandey is also entitled to receive additional voting stock to maintain 20%
        of
        the outstanding voting stock, and accordingly we issued 28,003 and 3,587
        additional Class C shares to Dr. Pandey in 2006 and 2005 with voting rights
        equal to 280,030,000 and 35,870,000 of common stock respectively.
 
 A
        renewed
        agreement has not yet been negotiated or finalized and it is not known at
        this
        time if the above terms will continue in a new agreement.
  F-30
 
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(6)
        Commitments and Contingencies (continued)***
  In
        April,
        2004, an employment agreement was entered into with Isaac Inyang for a two
        year
        period ending March 31, 2006 with an annual salary of $120,000. Mr. Inyang
        will
        hold the title of Director of Strategic Planning and Special Advisor to the
        Chairman/Chief Executive Officer. The
        employment agreement was not renewed.
 
 In
        May
        2006, an employment agreement which was entered into with Col. Bhuwan Pandey,
        Vice President - International Operations, which provides an annual salary
        of
        $250,000, an option purchase 20,000,000 shares of our common stock at $0.026
        per
        share, and customary vacation, severance, health and other
        benefits.
 
 In
        September 2006, an employment agreement was entered into with Howard Becker,
        Vice President-Operations, which provides an annual salary of $240,000 and
        an
        option to purchase 10,000,000 shares of common stock at $0.026 per share,
        vesting over a period of two years as follows: (i) 4,000,000 of the options
        vest
        immediately upon the effective date; (ii) 3,000,000 vest on the first
        anniversary of the effective date: and (iii) 3,000,000 vest on the second
        anniversary of the effective date, provided Mr. Becker is employed by the
        Company as of the applicable vesting date. The agreement also provided customary
        vacation, severance, health and other benefits. In November 2006, Mr. Becker
        ceased serving as our vice president of operations.
 
 ***Operating
        Leases -*** We
        have a
        five-year lease on our facilities, which commenced on July 1, 2002, and ends
        June 30, 2007. The Company is in negotiations with the landlord to extend
        the
        lease for an additional five years. At December 31, 2006, the commitment
        for
        minimum rental payment under this lease is:
  2007
                
                $
                94,000
  We
        are
        also liable for certain maintenance and utility charges that vary from month
        to
        month.
 
 As
        part
        of the negotiated terms of the July 2002 lease agreement, past due rental
        payments totaling approximately $88,000 would have been reduced to approximately
        $52,000 provided all rent and additional rent is paid on a timely basis from
        one
        year as of the date of the agreement. We did not fulfill our obligation under
        this agreement in 2003. As of December 31, 2006, $15,000 was still due to
        the
        landlord for failure to perform certain obligations under the agreement and
        is
        included in accounts payable. As of December 31, 2006, a total of $104,000
        remains due and payable to landlord and is included in accounts
        payable.
  In
        1996,
        Dr. Pandey purchased a 25% beneficial ownership in the lessor as a limited
        partner in such entity, which may be deemed to be an affiliate of Dr. Pandey.
        Rent expense amounted to approximately $185,000 and $177,000 for the years
        ended
        December 31, 2006 and 2005, respectively.
  In
        December 2004, Xechem Nigeria signed a 99 year lease, of which the first
        25
        years is irrevocable, for a production facility on approximately nine acres
        of
        land at a cost of Naira 25,000 (US $200) per annum.
 
 In
        July
        of 2004, the Company entered into a 36-month lease for an automobile for
        Dr.
        Pandey. Total 2006 payments under this lease were $13,800. Total commitments
        under this lease are $41,400 of which $10,400 is due in equal monthly payments
        of $1,150 in 2007.
  F-31
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(6)
        Commitments and Contingencies (Continued)***
 
 ***License
        Agreement -*** On
        July
        18, 2002, we signed an exclusive worldwide license for the manufacturing,
        marketing, distribution, and sales of NIPRISAN from the National Institute
        of
        Pharmaceutical Research and Development ("NIPRD") of the government of Nigeria,
        for the treatment of Sickle Cell Disease ("SCD"). NICOSANTM is our name for the
        non-toxic phytopharmaceutical product formerly named NIPRISAN, a nutraceutical.
        We are currently in the process of completing for submission of an
        Investigational New Drug ("IND") Application for this product to the United
        States Food and Drug Administration ("FDA"). To date, there has been no
        successful non-toxic drug developed for the treatment of SCD. We agreed to
        pay
        NIPRD a running royalty of 7.5 % of the net sales of this product. For the
        year
        ended December 31, 2006, we have accrued royalty expense of $14,800 for Nigeria
        sales which will be paid in the first quarter, 2007. We have sublicensed
        this
        technology by Agreement dated April 7, 2004 to our majority-owned
        subsidiary, Xechem Pharmaceuticals Nigeria, Limited ("Xechem Nigeria") for
        the
        production and sale of NICOSANTM in Nigeria ( *see
        Note 11* ).
  ***Lovastatin
        Agreement -*** In
        March
        1997, Xechem acquired a strain and related technology to produce Lovastatin
        for
        a total purchase price of $300,000, payable $50,000 upon delivery, $50,000
        upon
        initial laboratory verification, $100,000 upon additional laboratory
        verification and $100,000 upon the earlier of commercial production or two
        years
        after delivery of the strain and related technology. For accounting purposes,
        the payments have been considered research and development expenses incurred
        at
        the earliest date to which they become payable. Through December 31, 1998,
        a
        total of $200,000 has been recorded as research and development expense,
        of
        which $100,000 has been paid and $100,000 is included in accrued expenses
        at
        December 31, 2006 and 2005. There has been no activity in 2006 and 2005.
 
 ***Virginia
        Commonwealth University Agreement -*** In
        December 2005, we entered into an agreement with Virginia Commonwealth
        University (“VCU”) to acquire the exclusive, worldwide licensing rights to a new
        five-membered heterocyclic anti-sickling compound which has shown to be highly
        effective and relatively non-toxic treatment for Sickle Cell Disease. The
        agreement provides for a royalty payment to VCU of 5% on net sales and a
        20%
        payment or compensation received from sub-licenses. We have agreed to make
        annual minimum payments of $10,000 starting on the third anniversary of the
        effective date of the agreement and every anniversary thereafter as long
        as the
        licenses is in effect.
 
 ***BMS
        Settlement -*** On
        December 13, 2005, we entered into an agreement in principle concerning the
        settlement of the Xechem,
        Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb company, 03
        C 1920
        lawsuit. We filed an anti-trust lawsuit against Bristol-Myers Squibb on March
        17, 2003, to secure damages, injunctive and other equitable relief for
        Bristol-Myers Squibb's alleged violations of federal and state antitrust
        laws.
        The case, filed in the United States District Court, Northern District of
        Illinois, arose out of Bristol-Myers Squibb’s allegedly unlawful maintenance of
        a monopoly over the United States market for paclitaxel based anti-cancer
        drugs
        and conspiracy to further its monopoly.
  The
        lawsuit alleged that Bristol-Myers Squibb (BMS) was liable for violation
        of
        Section 2 of the Sherman Act (15 USC 2). Xechem sought an award in damages
        in
        the sum of $50 million dollars with damages to be trebled to at least $150
        million dollars. The case was dismissed in late 2003, and the Company filed
        an
        appeal of the dismissal with the U.S. Court of Appeals for the Seventh Circuit.
        On September 23, 2004, the U.S. Court of Appeals for the Seventh Circuit
        reversed the District Court opinion and determined that the basis for the
        dismissal was improper. It reinstated and remanded the case to the District
        Court.
  F-32
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(6)
        Commitments and Contingencies (Continued)***
 
 In
        return
        for Xechem’s full release of all claims that were or could have been asserted
        against BMS in connection with the case, BMS agreed to pay Xechem $4.2 million
        and further agreed to release Xechem from all claims BMS could have asserted
        against Xechem in the case. Each party agreed to bear their own costs, fees
        and
        expenses. Further, BMS agreed to waive the $29,600 fee award granted by the
        court on September 7, 2005. BMS made the settlement payment to Xechem in
        January
        2006.
  During
        2002, Xechem issued convertible notes totaling $367,000, which figure was
        increased by an additional funding of $767,000 by certain investors during
        the
        twelve months ended December 31, 2003, at which time debentures were converted
        into term notes. The term notes bear simple interest at 8% per annum, plus
        additional interest equal to 40% of the net judgment or settlement proceeds
        with
        respect to the BMS lawsuit (after deduction of legal fees and costs). A portion
        of the BMS settlement was used to satisfy the interest due on this
        financing.
  After
        payment of legal fees, costs, interest due on prior financings and prorations,
        the Company received approximately $1.7 million from the
        settlement.
 
 ***(7)
        Stock Options and Warrants***
 
 Xechem's
        original 1993 stock option plan ("Original Plan") provided for the grant
        of up
        to 100,000 shares of Common Stock to employees with incentive stock options
        ("ISOs") and non qualified stock options to employees, consultants and
        directors. The Original Plan was administered by the Board of Directors and
        the
        stock option committee.
  The
        exercise price of all ISOs granted under the Original Plan must be at least
        equal to the fair market value of the shares of Common Stock on the date
        of the
        grant. With respect to any participant who owns stock possessing more than
        10%
        of the voting power of Xechem's outstanding capital stock, the exercise price
        of
        any ISO granted must equal at least 110% of the fair market value on the
        grant
        date and the maximum exercise period of the ISO must not exceed five years.
        The
        exercise period of any other options granted under the Original Plan may
        not
        exceed 11 years (10 years in the case of ISOs). Options begin vesting after
        one
        year from the grant date at a rate of 20% per year. In December 1997, an
        exception was made so that 260 options granted on December 2, 1997 would
        begin
        vesting after one year from the grant date at a rate of 33 1/3% per year.
        In
        July 2000, an exception was made so that of the 4,400 options granted on
        July
        11, 2000, approximately one third (1/3) vested immediately and the balance
        would
        vest equally one year and two years from the grant date. In July 2001, an
        exception was made so that of the 3,883 options granted on July 9, 2001,
        approximately one third (1/3) vested immediately and the balance would vest
        equally one year and two years from the grant date. In November 2002, an
        exception was made so that of the 50,850 options granted on November 20,
        2002
        approximately one third (1/3) vested immediately and the balance would vest
        equally one year and two years from the date of grant.
  The
        Original Plan terminated in December 2003, ten years after the date it was
        first
        approved, though awards made prior to termination may expire after that date,
        depending on when granted.
  In
        October 2006 at the Annual Meeting, shareholders approved the 2006 Stock
        Award
        Plan (“2006 Plan”). The number of Shares with respect to which Options,
        Restricted Shares and other Stock-Based Awards may be granted under the Plan
        shall not exceed one hundred fifty million (150,000,000). The Plan shall
        terminate on the tenth anniversary of the Effective Date, unless previously
        terminated. All Awards granted prior to termination of the Plan shall continue
        in full force and effect following the termination of the Plan, subject to
        the
        terms and conditions upon which they were granted. Options already granted
        under
        this plan are 64,500,000, including 30,000,000 in 2006. Compensation costs
        for
        stock options at exercise prices below fair market value for 2006 and 2005
        totaled $ 1,387,000 and $0.00, respectively.
  F-33
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(7)
        Stock Options and Warrants (continued)***
 
 A
        summary
        of stock option activity under the Original Plan is as follows:
  2006
              
              2006
              
              2005
              
              2005Shares
              
              Weighted-Average
                  Exercise Price
              
              Shares
              
              Weighted-Average
                  Exercise PriceOutstanding
                  on January 1,
              
              
              46,779
              
              $
              7.46
              
              
              52,608
              
              $
              6.88Granted
              
              
              —
              
              
              —
              
              
              —
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited/Expired
              
              
              (3,796
              )
              $
              14.91
              
              
              (5,829
              )
              $
              2.22Outstanding
                  on December 31,
              
              
              42,983
              
              $
              6.63
              
              
              46,779
              
              $
              7.46Exercisable
                  on December 31,
              
              
              42,983
              
              $
              6.63
              
              
              46,779
              
              $
              7.46
  A
        summary
        of stock option actively under the 2006 Plan is as follows (shares in
        thousands):
 
 2006
              
              2006Shares
              
              Weighted-Average
                  Exercise PriceOutstanding
                  on January 1,
              
              —
              
              —Granted
              
              
              64,500
              
              $
              0.022Exercised
              
              
              —
              
              
              —Forfeited/Expired
              
              
              —
              
              
              —Outstanding
                  on December 31,
              
              
              64,500
              
              $
              0.022Exercisable
                  on December 31,
              
              
              59,466
              
              $
              0.021
  The
        following table summarizes information about stock options under the Original
        Plan at December 31, 2006:
  Outstanding
                  Stock Options
              
              Exercisable
                  Stock OptionsRange
                  of Exercise Prices
              
              Shares
              
              Weighted-Average
                  Remaining Contractual Life
              
              Weighted-Average
                  Exercise Price
              
              Shares
              
              Weighted-Average
                  Exercise Price$1.50
                  to $1020.00
              
              
              42,941
              
              
              6.6
              
              $
              4.70
              
              
              42,941
              
              $
              4.70$1,980.00
                  to $15,000.00
              
              
              42
              
              
              1.8
              
              $
              1,980.00
              
              
              42
              
              $
              1,980.00TOTALS
              
              
              42,983
              
              
              6.6
              
              $
              6.63
              
              
              42,983
              
              $
              6.63
  F-34
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(7)
        Stock Options and Warrants (Continued)***
 
 The
        following table summarizes information about stock options under the 2006
        Plan
        at December 31, 2006:
 
 Outstanding
                  Stock Options
              
              Exercisable
                  Stock OptionsRange
                  of Exercise Prices
              
              Shares
                (000)
              
              Weighted-Average
                  Remaining Contractual Life
              
              Weighted-Average
                  Exercise Price
              
              Shares
                (000)
              
              Weighted-Average
                  Exercise Price$0.0025
                  - $0.026
              
              
              48,500
              
              
              6.4
              
              $
              0.018
              
              
              43,800
              
              $
              0.018$0.03
                  - $0.07
              
              
              16,000
              
              
              7.5
              
              $
              0.033
              
              
              15,666
              
              $
              0.032TOTALS
              
              
              64,500
              
              
              6.7
              
              $
              0.022
              
              
              59,466
              
              $
              0.021
 
 Compensation
        cost for the stock options issued in 2006 and prior years has been determined
        based on the intrinsic value at the grant dates for awards under the plan,
        which
        resulted in compensation expense of approximately $ 1,387,000 and $0 in 2006
        and
        2005, respectively. At December 31, 2006, compensation costs related to invested
        stock options totaled $150,000 which will charged to operations in future
        periods.
 
 The
        fair
        value of certain option grants is estimated on the date of grant using the
        Black-Scholes option-pricing model with the following weighted-average
        assumptions used for grants in 2006: (i) dividend yields of 0%; (ii) expected
        volatility of approximately 159%; (iii) risk-free interest rates of 4.60;
        and
        (iv) expected life of 10 years.
  We
        account for employee stock-based compensation in accordance with Accounting
        Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
        Employees", using an intrinsic value approach to measure compensation expense,
        if any. Under this method, compensation expense is recorded on the date of
        grant
        only if the current market price of the underlying stock exceeds the exercise
        price. Options issued to non-employees are accounted for in accordance with
        SFAS
        123, "Accounting for Stock-Based Compensation", and Emerging Issues Task
        Force
        ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
        to
        Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
        and
        Services", using a fair value approach.
  SFAS
        No. 123 established accounting and disclosure requirements using a fair
        value-basis method of accounting for stock-based employee compensation plans.
        As
        allowed by SFAS No. 123, the Company has elected to continue to apply the
        intrinsic value-based method of accounting described above, and has adopted
        the
        disclosure requirements of SFAS No. 123 and SFAS No. 148. Had the Company
        elected to recognize compensation cost based on fair value of the stock options
        at the date of grant under SFAS 123, such costs would have been recognized
        ratably over the vesting period of the underlying instruments and the Company's
        net loss and net loss per common share would have increased to the pro forma
        amounts indicated in the table below.
  Years
                  ended December 31,2006
              
              2005Net
                  Loss (in Thousands):As
                  Reported
              
              $
              (11,130
              )
              $
              (10,039
              )Deduct:
                  Amount by which stockbased
                  employee compensation asdetermined
                  under fair value basedmethod
                  for all awards exceeds thecompensation
                  as determined under theintrinsic
                  value method
              
              $
              1,387
              
              $
              —Pro
                  Forma
              
              $
              (9,743
              )
              $
              (10,039
              )Net
                  Loss Per Share:As
                  Reported
              
              $
              (0.01
              )
              $
              (0.04
              )Pro
                  Forma
              
              $
              (0.01
              )
              $
              (0.04
              )
 
 F-35
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(7)
        Stock Options and Warrants (Continued)***
 
 In
        2006
        and 2005, 30,000,000 and 3,500,000 options, respectively, were reserved for
        employees, directors and consultants as incentives and bonuses.
 
 ***Warrants
        -*** In 2003
        in connection with the Chassman Agreement we granted 5-year warrants to purchase
        30 million shares of our common stock at an exercise price of $0.0025, to
        be
        issued upon complete funding of the loan according to terms. On January 11,
        2005, the Company entered into a new letter agreement which called for the
        immediate issuance of the vested warrants (14,000,000) and cancellation of
        the
        unvested warrants (16,000,000). In June 2006, the vested warrants (14,000,000)
        were exercised. ( *see
        Note 2* ).
 
 In
        2003
        in connection with a consulting agreement, we granted a 5-year warrant to
        purchase 7.5 million shares of our common stock exercisable at the average
        of
        the closing bid price for ten days preceding the day the agreement was
        signed.
 
