U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  FORM 10-KSB/A


[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 2003

[ ]     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 or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

New Brunswick Technology Center
100 Jersey Avenue, Building B, Suite 310, New Brunswick, New Jersey      08901
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)


Issuer's telephone number:                                       (732) 247-3300
--------------------------                                       --------------

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)


-------------------------------------------------------------------------------
                                (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 [X] NO [ ]

      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 [ ] NO [X]

      State issuer's revenues for its most recent fiscal year. $ 318,000
      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. $ 9,943,000 as of April 1, 2003.
      The number of shares outstanding of our Common Stock was 165,750,348 as of
      April 2, 2004.

<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE

Part I........................................................................1

   Item 1.  Description of Business...........................................1
   Item 2.  Description of Property..........................................29
   Item 3.  Legal Proceedings................................................29
   Item 4.  Submission of Matters to a Vote of Stockholders..................30

Part II......................................................................31

   Item 5.  Market for Common Equity and Related Stockholder Matters.........33
   Item 6.  Management's Discussion and Analysis.............................35
   Item 7.  Financial Statements.............................................41
   Item 8.  Changes In and Disagreements With Accountants
            on Accounting and Financial Disclosure...........................42
   Item 8.A.Controls and Procedures..........................................43

Part III.....................................................................44

   Item 9.  Directors, Executive Officers, Promoters and Control Persons;
            Compliance with Section 16(a) of the Exchange Act................44
   Item 10. Executive Compensation...........................................45
   Item 11. Security Ownership Of Certain Beneficial Owners And Management...48
   Item 12. Certain Relationships and Related Transactions...................50
   Item 13. Exhibits and Reports on Form 8-K.................................52
            Principal Accountant Fees and Services...........................54

<PAGE>


                                     PART I
ITEM 1.   DESCRIPTION OF BUSINESS(1)



GENERAL

Xechem International, Inc. ("Xechem", "we", "us" or "our") is a holding company
(www.xechem.com), which owns all of the capital stock of Xechem, Inc, a
development stage biopharmaceutical company currently engaged in the research,
development and limited production of niche generic and proprietary drugs from
natural sources.

XECHEM'S APPROACH FOR DRUG DISCOVERY AND DEVELOPMENT

      Our drug discovery and development  process  involves a  multidisciplinary
exchange among folklore  healers,  ethnobotanists,  natural product  scientists,
pharmacologists,  physicians and research pharmacists.  Since our targeted plant
material has, in certain instances,  already been used for many years in humans,
we believe that there is greater  likelihood that a compound  isolated from such
material  will work on humans  and,  correspondingly,  that there is a decreased
likelihood of toxicity. In addition,  because traditional medicinal preparations
are typically  administered either orally or topically,  they are more likely to
yield pharmaceuticals that are also active orally or topically. These methods of
administering a drug are product  attributes  viewed by the medical community as
convenient and desirable.

      Our product discovery and development process involves seven major phases:
(i)  folklore  healers  collaboration;   (ii)  ethnobotanical   research;  (iii)
biological  screening;  (iv) fingerprinting and standardization of the extracts;
(v) isolation of active compounds through bio-assay guided fractionations,  (vi)
product development, and (vii) sales and marketing.

      Folklore Healers  Collaborations.  Our drug discovery  process begins with
fieldwork in  collaboration  with folklore healers who have been utilizing plant
remedies used for generations by native people. Our scientists, as well as other
scientists and  non-scientists  working with us, have  participated  directly in
such fieldwork in India,  Nigeria and People's  Republic of China,  working with
local  folklore  healers to identify  and obtain  samples of plants used by such
healers,  and to understand  the folklore  applications  and means of using such
plants.  The Company has established  relationships  with the National Institute
for Pharmaceutical Research and Development (NIPRD),

------------------------------

      (1) Some of the  statements  included in Item 1,  Description of Business,
may be  considered  to be "forward  looking  statements"  since such  statements
relate to matters  which have not yet  occurred.  For  example,  phrases such as
"anticipate,  "believe" or "expect," indicate that it is possible that the event
anticipated,  believed or expected  may not occur.  Should such event not occur,
then the result  which we  expected  also may not occur or occur in a  different
manner,  which  may be more or less  favorable  to us. We do not  undertake  any
obligations  to publicly  release the result of any  revisions to these  forward
looking   statements   that  may  be  made  to  reflect  any  future  events  or
circumstances.

Readers should  carefully  review the items included under the subsection  Risks
Affecting Forward Looking  Statements and Stock Prices as they relate to forward
looking  statements  as  actual  results  could  differ  materially  from  those
projected in the forward looking statement.


                                       1
<PAGE>

Abuja,  Nigeria and Voluntary  Health  Education and Rural  Development  Society
(VHERDS),  Chennai, India and various  Non-Governmental  Organizations (NGOs) to
locate these products in the respective  countries.  In the People's Republic of
China,  this early  fieldwork has mainly been  performed by  researchers  at the
institutions  with which we  collaborate,  and which have made their  results of
this fieldwork available to us. See "Raw Material Supply" below.

      Ethnobotanical Research. We investigate candidate plant materials with the
ethnobotanists  and physicians who have conducted field  expeditions in Nigeria,
India and the People's Republic of China. The ethnobotanist records the specific
plants and plant parts used medicinally, the form of use (dried, brewed, fresh),
duration  and method of  treatment,  location  and  abundance  of the plant.  We
prioritize   the   plants   by   determining   their   anticancer,    antiviral,
anti-inflammatory,  anti-infective,  antiaging,  antidiabetic,  memory enhancing
areas and for the treatment of sickle-cell anemia. The field-derived information
is also crosschecked  through literature  searches as to chemical  constituents,
previously  discovered biological activity and other reported medicinal uses. In
our  multidisciplinary  environment,  the  ethnobotanists  continue to work with
other  scientists  after  the  expedition  phase  in the  later  stages  of drug
discovery to assist in directing activity screens.

      Biological  Screening.  The plants  selected  from the  folklore  healer's
collaboration  and  ethnobotanical  research are then  extracted  with  suitable
solvents,  as per their  folklore  use.  The  extracts are screened for specific
activities  in- vitro and  in-vivo.  The  positive  extracts are tested again to
confirm the activities.

      Fingerprinting and Standardization of the extracts.  Those extracts, which
show confirmed in-vitro and in-vivo activities,  are subjected to fingerprinting
and standardization by High Performance Liquid Chromatography (HPLC), Thin Layer
Chromatography (TLC) and biological assays for use as "phytopharmaceuticals".

      Isolation of Active Compounds through bio-assay guided  factionation.  The
active extracts are also subjected to  bioassay-guided  fractionation to isolate
pure  biologically  activities  to  develop  as  pharmaceuticalsas  per  western
standards.  We are currently  screening extracts and pure compounds for activity
against Sickle Cell Disease (SCD),  Helicobacter pylori (H. pylori),  Vancomycin
resistant  Enterococcus faecalis (VREF) and Methicillin resistant  Staphylococus
aureus   (MRSA),   antifungal,    anticancer,   antiviral,    anti-inflammatory,
anti-infectives  and memory enhancing areas. We conduct certain of its screening
in collaboration with the NIH and other industrial laboratories.

      Product  Development.  Once an extract or a pure compound has demonstrated
promising activity, it is subjected to the same product regulatory  requirements
as potential drugs from other sources.  These requirements  include current Good
Laboratory  Practices ("cGLP"),  Preclinical,  Investigational New Drug ("IND"),
Phase  I,  Phase  II  clinical  trials  (i.e.  trials  on  patients),  New  Drug
Application  ("NDA") and Abbreviated New Drug Application  ("ANDA") filings with
FDA. Our product  development team in consultation  with regulatory,  toxicology
and other experts,  as necessary,  designs  appropriate  clinical  studies.  See
"Government Regulation" below.

XECHEM NIGERIA

      In July 2002 we formed Xechem  Pharmaceuticals  Nigeria  Limited  ("Xechem
Nigeria"),  under the  Companies and Allied  Matters Act (1992),  of the Federal


                                       2
<PAGE>

Republic of Nigeria. Through Xechem Nigeria, we plan to manufacture,  market and
distribute  a number of  pharmaceuticals  and  prescription  phytopharmaceutical
originating from the African Continent.  This will place us in a unique position
to take full advantage of Nigeria's well-known  biodiversity,  which is expected
to yield new important drugs and other  phytopharmaceuticals in the near future.
Xechem Nigeria is majority owned by us.

      On July 18,  2002,  we  signed  an  exclusive  worldwide  license  for the
manufacturing,  marketing,  distribution and sales of NIPRISAN from the National
Institute  for  Pharmaceutical   Research  and  Development  ("NIPRD"),   Abuja,
government of Nigeria, for the treatment of Sickle Cell

Disease  ("SCD").   NICOSAN(TM)/HEMOXIN(TM)   is  our  name  for  the  non-toxic
phyto-pharmaceutical  product  formerly named  NIPRISAN,  a  nutraceutical.  The
Company has received the Orphan Drug  designation  for this  phytopharmaceutical
from the US-FDA for the  treatment  of Sickle  Cell  Disease  sufferers.  We are
currently in the process of completing the necessary papers 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 anticipate  the initial sales of  NICOSAN(TM)  in Nigeria by 2005.  All
manufacturing, marketing, distribution and sales of the product NICOSAN(TM) will
take place through Xechem Nigeria at this time.

      In 1972,  the 92nd US  Congress  passed the  National  Sickle  Cell Anemia
Control Act, which called for grant support for screening programs. In 1975, the
first US State began a newborn  screening  program for SCD.  However,  there has
been only one drug,  Hydroxyurea  (HU), which has come to the marketplace  since
that time, out of approximately  2,000 screened  candidates with over $1 billion
in research funding.

      According to a study  published by Allison  Ashley-Koch,  Quanhe Yang, and
Richard S. Olney of the Centers for Disease Control and Prevention ("CDC"),  SCD
is a major public health concern  (Ashley-Koch,  A. et al, Am. J. Epidemiol 151,
839, 2000). Each year in the US, an average of 75,000  hospitalizations  are due
to SCD, costing  approximately $475 million.  The average length of per hospital
visit was 6.1 days and adults  tended to have  longer  stays than  children  and
adolescents.  SCD is also associated with significant mortality. Among children,
the primary  causes of  mortality  are  bacterial  infections  and stroke.  This
genetic disorder has great impact on both the individual and society.

CEPTOR

      In January,  2004, we acquired  100%  ownership of Ceptor  Corporation,  a
research  drug  company  focusing  on   neuromuscular   diseases  which  include
therapeutics for muscular dystrophy,  multiple scleroses,  ALS and epilepsy.  We
have  established a program to separately  finance Ceptor which  contemplates us
substantially reducing our stake in Ceptor. See "Recent Developments" below.


                                       3
<PAGE>

OTHER ENDEAVORS

      We have a majority owned  subsidiary,  Xechem  (India) Pvt.,  Ltd., in New
Delhi,  India which seeks to obtain contracts for dependable  supplies of plants
and other raw materials from India.

      We have a subsidiary, XetaPharm, Inc. ("XetaPharm"), to develop and market
over-the-counter  natural  product  health  supplements  such as  GinkgoOnce(R),
GarlicOnce(R),  GinsengOnce(R),  Gugulon(TM), VIDAPRAS(TM) and CoEnzyme Q-10. To
date,  XetaPharm has had only limited  operations  and sales.  See  "XetaPharm,"
below.

PACLITAXEL

      We are also engaged in applying our proprietary extraction,  isolation and
purification   technology  to  the  production  and  manufacture  of  paclitaxel
(commonly  referred to in the scientific  literature as "TAXOL(R)," a registered
trademark of Bristol-Myers Squibb Company ("Bristol-Myers")).  Paclitaxel is an
anticancer compound used for the treatment of ovarian,  breast,  small cell lung
cancers and AIDS related Kaposi sarcomas.  We have successfully isolated greater
than 97% pure  paclitaxel  and have  received  seven  (7)  U.S.  and  seven  (7)
international  patents on this technology and its second generation analogs from
the U.S. Patent and Trademark Office and thirty-four  international  patents are
pending. We have also prepared, through contract, dosage forms of paclitaxel and
have performed  limited  stability  testing for submission of an Abbreviated New
Drug Application  ("ANDA") to the Food and Drug Administration  ("FDA"). We have
submitted  to the FDA a Drug Master File  ("DMF") for the  facility and the bulk
paclitaxel product, the Active Pharmaceutical Ingredient (API).