 In
        June
        2004, in connection with our Nigeria operations, B. Pandey was granted a
        5-year
        warrant to purchase 5 million shares of our common stock at an exercise price
        of
        $0.15 per share.
 
 In
        June
        2004, in connection with the Alembic Loan, an individual was granted a 5-year
        warrant to purchase 5 million shares of our common stock at an exercise price
        of
        $0.15 per share.
  In
          2004,
          in connection with Alembic Loan, we granted 5-year warrants to purchase
          10
          million shares of our common stock at an exercise price of $0.20 per share.
          In
          2005, this loan was restructured and the warrants were terminated.
 In
        February, 2005, in connection with certain Bridge Loan Financing Agreements,
        we
        granted 5-year warrants to purchase 52.3 million shares of our common stock
        at
        an exercise price of $0.015. This funding was completed in March 2005. The
        warrants contained non-dilution features related to number of shares to be
        exercised as well as exercise price due to subsequent financing conducted
        by the
        Company. The original 52.3 million warrants exercisable at $0.015 per share
        were
        exercised in July 2006. A net total of 77.7 million shares were issued at
        $0.0099 per share in a cashless exercise.
  In
        June
        2006, in connection with certain Bridge Loan Financing, we granted 5-year
        warrants to purchase 66.6 million shares of our common stock at an exercise
        price of $0.02 per share. The warrants were exercised at $0.032 per share
        in
        October 2006 and a net total of 25.0 million shares were issued in a non-cash
        transaction.
 
 In
        October 2006, in connection with certain Bridge Loan Financing, we granted
        5-year warrants to purchase 8.3 million shares of our common stock at an
        exercise price of $0.04 per share.
 
 As
        of
        December 31, 2006, we have the following warrants to purchase common
        stock:
  Number
                  Of Shares
                To
                  Be Purchased
              
              Warrant
                  Exercise
                Price
                  Per Share
              
              Warrant
                  Expiration Date11,853
              
              $
              30.0000
              
              
              May
                  23, 20077,500,000
              
              $
              0.1955
              
              
              December
                  9, 200810,000,000
              
              $
              0.15
              
              
              June
                  1, 20098,333,333
              
              $
              0.04
              
              
              February
                  10, 2010
  ***(8)***  ***Common
        and Preferred Stock:***
 
 The
        largest voting shareholder of our stock is Ramesh C. Pandey Ph.D., Chairman
        of
        the Board of Xechem International, Inc.
  F-36
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(8)***  ***Common
        and Preferred Stock (Continued)***
  In
        October 2006, at the Annual Meeting, shareholders approved to increase the
        number of shares of common stock authorized to 5 billion shares.
  The
        Board
        of Directors held a special meeting immediately following the conclusion
        of the
        Annual Meeting and passed a resolution restricting the ability of the Company
        to
        issue more than 3.5 billion shares of common stock without a further vote
        of the
        shareholders.
  Class
                    A Voting Preferred Stock, $.00001 par
                
                
                2,500
                    sharesClass
                    B 8% Preferred Stock, $.00001 par
                
                
                1,150
                    sharesClass
                    C Preferred Stock, $.00001 par
                
                
                49,996,350
                    sharesCommon
                    Stock, $.00001 par
                
                
                3,500,000,000
                    shares
 
 As
        of
        December 31, 2006, 360,000 shares of our common stock will be issued in
        connection with certain related party notes ( *see
        Note 4* ).
  In
        2003
        we received $48,000 from members of Dr. Pandey's family in the form of six
        short-term notes. The due dates of the notes have been extended to August
        2006
        with interest from 8% - 12% with accrued interest as of December 31, 2006
        of
        $20,000. Three of the note holders are to be issued 360,000 shares of our
        common
        stock; this resulted in a charge to operations of $77,800 for the fair value
        of
        the common stock on the date the agreement was entered into. As of December
        31,
        2006 the underlying 360,000 shares remain to be issued. Two notes totaling
        $20,000 can be converted into common stock at a conversion price of $ 0.01
        per
        share. The intrinsic value of the beneficial conversion feature of $20,000
        has
        been allocated to paid-in capital. This resulting debt discount is being
        amortized over the term of the notes. New terms are being negotiated for
        past
        due notes.
  In
        2005,
        we received $445,000 from related parties and $50,000 from non-related parties
        in the form of nine short-term notes. The due dates of the notes range from
        six
        month to one year with interest at 8% - 12% with accrued interest at December
        31, 2006 of $24,600.
  In
        2005,
        prior year notes payable to related and non-related parties totaling $551,000
        were extended from six months to one year and granted a five year option
        to
        purchase shares of common stock at market value at date of grant. These options
        were also granted to the parties whose notes were issued in 2005. At December
        31, 2006, a total of 32,626,000 options were granted to purchase shares of
        common stock.
  In
        2006,
        we received $362,000 from related parties and $95,000 from non-related parties.
        Some of these loans are to be documented and new terms are being negotiated
        for
        past due notes. The due dates of the loans range from three months to one
        year
        with interest at 8% - 15% with accrued interest at December 31, 2006 of $15,300.
        The note holders were granted five year options to purchase 26.2 million
        shares
        of common stock at market value at date of grant.
  In
        2005,
        the Company established a Sickle Cell Advisory Board to assist management
        in
        creating public awareness of Xechem’s efforts to bring an effective treatment
        for Sickle Cell Disease to the United States market. Members will collectively
        receive up to a total of 20,000,000 shares of Xechem common stock in
        consideration for their services. The Company has issued 4,000,000 shares
        as of
        December 31, 2006.
  F-37
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(8)***  ***Common
        and Preferred Stock (Continued)***
 
 As
        of
        December 31, 2006, we had reserved shares of common stock for issuance as
        follows:
 Exercise
                    of common stock options (old plan)
                
                
                42,943Exercise
                    of common stock options (new plan)
                
                
                64,500,000Exercise
                    of common stock purchase warrants
                
                
                25,845,186Exercise
                    of note agreement options
                
                
                58,807,744Common
                    stock to be issued to Sickle
                    Cell Advisory Board
                
                
                16,000,000Common
                  stock to be
                  issued pursuant to debt conversion
                
                
                468,140,365
  The
        following table summarizes the number of shares of common stock and preferred
        stock issued and outstanding at December 31, 2006:
 
 December
                  31, 2006Common
                  stock
              
              
              1,519,952,409Class
                  A voting preferred stock
              
              
              2,500Class
                  B preferred stock
              
              
              0Class
                  C - Series 6 preferred stock
              
              
              38,079Class
                  C - Series 7 preferred stock
              
              
              666
  ***Class
        A Voting Preferred Stock -*** There
        are currently issued and outstanding 2,500 shares of Class A Preferred Stock.
        Dr. Pandey, the holder of Class A Preferred Stock, is entitled to receive
        dividends of $0.00001 per share, and $0.00001 per share in liquidation, before
        any dividends or distributions on liquidation, respectively, may be paid
        to the
        holders of Common Stock. The holder of the Class A Preferred Stock is entitled
        to cast 0.3333 votes per share except as may be required by the Delaware
        General
 
 Corporation
        Law, and except that the affirmative vote or consent of the holders of a
        majority of the outstanding Class A Preferred Stock is required to approve
        any
        action to increase the number of authorized shares of Class A Preferred Stock,
        to amend, alter, or repeal any of the preferences of the Class A Preferred
        Stock, or to authorize any reclassification of the Class A Preferred Stock.
        Xechem may redeem the Class A Preferred Stock for $.00001 per share at any
        time
        after May 3, 2009, however, pursuant to the private offering of Xechem's
        Common
        Stock in 1995 and 1996, Dr. Pandey agreed with the underwriter to waive the
        option to redeem the Class A Preferred Stock. As of December 31, 2006 Dr.
        Pandey
        is still the holder of record.
 
 ***Class
        B 8% Convertible Preferred Stock -*** The 8%
        Convertible Preferred Stock is entitled to cumulative dividends on the
        liquidation preference at the rate of 8% per annum, payable quarterly when
        approved by the Board of Directors. The 8% Convertible Preferred Stock may
        be
        redeemed at any time, in whole or in part, at the option of Xechem for a
        redemption price equal to the liquidation preference plus accrued and unpaid
        dividends. After the fifth anniversary of issuance, the holders of 8%
        Convertible Preferred Stock may, at each holder's option, convert such 8%
        Convertible Preferred Stock into Common Stock at a conversion price equal
        to
        $5.00 per share; provided that if a change in control has occurred such shares
        may be converted, regardless of whether five years have elapsed at a conversion
        price equal to the lesser of (i) $5.00, (ii) 25% of the then-current market
        price of the Common Stock or (iii) the lowest price paid by the hostile acquirer
        within the one year preceding the change in control. The 8% Convertible
        Preferred Stock has no voting rights except for corporate actions such as
        mergers, consolidation, or sales of substantially all the assets of Xechem,
        which will require the affirmative vote or consent of the holders or majority
        of
        such shares, and except as may be required by law.
  F-38
 
 **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(8)***  ***Common
        and Preferred Stock (Continued)***
 
 ***Class
        C Preferred Stock -*** Xechem's
        Board of Directors may, without further action by Xechem's stockholders,
        from
        time to time, issue shares of the Class C Preferred Stock in series and may,
        at
        the time of issuance, determine the rights, preferences, and limitations
        of each
        series. Any dividend preference of any Class C Preferred Stock, which may
        be
        issued, would reduce the amount of funds available for the payment of dividends
        on Common Stock. Also, holders of the Class C Preferred Stock would normally
        be
        entitled to receive a preference payment in the event of any liquidation,
        dissolution, or winding-up of Xechem before any payment is made to the holders
        of Common Stock. The Board of Directors of Xechem, without stockholder approval,
        may issue the Class C Preferred Stock with voting and conversion rights,
        which
        could adversely affect the holders of Common Stock.
 
 On
        July
        9, 2001 we authorized the creation of a Class C, Series 6 Preferred Voting
        Stock, par value $0.00001 per share, consisting of 10,000 shares thereof
        with
        each share of Class C, Series 6 Preferred Voting Stock to be entitled to
        10,000
        votes and to vote as a class together with Common Stock. We have also granted
        a
        five (5) year option to Dr. Pandey to purchase up to .75 shares of Class
        C,
        Series 6 Preferred Voting Stock, $0.00001 per share, which are part of the
        options granted to Dr. Pandey by resolution of the Board of Directors at
        its
        meeting held on August 18, 1999, as amended by the Board of Directors.
 
 In
        2001
        we increased the authorized shares of Class C, Preferred Voting Stock, par
        value
        $0.00001 per share to 49,996,350.
 
 In
        2003
        we had a reverse common stock split of 3,000-1. All previous outstanding
        Class
        C, Preferred Voting Stock were cancelled and a new certificate for 6,489
        shares
        was issued to Dr. Pandey.
 
 In
        2006
        and 2005 an additional 28,003 and 3,587 shares, respectively, were issued
        to Dr.
        Pandey for a total of 38,079 outstanding shares as of December 31,
        2006.
 
 In
        2004,
        we acquired all of the outstanding capital stock of Ceptor Corporation
        (“Ceptor”) pursuant to an Agreement and Plan of Merger (“Merger Agreement”). In
        conjunction with the Merger Agreement, we issued 5,855 shares of Class C
        Series
        7 Preferred Voting Stock to the former shareholders of Ceptor Corporation,
        valued at $4,760,000. The Class C Series 7 Preferred Voting Stock has a
        $5,855,000 liquidation preference and is convertible into approximately
        29,275,000 shares of common stock at the option of the holders of the Class
        C
        Series 7 Preferred Stock, together with piggyback registration rights for
        the
        underlying common shares. Each share of Class C Series 7 Preferred Voting
        Stock
        is entitled to 5,000 votes and to vote as a class with Common Stock. In 2006,
        5,188 shares of Class C Series 7 Preferred Voting Stock were converted into
        25,943,243 shares of common stock and a total of 666 shares were outstanding
        at
        December 31, 2006.
 
 ***(9)
        Investments in Unconsolidated Affiliates***
 
 ***Xechem
        China Joint Venture -*** On
        April
        4, 2000, Xechem signed a joint venture agreement with J & M Consultants,
        Ltd. ("J & M") to establish Xechem Pharmaceutical China Ltd. (Xechem China)
        with offices in Hong Kong and Beijing, People's Republic of China. Xechem
        China
        is owned 45% by Xechem and 55% by J & M Consultants, Ltd. The purpose of
        establishing Xechem China was to carry on the business of manufacturing,
        marketing and distributing pharmaceutical and nutraceutical products. Xechem
        China will also carry out research, development, clinical studies and production
        of new drugs based on Xechem's technology related to traditional Chinese
        medicine and other disciplines, provide consulting services for drug development
        and set up a certified laboratory in the People's Republic of China to screen,
        verify and certify pharmaceutical products for the public.
  F-39
 
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES** ****
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(9)
        Investments in Unconsolidated Affiliates (continued)***
  Xechem
        has not made an investment in cash or by transfer of recorded assets to Xechem
        China, and accordingly, there is no amount reflected on the balance sheets
        of
        Xechem at December 31, 2005 and December 31, 2004. Xechem has no obligation
        to
        fund any losses or commitments of Xechem China ( *see
        Note 4* ).
 
 During
        the second quarter of 2001 Xechem China has ceased active operations, due
        to
        Xechem China's president and CEO having to devote his full attention to his
        other holdings. Xechem feels this is a temporary situation and will not hinder
        Xechem's present or future involvements in the Asian Market. Xechem and its
        subsidiaries are still actively pursuing other relationships.
  There
        have been no changes in 2006 or 2005.
  ***Ceptor
          Corporation -*** In
          January 2004, we issued 5,855 Class C Series 7 Preferred Stock to the former
          shareholders of Ceptor Corporation in connection with the merger of Ceptor
          Corporation into a wholly-owned subsidiary of the Company.
 
 In
          December 2004 through a series of mergers, Ceptor Corporation emerged as
          a stand
          alone, independent company, and
          on
          January 1, 2005, we owned 3,753,143 shares of common stock or 51.3% of
          Ceptor.
          In 2005 we sold a total of 3,253,143 shares back to Ceptor for $3,226,000
          which
          resulted in a gain from these sales of $2,930,000.
 
 Using
          the
          equity method for valuation of the investment in Ceptor, the losses incurred
          by
          Ceptor and charged to operations totaled $4,287,000 and $13,587,000 for
          2005 and
          cumulatively.
 
 The
          Company’s investment balance in Ceptor, under the equity method, is presented in
          the following table:
 
 December
                    31, 2005Total
                    Investment at inception
                
                $
                4,760,000Capital
                    contributed through sale of Ceptor
                
                
                9,135,000Return
                    of capital
                
                
                (3,238,000
                )Gain
                    on Sale of Ceptor stock
                
                
                2,930,000Cumulative
                    equity method loss
                
                
                (13,587,000
                )***Equity
                    method investment balance***
                
                $
                -
                    0
 ***(10)
        Note Payable Bank***
 
 Note
        payable bank at December 31, 2006 totaled $55,000. This loan is collateralized
        by all tangible assets plus accounts receivable. The loan represents borrowings
        against a $60,000 line-of-credit from a bank with interest at 10.25% as of
        December 31, 2006.. The line-of-credit renews annually.
  ***(11)
        Notes Payable***
 
 Notes
        Payable at December 31, 2006 consist of the following:
 *Long-Term*Secured
                    Notes Payable(A)
                
                $
                -
                    0 -Unsecured
                    Loan (B)
                
                
                -
                    0 -Unsecured
                    Loan (C)
                
                
                400,000Unsecured
                    Loan (F)
                
                
                2,505,000Secured
                    Loan (G)
                
                
                1,179,000Less
                    Debt Discount
                
                
                (1,395,000
                )$
                2,689,000
 *Current:*Alembic,
                    Ltd.(D)
                
                
                2,000,000Others
                    - Non-Related Parties (E)
                
                
                160,000$
                2,160,000
 
 A)
              During
                  2002, we issued convertible notes totaling $367,000, which was
                  increased
                  by an additional funding of $767,000 by certain investors during
                  the year
                  ended December 31, 2003, at which time debentures were converted
                  into term
                  notes. The new term notes bear simple interest at 8% per annum
                  and are due
                  on the earliest to occur of the settlement, dismissal or final
                  adjudication of the Bristol-Myers Squibb lawsuit (the “BMS Lawsuit”),
                  together with additional interest equal to forty percent (40%)
                  with
                  respect to the BMS Lawsuit, subject to an adjustment factor of
                  the net
                  recovery to us (after deduction of legal fees and costs). We granted
                  the
                  term loan holders a security interest in the BMS Lawsuit. These
                  notes were
                  due on the later of 18 months from the date of the Note Purchase
                  Agreement
                  or final
 
 F-40
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(11)
        Notes Payable (continued)***
  B)
              Disposition
                  of the Bristol-Myers Squibb lawsuit (provided that the additional
                  interest, if any, as referenced above, was due on the disposition
                  of the
                  lawsuit).
 
 In
        December 2005, we entered into an agreement in principle to settle the BMS
        Lawsuit. BMS agreed to pay Xechem $4.2 million and $1,075,000 or 40% of the
        net
        settlement was paid to the note holder in January 2006.
 
 The
        Company entered into a $1,500,000 Bridge Loan and Debt Restructuring Agreement
        on August 25, 2005, with Ms. Chassman (“Chassman”) and certain other investors
        introduced to the Company through Chassman (“the Investors”).
 
 On
        September 30, 2005, the parties entered into an amendment to the Term Sheet
        (the
“Amended Term Sheet”). Under the terms of the Amended Term Sheet, the price of
        converting this note into shares of common stock was reset from $.015 per
        share
        to $.0025 - $.0075 per share. The intrinsic value of the beneficial conversion
        feature of $3,793,000 was allocated to paid-in capital.
 
 In
        December 2005, $318,000 in principal and $230,000 in accrued interest was
        converted into 99,500,000 shares of common stock. In the year ended December
        31,
        2006, the remaining $816,000 in principal and $32,000 in accrued interest
        were
        converted into 124,539,373 shares of common stock. At December 31, 2006 there
        were no amounts due under this loan.
 
 (B)
        In
        the first quarter 2005, we received a loan of $3,800,000 from Chassman. On
        June
        17, 2005 Ceptor purchased/redeemed 2,886,563 shares of its common stock from
        Xechem, at $0.80 per share for an aggregate purchase price of $2,309,250.
        We
        used $1,616,171 of the proceeds to pay and satisfy in full the total bridge
        loan
        and related interest due under the Bridge Notes. We also used a portion of
        the
        proceeds ($141,168) to reduce the Chassman unsecured loan of $2,800,000 to
        $2,659,000. In December 2005, $35,000 was advanced to the company by Chassman
        which was subsequently converted to exercise warrants to purchase 14 million
        shares of common stock. At December 31, 2005 we had a balance of $2,659,000
        from
        this loan and recorded $59,000 in accrued interest. In December 31, 2006,
        $2,659,000 in principal and $161,000 in accrued interest were converted into
        734,505,264 shares of common stock (exercised at conversion rates between
        $.0025
        - $.005 per share) in full settlement of this loan and its related
        interest.
 
 (C)
        Pursuant to the Amended Term Sheet, Chassman and the Investors agreed to
        invest
        up to $1,500,000 into the Company. A total of $1,000,000 was funded. If the
        Company’s allocation of tax credits for fiscal year 2005 from the State of New
        Jersey was less than $500,000, the Investors agreed to advance the difference
        between such allocation and $500,000 in the form of convertible notes. The
        Company received $566,000 in tax credits from the State and no additional
        investment was necessary.
 
 For
        each
        $100,000 of the first $1,000,000 of notes funded, the Company agreed to issue
        1,500,000 shares of its $0.00001 par value common stock to the investor funding
        same for the aggregate issuance of 15,000,000 shares. The intrinsic value
        of the
        beneficial conversion feature of $194,000 was allocated to paid in capital.
        These shares were issued in June 2006.
  F-41
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(11)
        Notes Payable (continued)***
  The
        notes
        are convertible into the Company’s common stock. Prior to February 1, 2006, the
        notes and accrued interest were convertible at the rate of $0.05 per share.
        From
        February 1, 2006 and thereafter, the notes and accrued interest are convertible
        at the rate of $0.005 per share. The intrinsic value of the beneficial
        conversion of $540,000 has been allocated to paid in capital. In the year
        ended
        December 31, 2006, $600,000 and $50,000 in principal and accrued interest
        were
        converted into 130,069,984 shares of common stock (exercised at a conversion
        rate of $.005 per share). As of December 31, 2006, we have a balance of $400,000
        from this loan , which is due May 31, 2008, and $40,000 in accrued
        interest.
 
 (D)
        In
        April 2004, we executed definitive documents with Alembic Limited, which
        included a commitment to loan $3,000,000 to us. The entire $3,000,000 of
        the
        loan amount was funded. The note had an interest rate of 8% per annum and
        matured April 2008. The loan was convertible into our common stock, with
        maximum
        discount of 60% of FMV. The intrinsic value of the beneficial conversion
        feature
        of $3,000,000 on the debt funded as of December 31, 2004 had been allocated
        to
        paid in capital. Pursuant to the terms of the Alembic Agreements, we had
        a
        contractual commitment to issue Alembic a fifteen percent (15%) ownership
        interest in Xechem Nigeria.
 
 On
        December 22, 2005, Xechem and Alembic agreed to terminate the Old Note and
        enter
        into the New Note. Pursuant to the terms of the New Note, Xechem agreed to
        repay
        Alembic in full the outstanding principal and interest remaining from the
        New
        Note as follows: $1,000,000 to be paid on or before January 31 2006 (the
        “Initial Payment”), with the balance (the “Remaining Balance”) due on or before
        December 31, 2006. Furthermore, for every month beginning July 2006, in which
        any portion of the New Note remains unpaid, Xechem agreed to pay to Alembic
        as
        additional consideration the sum of $16,600, for a total of up to $99,600.
        The
        Initial Payment of $1,000,000 together with accrued interest of $190,700
        was
        paid to Alembic on or about January 31, 2006. The New Note continues to bear
        interest at the rate of 8%. The New Note is not convertible into shares of
        Xechem’s common stock.
 
 The
        parties agreed to terminate the MOU and the Cooperation Agreement. Under
        the MOU
        and the Cooperation Agreement, Alembic had previously lent Xechem $3,000,000
        (the “Old Note”). As additional consideration for the Old Note, Xechem agreed to
        pay Alembic a fee (the “Investment Fee”) during the License Term (15 years)
        equal to the product of the Alembic Applicable Percentage multiplied by the
        Gross Product Sales Amount, as those terms are defined herein. The Gross
        Product
        Sales Amount means the amount of gross sales revenue generated by the company
        from sales of NICOSANTM/HEMOXINTM in Nigeria and other African countries,
        calculated on a cash received basis. From the commencement date through the
        fifth anniversary, the Alembic Applicable percentage is 15%, from the fifth
        to
        the tenth anniversary, the Alembic Applicable percentage is 10%, and from
        the
        tenth anniversary to the end of the term, 5%. During the License Term, the
        company also agreed to pay Alembic a U.S. Export Fee in an amount equal to
        one
        percent of the amount of purchase price paid by the company for any
        NICOSANTM/HEMOXINTM sold by the company in the United States and internationally,
        except Nigeria (the “Export Fee”). Xechem also issued Alembic a warrant to
        purchase 10,000,000 shares of Xechem’s common stock at an exercise price of
        $0.20 per share (the “Warrant”). Alembic also agreed to provide certain
        production and regulatory compliance personnel to assist Xechem Nigeria,
        which
        services would be compensated upon terms agreeable to the parties (the
“Services”). The company also gave Alembic the right of first offer regarding
        the licensing of any distribution rights with respect to NICOSANTM/HEMOXINTM in
        the territory of Africa and India (the “Distribution Rights”).
  F-42
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(11)
        Notes Payable (continued)***
 
 Pursuant
        to the Termination Agreement entered into between the parties on December
        22,
        2005, all existing agreements and understandings between Xechem and Xechem
        Nigeria, on the one hand and Alembic on the other regarding the Cooperation
        Agreement, the MOU and the Old Note were terminated, including the Investment
        Fee, the Export Fee, the Warrant, the Services and the Distribution Rights.
        Notwithstanding the foregoing, the parties agreed that the provisions addressing
        the disclosure of confidential information, non-circumvention, confidentiality
        and nonsolicitation shall not be terminated and shall remain in full force
        and
        effect.
 
 Xechem
        and Alembic entered into a Security Agreement, as security for the payment
        of
        the Initial Payment and the Remaining Balance of the New Note. Xechem granted
        Alembic a security interest in:
        (a)
        500,000 shares of restricted stock in Ceptor Corporation owned by Xechem
        (the
“Ceptor Shares”), (b) 15% of the issued and outstanding shares of common stock
        of Xechem Nigeria; and (c) 5,000,000 shares of common stock of Xechem. The
        parties also signed mutual releases.
 
 At
        December 31, 2005 we had a balance of $3,000,000 from this loan and $175,400
        in
        accrued interest. In January 2006, from the proceeds received from the BMS
        settlement, $1,000,000 of principal and $190,700 of accrued interest was
        paid.
        As of December 31, 2006, we have a balance of $2,000,000 in principal and
        $249,400 in accrued interest.
 
 As
        of
        December 31, 2006, Xechem had paid Alembic $1,000,000 of the principal amount
        due plus interest in the amount of $190,000 on the New Note. The Remaining
        Balance of the New Note ($2,000,000) plus interest and penalty in the combined
        amount of approximately $250,000 was due on or before December 31, 2006.
        According to the Termination of Agreements, if the Remaining Balance and
        interest is not paid on or before December 31, 2006, subject to written notice
        from Alembic and a right to cure within 10 days as set forth in the New Note,
        Xechem would be in breach of the Termination of Agreements and the New
        Note.
 
 Xechem
        did not pay the amounts due Alembic on December 31, 2006. Xechem and Alembic
        extended the Maturity Date, pursuant to a Letter Agreement, dated January
        4,
        2007, to January 31, 2007. Pursuant to a second Letter Agreement, dated January
        31, 2007, the parties agreed to extend the Maturity Date to February 24,
        2007.
        As consideration for the second extension, Xechem agreed to pay to Alembic,
        in
        reduction of the indebtedness due under the Note, the sum of $100,000. Pursuant
        to a third Letter Agreement, dated as of February 24, 2007 (executed March
        1,
        2007), the parties agreed to extend the Maturity Date to March 31, 2007.
        As
        consideration for the third extension, Xechem paid Alembic, in reduction
        of the
        indebtedness due under the Note, the sum of $100,000 on March 1, 2007, which
        payment was a condition to the extension.
 
 Furthermore,
        the parties agreed that if Xechem made a principal payment to Alembic in
        reduction of the Note of not less than $1,000,000, together with accrued
        interest, on or before March 31, 2007, then the Maturity Date will be extended
        for an additional six months. Due to finalization of new funding, Alembic
        agreed
        to extend the payment date five days and payment was made on April 5,
        2007.
 
 E)
        In
        2005 and cumulatively, five non-related parties loaned to the Company a total
        of
        $50,000 and $65,000, respectively, for six months to one year with an interest
        rate of 8% - 12%. The individuals also received five year stock warrants
        to
        purchase a total of 1,900,000 shares of common stock at $.01 per share.
  F-43
 
 **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(11)
        Notes Payable (continued)***
  In
        May
        2006 an individual loaned $30,000 to the Company for six months with an interest
        rate of 10%. A note was issued convertible into shares of common stock at
        $0.0117 per share for a total of approximately 2,564,103 shares excluding
        interest. The individual also received a five year option to purchase a total
        of
        300,000 shares of common stock at $0.0117 per share. At December 31, 2006,
        accrued interest totaled $2,000.In December 2006, two individuals loaned
        $65,000
        to the Company for six months with an interest rate of 8%. The notes are
        convertible into shares of common stock at $0.019 - $0.021 per share for
        a total
        of approximately 3,170,425 shares excluding interest. The individuals also
        received five year options to purchase 1,593,226 shares of common stock at
        $0.019 - $0.021 per share. At December 31, 2006, accrued interest totaled
        $300.
 
 F)
        Over
        the period from February 22, 2006 through May 10, 2006, Marjorie Chassman
        (“Chassman”) infused $780,000 into Xechem. The note that will be issued to
        Chassman in the amount of $780,000 will bear interest at 8% and will be due
        May
        31, 2008. The note is convertible into shares of common stock at $0.005 per
        share (approximately 156,000,000 shares, excluding interest, which is also
        convertible into stock at $0.005 per share). The loan has not been documented
        at
        this time.
 
 In
        June
        2006, Chassman infused $200,000 into Xechem. The note will be issued to Chassman
        in the amount of $200,000, it will bear interest at 8% and is due May 31,
        2008.
        It will be convertible into shares of common stock at $0.01 per share
        (20,000,000 shares, excluding interest, which will also be convertible into
        stock at $0.01 per share). The loan has not been documented at this
        time.
  Chassman
        agreed to loan $1,025,000 to Xechem, in two tranches, one in the amount of
        $500,000 and the other in the amount of $525,000, which were received by
        June
        20, 2006. The note converts into shares of common stock at $0.015 per share
        (approximately 66,666,667 shares, excluding interest). The note bears interest
        at 8% and is due May 31, 2008. As additional consideration for infusion of
        the
        capital, Xechem will issue Chassman 66,666,667 warrants, exercisable at $0.02
        per share for a period of 5 years. In addition, Chassman has agreed to extend
        the due date on all existing notes held by the company to May 31, 2008. The
        loan
        has not been documented at this time.
 
 Over
        the
        period from August 14, 2006 through September 26, 2006, Chassman infused
        $300,000 into Xechem. A note will be issued to Chassman in the amount of
        $300,000, with interest at 8% and is due May 31, 2008. The note will be
        convertible into shares of common stock at $.03 per share (10,000,000 shares,
        excluding interest). As additional consideration for infusion of the capital,
        Xechem will issue Chassman 8,333,333 warrants exercisable at $0.04 for a
        period
        of five years. The loan has not been documented at this time.
 
 At
        December 31, 2006, accrued interest on these loans totaled
        $112,900.
 
 (G)
        On
        May 31, 2006, Nigeria Export-Import Bank (NEXIM) funded a direct loan to
        our
        wholly-owned subsidiary, Xechem Pharmaceutical Nigeria, Ltd. (Xechem Nigeria).
  The
        loan
        is in the principal amount of 150,000,000 Naira or approximately One Million
        Two
        Hundred Thousand Dollars (US) ($1,200,000). The loan proceeds are to be used
        primarily to facilitate the full-scale commercial production of NICOSANTM through
        the expansion and integration of existing production facilities at the company’s
        research and production facilities at Sheda Science and Technology Complex,
        Gwagwalada-Abuja. The loan facility will extend for a period of up to three
        years, with no principal payments due during the first year. The loan facility
        bears interest at the rate of 15% per year, payable during the first year
        in
        installments in November 2006 and May 2007.
  F-44
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(11)
        Notes Payable (continued)***
  Thereafter,
        the loan facility will be repaid through four consecutive semi-annual
        installments of principal and interest with the first repayment (of
        approximately $400,000 US) occurring on November 29, 2007. The loan facility
        is
        secured by: (a) an all assets debenture on the assets of the company which
        has
        been incorporated into a trust for all lenders to be managed by Diamond Trustees
        Company; (b) personal guaranty issued by the CEO, Dr. Ramesh Pandey, backed
        by a
        notarized statement of net worth; and (c) promissory notes.Xechem Nigeria
        is
        obligated to pay the following fees: (a) a facility fee of 1% flat on the
        facility amount or 1,500,000 Naira (approximately $12,500 US); (b) a management
        fee of 0.5% flat on the
  principal
        amount outstanding from time to time, payable annually on the anniversary
        of the
        facility;
 and
        (c) a
        monitoring fee of 100,000 Naira (approximately $800 US), payable annually
        on the
        anniversary of the facility. Nexim reserves the right to vary the rates as
        dictated by market realities. At December 31, 2006, accrued interest totaled
        $98,600.
  ***(12)
        Employee Benefit Plan***
 
 Effective
        August 1, 1997, the Company established a defined contribution plan qualified
        under Section 401(k) of the Internal Revenue Code. Any domestic employee
        who is
        at least eighteen years of age and has completed thirty days of employment
        may
        enroll in the plan. Participants may contribute up to 50% of their compensation,
        up to the maximum amount permitted by the Internal Revenue Code. Employer
        contributions are made up to 4% of the employee's gross compensation. In
        2006
        and 2005, respectively, the Company contributed $18,000 and $27,000 to the
        plan.
        Participants are always 100% vested in their contributions and earnings.
        The
        employer contributions and earnings are fully vested in six years from date
        of
        employment.
 
 ***(13)
        Subsequent Events***
 
 (A)  On
        March
        15, 2007, Xechem International, Inc. (the “Company”), engaged Bernstein &
Pinchuk, LLP, certified public accountants (the “Accountant”) to serve as its
        independent auditor. The Accountant replaces Moore Stephens, P.C., certified
        public accountants (“MS”). On March 15, 2007, the Company provided notice to MS,
        its independent registered public accounting firm, that the Company was
        dismissing MS, with the recommendation and approval of the Audit Committee
        of
        the Company. The MS report on the Company’s consolidated financial statements
        for the years ended December 31, 2004 and December 31, 2005, the years for
        which
        MS provided auditing services, each included an explanatory paragraph indicating
        that the Company had experienced operating losses and net working capital
        deficiencies and accumulated deficits that raise substantial doubt about
        the
        Company’s ability to continue as a going concern. The MS reports on the
        Company’s consolidated financial statements as of and for the years ended
        December 31, 2004 and December 31, 2005 did not contain any adverse opinion
        or
        disclaimer of opinion, nor were they qualified or modified as to uncertainty,
        audit scope or accounting principles. During the term of MS engagement and
        through March 15, 2007, there had been no disagreements with MS on any matter
        of
        accounting principles or practices, financial statement disclosures, or auditing
        scope or procedure, which, if not resolved to the satisfaction of MS, would
        have
        caused MS to make reference to the subject matter in connection with their
        report on the Company’s consolidated financial statements for the years ended
        December 31, 2004 and December 31, 2005.
  F-45
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  During
        the last two completed fiscal years and the 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
        MS, as
        there were none.
  The
        Company provided MS with a copy of this disclosure on March 20, 2007, requesting
        MS to furnish the Company with a letter addressed to the Securities and Exchange
        Commission (the “SEC”) stating whether it agrees with the statements made by the
        Company. On March 27, 2007, MS wrote to the SEC that it agrees with the
        Company’s statements.
 
 (B)
        As of
        December 31, 2006, Xechem had paid Alembic $1,000,000 of the principal amount
        due plus interest in the amount of $190,000 on the New Note. The Remaining
        Balance of the New Note ($2,000,000) plus interest and penalty in the combined
        amount of approximately $250,000 was due on or before December 31, 2006.
        According to the Termination of Agreements, if the Remaining Balance and
        interest is not paid on or before December 31, 2006, subject to written notice
        from Alembic and a right to cure within 10 days as set forth in the New Note,
        Xechem would be in breach of the Termination of Agreements and the New Note.
 