      We have continued and will continue to apply our expertise to research and
develop  other niche  compounds.  We have  focused  certain of our  research and
development  efforts on the  development  of drugs  from  sources  derived  from
Chinese,  Indian  and other  traditional  medicinal  plants  in the  anticancer,
antifungal,  antiviral  (including  anti-AIDS),  anti-inflammatory,   antiaging,
antidiabetic,  memory  enhancing  areas  and  compounds  for  the  treatment  of
sickle-cell  anemia.  Some of these efforts are performed in collaboration  with
the National  Cancer  Institute  ("NCI") and the National  Institutes  of Mental
Health ("NIMH"). We have identified a number of plant extracts showing excellent
in vitro biological activity against Helicobacter pylori (H. pylori), Vancomycin
resistant  Enterococcus  faecalis(VREF) and Methicillin resistant  Staphylococus
aureus(MRSA).

RECENT DEVELOPMENTS

Sale of Net Operating Loses (NOLs)

      During December of 2003 we received  approval from the New Jersey Economic
Development  Authority ("NJEDA") to sell approximately  $109,000 of tax benefits
generated from NOL's. Under the terms of this NJEDA program, the proceeds of the


                                       4
<PAGE>

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 2003 and
2002,  Xechem and its subsidiaries  transferred the tax benefits of $109,000 and
$303,000 in exchange for $100,000 and $243,00 respectively,  pursuant to the New
Jersey State Tax Credit Transfer  program.  We received $100,309 net pursuant to
this program in December 2003.

Alembic Transactions

      On April 7, 2004, we executed definitive  documents with Alembic Limited a
pharmaceutical company based in India. The documents relate to: (i) a commitment
to loan  $3,000,000  to us;  (ii) a license,  royalty  and  distribution  rights
agreement  ("Xechem  Nigeria  Agreement")  related to the  production,  sale and
licensing of  NICOSAN(TM)/HEMOXIN(TM)  through Xechem Nigeria,  a majority-owned
subsidiary of ours; and (iii) a five-year warrant to purchase  10,000,000 shares
of Xechem common stock at $0.20 per share.  The loan is in  connection  with our
planned  approval  for sale and  development  of a  manufacturing  facility,  in
Nigeria, for the production of NICOSAN(TM)/HEMOXIN(TM).

      The  $3,000,000  loan is to be funded with six payments of $500,000  each,
with the first made on the date of the closing of the transaction and subsequent
payments  to be made  each  thirty  days  thereafter.  Upon the  signing  of the
Memorandum of  Understanding  ("MOU") which  predated the loan,  Alembic  funded
$200,000 in escrow, which is to be applied toward the $3,000,000 loan amount.

      In the Xechem  Nigeria  Agreement,  we granted to Alembic a 15%  ownership
interest in Xechem  Nigeria  (with  antidilution  rights  regarding its next two
rounds of  financing),  and to  distribute  the  product in  Nigeria  and nearby
countries.  This royalty is in addition to the royalty payable by us to NIPRD of
7.5% of gross revenues on NICOSAN(TM)/HEMOXIN(TM).  We also agreed in the MOU to
use our best efforts to cause a designee of Alembic's to be elected to our board
of directors.  The Xechem Nigeria Agreement grants to Alembic the right of first
offer to act as Xechem Nigeria's distributor of the product in Africa and India.
Alembic's  right with regard to  distribution  in Africa and India will lapse if
Alembic fails to fund the loan on any of the designated  dates or within 30 days
after our delivery of notice to defendant.

      The loan will be convertible,  at Alembic's option, at a 30%, 40%, 50% and
60%  discount to the  average  closing  price of our common  stock on the first,
second,  third and fourth anniversaries of the closing date,  respectively.  The
Xechem  Nigeria  Agreement  also provides that Alembic will receive a royalty of
15% of the gross  collected  revenues from sales of  NICOSAN(TM)/HEMOXIN(TM)  in
Nigeria  for a period of five years from the date of the product  launch  (i.e.,
when the Nigerian  manufacturing  facility is fully approved by all governmental
and regulatory bodies),  10% of gross collected revenues for the succeeding five
years,  and 5% of gross  collected  revenues for the succeeding  five years.  In
addition,  we have  agreed to pay  Alembic a  royalty  of 1% of gross  collected
revenues in connection with sales of  NICOSAN(TM)/HEMOXIN(TM)  outside of Africa
and India.  The Xechem Nigeria  Agreement also provides that we will be entitled
to a royalty of 30% of the first year's revenues and 25% of revenues  thereafter
from  the  sale  of  NICOSAN(TM)/HEMOXIN(TM),  provided  that  such  royalty  is
subordinated to that payable to Alembic, as referenced above.


                                       5
<PAGE>

Ceptor Transactions

      On January 27, 2004,  we issued 6,000 shares of 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 ours. The new
Class C Series 7 Preferred Stock has a $6,000,000  liquidation preference and is
convertible into 30,000,000  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. We also agreed to provide a contingent
award of $1,000,000 of our stock to certain former Ceptor shareholders  (payable
in our stock  valued at the lesser of $0.20 per share or market  value) upon the
achievement  of a  designated  milestone  for each  product  developed  with the
technology.  Ceptor  is  a  research  drug  company  focusing  on  neuromuscular
diseases, which include therapeutics for muscular dystrophy, multiple sclerosis,
ALS and epilepsy.

      On April 1, 2004,  we entered  into an  agreement  with Ceptor and William
Pursley intended to provide a framework for independent financing of Ceptor. The
Ceptor agreement  contemplates that Ceptor will seek to obtain bridge funding to
be followed by a  subsequent  round of capital  infusion.  Ceptor has engaged in
dialogue  regarding  such  proposed  financing,  however  as of the date of this
document no binding  commitments  have been  received and no  assurances  can be
provided that future financing will be obtained.

      The Ceptor  agreement  contemplates  that Ceptor  will take the  necessary
steps to effect a stock  split so that  after the split,  we will 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 has further  agreed to issue to
Ceptor's  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.  These numbers are subject to  proportionate
increase or decrease.

      The Ceptor  agreement  provides that we will 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 future  financing  received by
Ceptor other than the contemplated bridge financing.  At the end of two years if
the full  $2,000,000  has not been paid out to us, we will have 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 (expected to be not
less than  $250,000 or more than  $1,000,000),  we have agreed that in the event
such a loan is funded  and is not paid off when due,  we will  permit the bridge
lender to convert the unpaid  indebtedness owing with respect to the bridge loan
into our  common  stock at the lesser of seven  cents per share or seventy  five
percent  (75%) of the  average  closing  price of our  common  stock for the ten
trading  days  preceding  the date of funding of the bridge  loan.  We have been
granted  piggyback  registration  rights with respect to the shares in Ceptor we
may hold from time to time,  subject to its agreement to lock up the sale of all
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,  and
one-half of its shares for an addition.


                                       6
<PAGE>

PACLITAXEL AND OTHER ANTICANCER AGENTS

Paclitaxel

      Paclitaxel  was  developed  through a program  sponsored  by the  National
Cancer  Institute  ("NCI") in which over 35,000  plant  species  were tested for
anticancer  activity.  One of the plant extracts (the bark of Taxus  brevifolia,
commonly known as Western Yew) led to the isolation and discovery of paclitaxel.
Paclitaxel  has a unique  anticancer  action,  which blocks the  replication  of
cancer cells. Bristol-Myers' formulation of paclitaxel (marketed under the trade
name  "TAXOL(R)")  was first  approved in the United States,  Canada,  and other
countries for use against  refractory ovarian and breast cancers in patients who
had  failed  to  respond  to  initial  chemotherapy.  Subsequently,  it has been
approved for small cell lung cancer and AIDS related Kaposi sarcoma.  Paclitaxel
has also been shown to be effective against skin cancer and colon cancer.

      We have developed our own process and isolated  limited  quantities  (less
than one kilogram) of greater than 97% pure  paclitaxel  that we utilized in our
efforts  to obtain  regulatory  approval  in the United  States  and  equivalent
regulatory  approval in foreign  jurisdictions  for the sale of the  compound In
connection with our development of paclitaxel,  Bristol-Myers was granted such a
period of marketing  exclusivity,  under the Waxman-Hatch Amendment to the Food,
Drug and Cosmetic Act of 1984 which has expired.

      An  established  market exists for  paclitaxel  that we believe  currently
exceeds  $1.5  billion per year.  Additionally,  as clinical  experience  grows,
paclitaxel  is  expected  to be  approved  for  use in  several  other  cancers.
Paclitaxel  is  also  used  in  combination  with  other  chemotherapy  and as a
sensitizer to radiation  therapy.  We believe that significant  market expansion
can be  expected in the near  future as a number of  competitors  produce or are
developing processes to produce paclitaxel.

MANUFACTURING

      We conduct pilot-scale manufacturing of our potential products (other than
nutraceuticals) under current Good Manufacturing Practices ("cGMP").  Management
believes  that its  in-house  pilot  plant  facility  has  adequate  capacity to
manufacture  a limited  quantity  of bulk  drugs for sale.  We have  temporarily
stopped our  in-house  manufacturing  of bulk  paclitaxel  due to  Bristol-Myers
exclusivity to market  paclitaxel,  now since expired.  We have submitted a Drug
Master File (DMF) for the facility and for the  manufacture  of bulk  paclitaxel
with the FDA. Such  certification  is a necessary  precondition to production of
paclitaxel  and other  pharmaceutical  products  for sale in the  United  States
market. See "Paclitaxel and Other Anticancer Agents" above.

      We are seeking  other  collaborative  partners for certain of our proposed
products if and when such  products are ready for  marketing  for wide  clinical
use. To the extent that collaborative partners do not perform manufacturing,  we
intend to lease commercial-scale manufacturing facilities or utilize third party
facilities as the needs arise and financing therefor is available.  There can be
no assurance that such facilities  will be available on commercially  acceptable
terms that such  facilities  will be adequate  for our  long-term  needs or that
financing for such facilities will be available on terms  satisfactory to us, if
at all.


                                       7
<PAGE>

PATENTS AND PROPRIETARY TECHNOLOGY

      Our policy is to seek patent  protection  aggressively  and enforce all of
its intellectual  property rights.  Dr. Pandey, CEO of Xechem Inc., was issued a
patent in 1992 for purifying  Dermostatin A and B, the rights to which have been
assigned  to us. A second  patent  related  to the  method  for  separating  and
purifying antifungal polyene macrolide antibiotics, was granted to Dr. Pandey in
1993 and  assigned by Dr.  Pandey to us. We have  received  two patents from the
U.S. Patent and Trademark Office for the HEXOID(TM) plate. We have also received
seven U.S.  patents  on  paclitaxel  and its  analogs  from the U.S.  Patent and
Trademark Office from 1997 through December 2002 and seven international patents
from  July  1999  through  December  2002.  Patent   applications  for  numerous
counterparts are pending in the areas of paclitaxel  isolation and purification,
paclitaxel analogs and plant tissue culture (which also will be assigned to us).

      No assurance  can be given that any patent held by, issued to, or licensed
by, we will provide protection that has commercial significance. Furthermore, no
assurance  can be given that our  patents,  if issued,  will  afford  protection
against competitors with similar compounds or technologies, that others will not
obtain  patents  which  make  claims  similar  to those  covered  by our  patent
applications,  or that the patents of others will not have an adverse  effect on
our ability to conduct business.

                                  UNITED STATES PATENTS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
          U.S. PATENT                     TITLE OF PATENT                     DATE OF
            NUMBER                                                             ISSUE
----------------------------------------------------------------------------------------
<S>     <C>              <C>                                                   <C>
1.      5,159,002        "Method for Purifying Dermostatin A and B"            1992
----------------------------------------------------------------------------------------
2.      5,210,226        "Method for Separating Purifying Polyene              1993
                         Macrolide Antibiotics"
----------------------------------------------------------------------------------------
3.      5,654,448        "Isolation and Purification of Paclitaxel from        1997
                         Organic Matter containing Paclitaxel,
                         Cephalomannine and Other Related Taxanes"
----------------------------------------------------------------------------------------
4.      5,840,748        "Dihalocephalomannine and Methods of Use              1998
                         Therefor"
----------------------------------------------------------------------------------------
5.      5,854,278        "Preparation of Chlorinated Paclitaxel Analogues      1998
                         and Their Use Thereof as Antitumor Agents"
----------------------------------------------------------------------------------------
6.      5,807,888        "Preparation of Brominated Paclitaxel Analogues       1998
                         and Their Use as Effective Antitumor Agents"
----------------------------------------------------------------------------------------
7.      5,840,930        "Method for Production of                             1998
                          2",3" Dihalocephalomannine"
----------------------------------------------------------------------------------------
8.      5,817,510        "Device and Method for Evaluating Microorganisms"     1998
----------------------------------------------------------------------------------------
9.      Des. 411,308     "Covered, Multi-Well Assay Plate"                     1999
----------------------------------------------------------------------------------------
10.     6,177,456        "Monohalocephalomannines having Anticancer and        2001
                         Antileukemic Activity and Method Preparation
                         Therefor"
----------------------------------------------------------------------------------------
</TABLE>


                                       8
<PAGE>

--------------------------------------------------------------------------------
                              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., L.K. Yankov,  R. Nair and A. Poulev,  "Paclitaxel  Analogs,
      Preparation and Use as Antitumor  Agents",  Mexican  Patent,  September 4,
      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, September 25, 2001.