 Xechem
        did not pay the amounts due Alembic on December 31, 2006. Xechem and Alembic
        extended the Maturity Date, pursuant to a Letter Agreement, dated January
        4,
        2007, to January 31, 2007. Pursuant to a second Letter Agreement, dated January
        31, 2007, the parties agreed to extend the Maturity Date to February 24,
        2007.
        As consideration for the second extension, Xechem agreed to pay to Alembic,
        in
        reduction of the indebtedness due under the Note, the sum of $100,000. Pursuant
        to a third Letter Agreement, dated as of February 24, 2007 (executed March
        1,
        2007), the parties agreed to extend the Maturity Date to March 31, 2007.
        As
        consideration for the third extension, Xechem paid Alembic, in reduction
        of the
        indebtedness due under the Note, the sum of $100,000 on March 1, 2007, which
        payment was a condition to the extension.
 
 Furthermore,
        the parties agreed that if Xechem made a principal payment to A lembic
        in
        reduction of the Note of not less than $1,000,000, together with accrued
        interest, on or before March 31, 2007, then the Maturity Date will be extended
        for an additional six months. Payment was made on April 5, 2007.
  (C)  In
        the
        period January 1, 2007 through March 28, 2007, Xechem received loans totaling
        $100,000 from Ms. Chassman and $569,600 from eight unrelated parties. Notes
        are
        to be issued with terms of six months and a per annum interest rate of
        8%.
 
 (D)  In
        the
        period January 1, 2007 through March 6, 2007, a holder of Xechem debt converted
        Xechem debt (in the for of principal and interest) in the aggregate amount
        of
        $162,600 ($116,900 of which is principal and $45,700 of which is interest)
        into
        32,515,556 shares of Xechem’s common stock (exercised at the conversion rate of
        $0.005 per share) representing approximately 2% of Xechem’s then issued and
        outstanding stock.
  F-46
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  (E)  On
        April
        4, 2007 the Company completed a private placement of $4,959,963 of Units
        pursuant to a securities purchase agreement (“Purchase Agreement”) with a number
        of investors (“Purchasers”). The Units are comprised of (i) 8% convertible
        debentures (“Debentures”) in an aggregate principal amount of $4,959,963;
        convertible into Common Stock of the Company at $0.0175 per share (representing
        283,426,449 shares of common stock on an as converted basis, subject to possible
        adjustment as discussed below); and (ii) two warrants per Debenture, each
        providing a right to purchase 37.5% of the number of shares of Common Stock
        purchasable with the original principal amount of the Debentures (i.e. up
        to 75%
        of the Common Stock in the aggregate), at
        a
        price of $0.0225 per share (subject to possible adjustment as discussed below);
        the first warrant has a term ending March 31, 2009 and is not callable (the
“Two
        Year Warrant”), and the second warrant has a term ending March 31, 2010 and is
        callable by the Company at a purchase price of $0.06 per share provided the
        volume weighted average price (“VWAP”) of the Company’s Common Stock exceeds
        $0.06 for 30 consecutive trading days (the “Three Year Warrant”—together with
        the Two Year Warrant, collectively, the “Warrants”). The Company has entered
        into a “Registration Rights Agreement,” pursuant to which it is obligated to
        file a registration statement to register the Common Stock of the Company
        underlying the Debentures and Warrants, which contains certain penalties
        if not
        timely filed. In connection with the transaction the principal officers and
        directors of the Company were required to lock up their shares of the Company
        for a period ending 6 months after the registration of the common stock
        underlying the Debentures and Warrants and in addition, the Company’s CEO
        pledged certain personal assets (his 25% beneficial ownership in the entity
        that
        owns the New Brunswick, NJ facility leased to the Company) to secure the
        Debentures. The Company agreed to grant to the advisor on the transaction
        an
        option to purchase 12% of the shares of Common Stock of the Company issuable
        upon the immediate conversion of the Debentures (i.e., 34,011,173 shares
        ) at a
        price of $0.001 per share, expiring March 31, 2009 for advising it in connection
        with the transaction. In addition, in the event of the exercise of any of
        the
        warrants issued as part of the offering, it is entitled to a 5% fee for the
        amount of the warrant exercise. The Company has also agreed to reimburse
        the
        Purchasers for interest at the rate of 8% per annum for the monies deposited
        by
        them in escrow pending the initial closing of the Purchase Agreement and
        to
        reimburse the advisor for $75,000 of its legal fees in connection with the
        transation *(See
        Note 13E).*
  The
        Purchase Agreement contains certain limitations as to application of the
        proceeds of the offering and further limits the release of in excess of
        $1,500,000 to the payment of past due payables on the occurrence of one of
        the
        following “Release Conditions:” (i) the closing of the current Nexim Bank loan
        commitment to Xechem Pharmaceuticals Nigeria, Limited (“Xechem Nigeria”) for the
        funding of at least $325 million Naira (approximately $2.6 million US dollars);
        (ii) the closing of funding of at least $9,000,000 of the proposed $9,388,980
        UPS Capital Loan to Xechem Nigeria, to be guaranteed by the Ex-Im Bank, which
        in
        turn is to be supported by guarantees of one half of such amount by each
        of
        Diamond Bank PLC and Bank PHB, PLC, which are local Nigerian banks; or (iii)
        the
        funding of at least $3,000,000 of equity financing by Xechem
        Nigeria.
  The
        Company has affirmative obligations under the Purchase Agreement to: (i)
        timely
        file all required reports under the Securities Act of 1934; (ii) promptly
        deliver the shares of Common Stock purchased by the Purchasers pursuant to
        conversion of their Debentures or exercise of the Warrants and is subject
        to a
        penalty of $10 per $1000 of securities (with the value computed based on
        a
        volume weighted average
        pricing or “VWAP” formula) for each day that it is late with respect to
        effecting such deliveries, increasing to $20 per $1000 of securities should
        it
        fail to make such delivery commencing 5 trading days after failing to meet
        this
        obligation; (iii) indemnify the Purchasers against enumerated liabilities
        in the
        event of actions taken against them in certain instances; (iv) reserve at
        all
        times a sufficient amount of Common Stock to enable it to meet its obligations
        under the Purchase Agreement (it should be noted that the Company adopted
        a
        resolution to not issue in excess of 3,500,000,000 shares of its authorized
        Common Stock without the approval of shareholders as to such increase, and
        in
        the event the Company is unable to meet this obligation, it has an affirmative
        obligation to obtain shareholder approval promptly following the reaching
        of
        such level; (v) provide a 2 year preemptive right to purchase up to 15% of
        the
        securities issued by the Company’s Xechem Nigeria Pharmaceuticals, Limited
        (“Xechem Nigeria”) subsidiary in any public offering that may subsequently occur
        through such subsidiary; (vi) permits the Purchasers to nominate one member
        to
        the Company’s board of directors (and a second one in the event of the issuance
        of not less than $6,000,000 of Units), reasonably agreeable to the Company,
        with
        there to be a limit of 5 directors for the first year following the closing
        of
        the Purchase Agreement; and (vii) provides a 15 day right of first refusal
        to
        the Purchasers to participate in up to 100% of any subsequent common stock
        transaction of the Company not constituting an “Exempt Issuance” as defined in
        the Purchase Agreement, subject to possible waiver if agreed to by holders
        of at
        least 80% of the outstanding Debenture principal amount.
  F-47
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  The
        Purchase Agreement contains a number of negative covenants for so long as
        the
        Debentures remain outstanding, which include a prohibition against: (i) the
        adoption of certain shareholder rights plans intended to prohibit or deter
        takeovers of the Company; (ii) the providing of material nonpublic information
        to the Purchasers or their counsel, absent execution by the applicable
        Purchaser(s) of a confidentiality agreement regarding such information; (iii)
        the issuance of additional capital stock of the Company (or securities
        convertible into the same) other than certain “Exempt Issuances” as detailed in
        the Purchase Agreement, for a period of 12 months from the initial closing
        of
        the Units issuance; (iv) entering into certain enumerated variable rate
        transactions where the pricing of the equity securities of the Company is
        subject to a variable formula; (v) uneven treatment with respect to the
        Purchasers; and (vi) the prohibition against a reverse or forward split of
        the
        Company’s stock for a year following the effectiveness of a registration
        statement registering the shares underlying the Units absent the consent
        of the
        holders of a majority of the Debentures.
  Detailed
        information regarding the Company is enumerated in the body of the Agreement
        and
        its accompanying schedules, including representations and warranties associated
        with its current financial condition. Inaccuracy of any of the representations
        or warranties in a material manner would constitute an event of default that
        would provide the Purchasers the right to accelerate the indebtedness regarding
        the Company. These representations include: (i) an acknowledgment that the
        Company has significant past due payables, many of which will not be satisfied
        with respect to the proceeds of the financing; a total of $1,383,326 of
        liabilities was scheduled as of March 23, 2007, and a total of $8,420,936
        of
        notes payable plus accrued interest of $642,368 was scheduled as of March
        25,
        2007, including the following primary lenders to the Company (principal amount
        only is summarized here): (a) independent third party individuals - $259,600;
        (b) related party loans - $1,313,439; (c) Dr. Pandey - $124,689; (d) Xechem
        China - $140,120; (e) Marjorie Chassman - $2,788,128; (f) Chassman/Brauser
        2007
        loans - $550,000; (g) Alembic - $2,000,000; (h) NEXIM Bank - $1,153,846;
        and UBA
        Loan - $91,115 (the latter two loans are to Xechem Nigeria); (ii) the issued
        and
        outstanding capital stock of Xechem Nigeria is presently 95,000,000
        shares all issued to the Company, subject to the qualifications that (a)
        a claim
        has been made by a prior employee of the Company as to ownership in Xechem
        Nigeria, which the Company refutes (and for which there has been no further
        follow up since the claim was made over a year ago); and (b) the Company
        outlined that Xechem Nigeria is expected to issue up to 20,000,000 additional
        shares to certain persons and entities primarily in Nigeria with respect
        to
        services rendered and/or to be rendered or purchase by such service providers
        and/or their designees, provided that any issuances other than for services
        rendered and/or to be rendered will be subject to the participation right
        of the
        Purchasers with respect to any subsequent public offering of Xechem Nigeria
        stock set forth elsewhere in the Purchase Agreement; and (c) Xechem India
        is
        presently owned 66-2/3% by the Company and the remainder by Ramesh C. Pandey
        and
        family members; (c) the Company was required to provide a solvency
        representation and in doing so it provided that anticipated cash flow of
        the
        Company, together with the proceeds the Company would receive were it to
        liquidate all of its assets from the funding of the Debenture sale after
        taking
        into account all anticipated uses of the cash would be sufficient to pay
        all
        amounts on or in respect of its liabilities when such amounts are required
        to be
        paid, and further provided that it does not intend to incur debts beyond
        its
        ability to pay such debts as they mature (taking into account the timing
        and
        amounts of cash to be payable on or in respect of its debt and assuming the
        continued forbearance of obligations from existing creditors consistent with
        past practice and the assumed accelerated increase in sales from Xechem Nigeria
        and the forbearance of existing loans that will be coming due during the
        next
        year. (It should be noted that the aforesaid representations regarding solvency
        are subject to numerous assumptions that may or may not materialize or based
        upon future liquidation values as to which there is not certainty and therefore
        persons dealing with the Company should recognize the precarious financial
        condition in which the Company has been historically and as of the present
        time.) and (iv) the Company has provided representations as to its
        capitalization, which as of March 25, 2007 included 1,555,797,965 issued
        and
        outstanding shares of Common Stock, an additional 749,479,461 shares of Common
        Stock issuable pursuant to options, warrants, convertible notes and/or actual
        issuances or agreed upon issuances of shares (bringing aggregate Common Stock
        as
        adjusted to 2,305,277,426 shares) and an additional 576,310,000 shares issuable
        to Ramesh C. Pandey in connection with his 20% antidilution rights, bringing
        aggregate estimated diluted capitalization (before adjustments for accrued
        interest convertible to equity) to approximately 2,881,587,426 shares of
        Common
        Stock.
  F-48
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  Debentures .
        The
        Debentures mature on March 31, 2009. They call for the payment of simple
        interest at the rate of 8% per annum, quarterly in arrears, calculated based
        upon a 360 day year and payable on the last day of May 31, 2007 and the last
        day
        of each third month thereafter through maturity. Interest is payable in cash
        unless otherwise agreed to between the Debenture holder and the Company.
        A late
        fee of 12% per annum is payable with respect to any late payments. Prepayment
        is
        not permitted without the consent of the Debenture holder.
  The
        Debentures are convertible from time to time at the option of their holders
        at
        the “Conversion Price.” The “Conversion Price” is $0.0175 per share, subject to
        adjustment to account for: (i) forward and reverse splits and other
        extraordinary transactions; and (ii) a full ratchet clause which effectively
        lowers the purchase price to the lowest price at which there is any subsequent
        placement of the Company’s Common Stock (or securities exchangeable into or
        convertible into or exercisable into Common Stock) placed at a price below
        the
        lowest Conversion Price then in effect, with the exception of certain detailed
        “Exempt Issuances,” which include issuances pursuant to any existing rights to
        acquire Common Stock currently in place. A similar Conversion Price adjustment
        applies to the extent of the value of any rights offerings
        made by the Company entitling stockholders to subscribe for securities at
        a
        price below the Conversion Price for the Debentures. In addition, the Debentures
        have protective provisions which effectively call for the issuance of additional
        securities to the holders as if they were shareholders in connection with
        any
        subsequent distributions of cash or securities to the holders of the Common
        Stock. The Company has an affirmative obligation to notify the Debenture
        holders
        of events that cause an adjustment in the conversion price for the Debentures.
  F-49
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  There
        is
        a limitation of conversions of Debenture principal or interest resulting
        in a
        holder owning greater than 4.99% of the Company’s Common Stock absent the prior
        consent of the holder. As noted above with respect to share transfers, there
        is
        a liquidated damages obligation of the Company of $10 per trading day per
        $1,000
        of Common Stock (increasing to $20 per trading day per $1,000 of Common Stock)
        after 7 trading days, to the extent that the Company fails to timely provide
        to
        the Purchasers the stock certificates to which they are entitled upon conversion
        of Debenture indebtedness to Common Stock.
  The
        Debentures contain a “Buy-In” liability to the Company in addition, should it
        fail to timely deliver certificates following delivery of a conversion notice,
        which effectively holds the Company liable for the loss the holder would
        incur
        in the event it sold any of the shares relating to a conversion notice and
        then
        was forced to buy the underlying shares to effect the trade due to the Company’s
        failure to timely deliver the certificate.
  The
        Debentures also provide that in the event of a “Fundamental Transaction,” absent
        the successor in interest to the Company requiring that the Debenture holders
        receive cash for the satisfaction of the Debenture obligation, then the
        Debenture holders shall be entitled to comparable rights with respect to
        the
        securities of the successor entity arising from the Fundamental Transaction.
        “Fundamental Transactions” include: (i) mergers or consolidations of the Company
        with or into another entity; (ii) sale by the Company of all or substantially
        all of its assets; (iii) certain tender offers or exchange offers whereby
        the
        Company’s stockholders can exchange their shares for other securities, cash or
        property; and (iv) certain reclassifications of the Company’s Common Stock or
        compulsory share exchanges effectively converting the Company’s securities into
        those of another entity.
  The
        Debentures contain certain negative covenants, which include: (i) amendments
        to
        the Company’s charter or bylaws in a manner that would adversely impact the
        Debenture holders; (ii) repurchases of stock of the Company with the exception
        of certain limited repurchases of stock owned by former employees; and (iii)
        payment of cash dividends or other distributions with respect to the Company’s
        securities.
  The
        Debentures provide that the holders can accelerate the indebtedness evidenced
        by
        the Debentures in the event of the occurrence of an “Event of Default” and
        failure to cure within the applicable cure period (not to exceed 5 days)
        if any;
“Events of Default” include the breach by the Company of any of the obligations
        of the Company pursuant to the Debentures or any of the other transaction
        documents (i.e., the Purchase Agreement or the associated agreements in
        connection therewith), any representation or warranty being untrue or incorrect
        at the time made in any material respect; certain insolvency events with
        respect
        to the Company or material subsidiaries, or defaults with respect to obligations
        which remain uncured for up to 45 days, cessation of listing of the Company’s
  F-50
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  Common
        Stock for 5 consecutive trading days, a Change of Control transaction (including
        changes of beneficial ownership of the Company in excess of 50% or transfers
        of
        at least 33% of the Company’s assets), failure to effect the effectiveness of
        the registration statement within 210 days of the closing or failure to maintain
        its effectiveness for 30 consecutive days (subject to certain limited
        extensions) , and failure to timely deliver stock certificates.
  Warrants .
        The
        Purchase Agreement calls for the issuance of two Warrants per Unit of
        investment, with each Warrant comprising the right to purchase up to 37.5%
        of
        the shares issuable per the Debenture (2,142,857 shares of Common Stock for
        each
        $100,000 of investment per Warrant, or 4,285,714 shares for both Warrants
        associated with a $100,000 investment) at an exercise price of $0.0225 per
        share
        (subject to adjustment as discussed below). The Two Year Warrant has a term
        of
        approximately two years, expiring March 31, 2009 and is not callable by the
        Company. The Three Year Warrant has a term of approximately three years,
        expiring March 31, 2010, and is callable in the event that the VWAP of the
        Company’s Common Stock for 30 consecutive trading days (following the
        declaration of effectiveness of a registration statement for the underlying
        Common Stock) exceeds $0.06 per share (subject to adjustment for splits and
        other extraordinary transactions) and provided that: (i) the holder is not
        in
        possession of material nonpublic information; (ii) the Company has honored
        all
        prior notices of exercise under the Warrant; (iii) the registration statement
        is
        effective for the duration of the exercise period following the delivery
        of the
        call notice; the Common Stock continues to be listed on a trading market
        (which
        can include trading on the OTC Bulletin Board or in the Pink Sheets); (iv)
        there
        continues to be sufficient reserved shares of Common Stock underlying the
        Units;
        and (v) after exercise of the Warrant the holder would not hold in excess
        of
        4.99% of the Company’s outstanding capital stock. In such event, the Company
        shall have the right to call initially 50% of the remaining shares underlying
        the Warrant for nominal consideration provided the call notice is delivered
        within 2 trading days of such 30 day period, and in such event the holder
        will
        have a 20 trading days following the receipt of the notice to exercise the
        Warrant before the right to purchase the called shares shall be cancelled.
        In
        the event the call is effectively exercised, then the remaining shares
        underlying the Three Year Warrant will be subject to a second call right
        provided the VWAP for the Common Stock thereafter meets the 30 trading day
        threshold for another 30 consecutive trading days and the other conditions
        to
        the call are also met (as enumerated above) for the subsequent period following
        the delivery of the call notice.
  Exercise
        of the Warrants is for cash only, provided however, if by the first anniversary
        following their date of issuance an effective registration statement is not
        in
        place for the underlying shares, then the holders shall have a right to exercise
        the Warrants on a cashless basis. Upon exercise of a Warrant, the Company
        has an
        obligation to promptly deliver the underlying shares and is subject to a
        liquidated damages clauses comparable to those applicable to the Debentures,
        for: (i) failure to timely deliver the certificates for the purchased Common
        Stock as a result of exercise of the Warrants; or (ii) losses incurred by
        the
        Warrant holder as a result of having to effect a Buy-In of Common Stock to
        cover
        any sale of the shares corresponding to the Warrant exercise, where the Company
        failed to timely delivery to the holder the shares of Common Stock related
        to
        the Warrant exercise.
  The
        $0.0225 per share exercise price for the Warrants is subject to adjustment
        for
        stock splits and other extraordinary corporate events. In addition, the Warrants
        contain a full ratchet adjustment mechanism for the applicable purchase price
        comparable to the full ratchet adjustment mechanism applicable
        to the exercise price for the conversion of Debenture indebtedness into equity
        of the Company, as well as a conversion modification to account for
        distributions of cash , securities or other property to stockholders of the
        Company. The Company has an affirmative obligation to notify the Warrant
        holders
        of adjustments to the exercise price of the Warrants.
 F-51
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  As
        with
        the Debentures, there is a limitation on the amount of Common Stock issuable
        to
        a Warrant holder to 4.99% of the outstanding Common Stock of the Company,
        absent
        waiver by the holder of that limitation. In addition, the Warrants call for
        similar rights in the event of Fundamental Transactions, provided that it
        the
        Fundamental Transaction is any of (i) an all cash transaction; (ii) a going
        private transaction under Rule 13e-3 of the Securities Exchange Act of 1934;
        or
        (iii) involving securities of a company whose shares are not traded on a
        national securities exchange, then at the Company’s option in lieu of a
        carryover of the Warrants to the successor entity, the holder shall be entitled
        to a the cash value of the Warrants keyed to a Black Scholes valuation.
  Registration
        Rights Agreement .
  The
        Company has agreed that it shall register 130% of the shares of Common Stock
        underlying the Units (“Registrable Securities”) promptly following the closing
        of the offering pursuant to the Purchase Agreement (“Closing Date”) . It is
        obligated to: (i) file a registration statement pursuant to the Securities
        Act
        of 1933 within 60 days following the Closing Date; (ii) respond to SEC comments
        and file pre-effective amendments within 10 days following receipt; and (iii)
        and cause it to be declared effective no later than 150 days following the
        Closing Date; (iv) telephonically request the declaration of effectiveness
        of
        the registration statement at 5:00 p.m. New York time on a trading day; (v)
        immediately notify the holders of Units of the declaration of effectiveness
        of
        the registration statement on the same day that it confirms such effectiveness
        with the SEC; (vi) file a prospectus with the SEC, as required by Rule 424
        within one day of the declaration of effectiveness; and (vii) following the
        declaration of effectiveness of the registration statement, the Company is
        obligated to maintain the effectiveness of the Registration Statement for
        10
        consecutive calendar days or 15 calendar days during any 12 month. Failure
        to
        meet any of the foregoing obligations constitutes and “Event,” which subjects
        the Company to penalties of 2% for each month in which it occurs and on each
        monthly anniversary thereof, of a liquidated damages obligation equal to
        2% of
        the original principal amount of the Debenture of the holder, subject to
        an
        aggregate cap of 15% of the original principal amount of the Debenture, payable
        in cash unless otherwise agreeable to the Company and the Debenture
        holder
  The
        Company has an obligation during the registration process to provide to each
        Debenture holder no less than 5 trading days prior to the filing of each
        registration statement and no less than one trading day prior to the filing
        of
        any related prospectus or amendment or supplement thereto, with a copy of
        the
        proposed filing, and shall have an obligation to address any reasonable
        objections provided by holders of a majority of the Registrable Securities.
        A
        mechanism has been provided in the Registration Rights Agreement to provide
        these copies to Basu Capital on behalf of the investors. The Company has
        an
        obligation to provide questionnaires to the holders relative to the information
        to be included in the registration statement regarding them, to be timely
        completed by the holders.
  F-52
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  The
        Company has an obligation to: (i) file the necessary post effective amendments
        to the registration statement and prospectus to be used by the holders of
        the
        Registrable Securities to keep the registration statement continuously effective
        until all the Registrable Securities are eligible for resale pursuant to
        Rule
        144(k); (ii) file all required supplements; (iii) respond promptly to comments
        received from the Commission and provide copies of all applicable correspondence
        to the holders of the Registrable Securities; and (iv) comply in all material
        respects with the requirements of the Securities Act of 1933 for the legal
        methods of disposition by the holders of the Registrable Securities.
  There
        is
        an obligation to file a new registration statement at such point in time
        as the
        amount of Registrable Securities exceeds the amount of securities then
        registered. There are obligations to notify the holders of Registrable
        Securities of the occurrence of numerous events which in certain events will
        include the need to suspend trading on the occurrence of certain events,
        including: (i) (A) when a prospectus or prospectus supplement is proposed
        to be
        filed; (B) when the SEC advises that a review will be effected or when comments
        are received; and (C) on the effectiveness of a registration statement or
        post
        effective amendment thereto; (ii) of any request by the SEC or other applicable
        government authority for amendments or supplements to the foregoing; (iii)
        the
        issuance of stop orders or similar proceedings; (iv) the receipt of
        notifications of suspension of permission for sale of securities; (v) the
        occurrence of an event or the passage of time where action must be taken
        to
        amend the registration statement to ensure that it does not misstate any
        material facts or omit to state any material facts; and (vi) the occurrence
        of
        material events regarding the Company under certain circumstances which the
        Company believes may not be in the Company’s best interest to continue the
        availability of the registration statement, provided that such information
        must
        be maintained on a confidential basis until publicly disclosed.
  The
        Registration Rights Agreement contains detailed delivery requirements to
        the
        holders of the Registrable Securities as well as the obligation to meet
        applicable NASD and state blue sky requirements. The Company is obligated
        to
        cover all of the costs of registration of the Registrable Securities and
        to
        provide detailed indemnification to the holders of the Registrable Securities
        for loss, liability and legal expenses associated with the same. Piggyback
        registration rights also apply to any Registrable Securities that for whatever
        reason are not registered, except with respect to subsequent Form S-4 and
        Form
        S-8 registration statements.
  Pandey
        Pledge Agreement .
        In
        order to induce the Purchasers to purchase the Units, Dr. Ramesh Pandey,
        the CEO
        of the Company, agreed to pledge to the Unit holders, effective as of the
        date
        that the indebtedness of the Company to Alembic, Limited is satisfied, 100%
        of
        the beneficial ownership in PRC Holdings, LLC and PCR Holding Company, Inc.
        (collectively, the “Pledged Interests”), which hold, collectively, 25% of the
        beneficial ownership in Vineyard Productions, LLC (“Vineyard”). Vineyard is the
        entity that owns the office building complex in which the Company’s offices and
        laboratory are located. Dr. Pandey shall be entitled to a release of the
        Pledged
        Interests at such time, if any, as the Company either pays off the Debentures,
        or posts cash collateral (or the substantial equivalent thereof) of $1,500,000
        to the holders of the Debentures. The Company has agreed to indemnify Dr.
        Pandey
        for any loss he may incur in the event he loses any of the Pledged Interests
        to
        the Debenture holders as well as to compensate him or a charity of his
        designation, in consideration for providing this collateral. The Pledge
        Agreement also provides to Dr. Pandey the right to pledge the Pledged Interests
        to secure the remaining obligations of the Company to Alembic,
        Limited.
  F-53
  **XECHEM
        INTERNATIONAL, INC. AND SUBSIDIARIES**
 **[A
        DEVELOPMENT STAGE ENTERPRISE]**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  ***(13)
        Subsequent Events (continued)***
  Chassman
        Pledge Agreement .
        The
        Purchasers required a pledge of additional collateral to consummate the Purchase
        Agreement from Marjorie Chassman, the wife of David Blech. She agreed to
        pledge
        to the Purchasers the following promissory notes which are convertible into
        Common Stock of the Company at the prices set forth below, to be released
        upon
        the occurrence of one of the Release Conditions (enumerated above) prior
        to an
        event of default with respect to the Debentures: (i) $30,000 principal amount
        dated April 5, 2006, convertible at $0.005 per share;
  (ii)
        $200,000 principal amount dated June 5, 2006, convertible at $0.01 per share;
        and $1,025,000 dated June 20, 2006, convertible at $0.015 per share. In order
        to
        induce Ms. Chassman to pledge the foregoing notes, the Company agreed to
        lower
        the conversion price from $0.03 per share to $0.0175 per share with respect
        to
        another promissory note that she holds in the original principal amount of
        $500,000.
  Intercreditor
        Agreement .
        The
        holders of the Debentures have entered into an intercreditor agreement amongst
        themselves so as to equitably allocate any of the Pledged Interests or proceeds
        there from in the event that such collateral is foreclosed upon to satisfy
        any
        of the Debenture indebtedness.
  (F)  On
        April
        3, 2007 Xechem Nigeria closed on its 500,000,000 Naira loan with the Nigerian
        Export Import Bank (“Nexim”), which represented a consolidation of the existing
        150,000,000 Naira loan of Xechem Nigeria with an increase in the loan by
        an
        additional 350,000,000 Naira (approximately $2,600,000 US dollars of additional
        funding). The loan is for a five year duration, inclusive of one year’s
        moratorium of debt service, but subject to biannual payments of interest
        during
        the moratorium period. Interest accrues on the loan at the rate of 16% per
        annum. Principal thereafter is due in 8 equal semiannual payments, with the
        first payment due on the first anniversary of the closing of the loan. A
        special
        condition to the loan was the reservation by Nexim of the right to amend,
        alter,
        cancel or waive the conditions of the facility should it determine that
        circumstances warrant such a change.
 
 On
        closing of the loan a facility fee of 0.5% was charged as against the increased
        amount of funding with respect to the loan. Additional fees with respect
        to the
        loan include a 0.5% annual management fee (based on outstanding principal
        amount) due on each anniversary of the loan, a 100,000 Naira annual monitoring
        fee payable on each anniversary of the loan and the obligation to reimburse
        Nexim for its legal fees. The loan is secured by a debenture trust deed on
        the
        assets of Xechem Nigeria and the personal guarantee delivered by Dr. Pandey.
        The
        loan contains customary affirmative and negative covenants, which include:
        (i)
        prohibitions against the granting of additional liens against the collateral
        or
        disposal of assets without Nexim’s consent; (ii) compliance with applicable laws
        and regulations; (iii) prohibition on the declaration of dividends unless
        the
        face value of due and payable obligations under the facility for the year
        in
        question have been paid; (iv) provide regular quarterly unaudited and annual
        audited financial statements; (v) provide proof of adequate insurance; and
        (vi)
        throughout the life of the facility Nexim has reserved the right to appoint
        a
        director to the board of directors of Xechem Nigeria.
  F-54





**Item
      8.**  **Changes
      In And Disagreements With Accountants On Accounting And
      Financial** **Disclosure**




On
      March
      15, 2007, Xechem International, Inc. (the “Company”), engaged Bernstein &
Pinchuk, LLP, certified public accountants (the “Accountant”) to serve as its
      independent auditor. The Accountant replaces Moore Stephens, P.C., certified
      public accountants (“MS”).




On
      March
      15, 2007, the Company provided notice to MS, its independent registered public
      accounting firm, that the Company was dismissing MS, with the recommendation
      and
      approval of the Audit Committee of the Company. The MS report on the Company’s
      consolidated financial statements for the years ended December 31, 2004 and
      December 31, 2005, the years for which MS provided auditing services, each
      included an explanatory paragraph indicating that the Company had experienced
      operating losses and net working capital deficiencies and accumulated deficits
      that raised substantial doubt about the Company’s ability to continue as a going
      concern. The MS reports on the Company’s consolidated financial statements as of
      and for the years ended December 31, 2004 and December 31, 2005 did not contain
      any adverse opinion or disclaimer of opinion, nor were they qualified or
      modified as to uncertainty, audit scope or accounting principles. During the
      term of MS engagement and through March 15, 2007, there had been no
      disagreements with MS on any matter of accounting principles or practices,
      financial statement disclosures, or auditing scope or procedure, which, if
      not
      resolved to the satisfaction of MS, would have caused MS to make reference
      to
      the subject matter in connection with their report on the Company’s consolidated
      financial statements for the years ended December 31, 2004 and December 31,
      2005.




During
      the last two completed fiscal years and the 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 MS,
      as
      there were none.





The
      Company provided MS with a copy of this disclosure on March 20, 2007, requesting
      MS to furnish the Company with a letter addressed to the Securities and Exchange
      Commission (the “SEC”) stating whether it agrees with the statements made by the
      Company. On March 27, 2007, MS wrote to the SEC that it agrees with the
      Company’s statements.




**Item
      8A.** **Controls
      and Procedures**




Evaluation
      of Disclosure Controls and Procedures




We
      maintain disclosure controls and procedures that are designed to provide
      reasonable assurance that information required to be disclosed in our filings
      under the Securities Exchange Act of 1934 is recorded, processed, summarized
      and
      reported within the periods specified by the rules and forms of the Securities
      Exchange Commission and that such information is accumulated and communicated
      to
      our management, including its principal executive officer and principal
      financial officer, as appropriate, to allow timely decisions regarding required
      disclosure.




Our
      management does not expect that our disclosure controls or internal controls
      over financial reporting will prevent all errors or all instances of fraud.
      A
      control system, no matter how well designed and operated, can provide only
      reasonable, not absolute assurance that the control systems’ objectives will be
      met. Further, the design of a control system must reflect the fact that there
      are resources constraints, and the level of controls must be considered relative
      to their costs. Because of the inherent limitations in all controls systems,
      no
      evaluation of controls can provide absolute assurance that all control issues
      and instances of fraud within our company have been detected. These inherent
      limitations include the realties that judgments and decision making can be
      faulty and that breakdowns can occur because of simple error or mistake. Because
      of the inherent limitation of a cost-effective control system, misstatements
      due
      to error or fraud may occur and not be detected.




46




Changes
      in Internal Controls Over Financial Reporting




No
      changes in our internal controls over financial reporting have come to
      management’s attention during our last fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, our internal controls
      over financial reporting. Review and evaluation of disclosure controls and
      procedures is an ongoing process that we will continue to refine as we perform
      quarterly evaluations.




**Item
      8B.** **Other
      Information**




None.




47




**Part
      III**




****Item
                  9.****
              **Directors,
                    Executive Officers, Promoters And Control Persons; Compliance
                    With****Section
                    16(A) Of The Exchange
                    Act.**


The
      composition and biographies of our directors and officers (including nominees
      for appointment) are as follows:




NAME
            
            AGE
            
            POSITION
                WITH XECHEMDr.
                Ramesh C. Pandey (1)(4)
            
            68
            
            Chief
                Executive Officer, Chairman of the Board, Secretary and
                TreasurerStephen
                F. Burg (1)(2)(3)(4)
            
            69
            
            Director
                and Assistant SecretaryAdesoji
                Adelaja, Ph.D.(1)(2)(3)(4)
            
            54
            
            DirectorCol.
                (Rtd.) Bhuwan C. Pandey
            
            65
            
            Vice
                President - International OperationsHoward
                Becker
            
            47
            
            Vice
                President of Operations





(1)
      Member of the stock option committee.


(2)
      Member of the compensation committee.


(3)
      Member of the audit committee.


(4)
      Member of the nominating committee.