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.

--------------------------------------------------------------------------------

No  assurance  can be given that any current or future  patents  will provide us
with  competitive  advantages  for  our  products,  or  that  they  will  not be
successfully  challenged or circumvented by our competitors.  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


                                       9
<PAGE>

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.

      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.

RESEARCH FOR PROPRIETARY DRUGS AND TECHNOLOGY DEVELOPMENT

Sickle Cell Drug (SCD)

      In July 2002, we formed Xechem  Pharmaceuticals  Nigeria Limited  ("Xechem
Nigeria"),  under the  Companies and Allied  Matters Act (1992),  of the Federal
Republic of Nigeria.  Through Xechem Nigeria,  we will  manufacture,  market and
distribute  a  number  of   pharmaceuticals   and   prescription   nutraceutical
(phytopharmaceutical)  originating from the African Continent. The first product
in the pipeline is NICOSAN(TM).

      In addition to NICOSAN(TM),  Xechem Nigeria,  as a result of its proximity
and  relationship  to the National  Institute  for  Pharmaceutical  Research and
Development  (NIPRD) in Abuja,  Nigeria,  is in a unique  position  to take full
advantage of Nigeria's well-known  biodiversity,  which is expected to yield new
important drugs and other nutraceuticals in the near future.

      On July 18,  2002,  we  signed  an  exclusive  worldwide  license  for the
manufacturing,   marketing,  distribution  and  sales  of  NIPRISAN  (new  names
NICOSAN(TM)/HEMOXIN(TM)) from NIPRD, government of Nigeria, for the treatment of
Sickle Cell Disease  ("SCD").  NICOSAN(TM)  is Xechem's  name for the  non-toxic
phyto-pharmaceutical product formerly named NIPRISAN(TM), a phyto-pharmaceutical
medicament.

      In  August  2003  our  sickle  cell  disease   product   (SCD),   NIPRISAN
(HEMOXIN(TM)),  received Orphan Drug  designation  from the FDA Office of Orphan
Drug Products Development, providing the Company with seven years of U.S. market
exclusivity after the FDA approval of HEMOXIN(TM).  If it is first to market the
proprietary phytopharmaceutical. An orphan disease is defined in the U.S. as:

      o     A rare disease that affects fewer than 200,000 people; or
      o     A common disease that has been ignored  because it is less prominent
            in the U.S., compared with developing nations.


                                       10
<PAGE>

      The U.S.  Orphan Drug Act of 1983 offers tax incentives on clinical trials
and seven years' market  exclusivity  on orphan drugs.  Since the Act, more than
200 orphan drugs have been approved by the FDA and are on the market.  According
to the NIH, more than 6,000  so-called  orphan diseases exist in the U.S. With a
mere 300 of these  diseases being  directly  addressed in a therapeutic  manner,
there is a large need to undergo development programs to counter orphan diseases
like SCD.

      Importantly, while the diseases within the orphan market only affect small
number of individuals, collectively, they represent the highest value healthcare
market in the world. For example,  Genzyme Corporation's  (GENZ-NASDAQ) Cerezyme
to treat Type 1 Gaucher's disease costs  approximately  $300,000 per patient per
year;  Transkaryotic  Therapies,  Inc.'s  (TKTX-NASDAQ.NM)  Replagal for Fabry's
disease  costs  approximately  $170,000  per  patient  per  year;  Factor  VIII,
manufactured  by a variety  of  companies  for  Hemophilia  costs  approximately
$70,000 per patient per year; and Human Growth Hormone (HGH),  also manufactured
by a variety of companies, can cost upwards of $20,000 per patient per year.

      We  believe  there  are a  significant  number of  advantages  that can be
capitalized on by creating a realistic,  focused,  orphan disease platform, such
as those  listed in the table  below.  We expect to take full  advantage  of the
lucrative  orphan drug market through the  development  and  distribution of our
proprietary  product,  HEMOXIN(TM).  Based on the aforementioned  factors,  this
could represent a lucrative opportunity to capture a niche market for SCD.

--------------------------------------------------------------------------------
                       TABLE SHOWING ADVANTAGES OF AN ORPHAN DISEASE PLATFORM
--------------------------------------------------------------------------------
Mark exclusivity       Government  allows seven years of market  exclusivity  in
                       the   U.S.   and  10  years   in  the  EU,   creating   a
                       competition-free environment.

Technology             Since larger pharmaceutical companies are less interested
acquisition            in the orphan market,  technologies can be acquired under
                       reasonable  terms.  Also, many universities are searching
                       for companies to move their technology forward.

Regulatory             Orphan drug legislation  helps to expedite the regulatory
                       process.  The FDA is  currently  required  to  review  an
                       orphan  drug  approval  application  within  six  months,
                       rather than one or two years.

Commercialization      Orphan  drugs  demand  a high  premium  because  of their
                       ability to  improve  the  quality of life in areas  where
                       there is no other hope.

Distribution           Most  orphan  drugs  are  contracted  out  separately  to
                       specialty distribution companies at a significant cost to
                       profits.

Reimbursement          Since the costs of most orphan  products  cannot be borne
                       by  the  individual  patients,   nor  can  the  insurance
                       complications  be  borne by the  prescribing  physicians,
                       they  require an expert  reimbursement  service to assure
                       uninterrupted therapy without undue hassle.
--------------------------------------------------------------------------------

      We are  currently in the process of  completing  for the  submission of an
Investigational  New Drug ("IND")  Application for this product to FDA. To date,
there has been no successful non-toxic drug developed for the treatment of SCD.

      We along with the Children's Hospital of Philadelphia  (CHOP), have united
in  our   efforts  to  test,   standardize   and  quality   control   "NIPRISAN"
(NICOSAN(TM)/HEMOXIN(TM)),   an  extract  of  four  herbs  that  has   exhibited


                                       11
<PAGE>

anti-sickling effects in patients with sickle cell anemia. This product has been
used in Nigeria to treat sickle cell anemia with little or no toxicity;  however
there has been no quality  control or  standardization  of the product.  Phase I
research will be dedicated to develop quality control and standardization of the
product.  Investigations into synergistic  relationships  between the four plant
extract  components  as well as  composition  of the  actives  will be  explored
through bioassay.

      Sickle Cell Anemia affects  approximately 70,000 people just in the United
States;  worldwide the numbers are  staggering.  The  long-term  objective is to
provide a safe,  inexpensive  phytopharmaceutical  to relieve the  suffering  of
patients with sickle cell disease. NIPRISAN  (NICOSAN(TM)/HEMOXIN(TM)) is unique
in its ability to bind to deoxygenated Hb S, the form of hemoglobin  affected by
the disease, delaying or reducing the deformation of the red blood cells.

      Regarding the sales of NICOSAN(TM) in Nigeria, we are planning to lease or
build a manufacturing  facility in Nigeria to process  commercial  quantities of
the  raw  material.  The  active  phytopharmaceutical   product  (API)  will  be
encapsulated  and  sold  in  Nigeria  in  2005.  All  manufacturing,  marketing,
distribution  and sales of the product  NICOSAN(TM)  are presently  scheduled to
take place through Xechem Nigeria.

Paclitaxel Analogs

      During the isolation and purification of paclitaxel,  we have isolated and
purified at least nine analogs of  paclitaxel,  which were first tested in vitro
in collaboration with the NCI.  Preliminary animal studies have shown that these
analogs may have  significant  advantage  over  TAXOL(R) or  TAXOTERE(R)  in the
treatment of certain  cancers.  We have been awarded seven United States patents
and nine international  patents with numerous  international  patents pending in
this area.

Niche Anticancer Drugs

      In addition to paclitaxel,  we are developing  technologies for production
and  formulation  of other niche  generic  anticancer  drugs whose  patents have
either expired or will expire. In some instances, the bulk raw material for such
products will require independent strain development from cultures and scale up,
such as in the  case of  bleomycin.  Our  ability  to  develop  such  additional
products  will be  dependent,  at least in part,  upon our  ability to set aside
sufficient funds to commence these sometimes lengthy  projects.  Due to both the
niche  market  size  and the  difficulty  in  isolating  and  replicating  these
compounds,  we believe that there will be limited  future  competition  in these
markets.

      Approval  of the FDA will be  required  before  we may  market  any  niche
generic drugs through submission of an ANDA in the United States.  Opportunities
may exist to market such drugs abroad, subject to less stringent requirements in
certain instances.

Products from Traditional Medicinal Plants and Marine Sources

      In addition to its efforts to develop  generic  equivalents  to compounds,
which no longer enjoy patent protection, we have developed what we believe is an
efficient  drug   discovery   program  for  the   discovery,   development   and
commercialization  of new classes of pharmaceuticals  and  phytopharmaceuticals.


                                       12
<PAGE>

Towards this goal, we are seeking to develop  proprietary drugs from extracts of
medicinal   plants  and  marine  sources,   as  well  as  diagnostic  tests  for
determination of the presence of certain biochemical compounds and/or diseases.

      Though the pharmaceutical industry's emphasis has shifted from plant-based
drug  discovery to the  increased  screening  through  combinatorial  chemistry,
synthetic   compounds  and  the  modification  of  existing  compounds  for  the
generation of analogs and the utilization of biotechnology tools and techniques,
we believe our approach of screening folk lore medicinal plants and modification
through semisyntheses have better chances of success in developing new drugs.

      Traditional   plant  medicines  have  been  valued  in  various   cultures
throughout  the ages for their  therapeutic  and healing  properties.  In recent
decades, modern investigations have led to the systematic screening of thousands
of plants and other  natural  products for a variety of  biological  activities.
Several commercially successful  pharmaceuticals based upon these medicines have
exhibited  activities  useful in treating  cancer,  fungal and viral  infections
(including AIDS), and in retarding aging and senescence. Ethical pharmaceuticals
currently in use having plant origins include: L-dopa, used for the treatment of
Parkinson's disease; pilocarpine, used to treat glaucoma; quinine, used to fight
malaria; and vinblastine and vincristine, used to treat certain cancers, both of
which come from India and the People's  Republic of China.  In  addition,  drugs
such as aspirin,  ephedrine,  digitalis,  paclitaxel and camptothecin originated
from plants found in temperate  regions of the world.  Valuable  natural-product
pharmaceuticals  may be  derived  from a variety  of  medicinal  plants,  marine
sources and fermentation processes.

      Our particular  focus is the  development  of therapeutic  agents based on
traditional  plant medicines,  especially the folklore of India and the People's
Republic of China.  Over the past few decades,  research in these  countries has
developed a number of drugs from such plants. However, only a few of these drugs
have been introduced into Western medicine. We believe we have an opportunity to
use our expertise and knowledge of these agents,  as well as sourcing of natural
compounds, to develop pharmaceuticals that can be successfully introduced in the
United States and other developed countries.

      Through a detailed  investigation of traditional  Chinese medicinal plants
and herbs, Indian Ayurvedic medicines and Western pharmacological literature, we
have  selected  over  2,000  natural  products,  extracts,   semi-synthetic  and
synthetic  compounds  for  further  research  and  development  in the  areas of
anticancer,  antiviral (including AIDS) and  anti-inflammatory,  anti-infective,
cholesterol-lowering, and anti-aging/anti-senescence agents.

      All of these extracts and pure  compounds are  undergoing  early stages of
laboratory  screening for activity against cancer,  AIDS,  infections,  or other
conditions.  Those compounds,  which  demonstrate  significant  activity will be
further tested in animal  studies.  We will select those  compounds,  which show
greatest  promise  for  further   investigation  and  commence  the  process  of
submitting  applications  to the FDA,  conducting  human  clinical  trials,  and
obtaining final FDA approval.  Historically  in the United States,  seven to ten
years  are  needed  to  advance  a new  pharmaceutical  from the  laboratory  to
marketing. See "Government Regulation" below.


                                       13
<PAGE>

OTHER NICHE GENERIC DRUGS

      In addition to  anti-Sickle  Cell  Disease and  anticancer  drugs,  we are
seeking  to  develop   compounds   for   generic   antifungal,   anti-AIDS   and
cardiovascular  drugs which enjoy  significant  market  demand but are no longer
subject  to patent  protection,  to obtain  ANDA  approval  of such drugs and to
market  such  drugs   independently   or  through  joint   ventures  with  other
pharmaceutical  firms.  Management  believes  this will afford us the ability to
develop one or more products in the  marketplace  on a faster basis than through
the development of new drugs, with the concomitant regulatory hurdles.

TECHNICAL AND CONSULTING SERVICES

      In addition to its research, development and production activities, we, to
a limited extent,  provide  technical and consulting  services to pharmaceutical
and chemical product  companies,  as well as to companies in the food,  cosmetic
and household product industries.  Our microbiologists can perform tests such as
potency   assays   for   antibiotics   and   vitamins,   microbial   counts  for
pharmaceuticals,  water,  cosmetics and  toiletries,  and  mutagenic  studies of
pharmaceuticals.  Our  chemists  can  provide  tests  such as  infrared  ("IR"),
ultraviolet    ("UV-VIS")   and   gas   chromatography    ("GC")   analysis   of
pharmaceuticals,  chemical  analysis of vitamins,  and High  Performance  Liquid
Chromatography ("HPLC") analysis of pharmaceuticals and cosmetics. Many of these
tests are  standardized  tests required to obtain approval of products by FDA or
the U.S. Environmental Protection Agency ("EPA").

      We  also  consult  with  and  assist  clients  in  their  development  and
improvement of  pharmaceuticals.  We assist clients in developing and validating
methods and protocols for  researching and producing  pharmaceuticals  and other
products.  Technical and consulting services are not our principal focus and are
not expected to have a material impact on our operations.

      Although  we  stress  quality  control  in our  technical  and  consulting
services,  we may face professional  liability as a result of this service work.
We do not maintain,  and do not currently  intend to obtain,  insurance  against
such liabilities.

XETAPHARM(TM)

      We   established   XetaPharm(TM)   in  1996  to  bridge  the  gap  between
pharmaceuticals and nutraceuticals.  XetaPharm's principal business objective is
to develop "quality controlled"  nutraceutical products for the consumer market.
Based on meetings between the National Center for  Complimentary and Alternative
Medicine ("NCCAM"),  National  Institutes of Health ("NIH"),  and the FDA, which
were attended by our scientists,  we determined that our technological  strength
and  agreements   with  Chinese  and  Indian   institutions   could  assure  the
introduction of standardized quality controlled  nutraceutical products. We have
obtained "Gold Leaf(R)" as our Trademark for these products.

      XetaPharm  has  developed  a limited  number of  over-the-counter  natural
products (not  requiring FDA approval) for sale through direct  consumer  sales,
health  food  outlets  and  distribution  companies.  We have  selected  several
products  to  be   manufactured  by  contract   manufacturers   under  XetaPharm
trademarks.  The emphasis of the products has been the natural health  benefits.


                                       14
<PAGE>

Initial marketing efforts commenced in the second quarter of 1996. XetaPharm has
six   products,   to   date:   GarlicOnce(R);   GinkgoOnce(R);   GinsengOnce(R);
Gugulon(TM);  Co-Enzyme-Q10  and  VIDAPRAS(TM).  We have designed a time-release
component  for the first three of these  products,  reducing the number of pills
that must be taken.  There can be no  assurances  as to the level of success for
this program.  XetaPharm's marketing efforts and sales have been limited, due to
our financial  constraints.  We are evaluating our long-term  commitment,  which
includes  continued  investment in sales and  marketing,  limited  investment to
product development for other companies or divestiture of XetaPharm.

      In December of 2001,  we fully  reserved the value of our  finished  goods
inventory of Xetapharm due to slow movement and limited  sales.  This will in no
way stop our efforts to market nutraceuticals in the future, however it is not a
major thrust of our activities at the present time.

MANUFACTURING OF NUTRACEUTICALS

      A contract  manufacturer  currently  produces  XetaPharm  products  to our
specifications until our marketing efforts through brokers, Internet and foreign
sales show sufficient increases in demand to warrant in-house manufacturing.  We
will analyze possible alternatives.

MARKETING

      Our initial potential  pharmaceutical  products are targeted at the sickle
cell,  anticancer,  antiviral,  and antifungal markets. We are seeking corporate
alliances  with large  pharmaceutical  companies  for some of these  programs in
order to take  advantage  of such  companies'  abilities  to  reach  broad-based
markets.  There  can be no  assurance  that we will be able to enter  into  such
collaborative  agreements.  If we decide to  conduct  any  direct  marketing  of
potential  products,  there can be no assurance  that we will be  successful  in
establishing a successful  in-house marketing and sales force or that sufficient
financing will be available to develop its marketing and sales capabilities.

      XetaPharm sells its nutraceutical product line through health food stores,
pharmacies and through the Internet.  XetaPharm has limited  in-house  marketing
and sales  force at this time and is seeking to  establish  alliances  with more
distributors, as well as marketing firms, to promote its product line. We may in
the future  co-market these products with  established  marketing  organizations
and/or  provide some of these  products on a private  label basis.  We have also
established sales through the worldwide web and E-commerce  through the web site
WWW.XETAPHARM.COM.

TRADEMARKS

      We have  registered  and maintain  trademark  rights to XECHEM(R).  We had
planned to market  paclitaxel under the trademark  PAXETOL(TM).  Registration of
PAXETOL(TM) in United States and Canada was opposed by Smithkline Beecham P.L.C.
("SKB")  based  on SKB's  registered  PAXIL(R)  mark  for use with a  dissimilar
product.  In order to avoid  this  conflict,  we will  select a new name for the
United States and Canada,  but will retain the trademark  PAXETOL(TM)  for other
countries. We may seek to register other existing or future trademarks.  We have
also  registered and maintain  trademark  rights for NICOSAN(TM) and HEMOXIN(TM)
for our new Sickle Cell Disease  products.  We are not aware of any  competitive
uses of trademarks similar to our existing trademarks,  other than as claimed by
SKB, which may interfere with our use of our trademarks.


                                       15
<PAGE>

      XetaPharm  maintains  trademark rights to  GarlicOnce(R),  GinsengOnce(R),
GinkgoOnce(R),  Gold  Leaf(R),  Gugulon(TM)  and VIDA  PRAS(TM)  for which  U.S.
registration has been granted. XetaPharm may adopt other trademarks for use with
its potential products.

RAW MATERIAL SUPPLY

      The Company has been using Xechem India to obtain contracts for dependable
supplies of plants and other raw materials from India.  Based on our discussions
with Indian sources for such  materials,  we believe that an Indian  corporation
will be able to obtain such contracts on significantly better terms than would a
United  States-based  corporation.  Xechem India also conducts certain research,
manufacturing,  and marketing activities in India.  Currently The Company is the
major share holder of Xechem India. We have not invested significant  additional
amounts in Xechem India. It is anticipated that Xechem India will seek financing
from Indian sources,  including,  in particular,  individuals or  organizations,
which will be active in Xechem India's  business,  which may dilute our interest
in Xechem India.  Dr.  Pandey's family has invested  additional  funds in Xechem
India.  It is  anticipated  that  Xechem  India  will make  available  to us the
materials  Xechem India obtains.  We have adopted a policy that all transactions
with affiliates shall be on terms no less favorable to us than could be obtained
from an unaffiliated party and must be approved by a majority of our independent
directors.  Such policy  specifically  applies to any transaction between Xechem
India  and us.  However,  if we do not  control  Xechem  India,  there can be no
assurance that Xechem India will make such materials available to us, or that it
will not make such materials available to competitors of Xechem. In addition, if
we do not control  Xechem India,  there can be no assurance  that Xechem India's
research,  development,  manufacturing,  and other activities will be of benefit
to, or would not be  competitive  with,  us. The results of operations of Xechem
India have not been significant to date.

COMPETITION

Pharmaceuticals

      Competition  in the  pharmaceutical  industry is  extremely  intense.  The
principal  factors  upon  which such  competition  is based  include  marketing,
distribution,  price,  therapeutic efficacy,  side effect, profile, ease of use,
safety, physician acceptance, and patient compliance.  Many treatments exist for
cancer,  viruses, and fungi, and additional  therapeutics are under development,
including other naturally sourced pharmaceuticals.

      Most  competitors,  one of whom currently  dominates the paclitaxel market
(Bristol-Myers),  have  substantially  greater capital  resources,  research and
development capabilities,  manufacturing and marketing resources, and experience
than we do. In addition,  these companies have vastly greater  resources for the
production  and  distribution  of  pharmaceuticals   following  development  and
regulatory  approval.   These  companies  may  represent  significant  long-term
competition for us. Our competitors may succeed in developing  products that are
more effective or less costly than any that may be developed by us, or that gain
regulatory  approval prior to our products.  Bristol-Myers is already  marketing
paclitaxel commercially in the United States, Canada and certain other countries
for treating  ovarian,  breast,  small cell lung cancers and AIDS related Kaposi
Sarcoma. In addition, other companies have competitive products that are in more
advanced stages of clinical testing than our paclitaxel or our second-generation
paclitaxel.  We also  expect  that the number of market  entrants,  and thus the


                                       16
<PAGE>

number of our  competitors  and  potential  competitors,  will  increase as more
paclitaxel  products  receive  commercial  marketing  approvals  from the FDA or
analogous  foreign  regulatory  agencies.  Any of  these  entrants  may be  more
successful than us in manufacturing, marketing and distributing our products. In
addition,   we  understand  that:  (i)  in  October  and  December  1993,  Napro
Biotherapeutics,  Inc.  ("Napro") filed a confidential DMF containing certain of
Napro's  proprietary  manufacturing  processes  with the FDA and the  Australian
Therapeutic Goods Administration (the "TGA"), Australia's equivalent of the FDA,
relating to Napro's  manufacture of paclitaxel,  and that Napro has been selling
certain  quantities  of  paclitaxel  in  Australia;  and (ii) Rhone  Poulenc has
developed a paclitaxel analogue trademarked as "TAXOTERE(TM)," which has similar
but different  properties to paclitaxel,  which has been sold in Europe,  and in
1996  received  approval  to sell  TAXOTERE(TM)  in the  United  States.  To our
knowledge,  a number  of other  pharmaceutical  firms are  poised  to  introduce
paclitaxel for sale in the United States since Bristol -Myers's  exclusivity for
TAXOL(R) has lapsed.

      There  can be no  assurance  that  developments  by  other  pharmaceutical
companies   will  not  render  our   products   or   technologies   obsolete  or
noncompetitive  or  that  we will  be  able  to  keep  pace  with  technological
developments of our  competitors.  We believe that some of our competitors  have
developed or are in the process of developing  technologies  that are, or in the
future may be, the basis for  competitive  products.  Some of these products may
have an  entirely  different  approach  or means of  accomplishing  the  desired
therapeutic effect than products being developed by us. These competing products
may be more effective and less costly than the products developed by us. We have
established some collaboration to investigate our  second-generation  paclitaxel
analogs, which are at a very preliminary stage.

Nutraceuticals

      The  health  supplements  and  nutritional  product  industries  in  which
XetaPharm operates are extremely  competitive,  both  internationally and in the
United States.  XetaPharm faces substantial competition to each of its products.
Competitive factors include quality, price, style, name recognition and service.
As  a  new  entrant  in  these  markets,  XetaPharm  has  not  established  name
recognition  and its competitive  position cannot be determined.  XetaPharm will
primarily  compete  with  health-aid   companies,   specialty  retailers,   mass
merchandisers,  chain drug stores, health food stores and supermarkets.  Many of
such companies have trademarked  products known  worldwide.  XetaPharm will also
compete with companies,  which manufacture and distribute  non-branded (generic)
products.  Many competitors have substantially greater financial,  distribution,
marketing and other resources than XetaPharm and have achieved  significant name
recognition  and goodwill for their brand names.  There can be no assurance that
XetaPharm  will  be able to  successfully  compete  with  these  companies  when
marketing its products.

GOVERNMENT REGULATIONS

      The  research,  development,  manufacture,  and marketing of our potential
products are subject to  substantial  regulation by the FDA in the United States
and by comparable  authorities in other countries.  These national  agencies and
other federal, state, and local entities regulate,  among other things, research
and development activities and the testing, manufacture,  safety, effectiveness,
labeling, storage, record keeping, approval,  advertising,  and promotion of our
potential  products.  Historically  in the United States,  it takes seven to ten
years to advance a new  pharmaceutical  from the  laboratory to the time when it
can be marketed.


                                       17
<PAGE>

      Prior to  marketing  any  pharmaceutical  product for other than  research
purposes,  we must  prepare and submit a Drug Master File  ("DMF") to the FDA to
obtain overall approval of the facility as a manufacturer of pharmaceuticals and
a DMF for the process of manufacturing such products.  Thereafter, before any of
our potential new  pharmaceutical  products may be marketed in the United States
the following is involved:  (i) preclinical  testing including stability studies
and  animal  tests;  (ii)  submission  of an  Investigational  New Drug  ("IND")
application which must become effective before clinical trials may begin;  (iii)
well-controlled  human  clinical  trials to establish the safety and efficacy of
the proposed  drug in its intended  application;  and (iv) FDA approval of a New
Drug Application  ("NDA").  If the drug or compound  utilized in the product has
been previously approved for use in another dosage form, the approval process is
similar,  except that certain  preclinical  toxicity tests normally required for
the IND may be avoided through the use of an ANDA.