RAMESH
      C.
      PANDEY, PH.D., is our founder. He has served as the Chief Executive Officer
      and
      President and a director of Xechem Inc. since its formation in 1990, and our
      Chief Executive Officer, President, and Chairman of the Board of Directors
      since
      our formation in February 1994. From 1984 to March 1990, Dr. Pandey was the
      President and Chief Scientist of our predecessor, which was a subsidiary of
      LyphoMed. Dr. Pandey served as a visiting Professor at the Waksman Institute
      of
      Microbiology at Rutgers University from 1984 to 1986. Dr. Pandey has also served
      as scientist, consultant, and research associate for several universities and
      private laboratories. Dr. Pandey has published over eighty articles in
      professional publications such as the Journal of Antibiotics, the Journal of
      the
      American Chemical Society, the Journal of Industrial Microbiology and the
      Journal of Natural Products. Dr. Pandey is a member of the editorial board
      of
      the Journal of Antibiotics and of several professional societies. Dr. Pandey
      is
      also a member on the Statewide Advisory Committee of the Board of Managers,
      New
      Jersey Agricultural Experiment Station, Rutgers, The State University of New
      Jersey, in the field of Biotechnology for the term 2002 - June 30, 2005, and
      the
      New Jersey Technology Council (NJTC) Life Sciences Advisory board member. From
      1999 through March 2002, Dr. Pandey was a board member of the Middlesex County,
      New Jersey Work Force Investment, and from 1999 to 2001, he was a member of
      the
      Advisory Committee for the Science Transfer and Science Technology Program
      at
      Middlesex County College, Edison, New Jersey.




STEPHEN
      F. BURG, has served as our director since 1996. From 1986 to the present, Mr.
      Burg has been the chief executive officer of SB Corporate Consulting, Inc.,
      which offers corporate growth strategies for public and private companies,
      nationally and internationally. From 1978 to 1986, Mr. Burg was Vice
      President-Corporate Acquisitions for Evans Products Company and from 1973 to
      1978 was Corporate Director-Acquisitions and Human Services for Jack August
      Enterprises. Mr. Burg serves as a consultant to various businesses. Mr. Burg
      is
      our financial expert on the audit committee. Mr. Burg is not independent, as
      he
      received consulting fees in 2005 from us other than for board
      services.




48




ADESOJI
      ADELAJA, PH.D., became a director in March 2004. He is the John A. Hannah
      Distinguished Professor in Land Policy and Director of Research for the Victor
      Institute at Michigan State University. He holds joint faculty appointments
      as
      professor in the following departments: Agricultural Economics; Geography;
      and
      Community, Agricultural and Recreational Resource Studies. Dr. Adelaja commenced
      his appointment at MSU on January 1, 2004. Prior to that, he served as the
      Executive Dean of Agriculture and Natural Resources, the Dean of Cook College,
      the Executive Director of the New Jersey Agricultural Experiment Station and
      Director of Rutgers Cooperative Extension at Rutgers University.




COL.
      BHUWAN C. PANDEY, is our vice president of international operations. He joined
      our subsidiary, Xechem India Pvt. Ltd., in 1993 as the managing director and
      member of the board of directors. Col. Pandey joined Xechem Pharmaceuticals
      Nigeria Ltd. on its inception in 2002 where he served as general manager. He
      is
      also a non-voting member of the board of directors of Xechem Pharmaceuticals
      Nigeria ltd. and Xechem India Pvt. Ltd. A graduate from India Military Academy,
      he has a distinguished career in the Armed Forces of sovereign Republic of
      India. He served with the coveted regiment of Gorkhas, was awarded the PURPLE
      HEART and was recognized by the President of India and awarded the Army Medal
      (Sena Medal) for valour and selfless devotion to duty beyond the call and nature
      of service. Col. Pandey is the brother of Dr. Pandey, the company’s Chairman and
      CEO.




HOWARD
      BECKER, was appointed Vice President of Operations in September 2006. For
      approximately one year prior to his appointment, he served as a consultant
      to
      the Company. Before joining Xechem, 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 restructuring, including
      ten years at 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 resigned from this position in
      November 2006.




All
      directors are elected annually and serve until the next annual meeting of
      stockholders or until their successors are elected and qualified or until their
      earlier resignation or removal. Officers serve at the direction of the board
      of
      directors.




**Code
      of Ethics**




We
      have
      adopted a code of ethics that applies to our chief executive officer, chief
      operating officer, principal financial officer, principal accounting officer
      and
      controller. To receive a copy of the code of ethics, please send a written
      request to Dr. Ramesh Pandey at our corporate offices.




**Board
      Committees**




Our
      Board
      has formed four committees:




1.
            a
                stock option committee comprised of Ramesh C. Pandey, Stephen F.
                Burg and
                Adesoji Adelaja. The stock option committee was established in May
                1995
                and currently administers our stock option plan and reviews and recommends
                to the board of directors stock options to be granted;




49




2.
            a
                compensation committee comprised of Stephen F. Burg and Adesoji Adelaja.
                The compensation committee was established in May 1995 and reviews
                and
                recommends to the board of directors the compensation and benefits
                of all
                officers of the company and reviews general policy matters relating
                to
                compensation and benefits of employees of the
                company;




3.
            an
                audit committee comprised of Stephen F. Burg and Adesoji Adelaja.
                The
                audit committee was established in May 1995 and reviews with our
                independent public accountants the scope and timing of their audit
                services and any other services which they are asked to perform.
                The
                accountants report on our financial statements following completion
                of
                their audit and our policies and procedures with respect to internal
                accounting and financial controls. In addition, the audit committee
                makes
                annual recommendations to the board of directors for the appointment
                of
                independent public accountants for the ensuing year. Mr. Burg is
                our
                financial expert serving on the Audit Committee;
                and




4.
            a
                nominating committee comprised of Ramesh C. Pandey, Stephen F. Burg
                and
                Adesoji Adelaja.




**Compliance
      With Section 16(A) Of The Securities Exchange Act Of 1934**




Our
      executive officers, directors and shareholders beneficially owning more than
      10%
      of our Common Stock are required under the Exchange Act to file reports of
      ownership of Common Stock of Xechem with the Securities and Exchange Commission.
      Copies of those reports must also be furnished to us. Based solely upon a review
      of the copies of reports furnished to us and written representations that no
      other reports were required, we believe that during the preceding year all
      filing requirements applicable to executive officers, directors and shareholders
      beneficially owning more than 10% of our Common Stock have been complied
      with.




**Item
      10.**  **Executive
      Compensation**




Compensation
      of Directors




Non-management
      directors are compensated $500 per day for attendance at each board meeting.
      There were 3 meetings in 2006 and $1,500 was paid to each director. In addition,
      Mr. Burg received consulting fees during 2006 in the amount of $13,600 for
      general business consulting




Compensation
      of Officers




Dr.
      Pandey was employed pursuant to an employment agreement dated February 1994,
      which expired on its tenth anniversary. The board of directors approved an
      increase in his base salary to $250,000 per annum, effective December 2, 2003.
      On February 18, 2004, the board of directors voted to increase Dr. Pandey’s
      compensation to $350,000 per annum, effective March 1, 2004. A renewed
      employment agreement has not yet been negotiated or finalized. It is anticipated
      that the employment agreement will provide for substantial benefits to Dr.
      Pandey, including one or more of the following: (i) increased salary on
      attainment of $1,500,000 of sales per month to a base salary of $500,000; (ii)
      severance compensation if terminated without cause; (iii) issuance on an
      evergreen basis of nominally priced stock options designed to retain a 20%
      equity interest in Xechem, as well as, additional Class C Series 6 Voting
      Preferred Stock, or an equivalent stock, so that he may maintain a corresponding
      voting interest in Xechem; (iv) a minority position in the equity of Xechem
      Nigeria; (v) a royalty payment for sales of product by us and our subsidiaries,
      including Xechem Nigeria; and (vi) issuance of a minority ownership interest
      in
      Xechem India, which presently has no independent operations other than providing
      raw materials, personnel and facilities to us. The employment agreement is
      subject to negotiation, documentation and board approval. Dr. Pandey was also
      entitled to acquire voting stock equal to 20% of the outstanding voting stock
      issued through December 2003, and we have continued this practice since such
      date. We also issued 3,587 and 5,566 additional shares to bring his ownership
      percentage of voting stock to 20% in the years ended December 2005 and 2004,
      respectively. We issued 28,003 shares in 2006, bringing his Class C, Series
      6
      Preferred stock total to 38,079 or 380,079,000 voting share equivalents.




50




Col.
      Pandey will receive an annual salary of $250,000, an option to purchase
      20,000,000 shares of the company’s common stock at $0.026 per share and
      customary vacation, severance, health and other benefits.




**2006
      SUMMARY COMPENSATION TABLE**





**Name
                and****Principal****Position**
            
            **Salary**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)**
            
            **All****O****ther**
              **Compensation**
              **($)****(5)**
            
            **Total**
              **($)**Dr.
                Ramesh Pandey(2)
              Chairman
                & CEO
            
            
            284,374
            
            
            0
            (1)
            
            0
            (1)
            
            17,008
            
            
            301,282Col.
                Bhuwan Pandey(3)
              VP
                - International Operations
            
            
            182,798
            
            
            0
            
            
            520,000
            
            
            625
            
            
            703,333Howard
                Becker(4)
              VP
                - Operations
            
            
            155,000
            
            
            0
            
            
            260,000
            
            
            19,667
            
            
            434,667




(1)  Dr.
        Pandey has negotiated with the Board, but not yet codified in 2006 an
        understanding that effective from the issuance of his first shares of Class
        C
        Series 6 Preferred Stock (October 1, 2001), in addition to the shares of
        Preferred Stock, he shall have an option to purchase up to twenty percent
        (20%)
        of the outstanding Common Stock of the Company from time to time after giving
        effect to the exercise of the option, for so long as he remains in the
        employment of the Company, for nominal consideration, or such greater purchase
        price as he shall designate at the time of execution of a definitive binding
        agreement. For the period of 2006, this would equate to 280,790,000 shares
        of
        Common Stock, and for the period from October 1, 2001 through December 31,
        2006,
        this would represent the right to purchase cumulatively 380,790,000 shares
        of
        Common Stock. In addition, he has been issued 28,079 shares of Class C Series
        6
        Preferred Stock in 2006 and cumulatively, an aggregate of 38,079 shares of
        Class
        C Series 6 Preferred Stock through December 31, 2006, which shares carry
        nominal
        economic value, but vote together with Common Stock based upon 10,000 votes
        per
        share of Class C Series 6 Preferred Stock.




(2)  Dr.
      Pandey deferred $65,625 in salary in 2006.




(3)  Col.
      Pandey deferred $46,875 in salary in 2006.




(4)  Howard
      Becker was hired on March 1, 2006 and terminated his employment on November
      30,
      2006. He deferred $45,000 in salary in 2006.




(5)


(i)
            Dr.
                Pandey, the amount reported includes $13,800 for a leased automobile
                and
                $3,208 for the Company matching contributions in the Xechem 401(K)
                Plan.


(ii)
            For
                Col. Pandey, the amount reported of $625 is the Company matching
                contributions in the Xechem 401(K) Plan.


(iii)
            For
                Mr. Becker, the amount reported of $19,667 is for consulting fees
                prior to
                joining Xechem as an employee.





51




**2006
      OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END**





**Name**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Unexercisable**
            
            
            
            **Option**
              **Exercise**
              **Price**
              **($)**
            
            **Option
                Expiration**
              **Date**
            
            **Number
                of Shares That Have Not Vested**
              **(#)**
            
            **Market
                Value of Shares of Stock That Have Not Vested**
              **(#)**
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares Or other Rights
                That Have
                not Vested**
              **(#)**
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares
                Or Other
                Rights That Have not Vested**
              **(#)****Option
                Awards**
            
            
            
            
            
            
            
            **Stock
                Awards****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)**
            
            **(f)**
            
            **(g)**
            
            **(h)**
            
            **(i)**
            
            **(j)**Dr.
                RameshPandey(1)
            
            
            500
            
            
            —
            
            
            
            
            
            1.50
            
            
            7/11/2010
            
            
            —
            
            
            —
            
            
            —
            
            
            —Col.
                Bhuwan Pandey
            
            
            1,666
            
            
            —
            
            
            
            
            
            1.50
            
            
            10/18/2012
            
            
            —
            
            
            —
            
            
            —
            
            
            —333,333
            
            
            166,667
            
            
            
            
            
            .07
            
            
            3/18/2014
            
            
            —
            
            
            —
            
            
            —
            
            
            —15,000,000
            
            
            —
            
            
            
            
            
            .03
            
            
            5/04/2014
            
            
            —
            
            
            —
            
            
            —
            
            
            —20,000,000
            
            
            —
            
            
            
            
            
            .076
            
            
            4/16/2016
            
            
            —
            
            
            —
            
            
            —
            
            
            —Howard
                Becker(2)
            
            
            7,000,000
            
            
            3,000,000
            
            
            
            
            
            .026
            
            
            3/01/2016
            
            
            —
            
            
            —
            
            
            —
            
            
            —





(1) Dr.
        Pandey has negotiated with the Board, but not yet codified in 2006 an
        understanding that effective from the issuance of his first shares of Class
        C
        Series 6 Preferred Stock (October 1, 2001), in addition to the shares of
        Preferred Stock, he shall have an option to purchase up to twenty percent
        (20%)
        of the outstanding Common Stock of the Company from time to time after giving
        effect to the exercise of the option, for so long as he remains in the
        employment of the Company, for nominal consideration, or such greater purchase
        price as he shall designate at the time of execution of a definitive binding
        agreement. For the period of 2006, this would equate to 280,790,000 shares
        of
        Common Stock, and for the period from October 1, 2001 through December 31,
        2006,
        this would represent the right to purchase cumulatively 380,790,000 shares
        of
        Common Stock. In addition, he has been issued 28,079 shares of Class C Series
        6
        Preferred Stock in 2006 and cumulatively, an aggregate of 38,079 shares of
        Class
        C Series 6 Preferred Stock through December 31, 2006, which shares carry
        nominal
        economic value, but vote together with Common Stock based upon 10,000 votes
        per
        share of Class C Series 6 Preferred Stock.




(2)  Howard
      Becker was hired on March 1, 2006 and terminated his employment on November
      30,
      2006.




52




**2006
      OPTION EXERCISES AND STOCK VESTED**





**Option
                Awards**
            
            **Stock
                Awards****Name**
            
            **Number
                of Shares Acquired on Exercise (#)**
            
            **Value
                Realized on Exercise**
              **($)**
            
            **Number
                of Shares Acquired on Vesting (#)**
            
            **Value
                Realized on Vesting**
              **($)****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)**Dr.
                Ramesh C. Pandey(1)
            
            
            0
            
            
            0
            
            
            0
            
            
            0Col.
                Bhuwan Pandey
            
            
            0
            
            
            0
            
            
            20,000,000
            
            
            520,000Howard
                Becker
            
            
            0
            
            
            0
            
            
            7,000,000
            
            
            182,000








(1)  Dr.
      Pandey has negotiated with the Board, but not yet codified in 2006 an
      understanding that effective from the issuance of his first shares of Class
      C
      Series 6 Preferred Stock (October 1, 2001), in addition to the shares of
      Preferred Stock, he shall have an option to purchase up to twenty percent (20%)
      of the outstanding Common Stock of the Company from time to time after giving
      effect to the exercise of the option, for so long as he remains in the
      employment of the Company, for nominal consideration, or such greater purchase
      price as he shall designate at the time of execution of a definitive binding
      agreement. For the period of 2006, this would equate to 280,790,000 shares
      of
      Common Stock, and for the period from October 1, 2001 through December 31,
      2006,
      this would represent the right to purchase cumulatively 380,790,000 shares
      of
      Common Stock. In addition, he has been issued 28,079 shares of Class C Series
      6
      Preferred Stock in 2006 and cumulatively, an aggregate of 38,079 shares of
      Class
      C Series 6 Preferred Stock through December 31, 2006, which shares carry nominal
      economic value, but vote together with Common Stock based upon 10,000 votes
      per
      share of Class C Series 6 Preferred Stock.





**2006
      DIRECTOR COMPENSATION**





**Name**
            
            **Fees
                Earned or Paid in Cash**
              **($)**
            
            **Stock
                Awards**
              **($)**
            
            **Option
                Awards**
              **($)**
            
            **Non-Equity
                Incentive Plan Compensation**
              **($)**
            
            **Change
                in Pension Value and Nonqualified Deferred
                Compensation**
              **($)**
            
            **All
                Other Compensation**
              **($)**
            
            **Total**
              **($)**Stephen
                F. Burg
            
            
            1,500
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            13,600
            
            
            15,100Adesoji
                Adelaja
            
            
            1,500
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1,500





53




**2006
      POTENTIAL PAYMENTS UPON TERMINATION**


**OR
      CHANGE-IN-CONTROL**





**Name**
            
            **Executive
                Benefits and Payments upon Termination**
            
            **Death
                or Total Disability (1)**
            
            **For-Cause
                by Company or Voluntarily by Executive (2)**
            
            **Without
                Cause by Company (3)**
            
            **Change
                in Control (4)**
            
            **By
                Executive for Good Reason (other than Change in Control)
                (5)****Does
                Not Apply to 2006**


**2006
      GRANTS OF PLAN-BASED AWARDS**





**Estimated
                Future Payouts Under Non-Equity Incentive Plan
                Awards**
            
            **Estimated
                Future Payouts Under Equity Incentive Plan Awards****Name**
            
            **Grant
                Date**
            
            **Threshold**
              **($)**
            
            **Target**
              **($)**
            
            **Maximum**
              **($)**
            
            **Threshold**
              **(#)**
            
            **Target**
              **(#)**
            
            **Maximum**
              **(#)**
            
            **All
                other Stock Awards: Number of Shares of Stock**
              **(#)**
            
            **All
                Other Awards: Number of Securities Underlying
                Options**
              **(#)**
            
            **Exercise
                or Base Price of Option Awards**
              **($/Sh)****Does
                Not Apply to 2006**





**2006
      NONQUALIFIED DEFERRED COMPENSATION**





**Name**
            
            **Executive
                Contributions in 2006**
              **($)**
            
            **Company
                Contributions in 2006**
              **($)**
            
            **Aggregate
                Earnings in 2006**
              **($)**
            
            **Aggregate
                Withdrawals / Distirbitions**
              **($)**
            
            **Aggregate
                Balance on December 31, 2006****Does
                Not Apply to 2006**




54





**Long
      Term Incentive Plan**




Effective
      December 1993, our sole stockholder approved the Share Option Plan (the "Plan"),
      which we assumed, providing for the issuance to employees, consultants, and
      directors of options to purchase up to 12,600,000 (pre-split) shares of Common
      Stock. The Plan provides for the grant to employees of incentive stock options
      ("ISOs") and non-qualified stock options. On November 20,2002 the Board of
      Directors increased the number of options available to 300,000,000 (pre-split)
      shares.




The
      Plan
      is administered by a Stock Option Committee established in May 1995 comprised
      of
      three members of the board of directors which has the power to determine
      eligibility to receive options and the terms of any options granted, including
      the exercise or purchase price, the number of shares subject to the options,
      the
      vesting schedule, and the exercise period. The exercise price of all ISOs
      granted under the Plan must be at least equal to the fair market value of our
      shares of common stock on the date of grant. With respect to any participant
      who
      owns stock possessing more than 10% of the voting power of our outstanding
      capital stock, the exercise price of any ISO granted must equal at least 110%
      of
      the fair market value on the grant date and the maximum exercise period of
      the
      ISO must not exceed five years. The exercise period of any other options granted
      under the Plan may not exceed 11 years (10 years in the case of
      ISOs).




The
      Plan
      was terminated in December 2003, ten years after the date it was first approved,
      though awards made prior to termination may expire after that date, depending
      on
      when granted. As of December 31, 2003, we have granted options under the Plan
      to
      purchase 53,741 (post-split) shares of Common Stock, with 46,779 (post-split)
      shares still outstanding under the Plan as of December 31, 2005.




In
      October 2006 at the Annual Meeting, shareholders approved the 2006 Stock Award
      Plan (“2006 Plan”). The number of Shares with respect to which Options,
      Restricted Shares and other Stock-Based Awards may be granted under the Plan
      shall not exceed one hundred fifty million (150,000,000). The Plan shall
      terminate on the tenth anniversary of the Effective Date, unless previously
      terminated. All Awards granted prior to termination of the Plan shall continue
      in full force and effect following the termination of the Plan, subject to
      the
      terms and conditions upon which they were granted. In 2006 and cumulatively,
      30,000,000 and 64,500,000, respectively, options have been granted.




55





**Item
      11.****Security
      Ownership Of Certain Beneficial Owners And Management**




The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock and total voting stock (including the Class A
      and
      Class C Preferred Stock) as of April 1, 2007 by: (i) each stockholder known
      by
      us to beneficially own in excess of 5% of the outstanding shares of common
      stock
      or Class A Preferred stock; (ii) each director; and (iii) all directors and
      officers as a group. As of April 1, 2007, we had 1,552,467,965 shares of common
      stock issued and outstanding, 2,500 Class A Preferred shares issued and
      outstanding, 38,079 shares of the Class C Series 6 Voting Preferred stock issued
      and outstanding and 666 shares of Class C Series 7 Voting Preferred stock issued
      and outstanding. Dr. Pandey, our CEO, CFO and Chairman of the Board owns all
      of
      the Class C Series 6 Voting Preferred stock. Except as otherwise indicated
      in
      the notes, the persons named below hold sole voting and disposition power with
      respect to the shares.




Common
                Stock
            
            Class
                A Preferred Stock
            
            Class
                C, Series 6 VotingPreferred
                Stock
            
            All
                VotingStockName
                andAddress
            
            Number
                ofShares
            
            Percent
                ofClass
            
            Number
                ofShares
            
            Percent
                ofClass
            
            Number
                ofShares
            
            Percent
                ofClass
            
            Percent
                of VotingSharesRamesh
                C. Pandey, Ph.D (1)
            
            
            20,640
            (2)
            
            0
            %
            
            2,500
            (3)
            
            100
            %
            
            38,079
            (4)
            
            100
            %
            
            19.08
            %Stephen
                F. Burg (5)
            
            
            15,002,673
            (6)
            
            0.93
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            0.75
            %Adesoji
                Adelaja, Ph.D. (7)
            
            
            10,017,390
            (8)
            
            0.62
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            0.50
            %Col.
                Bhuwan Pandey (9)
            
            
            38,020,541
            (10)
            
            2.35
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1.90
            %All
                Directors and Executive Officers as a Group (4 Persons)
            
            
            63,061,244
            
            
            3.90
            %
            
            2,500
            
            
            100
            %
            
            38,079
            
            
            100
            %
            
            22.23
            %




(1)  Dr.
      Pandey’s business address is 100 Jersey Avenue, Building B, Suite 310, New
      Brunswick, New Jersey 08901.




(2)  Includes
      500 shares that are presently exercisable options, at $1.50 per
      share.




(3)  Each
      Class A Preferred Stock share is entitled to 0.3333 votes. Therefore, Dr.
      Pandey’s 2,500 shares of Class A Preferred Stock equal approximately 833 votes.
      Dr. Pandey owns all of the issued and outstanding shares of Class A Preferred
      Stock.




(4)  Each
      Class C, Series 6 Voting Preferred Stock share is entitled to 10,000 votes.
      Therefore, Dr. Pandey’s shares of Class C, Series 6 Voting Preferred Stock equal
      100,000,000 votes or a 20% voting interest in the Xechem. Dr. Pandey owns all
      of
      the issued shares of Class C, Series 6 Voting Preferred Stock. We are obligated
      to issue him additional shares of Class C, Series 6 Voting Preferred Stock
      in
      such amounts and at such times so that he may maintain his 20% voting
      interest.




(5)  Mr.
      Stephen Burg’s business address is 100 Jersey Avenue, Building B, Suite 310, New
      Brunswick, New Jersey 08901.




(6)  Includes
      options to purchase 5,000,000 and 10,000,000 shares of common stock granted
      to
      Mr. Burg, as a director, in 2004, which are exercisable at $0.0025 and $0.023
      per share, respectively. In 2007, Mr. Burg was granted 5,000,000 shares at
      $0.023 per share for past services.




(7)  Dr.
      Adelaja’s business address is 100 Jersey Avenue, Building B, Suite 310, New
      Brunswick, New Jersey 08901.




(8)  Includes
      options to purchase 5,000,000 and 10,000,000 shares of common stock granted
      to
      Dr. Adelaja, as a director, in 2004 and 2007, which are exercisable at $0.0025
      and $0.023 per share, respectively.




(9)  Col.
      Pandey’s business address is 100 Jersey Avenue, Building B, Suite 310, New
      Brunswick, New Jersey 08901.




(10)  Col.
      Pandey holds options to purchase 15,000,000, 500,000 and 20,000,000 shares
      of
      our common stock at $0.03, $0.07 and $0.026 per share, respectively. He also
      has
      warrants to purchase 5,000,000 shares at $0.15 per share.





56





**Item
      12.**  **Certain
      Relationships And Related Transactions**




We
      currently receive our supplies of plant extracts from India through informal
      collaborative relationships. Dr. Pandey and his brothers incorporated a
      corporation in India (Xechem India), which was established to formalize such
      relationships by obtaining contracts for dependable supplies of plants and
      other
      raw materials. Based on its discussions with Indian sources for such materials,
      we believed that an Indian corporation would obtain such contracts on
      significantly better terms than would a United States-based corporation. Xechem
      India may also conduct certain research, manufacturing, and marketing activities
      in India. In 1998, as a contribution to our capital, Dr. Pandey transferred
      his
      66-2/3% interest in Xechem India to us for no consideration other than
      reimbursement of amounts Dr. Pandey advanced for organizational expenses
      (approximately $5,000). Dr. Pandey's brothers own the remaining equity in Xechem
      India, some or all of which we anticipate will be made available to other,
      unrelated, persons in India.




Effective
      June 25, 1996, an entity wholly-owned by Dr. Pandey became a member of Vineyard
      Productions, L.L.C., which in June 1994 acquired the building in which we lease
      our offices. Prior to making the investment, Dr. Pandey informed the board
      of
      directors of the opportunity for such investment, and the board determined
      that
      it was not interested and approved Dr. Pandey making the
      investment.




We
      entered into a new five-year lease, which commenced on July 1, 2002. Rent
      expense amounted to approximately $185,000 and $177,000 for the years ended
      December 31, 2006 and 2005, respectively. At December 31, 2006, we owed rental
      payments to the lessor totaling approximately $198,000 and a security deposit
      of
      $26,000. As of December 31, 2006, $15,000 was still due to the landlord for
      failure to perform certain obligations under the agreement. As of December
      31,
      2006, $104,000 remains due and payable to landlord and is included in accounts
      payable.




We
      owe
      Dr. Pandey, Chairman of the Board, CEO and CFO $804,000 as of December 31,
      2006.
      Dr. Pandey loaned us $125,000 in the aggregate, which amounts were loaned at
      various times and in various amounts over the course of the last seven years.
      The Pandey loan bears interest at 8% per annum. The Pandey loan has accrued
      interest of $230,000 as of December 31, 2006. We also owe Dr. Pandey accrued
      salary of $450,000 as of December 31, 2006.




We
      owe
      three notes payable to Dr. Renuka Misra, director of our Natural Products
      division for $298,000, $150,000 and $150,000 dated August 23, 2005, May 1,
      2005
      and November 2, 2006, respectively. The notes bear interest at the rate of
      12% -
      15% and are six months to one year notes. New terms are being negotiated for
      past due notes.




We
      received a loan from Beverly Robbins, a sales and marketing representative
      totaling $190,000 and $200,000 dated April 1, 2005 and July 5, 2005,
      respectively. The notes bear interest at the rate of 10% and are one year notes.
      New terms are being negotiated for past due notes.




In
      2003,
      we received convertible notes in the amount of $48,000 from members of Dr.
      Pandey’s family. In 2005, three new notes in the amount of $85,000 were issued
      to the Pandey Family. In 2005, the notes were restructured to provide for
      10%-12% interest, and one year due dates. All noteholders were granted options,
      in the aggregate to purchase 6,760,000 shares of common stock at $0.01-$0.0135
      per share. In 2006, the company received an additional $167,000 from members
      of
      Dr. Pandey’s family. These notes bear interest rate of 8% - 12% and due dates
      are from six months to one year. These lenders were granted options in the
      aggregate to purchase 14,738,519 shares of common stock at $.0103 - $.021 per
      share. In addition, certain noteholders were issued 360,000 shares of our common
      stock. Noteholders may convert principal and accrued interest to shares of
      common stock at the option price. New terms are being negotiated for past due
      notes.




57




Interest
      expense for related parties totaled approximately $132,000 and $95,000 for
      the
      years ended December 31, 2006 and 2005, respectively.




On
      March
      1, 2006, the board of directors issued Howard Becker a ten year option to
      purchase 10,000,000 shares of our common stock at $0.026 per share.




On
      April
      16, 2006, the board of directors issued to Col. B. Pandey a ten year option
      to
      purchase 20,000,000 shares of common stock at $0.026 per share.




On
      December 2, 2003, the board of directors voted to make Mr. Pursley the president
      and chief operating officer of Xechem. The board further agreed to enter into
      a
      two year employment agreement with Mr. Pursley, effective December 1, 2003,
      whereby he would receive an annual base salary of $330,000 with a discretionary
      bonus in addition to an option package exercisable at $0.0025 per share to
      provide him with 20% fully diluted ownership of Xechem based upon current
      outstanding stock. On March 31, 2004, we entered into an agreement with CepTor
      Corporation and William Pursley, in which Mr. Pursley agreed to resign as the
      president and chief operating officer of Xechem and act as the chief executive
      officer of CepTor Corporation for a two year term, subject to automatic renewal.
      As part of his compensation package, the board of directors amended Mr.
      Pursley’s original option package to eliminate his 20% option and replace it
      with a five year option to purchase 43,000,000, shares of Xechem common stock
      exercisable at $0.0025 per share. In 2005, Mr. Pursley surrendered his
      option.




On
      February 18, 2004, the board of directors granted each of Leonard Mudry and
      Stephen Burg, directors of Xechem, ten year options to purchase 5,000,000 shares
      of our common stock at $0.01 per share. This exercise price was amended on
      August 27, 2004 to $0.0025 per share by the board of directors.




On
      March
      18, 2004, the board of directors issued Bhuwan Pandey a ten year option to
      purchase 500,000 shares of our common stock at $0.07 per share.




On
      March
      18, 2004, the board of directors issued Anil Bhansali a ten year option to
      purchase 500,000 shares of common stock at $0.07 per share.




On
      March
      18, 2004, the board of directors granted Adesoji Adelaja, a director of ours,
      a
      five year option to purchase 5,000,000 shares of common stock at $0.0025 per
      share.




On
      June
      2, 2004, the board of directors issued a five year warrant to Anil Bhansali,
      and
      his designees, to purchase up to 5,000,000 shares of our common stock at $0.15
      per share.




On
      June
      2, 2004, the board of directors issued Bhuwan Pandey a five year warrant to
      purchase up to 5,000,000 shares of our common stock at $0.15 per share, vesting
      2,500,000 shares on the launch of NICOSANTM in Nigeria and 2,500,000 shares on
      the first anniversary of the launch date, provided he is employed by us or
      has
      been discharged by us without cause.




We
      have
      agreed to provide to Dr. Pandey the amount of voting stock necessary for him
      to
      maintain 20% of the outstanding voting stock of our company. On December 31,
      2005, we issued Dr. Pandey 28,003 shares of Class C, Series 6 Voting Preferred
      Stock, so that he may maintain his 20% voting interest. The shares were issued
      to Dr. Pandey at par value. Each share of Class C, Series 6 Voting Preferred
      Stock is equivalent to 10,000 shares of voting stock, but has no economic rights
      other than to be redeemed at par or to participate pro rata with common stock.
      He now owns 38,079 shares of Class C, Series 6 Voting Preferred Stock. In April
      2005, Dr. Pandey transferred 100% of the ownership interest of Xechem Nigeria,
      which he held as nominee for the benefit of Xechem International, Inc. to Xechem
      International, Inc.




58




**Item
      13.****Exhibits**




EXHIBIT
      NO.




2.1
            Agreement
                and Plan of Merger by and among Xechem International, Inc., CepTor
                Acquisition, Inc. and CepTor Corporation, dated as of December 23,
                2003(1)




2.2
            Agreement
                of Merger and Plan or Reorganization, by and among Medallion Crest
                Management, Inc., a Florida corporation, CepTor Corporation and CepTor
                Acquisition Corp., dated December 8, 2004(2)




3(i).1
            Certificate
                of Incorporation, dated February 9, 1994; Certificate of Correction
                to Certificate of Incorporation, dated February 16, 1994; Certificate
                of
                Amendment to the Certificate of Incorporation, dated May 26, 1995;
                Certificate of Amendment to Certificate of Incorporation, dated January
                15, 1997; Certificate of Correction of Certificate of Amendment to
                Certificate of Incorporation, dated January 23, 1997; Certificate
                of
                Amendment to Certificate of Incorporation, dated July 17, 2000;
                Certificate of Amendment to Certificate of Incorporation, dated November
                7, 2001; Certificate of Amendment to Certificate of Incorporation,
                dated
                November 20, 2002; Certificate of Amendment to Certificate of
                Incorporation, dated April 18, 2003; Certificate of Amendment to
                Certificate of Incorporation, dated May 22, 2003; Corrected Certificate
                of
                Amendment of Certificate of Incorporation, dated May 22, 2003; and
                Corrected Certificate of Amendment of Certificate of Incorporation,
                dated
                June 10, 2004(3)Certificate
                of Amendment of Certificate of Incorporation, dated October 24,
                2006




3(ii)
            By-Laws(3)




4.1
            Certificate
                of Designations, Preferences and Rights of Class C Shares (Class
                C Series
                1 Preferred Stock), dated April 9, 1996(4)




4.2
            Certificate
                of Correction of Designations, Preferences and Rights of Class C
                Shares/Preferred Stock(3)




4.3
            Certificate
                of Designations, Preferences and Rights (Class C Series 2 and Series
                3
                Preferred Stock), dated October 25, 1996(4)




4.4
            Amended
                Certificate of Designations, Preferences, and Rights of Class C Series
                2
                Voting Convertible Preferred Stock(3)




4.5
            Certificate
                of Elimination to the Certificate of Incorporation (Class C Series
                1,
                Series 2 and Series 3 Preferred Stock), dated March 12, 1997(4)




4.6
            Certificate
                of Designations, Preferences and Rights of Class C Series 4 Voting
                Convertible Preferred Stock(3)




59




4.7
            Certificate
                of Designations, Preferences and Rights of Class C, Series 6 Voting
                Preferred Stock, dated October 3, 2001; Certificate of Correction,
                dated
                October 15, 2001; and Certificate of Amendment dated March 31,
                2003(3)




4.8
            Certificate
                of Designations, Preferences, and Rights of Class C, Series 5 Voting
                Convertible Preferred Stock(3)




4.9
            Certificate
                of Designations, Preferences and Rights of Class C, Series 7 Preferred
                Stock, dated January 19, 2004(1)




4.10
            Certificate
                of Designations, Preferences and Rights of Class C Series 8 Voting
                Convertible Preferred Stock, as corrected, filed October 11,
                2005.