      Clinical trials are typically  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 to: (i) determine the efficacy of the product for
specific,  targeted  indications;  (ii) determine  dosage  tolerance and optimal
dosage; and (iii) identify possible adverse effects and safety risks. When Phase
II evaluations  demonstrate  that the product is effective and has an acceptable
safety profile, Phase III trials are undertaken to further evaluate dose ranging
and  clinical  efficacy  and to further  test for safety in an expanded  patient
population at  geographically  dispersed  clinical  study sites.  The FDA or the
sponsor  may  suspend  clinical  trials at any point in this  process  if either
entity  concludes  that clinical  subjects are being exposed to an  unacceptable
health risk, or for other reasons.

      The results of product  development,  preclinical  studies,  and  clinical
studies are  submitted to the FDA as part of a NDA for approval of the marketing
and  commercial  shipment of the product.  The FDA may deny a NDA if  applicable
regulatory criteria are not satisfied,  or may require additional clinical data.
Even if such data is submitted,  the FDA may ultimately decide that the NDA does
not satisfy the criteria for approval.  Once issued,  a product  approval may be
withdrawn  if  compliance  with  regulatory  standards is not  maintained  or if
problems occur after the product  reaches the market.  In addition,  the FDA may
require  testing  and  surveillance  programs  to monitor the effect of approved
products,  which  have been  commercialized,  and it has the power to prevent or
limit   further   marketing  of  a  product   based  on  the  results  of  these
post-marketing programs.

      Under the  Waxman-Hatch  Amendment  to the Food,  Drug and Cosmetic Act of
1984, a five-year  period of marketing  exclusivity is granted to any firm which
develops and obtains FDA approval of a non-patentable  new molecular  entity, to
compensate the firm for  development  efforts on such  non-patentable  molecular
entities.  In connection with its development of paclitaxel,  Bristol-Myers  was
granted a period of marketing  exclusivity,  which was to expire on December 29,
1997,  but was extended for four years.  Management  believes  some, but not all
foreign  countries  have given  Bristol-  Myers  exclusive  rights to market the
compound. We intend, but cannot guaranty,  to submit an ANDA for paclitaxel.  At
such time as we have such data,  we intend to apply for  regulatory  approval to
market  paclitaxel  in  certain  foreign  countries.  Management  believes  that
obtaining  regulatory  approval to market and  distribute  paclitaxel in certain
foreign markets will require a  significantly  shorter period of time than would
be required in the United States, but can offer no assurance thereof.


                                       18
<PAGE>

      Each drug product  manufacturing  establishment that supplies drugs to the
U.S.  market  must be  registered  with,  and  approved  by,  the FDA  prior  to
commencing  production,  and is subject to biennial  inspections  by the FDA for
cGMP  compliance  after a NDA or an ANDA has been  approved.  In addition,  drug
product  manufacturing  establishments  must  meet  applicable  state  and local
standards.

      In nutraceuticals,  the processing,  formulation,  packaging, labeling and
advertising of XetaPharm's products will be subject to regulation by one or more
federal  agencies,  including  the FDA, the Federal  Trade  Commission,  and the
Consumer  Product Safety  Commission,  among others.  The  Hatch-Harkin  Dietary
Supplement  Health  and  Education  Act of 1994 and  will  also  regulate  these
activities  by  various  agencies  of the  states  and  localities  in which our
products will be sold. We intend to, and believe that we will be able to, comply
with these laws and regulations in all material respects.

ENVIRONMENTAL REGULATIONS

      In connection with our research, development and manufacturing activities,
we are  subject to  federal,  state,  and local laws,  rules,  regulations,  and
policies  governing the use,  generation,  manufacture,  storage,  air emission,
effluent  discharge,  handling,  and disposal of certain  materials  and wastes.
Although we believe that we have complied with these laws and regulations in all
material  respects  and we have not been  required to take any action to correct
any  noncompliance,  there can be no  assurance  that we will not be required to
incur  significant  costs to comply  with health and safety  regulations  in the
future.  Our research and  development  involves the controlled use of hazardous
materials,  chemicals,  and microorganisms.  Although we believe that our safety
procedures  for  handling  and  disposing  of such  materials  comply  with  the
standards  prescribed  by state and federal  regulation,  the risk of accidental
contamination  or injury from these materials  cannot be completely  eliminated.
This risk is less when handling  anticancer  compounds.  In the event of such an
accident,  we could be held  liable  for any  damages  that  result and any such
liability could exceed our resources.

EMPLOYEES

      As of December 31, 2003, we have fifteen  employees.  Of these  employees,
five are  dedicated  to  research,  development,  manufacturing  and  regulatory
compliance.  Six of our employees hold doctorate degrees.  None of our employees
are covered by a collective bargaining agreement.  We believe all relations with
our employees are satisfactory.

SCIENTIFIC ADVISORY BOARD

      We have established the Scientific Advisory Board ("SAB"),  which consists
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 with  respect to  technical  or clinical
matters, and recommend personnel.

      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


                                       19
<PAGE>

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 anaesthetic 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 a 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.

      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.


                                       20
<PAGE>

      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 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 entkauranoids,  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.

      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


                                       21
<PAGE>

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 nations  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.

      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


                                       22
<PAGE>

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.

RISKS AFFECTING FORWARD LOOKING STATEMENTS AND STOCK PRICES

      In addition to those matters  already set forth in Item 1,  Description of
Business and Item 6,  Management's  Discussion  and Analysis,  the following may
result in our not achieving  certain results  included in any statement that may
be  considered a forward  looking  statement and affect the trading price of our
Common Stock.  We caution the reader that the following  risk factors may not be
exhaustive.

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.

      The Board of Directors  effected 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 new trading symbol is "XKEM."

No Developed or Approved Products; Early Stage of Development

      We are a development  stage company.  Our primary potential new product is
NIPRISAN (NICOSAN(TM)/HEMOXIN(TM)), our sickle cell disease (SCD) drug, which we
hope to begin marketing in Nigeria in 2005. Under Ceptor a subsidiary of ours we
have two new  potential  drugs  Myodur(TM)  used in the  treatment  of  muscular
dystrophy and Neurodur(TM) used in the treatment of multiple sclerosis. As noted
above, it is expected that through the financing plan for Ceptor, it will become
a minority held subsidiary over time. We plan on applying for orphan drug status
and filing  IND's on both drugs in 2004.  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,  such as by
alleging  infringement on certain  patents.  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


                                       23
<PAGE>

research and development. 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,  alone  or  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.

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, 2003, our
accumulated  deficit was approximately  $45,304,000,  which included losses from
operations of  $2,326,000,  and $2,331,000 for the years ended December 31, 2003
and 2002 respectively.  To date, we have been dependent on capital infusions 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  its   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
achieve profitable operations. See "Management's Discussion and Analysis."

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,  1993  through  2003,  contain  an
explanatory  paragraph  indicating  that there is  substantial  doubt  about our
ability to continue as a going concern.  Our  continuation is dependent upon 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 be operated  profitably in the
future.  See  "Management's  Discussion and Analysis" and Note 3 to the Notes to
our Consolidated Financial Statements.

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 its 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. See "Marketing" above.


                                       24
<PAGE>

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.  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.  As of date of  filing we have  obtained  a  $5,000,000  key man life
insurance  policy on Dr.  Pandey.  See Item 9,  Directors,  Executive  Officers,
Promoters  and Control  Persons;  Compliance  with Section 16(a) of the Exchange
Act.

      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

      As a result of a reduced amount of capital,  the number of persons,  which
we employ,  has  decreased.  We have  reduced  our staff from a one time high of
fifty-five to fifteen  people.  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.  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.


                                       25
<PAGE>

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

      Our  principal  strategy  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 markets 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.

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.  We may
also face professional  liability as a result of our contract research and other
services.  While we will  continue to attempt to take  appropriate  precautions,
there  can be no  assurance  that we will  avoid  significant  exposure  to such
liabilities.  Because  we have not yet sold any  products  except  for  research
purposes,  and because of the expense of  insurance,  we do not carry product or
professional  liability  insurance.  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 of Doing Business in Nigeria

      Last year we announced that we have  incorporated a corporation in Nigeria
in order to manufacture,  market and distribute a number of pharmaceuticals  and
prescription  nutraceuticals  originating  from the African  continent.  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
conduct businesses in Nigeria.

      The currency of Nigeria has experienced  significant  fluctuations against
the U.S. dollar. Xechem  Pharmaceuticals  Nigeria Limited 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.


                                       26
<PAGE>

      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 or regulation,
in  their  respective  economies.  Action  by  these  governments  could  have a
significant adverse effect on the economies of such countries.

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,   designation,
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 its Common Stock since its formation.
We do not  currently  intend to pay any  dividends  upon the Common Stock in the
foreseeable  future  and  anticipates  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.

Alembic Agreements

      We have entered into a series of agreements with Alembic,  Limited.  Under
its $3,000,000  convertible  note, should Alembic fail to fund such note in full
we may lack the funds  necessary to fund our  anticipated  operations in Nigeria
and/or  domestically.  Such loan is  convertible  into common stock at Alembic's
option at a  substantial  discount  to the current  market  price for our stock.
Should  Alembic  elect to effect such  conversion,  it may become a  substantial
stockholder  of  ours,  at a  valuation  substantially  dilutive  of our  market
valuation.  If it  does  not  elect  to  convert  the  loan,  we  will  owe it a
substantial sum when the loan comes due, and may be unable to pay it.

      Under our royalty,  distribution  rights and joint  cooperation  agreement
with Alembic,  we are obligated to pay it substantial  royalties with respect to


                                       27
<PAGE>

our African and Indian activities and lesser royalties with respect to our U. S.
activities.  Should we fail to generate significant gross margins on the sale of
our products in those areas,  we may not be able to satisfy the  obligations  to
Alembic,  which would  supersede our royalty  rights.  In addition,  Alembic has
rights of first refusal which could impair our ability to effectively market the
product in Africa and surrounding regions with other distributors.

      Our financing  plan for Xechem  Nigeria  contemplates  that we will obtain
additional  financing  from  investors  in Nigeria  for  certain  aspects of the
production  and  distribution  of  Nicosan/Hemoxin  in Nigeria.  There can be no
assurances  that we will be successful in obtaining  financing in Nigeria and/or
that we will not  experience  unexpected  costs or cost  overruns  in  obtaining
regulatory approval for the product, buildout of the production facilities, cost
of production of the product and/or cost of distribution of the product.  We may
be required to sell off a greater  percentage of Xechem Nigeria than  originally
contemplated and/or be required to modify the current royalty structure in place
as a condition to obtaining such  financing,  which could  adversely  impact our
operations. We have no guarantees that current or future legislation or business
practices in Nigeria will not adversely impact or ability to expatriate  profits
and/or royalty payments from our operation in Nigeria.

Ceptor Corporation

      We have  entered  into a series of  agreements  regarding  our  subsidiary
Ceptor  Corporation,  intended to facilitate  financing of the subsidiary and to
provide substantial  incentives to the management team to effect such financing.
Should Ceptor fail to obtain independent  financing,  it may not be able to meet
its  obligations  and may not be able to bring product to market.  The financing
structure in place, if successful, is intended to provide substantial capital to
Ceptor  and  a  means  whereby  we  would  also  obtain  additional  funding  in
consideration  for a  lessening  of our  position  in  Ceptor.  There  can be no
assurances  that the  financing to Ceptor will be along the lines  contemplated,
and there is a risk that it may be more  dilutive than  originally  contemplated
and/or in a lesser  aggregate amount than originally  contemplated,  which could
impair its  ability to bring  product  to market.  Even if Ceptor is  adequately
financed,  there  can be no  assurances  that  its  products  will  receive  the
necessary  regulatory  approval  and/or prove  effective in the treatment of the
diseases they are intended to treat.

Note Purchase Agreement

      We have  received  $2,800,000  of funding to date under the Note  Purchase
Agreement,  which calls for a funding of up to $6,000,000 from Marjorie Chassman
or her designees,  all coming due 18 months from the initial funding.  Should we
fail to  receive  the  balance  of the  scheduled  funding,  we may be unable to
successfully  fund our operations.  We may lack the funds necessary to repay the
loan when due and/or may seek to  negotiate a  conversion  of some or all of the
loan  obligation to equity,  which could be  substantially  dilutive of existing
stockholders.

Other Loans

      As noted in Item 6 below, we have borrowed  additional monies from various
lenders  besides those  enumerated  above.  Should we fail to repay those loans,
such lenders could take actions adverse to us.


                                       28
<PAGE>

ITEM 2.    DESCRIPTION OF PROPERTY

      We conduct our operations in a state-of-the-art laboratory facility in New
Brunswick,  New  Jersey.  Organizations  such  as us  that  develop  or  produce
pharmaceuticals 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  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.  We currently believe that we operate our facility in
accordance  with cGLP and cGMP;  however,  to date, we have not 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  invested
personal funds to acquire an approximately 25% interest in the lessor.  Our base
rent is  approximately  $13,400 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 up to date with our  current  monthly  rent;  however,  we are
$80,000 in arrears  from 1998 and  $26,000 for a security  deposit  that was due
with the signing of the lease.

      We believe that our facilities are adequate for our current needs.  If our
operations are successful and our research and development  activities  continue
to expand,  or if we  determine  to  produce  HEMOXIN(TM),  paclitaxel  or other
products in  large-scale  commercial  quantities  at 100 Jersey  Avenue,  we may
require  additional  equipment,  manufacturing  facilities,  or both.  We cannot
predict  the nature  and extent of the  equipment  or  facilities  that might be
needed  at  such  time.  We  intend  to  build  a  manufacturing   facility  for
NICOSAN(TM)/HEMOXIN(TM) in Nigeria.


ITEM 3.    LEGAL PROCEEDINGS

      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  violations of federal and state antitrust laws. The case, filed in the
United  States  District  Court,  Northern  District of Illinois,  arises out of
Bristol-Meyers  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.

      Our lawsuit alleges that  Bristol-Myers  Squibb is liable for violation of
Section 2 of the  Sherman  Act (15 USC 2). We are seeking an award in damages in
the sum of at least $50  million  dollars  and said  damages to be trebled to at
least $150 million  dollars.  The case was  dismissed in late 2003,  and we have
since filed an appeal of the  dismissal  with the U.S.  Court of Appeals for the
Seventh  Circuit.  The appeal has been briefed and is awaiting further action by
the Court. There can be no assurances as to the outcome of this lawsuit.


                                       29
<PAGE>

      In April 2003, a suit was filed against us by our former  patent  counsel,
Dorsey  Whitney,  LLP  seeking  legal fees and costs.  We settled the lawsuit on
August 25, 2003 by entering into a stipulation for confession of judgment in the
amount of $200,000.  Execution of the judgment by agreement has been delayed for
12  months.  To secure the  judgment,  we have  granted to our former  counsel a
security  interest  in the net  proceeds of our lawsuit  against  Bristol  Myers
Squibb,  exclusive  of the 40%  interest in such  lawsuit  proceeds  assigned to
Marjorie  Chassman and exclusive of all contingency  legal fees payable by us in
connection with the lawsuit. As part of the settlement,  we provided releases to
our former counsel.

      Xechem  formerly had entered into a license  agreement with M.D.  Anderson
Cancer Center for certain paclitaxel  formulation rights. That license has since
been  cancelled,  with all investment  therein by us having been written off. In
March, 2000 we filed a declaratory judgment action in the United States District
Court  against MD Anderson and the Board of Regents of the  University  of Texas
seeking to reinstate the license and to change inventorship and ownership of the
corresponding  patent. The lawsuit was dismissed in 2003 and in January, 2004 we
filed an appeal of the dismissal in the United States Court of Appeals,  and the
matter is still pending.

      The outcome of these, and all other legal matters, is not expected to have
a negative effect on the financial position, results of operations or cash flows
of the Company.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

      On or about March 12, 2003, we delivered to  stockholders  an  Information
Statement which disclosed information  concerning two matters as to which we had
received  approval of our  stockholders  by consent,  namely a proposed  reverse
stock split and a proposed  amendment to our  Certificate  of  Incorporation  to
increase the number of authorized  shares of our common stock.  The  Information
Statement  was filed with the  Securities  and Exchange  Commission on March 12,
2003. We make reference to this  Information  Statement for further  information
concerning these matters.


                                       30
<PAGE>

                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our Common Stock is traded on the OTC Bulletin Board.  The following table
shows the high and low bid quotations, on a quarterly basis, of our Common Stock
from January 1, 2002 through December 31, 2003:

<TABLE>
<CAPTION>
                                                  Common Stock
----------------------------------------------------------------------------------------------------------

                 2002       2002        2002       2002        2003        2003       2003        2003
                First      Second      Third      Fourth      First       Second      Third      Fourth
               Quarter     Quarter    Quarter     Quarter    Quarter     Quarter     Quarter    Quarter
----------------------------------------------------------------------------------------------------------
<S>              <C>        <C>         <C>        <C>        <C>          <C>         <C>        <C>
  High Bid       .02        .015        .008       .0014      .0008        .53         .33        .305
----------------------------------------------------------------------------------------------------------
   Low Bid       .005       .006       .0013       .0007      .0001       .0001        .17        .14
----------------------------------------------------------------------------------------------------------
</TABLE>

      We have not declared or paid any dividends on our Common Stock.

      In May 2003 we had a reverse stock split of 3000 to 1. Our trading  symbol
also was changed at that time from "ZKEM" to "XKEM".

      As of April 2, 2004, there were 397 record holders and approximately 6,500
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 April 2, 2004 there
were 2,500  outstanding  shares of Class A Preferred  Stock. As of April 2, 2004
there were 923 outstanding shares of Class C Preferred Stock with a par value of
$ .00001 with voting rights for 1 share equal to 10,000 shares of Common Stock.

      During the year ended  December  31,  2003,  we sold  shares of our Common
Stock (the "Shares") in transactions  not registered under the Securities Act of
1933, as amended (the "Securities Act") as set forth below:

      During the year ended  December 31, 2003,  we issued a total of 63,581,057
shares  (post-split)  of our  Common  Stock to holders  of  convertible  debt in
connection with the conversion of such indebtedness.  The amount of indebtedness
converted as a result of such  transactions  was $1,003,007.  We did not use the
services of any finders or securities  broker-dealers  in connection  with these
transactions.  We believe that all shares issued in the above  transactions  are
exempt from  registration  under the Securities Act by virtue of Section 3(a)(9)
of the Securities Act and/or Regulation D promulgated thereunder.

      During December 2003 we canceled all outstanding Shares of Class C, Series
6 Stock to Dr. Ramesh C. Pandey due to reverse split,  we then issued a total of


                                       31
<PAGE>

923  Shares  of Class C,  Series 6 Stock to Dr.  Ramesh  C.  Pandey,  the  Chief
Executive Officer and Chairman of Xechem in order for Dr. Pandey to maintain his
20% voting  rights.  We received par value as  consideration  from Dr. Pandey in
connection  with this  transaction.  We believe that all Class C, Series 6 Stock
issued  in the  above  transactions  are  exempt  from  registration  under  the
Securities Act by virtue of Section 4(2) of the Securities Act.


                                       32
<PAGE>

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS(2)

General

      We are  the  holder  of all  of the  capital  stock  of  Xechem,  Inc.,  a
development   stage   bio-pharmaceutical   company   engaged  in  the  research,
development,  and production of niche generic and proprietary drugs from natural
sources.  Xechem, Inc., was formed in March 1990 to acquire substantially all of
the assets of a subsidiary of LyphoMed,  Inc. (later known as Fujisawa/LyphoMed,
Inc.),  a  publicly  traded  company.  Xechem  Laboratories  (formed  in  1993),
XetaPharm,   Inc.  (formed  in  1996),  Xechem  (India)  Pvt.  Ltd.  and  Xechem
Pharmaceuticals  Nigeria Limited (formed in 2002) are our  subsidiaries.  Xechem
Pharmaceutical  China Ltd., (formed in 2000) is an affiliate in the early stages
of development.

Results of Operations

The Year Ended December 31, 2003 vs. The Year Ended December 31, 2002

      The  following  table sets forth certain  statement of operations  data of
Xechem for each of the years ended  December 31, 2003, and December 31, 2002 for
the cumulative period from inception (March 15, 1990) to December 31, 2003.

<TABLE>
<CAPTION>
                                                                                    CUMULATIVE
                                                         YEARS ENDED                    FROM
                                                         DECEMBER 31                INCEPTION TO
                                                         -----------                ------------
                                                    2003          2002                 2003
                                                as Restated                        as Restated
                                                             (in thousands)
<S>                                            <C>            <C>                  <C>
Revenue                                        $        318   $        269         $      1,948
Research and development expense               $        773   $        698         $     11,424
General and administrative expenses            $      1,866   $      1,902         $     16,907
Writedown of inventory and intangibles         $          5   $         --         $      1,861
Loss from operations                           $     (2,326)  $     (2,331)        $    (28,244)
Other expense                                  $     (1,592)  $     (1,511)        $    (17,076)
Sale of New Jersey net operating loss
  carryforwards                                $     90,000   $    243,000         $  1,685,000
Net Loss                                       $     (3,828)  $     (3,599)        $    (43,635)
</TABLE>

-------------------------

(2)   Some of the  statements  included  in Item 6,  Management  Discussion  and
      Analysis,  may be considered to be "forward looking statements" since such
      statements  relate to matters  which have not yet  occurred.  For example,
      phrases such as "we anticipate,"  "believe" or "expect"  indicates that it
      is possible  that the event  anticipated,  believed  or  expected  may not
      occur.  Should such event not occur, then the result that we expected also
      may not occur or occur in a  different  manner,  which may be more or less
      favorable to us. We do not  undertake any  obligation to publicly  release
      the result of any revisions to the forward-looking  statements that may be
      made to reflect any future events or circumstances.


                                       33
<PAGE>

      Readers should  carefully review the items included in Item 1, Description
of Business - Risks Affecting  Forward Looking  Statements and Stock Prices,  as
they relate to any forward  looking  statements,  as actual results could differ
materially from those projected in the forward looking statement.

Revenue

      Revenue increased $49,000 or 18% from $269,000 for the year ended December
31, 2002 to $318,000  for the year ended  December  31,  2003.  The  $318,000 in
revenues   consisted  of   approximately   $35,000  in  consulting   fees,   and
approximately  $158,000 in lab service fees for Xechem Inc. XetaPharm's revenues
from the sale of nutraceuticals remained consistent at approximately $13,000 for
both  years  ended  December  31,  2003 to the year  ended  December  31,  2002.
Xetapharm also recognized revenue from consulting fees of approximately $112,000
an increase of approximately $44,000 or 65%.

Research and Development

      Research and  development  increased  $75,000 or 11% from $698,000 for the
year ended  December 31, 2002 to $773,000 for the year ended  December 31, 2003.
Our research and  development  expenditures  emphasize our new sickle cell drugs
NIPRISAN (new names  NICOSAN(TM)/HEMOXIN(TM))  and a new start up entity, Xechem
Nigeria  Ltd.  which will be in place in 2004,  start up costs for this  project
were approximately $208,000 in 2003 as compared to $72,000 in 2002. We are still
emphasizing  research on compounds for niche generic  anticancer,  antiviral and
antibiotic  products,  which enjoy  significant  market demand but are no longer
subject to patent protection.

      The major  expenses  of 2003  were:  salaries  and wages of  approximately
$220,000 which decreased by  approximately 9% or $21,000 as compared to 2002 due
to reduced hours in the second quarter,  depreciation  expense of  approximately
$150,000 a decrease of approximately $35,000 or 19% as compared to 2002 due to a
number of fixed  assets being fully  depreciated  in 2002,  outside  services of
approximately  $77,000 as  compared to $ 0. in 2002 due to the start of clinical
testing  and trials of our new drug,  repairs  and lab  materials  and  supplies
remained constant at approximately $80,000 for each year, and the start up costs
for Xechem Nigeria Ltd. and our new sickle cell drug of approximately $208,000.

      We  anticipate  expenses  to  increase  for  2004  with our  launching  of
NICOSAN(TM)  in  Nigeria  and the  clinical  testing  and trials of our new drug
HEMOXIN(TM) in the United States.

General and Administrative

      General and administrative  expenses  decreased $36,000,  or less than 2%,
for the year ended  December 31, 2003 as compared to the year ended December 31,
2002.  The  major  expenses  for the year were from  salaries  of  approximately
$490,000 which increased by approximately  15% or $65,000 mainly from Xetapharm,
which were offset by the  increase in service fees paid to us,  consulting  fees
which increased by approximately 3% or $6,000 primarily  connected to the sickle
cell  project and  investor  relations,  rent  expense  increased  approximately
$58,000 or 45% for the year ended  December  31,  2003 as  compared  to the year
ended  December 31, 2002 this was due to the rent increase  associated  with our
new lease,  and legal fees  increased in for the year ended December 31, 2003 as


                                       34
<PAGE>

compared to the year ended December 31, 2002 by approximately $290,000; this was
caused by our new financing  activities and public  registration,  reporting and
compliance  activity in 2003.  Our major  decrease  resulted  when we wrote-down
promissory notes of $265,000 in 2002.