4.11
            Form
                of 2001 Unsecured Subordinated Convertible Debenture(5)




4.12
            Form
                of Unsecured Convertible Note(5)




4.13
            Form
                of 2002 Subscription Agreement for Purchase of Unsecured Subordinated
                Convertible Notes(5)




4.14
            Form
                of 2001 Subscription Agreement for Purchase of $1,000,000 Unsecured
                Convertible Subordinated Debentures(5)




4.15
            Form
                of 2002 Warrant to Purchase Shares of Common Stock(5)




4.16
            Pursley
                Option Agreement(3)[Terminated]




4.17
            Form
                of Registration Rights Agreement, dated January 2004(1)




4.18
            Form
                of Pandey Option(3)




4.19
            Form
                of Secured Convertible Promissory Note, dated February 2005(6)[Terminated]




4.20
            Form
                of Stock Pledge and Escrow Agreement, dated February 2005(6)[Terminated]




4.21
            Form
                of Common Stock Purchase Warrant, dated February 2005(6)




4.22
            Form
                of Registration Rights Agreement, dated February 2005(6)




4.23
            Amended
                and Restated Stock Option Plan(3)




4.24
            2004
                Long Term Incentive Plan(7)




10.1
            Form
                of Employment Agreement between Xechem and Dr. Pandey(3)[Expired]




10.2
            Royalty,
                Distribution Rights and Joint Cooperation Agreement Among Xechem
                International, Inc., Xechem Pharmaceuticals Nigeria, Limited and
                Alembic,
                Limited, dated April 7, 2004(7)[Terminated]




10.3
            Form
                of $3,000,000 Promissory Note to Alembic, Limited(7)[Terminated]




60




10.4
            CepTor
                Agreement among CepTor Corporation, Xechem International, Inc. and
                William
                Pursley, dated March 31, 2004(7)[Terminated]




10.5
            Employment
                Agreement between CepTor Corporation and William Pursley, dated March
                31,
                2004(7)[Terminated]




10.6
            Amended
                and Restated Stock Option Agreement between Xechem International,
                Inc. and
                William Pursley, dated Mach 31, 2004(7)[Terminated]




10.7
            Second
                Amendment to the CepTor Agreement by and among Xechem International,
                Inc.,
                William Pursley and CepTor Corporation, dated December 9, 2004(8)




10.8
            Note
                Purchase Agreement by and among Xechem International, Inc., CepTor
                Corporation and various holders, dated April 23, 2004(9)




10.9
            Form
                of CepTor Promissory Note, dated April 23, 2004(9)




10.10
            Form
                of CepTor Waiver of Rights under Note, dated April 23, 2004(9)




10.11
            CepTor
                Waiver of Contingent Consideration, dated April 23, 2004(9)




10.12
            Form
                of Securities Purchase Agreement, by and between Xechem International,
                Inc. and CepTor Corporation, dated June 17, 2005(10)




10.13
            Term
                Sheet for Debt Restructuring, by and between Marjorie Chassman and
                Xechem
                International, Inc., dated June 17, 2005(10)




10.14
            Chassman
                Letter Agreement, dated January 11, 2005, by and between Marjorie
                Chassman
                and Xechem International, Inc.




10.15
            Term
                Sheet for $1,000,000 Bridge Loan and Debt Restructuring Agreement,
                dated
                August 25, 2006(11)




10.16
            Amended
                Term Sheet for $1,000,000 Bridge Loan and Debt Restructuring Agreement,
                dated September 30, 2005(12)




10.17
            Agreement
                in Principle Concerning the Settlement of the*Xechem,
                Inc., and Xechem International, Inc. vs. Bristol-Myers Squibb
                Company,*03
                C 1920 lawsuit




10.18
            Form
                of Agreement by and between Xechem International, Inc. and Alembic
                Regarding Termination of Agreements and Repayment of Loan, dated
                December
                22, 2005




10.19
            Form
                of Security Agreement by and between Alembic Limited, an Indian
                corporation and Xechem International, Inc., a Delaware corporation,
                dated
                December 22, 2005




10.20
            Form
                of $3,000,000 Promissory Note to Alembic Limited, dated December
                22,
                2005




10.21
            New
                Brunswick, New Jersey Lease
                Agreement




10.22
            Direct
                Lending Facility Agreement, between Xechem Pharmaceutical Nigeria
                Limited
                and
                Nigerian Export-Import Bank, dated May 22, 2006(15).




61




10.23
            Letters
                of offer from Nigerian export-Import Bank to Xechem Pharmaceuticals
                NigeriaLtd.,
                dated May 15, 2 006(15).  10.24
            Xechem
              2006 Stock Award Plan (16)





14
            Code
                of Ethics(3)




16.1
            Letter
                from WithumSmith+Brown P.C., dated September 16, 2004(13)




16.2
            Letter
                from WithumSmith+Brown P.C., dated September 23, 2004(14)




21
            Subsidiaries
                of the small business issuer




31
            Certification
                of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002




32
            Certification
                Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002







(1) Incorporated by reference from our Current Report on Form 8-K filed on February
      3, 2004 (SEC File No. 000-23788).




(2) Incorporated by reference from CepTor Corporation (formerly Medallion Crest
      Management, Inc.) Current Report on Form 8-K filed with the SEC on December
      14,
      2004 (File No. 000-50502).




(3) Incorporated by reference from our Annual Report on Form 10-KSB for the year
      ended December 31, 2004, filed with the SEC on April 15, 2005 (SEC File No.
      000-23788).




(4) Incorporated by reference from our Annual Report on Form 10-KSB for the year
      ended December 31, 1996, filed with the SEC on April 14, 1997 (SEC File No.
      000-23788).




(5) Incorporated by reference from our Registration Statement on Form S-3, filed
      with the SEC on July 30, 2002.




(6) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on March 4, 2005 (File No. 000-23788).




(7) Incorporated by reference from our Form 10-KSB/A for the fiscal year ended
      December 31, 2003, filed with the SEC on March 9, 2005 (File No.
      000-23788).




(8) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on December 14, 2004 (File No. 000-23788).




(9) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on May 28, 2004 (File No. 000-23788).




(10) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on June 23, 2005 (SEC File No. 000-23788).




(11) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on August 31, 2005 (SEC File No. 000-23788).




62




(12) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on October 6, 2005 (SEC File No. 000-23788).




(13) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on September 17, 2004 (File No. 000-23788).




(14) Incorporated by reference from our Current Report on Form 8-K/A filed with
      the
      SEC on September 27, 2004 (File No. 000-23788).




(15) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on June 1, 2006. (File
      No.
      000-23788).




(16)Incorporated by reference from our Definitive Proxy Statement filed with the
      SEC
      on September 22, 2006.(File
      No.
      000-23788).   **Principal
      Accounting Fees And Services**




AUDIT
      FEES: The audit fees for 2006 from Bernstein & Pinchuk are $55,000 for the
      annual audit and review of Form 10-KSB and an estimated $10,000 for each
      quarterly review in 2007 as compared to $62,000 for the 2005 annual audit and
      review of Form 10-KSB and $10,000 for each quarterly review in 2006 from Moore
      Stephens.




TAX
      FEES:
      The fees for our corporate tax return for 2006 will be $11,000 as compared
      to
      $11,500 for 2005 returns.




ALL
      OTHER
      FEES: There have been fees of $6,333 from Moore Stephens for miscellaneous
      services in 2006.




All
      fees
      and the retaining of auditors is done by our audit committee with the approval
      of our board of directors.




63




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      as
      amended, the registrant caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.


XECHEM
                INTERNATIONAL, INC.Date:
                April 13, 2007
            
            /s/
                Ramesh C. PandeyRamesh
                C. Pandey, Ph.D.
              Chief
                Executive Officer, President and
              Chairman
                of the Board of Directors




In
      accordance with the Securities Exchange Act of 1934, as amended, this report
      has
      been signed below by the following persons on behalf of the registrant and
      in
      the capacities and on the dates indicated.






By:
            /s/
                Ramesh C. Pandey
            
            Date:
                April 13, 2007Ramesh
                C. Pandey
              Chief
                Executive Officer, President and
              Chairman
                of the Board of Directors




By:
            /s/
                Stephen F. Burg
            
            Date:
                April 13, 2007Stephen
                F. Burg
              DirectorBy:
            /s/
                Adesoji Adelaja, Ph.D.
            
            Date:
                April 13, 2007Adesoji
                Adelaja, Ph.D.
              Director





64




EXHIBIT
      INDEX




Number
            Exhibit  2.1
            Agreement
                and Plan of Merger by and among Xechem International, Inc., CepTor
                Acquisition, Inc. and CepTor Corporation, dated as of December 23,
                2003(1)




2.2
            Agreement
                of Merger and Plan or Reorganization, by and among Medallion Crest
                Management, Inc., a Florida corporation, CepTor Corporation and CepTor
                Acquisition Corp., dated December 8, 2004(2)




3(i).1
            Certificate
                of Incorporation, dated February 9, 1994; Certificate of Correction
                to Certificate of Incorporation, dated February 16, 1994; Certificate
                of
                Amendment to the Certificate of Incorporation, dated May 26, 1995;
                Certificate of Amendment to Certificate of Incorporation, dated January
                15, 1997; Certificate of Correction of Certificate of Amendment to
                Certificate of Incorporation, dated January 23, 1997; Certificate
                of
                Amendment to Certificate of Incorporation, dated July 17, 2000;
                Certificate of Amendment to Certificate of Incorporation, dated November
                7, 2001; Certificate of Amendment to Certificate of Incorporation,
                dated
                November 20, 2002; Certificate of Amendment to Certificate of
                Incorporation, dated April 18, 2003; Certificate of Amendment to
                Certificate of Incorporation, dated May 22, 2003; Corrected Certificate
                of
                Amendment of Certificate of Incorporation, dated May 22, 2003; and
                Corrected Certificate of Amendment of Certificate of Incorporation,
                dated
                June 10, 2004(3)Certificate
                of Amendment of Certificate of Incorporation, dated October 24,
                2006




3(ii)
            By-Laws(3)




4.1
            Certificate
                of Designations, Preferences and Rights of Class C Shares (Class
                C Series
                1 Preferred Stock), dated April 9, 1996(4)




4.2
            Certificate
                of Correction of Designations, Preferences and Rights of Class C
                Shares/Preferred Stock(3)




4.3
            Certificate
                of Designations, Preferences and Rights (Class C Series 2 and Series
                3
                Preferred Stock), dated October 25, 1996(4)




4.4
            Amended
                Certificate of Designations, Preferences, and Rights of Class C Series
                2
                Voting Convertible Preferred Stock(3)




4.5
            Certificate
                of Elimination to the Certificate of Incorporation (Class C Series
                1,
                Series 2 and Series 3 Preferred Stock), dated March 12, 1997(4)




4.6
            Certificate
                of Designations, Preferences and Rights of Class C Series 4 Voting
                Convertible Preferred Stock(3)




4.7
            Certificate
                of Designations, Preferences and Rights of Class C, Series 6 Voting
                Preferred Stock, dated October 3, 2001; Certificate of Correction,
                dated
                October 15, 2001; and Certificate of Amendment dated March 31,
                2003(3)




4.8
            Certificate
                of Designations, Preferences, and Rights of Class C, Series 5 Voting
                Convertible Preferred Stock(3)




65




4.9
            Certificate
                of Designations, Preferences and Rights of Class C, Series 7 Preferred
                Stock, dated January 19, 2004(1)




4.10
            Certificate
                of Designations, Preferences and Rights of Class C Series 8 Voting
                Convertible Preferred Stock, as corrected, filed October 11,
                2005




4.11
            Form
                of 2001 Unsecured Subordinated Convertible Debenture(5)




4.12
            Form
                of Unsecured Convertible Note(5)




4.13
            Form
                of 2002 Subscription Agreement for Purchase of Unsecured Subordinated
                Convertible Notes(5)




4.14
            Form
                of 2001 Subscription Agreement for Purchase of $1,000,000 Unsecured
                Convertible Subordinated Debentures(5)




4.15
            Form
                of 2002 Warrant to Purchase Shares of Common Stock(5)




4.16
            Pursley
                Option Agreement(3)[Terminated]




4.17
            Form
                of Registration Rights Agreement, dated January 2004(1)




4.18
            Form
                of Pandey Option(3)




4.19
            Form
                of Secured Convertible Promissory Note, dated February 2005(6)[Terminated]




4.20
            Form
                of Stock Pledge and Escrow Agreement, dated February 2005(6)[Terminated]




4.21
            Form
                of Common Stock Purchase Warrant, dated February 2005(6)




4.22
            Form
                of Registration Rights Agreement, dated February 2005(6)




4.23
            Amended
                and Restated Stock Option Plan(3)




4.24
            2004
                Long Term Incentive Plan(7)




10.1
            Form
                of Employment Agreement between Xechem and Dr. Pandey(3)[Expired]




10.2
            Royalty,
                Distribution Rights and Joint Cooperation Agreement Among Xechem
                International, Inc., Xechem Pharmaceuticals Nigeria, Limited and
                Alembic,
                Limited, dated April 7, 2004(7)[Terminated]




10.3
            Form
                of $3,000,000 Promissory Note to Alembic, Limited(7)[Terminated]




10.4
            CepTor
                Agreement among CepTor Corporation, Xechem International, Inc. and
                William
                Pursley, dated March 31, 2004(7)[Terminated]




10.5
            Employment
                Agreement between CepTor Corporation and William Pursley, dated March
                31,
                2004(7)[Terminated]




10.6
            Amended
                and Restated Stock Option Agreement between Xechem International,
                Inc. and
                William Pursley, dated Mach 31, 2004(7)[Terminated]




66




10.7
            Second
                Amendment to the CepTor Agreement by and among Xechem International,
                Inc.,
                William Pursley and CepTor Corporation, dated December 9, 2004(8)




10.8
            Note
                Purchase Agreement by and among Xechem International, Inc., CepTor
                Corporation and various holders, dated April 23, 2004(9)




10.9
            Form
                of CepTor Promissory Note, dated April 23, 2004(9)




10.10
            Form
                of CepTor Waiver of Rights under Note, dated April 23, 2004(9)




10.11
            CepTor
                Waiver of Contingent Consideration, dated April 23, 2004(9)




10.12
            Form
                of Securities Purchase Agreement, by and between Xechem International,
                Inc. and CepTor Corporation, dated June 17, 2005(10)




10.13
            Term
                Sheet for Debt Restructuring, by and between Marjorie Chassman and
                Xechem
                International, Inc., dated June 17, 2005(10)




10.14
            Chassman
                Letter Agreement, dated January 11, 2005, by and between Marjorie
                Chassman
                and Xechem International, Inc.




10.15
            Term
                Sheet for $1,000,000 Bridge Loan and Debt Restructuring Agreement,
                dated
                August 25, 2006(11)




10.16
            Amended
                Term Sheet for $1,000,000 Bridge Loan and Debt Restructuring Agreement,
                dated September 30, 2005(12)




10.17
            Agreement
                in Principle Concerning the Settlement of the*Xechem,
                Inc., and Xechem International, Inc. vs. Bristol-Myers Squibb
                Company,*03
                C 1920 lawsuit




10.18
            Form
                of Agreement by and between Xechem International, Inc. and Alembic
                Regarding Termination of Agreements and Repayment of Loan, dated
                December
                22, 2005




10.19
            Form
                of Security Agreement by and between Alembic Limited, an Indian
                corporation and Xechem International, Inc., a Delaware corporation,
                dated
                December 22, 2005




10.20
            Form
                of $3,000,000 Promissory Note to Alembic Limited, dated December
                22,
                2005




10.21
            New
                Brunswick, New Jersey Lease
                Agreement




14
            Code
                of Ethics(3)




16.1
            Letter
                from WithumSmith+Brown P.C., dated September 16, 2004(13)




16.2
            Letter
                from WithumSmith+Brown P.C., dated September 23, 2004(14)




16.3
            Letter
                from Moore Stephens P.C., dated March 27, 2007(15)




21
            Subsidiaries
                of the small business issuer




31
            Certification
                of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act
                of
                2002




67




32
            Certification
                Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002







(1) Incorporated by reference from our Current Report on Form 8-K filed on February
      3, 2004 (SEC File No. 000-23788).




(2) Incorporated by reference from CepTor Corporation (formerly Medallion Crest
      Management, Inc.) Current Report on Form 8-K filed with the SEC on December
      14,
      2004 (File No. 000-50502).




(3) Incorporated by reference from our Annual Report on Form 10-KSB for the year
      ended December 31, 2004, filed with the SEC on April 15, 2005 (SEC File No.
      000-23788).




(4) Incorporated by reference from our Annual Report on Form 10-KSB for the year
      ended December 31, 1996, filed with the SEC on April 14, 1997 (SEC File No.
      000-23788).




(5) Incorporated by reference from our Registration Statement on Form S-3, filed
      with the SEC on July 30, 2002.




(6) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on March 4, 2005 (File No. 000-23788).




(7) Incorporated by reference from our Form 10-KSB/A for the fiscal year ended
      December 31, 2003, filed with the SEC on March 9, 2005 (File No.
      000-23788).




(8) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on December 14, 2004 (File No. 000-23788).




(9) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on May 28, 2004 (File No. 000-23788).




(10) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on June 23, 2005 (SEC File No. 000-23788).




(11) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on August 31, 2005 (SEC File No. 000-23788).




(12) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on October 6, 2005 (SEC File No. 000-23788).




(13) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on September 17, 2004 (File No. 000-23788).




(14) Incorporated by reference from our Current Report on Form 8-K/A filed with
      the
      SEC on September 27, 2004 (File No. 000-23788).




(15) Incorporated by reference from our Current Report on Form 8-K filed with the
      SEC
      on March 15, 2007 (File No. 000-23788)




68