      Interest expense for non-related  parties was approximately  $1,524,000 in
the year ended December 31, 2003, an increase of  approximately  $197,000 or 15%
as compared to the year ended  December 31,  2002.  This expense was non-cash in
nature due to borrowings  evidenced by debentures  and notes and the  beneficial
conversion feature of said debentures.

      On May 23, 2002 we received $1,150,000 from "Unsecured  Convertible Notes"
less $130,000 in legal and finder's fees. The term of these notes is for two (2)
years with simple interest  accruing at the annual rate of 8% payable on May 23,
2004 (the Maturity Date).  These notes are convertible into shares of our common
stock, par value $.00001 per share after six months from receipt, the conversion
price of the Notes is the lower of $0.005 or 50% of the lowest closing bid price
for the  Shares on the OTC Pink  Sheets,  the OTC  Bulletin  Board,  the  Nasdaq
SmallCap or NMS Markets or any stock exchange,  or if not then trading on any of
the  foregoing,  such other  principal  market or exchange  where the Shares are
listed or traded for 30  trading  days  prior to but not  including  the date of
conversion.  The interest on those notes  accrues and is payable upon  maturity,
and at the option of the holder may be  converted  into  common  stock,  per the
aforesaid formula. In addition,  the holders of Unsecured Convertible Notes were
issued five year warrants to purchase common stock at an exercise price of $0.30
per share,  with .0133  warrants  issued for each $1.00 of  investment in notes.
These notes may not be redeemed or paid before the Maturity Date without consent
of the Borrower.

During 2003 we had the following activity concerning the "Unsecured  Convertible
Notes":

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Balance           Additions       Conversions     Interest        Shares Issued    Balance
01/01/03                                                          Post-split       12/31/03
-------------------------------------------------------------------------------------------------
<S>               <C>             <C>             <C>             <C>              <C>
$ 1,133,500       $50,000         $866,151.48     $68,497.50      62,680,970       $317,348.52

-------------------------------------------------------------------------------------------------
</TABLE>

      The $50,000  addition  to the notes  resulted  in a  $14,483.33  charge to
operations  with another  $35,516.67  in charges to be expensed over the life of
the  note.  This is in  addition  to a charge  to  operations  of  approximately
$1,500,000  relating to the  beneficial  conversion  feature  and  modifications
thereof  during  2002.  We also have accrued  interest  relating to the notes of
$35,253.42

      As of December 31, 2003 we had $144,173 in outstanding  debentures bearing
interest at 8% and  maturing in 2011.  At December 31, 2003 there was $14,029 in
accrued  interest  relating  to the  debentures.  In  March  2003  we  converted
$68,358.34  of  principal  and  interest  into  900,087  shares of common  stock
post-split. After a series of modifications the unpaid principal and interest on
the debentures,  are convertible into common stock using a conversion price of $
0.0025 per share.

      Xechem has reserved the right to repay these debentures in full or in part
without  penalty at any time.  Xechem must give  fifteen (15) days notice to the
payee of its intention to prepay.

      A  second  tranche  of  convertible  debentures  aggregating  $367,000  at
December 31, 2002 was increased by an additional  funding of $767,000 by certain
investors  during the twelve months ended  December 31, 2003,  which  debentures
were  converted to a term loan bearing simple  interest at 8% per annum,  due on


                                       35
<PAGE>

the earliest to occur of the settlement,  dismissal or final adjudication of the
Bristol Myers Squibb lawsuit (the "BMS Lawsuit"), plus additional interest equal
to forty percent (40%) of net recovery 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 have granted the term loan holders a security interest in the BMS
lawsuit.  These notes will be due on the later of 18 months from the date of the
note purchase agreement or final disposition of the Bristol Myers Squibb lawsuit
(provided that the additional interest, if any, as referenced above, will be due
on disposition of the lawsuit).  As of December 31, 2003 we accrued  interest of
$70,506 associated with this loan.

Agreement to Fund $6,000,000 Unsecured Loan

      We have entered into a letter agreement ("Note Purchase  Agreement") dated
November 11, 2003 with Margie  Chassman and designees (the  "Investor") to issue
$6,000,000  of  unsecured  promissory  notes (the "New  Notes")  over a 12 month
period,  to be funded:  (i)  $700,000 by November  25,  2003;  (ii)  $650,000 by
December 24, 2003; (iii) $500,000 per month for January and February, 2004; (iv)
$450,000 for March,  April and May, 2004; (v) $400,000 for June,  July,  August,
September and October, 2004; and (vi) $300,000 for November, 2004. The loans for
2004 are due on the first  business day of the month,  subject to a 30-day grace
period.  The New Notes will bear  interest  at 8% per annum and mature 18 months
from the date of the  agreement.  The  funding of the New Notes was  conditioned
upon  satisfaction  and  subject  to all of other  matters  discussed  below and
execution of definitive documents consistent with the letter agreement.

Recapitalization of Company

      We had previously  issued a series of convertible  notes (the "Convertible
Notes") that were  convertible  into our common stock at a conversion rate equal
to 50% of the lowest bid price of our stock for the  30-day  period  immediately
preceding the date of conversion.  The Note Purchase Agreement acknowledges that
in consideration  for $175,000 of pre-closing  advances on October 27, 2003, the
terms of all Convertible Notes held or subsequently  acquired by the Investor on
or  following  October  27,  2003 are to be  convertible  as to  principal  plus
accrued, unpaid interest at a conversion price of $0.0025 per share. As of April
2, 2004,  an  aggregate of  151,081,266  shares of common stock have been issued
pursuant to  conversions  under this  Convertible  Note,  which has  resulted in
(together  with all  other  shares  of  common  stock  outstanding)  issued  and
outstanding  common stock of  165,750,348  shares.  At such date an aggregate of
$141,700 of unpaid  principal  and  interest  were owed on such notes,  which if
converted at $0.0025 per share,  would  result in the issuance of an  additional
56,679,941  shares of common stock. As interest  continues to accrue,  this will
increase the amount of stock issuable upon  conversion.  The  Convertible  Notes
will continue to be subject to the limitation  that the holder not own in excess
of 4.9% of our  outstanding  common stock at any time after giving effect to the
conversion.  In addition,  the Note Purchase Agreement provided for the grant to
the Note  Purchaser  of a 5-year  warrant to purchase an  additional  30,000,000
shares of our  common  stock at  $0.0025  per  share,  together  with a cashless
exercise  provision,  and with demand and piggyback  registration rights for the
shares of common stock issuable pursuant to conversion of the notes and exercise
of the warrant

      The Note  Purchase  Agreement  loan  contemplates  as a  condition  to the
funding of the  corresponding  loan that each of Dr.  Ramesh  Pandey and William
Pursley  receive  options to acquire 20% of the fully diluted common stock of us
after giving effect to the sum of (i) the then outstanding  capital stock of the


                                       36
<PAGE>

Company,  plus (ii) the shares  issuable or  conversion of the notes and warrant
issued to the  Investor;  plus (iii) the shares  issuable to Dr.  Pandey and Mr.
Pursley per this option; and (iv) any shares issuable to the Investor and to the
holders of the debt secured by the 40% participation in the Bristol Myers Squibb
lawsuit,  as a result of any  restructuring of such debt. In connection with the
restructuring of Mr.  Pursley's  employment  arrangement in April,  2004, he was
granted an amended and restated option agreement by us, modifying his options to
a fixed sum of 43,000,000 shares, exercisable at $0.0025 per share; Dr. Pandey's
option as contemplated by the Note Purchase  Agreement is exercisable at $0.0001
per share.

      The Note Purchase  Agreement  also calls for the granting of certain third
party  note  holders  who hold  $156,000  of loans  to have a 30 day  option  to
exchange such debt for common stock at $0.01 per share.

      As of December 31, 2003 we have received $1,350,000 from the Note Purchase
Agreement  loan and have recorded  $9,600 in accrued  interest.  (An  additional
$1,450,000 has been funded through April 8, 2004.)

      In 2003 we have received $88,000 from eight short-term notes.  These notes
are all for one year with interest from 8% - 12% accrued interest as of December
31, 2003 is $4,033.  Four 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.  Two notes
totaling $20,000 can be converted into common stock with a conversion price of $
0.01 The intrinsic  value of the beneficial  conversion  feature of $ 20,000 has
been  allocated to paid in capital and is being  amortized  over the term on the
notes.

      During December of 2003 we received  approval from the New Jersey Economic
Development  Authority ("NJEDA") to sell approximately  $109,000 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 2003 and
2002,  Xechem and its subsidiaries  transferred the tax benefits of $109,000 and
$303,000 in exchange for $100,000 and $243,00 respectively,  pursuant to the New
Jersey State Tax Credit Transfer  program.  We received $100,309 net pursuant to
this program in December 2003.

Liquidity and Capital Resources; Plan of Operations

      On December 31, 2003, we had cash of $580,000, negative working capital of
$1,989,000 and a deficit in stockholders' equity of $1,617,000.

      We have  received  approximately  $2,509,000  in the form of proceeds from
debentures,  short-term loans,  related party loans and equity securities.  Cash
used in operating activities was $1,272,000 during 2003.

      As a result of our net losses to December 31, 2003 and accumulated deficit
since inception,  our auditors,  in their report on our financial statements for
the year ended December 31, 2003, included an explanatory  paragraph  indicating
there is substantial doubt about our ability to continue as a going concern. Our
research  and  development  activities  are  continuing  and the time and  money


                                       37
<PAGE>

required to determine the  commercial  value and  marketability  of our proposed
products cannot be estimated with precision.  We expect research and development
activities  to  continue  to  require   significant  cost  expenditures  for  an
indefinite period in the future.

      Our research and development activities are at an early stage and the time
and money  required  developing 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 two
recent financing agreements.

            (1)  We  have  entered  into  a  letter  agreement  ("Note  Purchase
      Agreement")  dated  November 11, 2003 with Margie  Chassman and  designees
      (the  "Investor") to issue  $6,000,000 of unsecured  promissory notes (the
      "New  Notes")  over a 12  month  period,  as  notice  fully  described  in
      "Agreement to Fund  $6,000,000  Unsecured  Loan" and  Recapitalization  of
      Company," above.

            (2) We have entered into a Memorandum of  Understanding  (MOU) dated
      December 3, 2003 with Alembic,  Limited. Funding will be in two parts: (i)
      a subscription  agreement to purchase $640,000 of our common stock,  which
      subscription  was funded in March,  2004; and (ii) a $3,000,000  loan that
      included a $200,000  advance in December 2003 with the balance due in 2004
      after  agreement  is  finalized;  the MOU was  superceded  by a definitive
      convertible  note dated April 7, 2004.  (See Financial  Statements Note 17
      Subsequent Events.)

      In view of the matters  described in the previous  paragraph our continued
operations are dependent upon our ability to meet our financing  requirements on
a  continuous  basis and to  succeed  in our future  operations.  The  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification of recorded asset amounts or amounts of liabilities that might be
necessary should we be unable to continue in existence.

      Additionally  we have  expended  and will  continue to expend  substantial
funds in connection  with the research and  development  of our  products.  As a
result  of  these  expenditures,   and  even  with  revenues   anticipated  from
commencement of sales of niprisan and paclitaxel, we anticipate that losses will
continue for the foreseeable future.

      Our  planned  activities  will  require  the  addition  of new  personnel,
including  management,  and the continued development of expertise in areas such
as  preclinical   testing,   clinical  trial  management,   regulatory  affairs,
manufacturing and marketing.  Further, if we receive regulatory approval for any
of our products,  in the United States or elsewhere,  we will incur  substantial
expenditures  to develop our  manufacturing,  sales and  marketing  capabilities
and/or  subcontract or joint venture these activities with others.  There can be
no  assurance  that we will  ever  recognize  revenue  or  profit  from any such
products.  In  addition,  we may  encounter  unanticipated  problems,  including
developmental,  regulatory,  manufacturing  or marketing  difficulties,  some of
which may be beyond our ability to resolve.  We may lack the capacity to produce
its  products  in-house and there can be no  assurances  that we will be able to
locate suitable contract  manufacturers or be able to have them produce products
at satisfactory prices.

      We will  continue  to apply to various  governmental  agencies to fund our
research on specific projects and those projects that are in our expertise.


                                       38
<PAGE>

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

      FIN No.  45,  "Guarantor's  Accounting  and  Disclosure  Requirements  for
Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others" (FIN No.
45), was issued in November  2002.  FIN No. 45 addresses the  disclosures  to be
made by a guarantor  in its interim and annual  financial  statements  about its
obligations  under  certain  guarantees  that it has  issued.  Under FIN No. 45,
recognition  and initial  measurement  provisions  of this new  standard,  which
require a guarantor to recognize a liability at inception of a guarantee at fair
value,  are  effective on a prospective  basis to guarantees  issued or modified
after  December 31, 2002.  The adoption of FIN No. 45 did not have a significant
impact on our consolidated financial position or results of operations.

      In November  2002,  the  Emerging  Issues Task  Force,  "EITF",  reached a
consensus on Issue No. 00-21,  "Revenue  Arrangements  with  Multiple  Elements"
(EITF No. 00-21), which addresses certain aspects of accounting for arrangements
that include multiple products or services.  Specifically this issue states that
in an  arrangement  with multiple  deliverables,  the delivered  items should be
considered a separate unit of accounting if: (1) the delivered  items have value
to the  customer on a stand alone  basis,  (2) there is  objective  and reliable


                                       39
<PAGE>

evidence of the fair value of the  undelivered  items,  and (3) the  arrangement
includes a general right of return  relative to the delivered item, and delivery
or performance of the undelivered items is considered probable and substantially
within  the  Company's  control.   Additionally,   the  Issue  states  that  the
consideration  should be allocated among the separate units of accounting  based
upon their relative fair values.  If there is objective and reliable evidence of
the fair value of the  undelivered  items in an arrangement but no such evidence
for the delivered items, then the residual method should be used to allocate the
consideration.  Under the residual method, the amount of consideration allocated
to the delivered  items equals the total  consideration  less the aggregate fair
value of the undelivered items.  Accordingly,  the application of EITF No. 00-21
may impact the timing of revenue  recognition as well as the allocation  between
products and services.  The adoption of EITF No. 00-21 for transactions  entered
into after July 1, 2003 did not have a  significant  impact on our  consolidated
financial statements.

      In  January  2003,  the FASB  issued  Interpretation  No.  46 ("FIN  46"),
"Consolidation of Variable Interest  Entities".  The primary  objectives of this
interpretation  are to provide  guidance on the  identification  of entities for
which  control is  achieved  through  means  other than  through  voting  rights
("variable  interest  entities")  and how to determine  when and which  business
enterprise (the "primary  beneficiary") should consolidate the variable interest
entity.  This new model for  consolidation  applies to an entity in which either
(i) the equity investors (if any) do not have a controlling  financial interest;
or (ii) the equity  investment at risk is  insufficient to finance that entity's
activities  without  receiving  additional  subordinated  financial support from
other parties.  In addition,  FIN 46 requires that the primary  beneficiary,  as
well as all other enterprises with a significant  variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46 were effective
for financial  statements  issued after January 31, 2003. In December  2003, the
FASB issued FIN 46 (revised December 2003),  "Consolidation of Variable Interest
Entities"  ("FIN 46-R") to address  certain FIN 46  implementation  issues.  The
effective  dates  and  impact  of FIN 46  and  FIN  46-R  are  as  follows:  (i)
Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company
must apply either the  provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first  interim or annual  reporting  period  ending after
December 15, 2003. (ii) Non-SPEs  created prior to February 1, 2003. The Company
is  required  to  adopt  FIN  46-R at the end of the  first  interim  or  annual
reporting period ending after March 15, 2004. (iii) All entities,  regardless of
whether an SPE, that were created subsequent to January 31, 2003. The provisions
of FIN 46 were  applicable  for variable  interests in entities  obtained  after
January 31,  2003.  The Company  does not have any  arrangements  with  variable
interest entities that will require consolidation of their financial information
in our financial statements

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial  Instruments with Characteristics of both Liability and Equity".  SFAS
No. 150 establishes  standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. It also
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some  circumstances).  Many of those  instruments
were  previously  classified as equity.  SFAS No. 150 is effective for financial
instruments  entered  into or modified  after May 15,  2003,  and  otherwise  is
effective at the beginning of the first interim period  beginning after June 15,
2003. It is to be implemented by reporting a cumulative effect of a change in an
accounting  principal of financial  instruments created before the issuance date
of the  Statement and still  existing at the beginning of the interim  period of
adoption.  Restatement  is not  permitted.  The adoption of SFAS No. 150 did not
have a material  impact on our  consolidated  financial  position  or results of
operations.

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


                                       40
<PAGE>

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.


                                       41
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders,
Xechem International, Inc. (A Development Stage Enterprise) and Subsidiaries:

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Xechem
International,  Inc. (A Development  Stage  Enterprise)  and  Subsidiaries as of
December  31,  2003,  and the related  consolidated  statements  of  operations,
stockholders'  equity  and cash flows for the year then ended and for the period
from March 15, 1990 (date of  inception) to December 31, 2003.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.  We did not audit the  consolidated  financial  statements  of Xechem
International,  Inc. (A Development  Stage  Enterprise) for the period March 15,
1990 (date of inception) to December 31, 2002.  Such  statements are included in
the cumulative  totals from  inception to December 31, 2003 on the  consolidated
statements of operations,  cash flows and stockholders' equity, which reflects a
net loss of $39,807,000 of the related  cumulative total.  Those statements were
audited  by other  auditors  whose  reports  have been  furnished  to us and our
opinion, insofar as it relates to amounts for the period March 15, 1990 (date of
inception)  to December 31, 2002  included in the  cumulative  totals,  is based
solely upon the reports of the other auditors.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  based on our audit and the reports of other auditors insofar as
it relates  to amounts  for the period  March 15,  1990 (date of  inception)  to
December 31, 2002 included in the cumulative totals,  these financial statements
referred to above present fairly,  in all material  respects,  the  consolidated
financial   position  of  Xechem   International,   Inc.  (A  Development  Stage
Enterprise)  and  Subsidiaries  as of December  31, 2003,  and the  consolidated
results of their operations and their cash flows for the year then ended and for
the period  from March 15,  1990 (date of  inception)  to  December  31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.


                                      F-1
<PAGE>

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  As more fully  described in
Note 3 to the  consolidated  financial  statements,  the Company has sustained a
significant  operating  loss in 2003 and has a  working  capital  deficiency  of
$1,989,000  and an  accumulated  deficit of $43,635,000 as of December 31, 2003.
These conditions raise substantial doubt about the Company's ability to continue
as a  going  concern.  Management's  plans  regarding  those  matters  are  also
described in Note 3. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ WithumSmith+Brown P.C.
New Brunswick, New Jersey
March 26, 2004, except for Note 17 (2) which is
dated March 31, 2004 and (1) which is dated
April 7, 2004 and Note 18 which is dated
February 25, 2005



                                      F-2
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Audit Committee of Xechem International, Inc.

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Xechem
International,  Inc.  and  Subsidiaries  (a  Development  Stage  Company)  as of
December  31,  2002  and the  related  consolidated  statements  of  operations,
stockholders'  equity and cash flows for the period ended December 31, 2002. The
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an opinion on the  consolidated
financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall  consolidated  financial statements  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 consolidated financial position of Xechem
International,  Inc.  and  Subsidiaries  (a  Development  Stage  Company)  as of
December 31, 2002 and the  consolidated  results of their  operations  and their
consolidated  cash flows for the period ended  December  31, 2002 in  conformity
with accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial  statements,  the Company has incurred substantial losses and negative
cash flows since  inception  through the period ended  December 31, 2002,  had a
working  capital  deficiency,  and have realized  minimal  revenues to date. The
Company's  historical losses and illiquid  financial  position raise substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans in regard to these  matters are also  described  in Note 2. The  financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.


WISS & COMPANY, LLP
Livingston, New Jersey
March 6, 2003


                                      F-3
<PAGE>

                       XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                            (A DEVELOPMENT STAGE ENTERPRISE)
                               CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                     December 31, 2003       As Reclassified
                                                                                        As restated         December 31, 2002
                                                                                        -----------         -----------------
<S>                                                                                     <C>                   <C>
CURRENT ASSETS
   Cash                                                                                 $    580,000          $    135,000
   Accounts receivable, net of allowance of $7,000 (2003) and $ -0- (2002)                    27,000                22,000
   Inventory                                                                                      --                 5,000
   Prepaid expenses and other current assets                                                 109,000                 1,000
                                                                                        ------------          ------------

   TOTAL CURRENT ASSETS                                                                      716,000               163,000

 Equipment, less accumulated depreciation of
   $1,266,000 (2003) and  $1,185,000 (2002)                                                  423,000               382,000
 Leasehold improvements, less accumulated amortization of
   $705,000 (2003) and $637,000 (2002)                                                       310,000               378,000
 Deposits                                                                                     53,000                45,000
 Deferred consulting charge                                                                1,275,000                    --
                                                                                        ------------          ------------

TOTAL ASSETS                                                                            $  2,777,000          $    968,000
                                                                                        ============          ============

CURRENT LIABILITIES
   Accounts payable                                                                     $    601,000          $    637,000
   Accrued expenses to related parties                                                       594,000               515,000
   Accrued expenses to others                                                                380,000               211,000
   Note payable to bank                                                                       55,000                55,000
   Notes payable to related party                                                            595,000               493,000
   Notes payable                                                                             200,000                    --
   Convertible notes, net of discount of $99,000 (2003) and $ 0 (2002)                       218,000                    --
   Capital leases: short-term                                                                 27,000                 6,000
   Other current liabilities                                                                  35,000                36,000
                                                                                        ------------          ------------

     TOTAL CURRENT LIABILITIES                                                             2,705,000             1,953,000
                                                                                        ------------          ------------

Notes payable, net of discount of $1,238,000                                               1,246,000                    --
Notes payable to related parties                                                             340,000               384,000
Capital leases: long term                                                                     86,000                18,000
Convertible notes, net of discount of  $ -0- (2003) and $1,133,000 (2002)                         --               368,000
Convertible debentures, net of discount of $67,000 (2003) and $128,000 (2002)                 17,000                16,000
                                                                                        ------------          ------------

TOTAL LIABILITIES                                                                          4,394,000             2,739,000
                                                                                        ------------          ------------

COMMITMENTS & CONTINGENCIES

STOCKHOLDERS EQUITY (DEFICIT)
   Class A voting preferred stock,$ .00001 par value, 2,500 shares
     authorized; 2,500 shares issued and outstanding (2003and 2002)                               --                    --
   Class B 8% preferred stock,$ .00001 par value, 1,150 shares
     authorized; none outstanding                                                                 --                    --
   Class C preferred stock,$ .00001 par value, 2,996,350 shares authorized;
     923 issued and outstanding in (2003) and 14  issued and outstanding in (2002)                --                    --
   Common stock,$.00001 par value, 499,950,000,000 shares authorized;
     64,240,000 (2003) and 659,000 (2002)  issued and outstanding                              1,000                20,000
   Unearned compensation expense                                                                  --              (158,000)
   Additional paid in capital                                                             42,017,000            38,174,000
   Deficit accumulated during development stage                                          (43,635,000)          (39,807,000)
                                                                                        ------------          ------------

   TOTAL STOCKHOLDERS EQUITY (DEFICIT)                                                    (1,617,000)           (1,771,000)
                                                                                        ------------          ------------

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                     $  2,777,000          $    968,000
                                                                                        ============          ============
</TABLE>
                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-4
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                CUMULATIVE FROM
                                                                                 MARCH 15, 1990
                                                      YEARS ENDED             (DATE OF INCEPTION) TO
                                                      DECEMBER 31,                 DECEMBER 31
                                             -------------------------------       ------------
                                                 2003               2002               2003
                                             ------------       ------------       ------------
                                             As restated                             As restated
                                             ------------                          ------------
<S>                                          <C>                <C>                <C>
Revenues:
                                             $    318,000       $    269,000       $  1,948,000
EXPENSES:

   Research and development                       773,000            698,000         11,424,000
   General and administrative                   1,866,000          1,902,000         16,907,000
   Writedown of inventory
      & intangibles                                 5,000                  0          1,861,000
                                             --------------------------------------------------
                                                2,644,000          2,600,000         30,192,000
                                             --------------------------------------------------

   LOSS FROM OPERATIONS                        (2,326,000)        (2,331,000)       (28,244,000)
                                             --------------------------------------------------

OTHER INCOME(EXPENSE) - NET:

   Interest Expense - Related Party               (72,000)           (70,000)        (8,941,000)

   Interest Expense                            (1,524,000)        (1,327,000)        (8,328,000)

   Other(net)                                       4,000           (114,000)           193,000
                                             --------------------------------------------------
                                               (1,592,000)        (1,511,000)       (17,076,000)
                                             --------------------------------------------------

NET LOSS BEFORE INCOME TAXES                   (3,918,000)        (3,842,000)       (45,320,000)

   Sale of New Jersey net operating
    loss carryforwards                             90,000            243,000          1,685,000
                                             --------------------------------------------------

   NET LOSS                                  $ (3,828,000)      $ (3,599,000)      $(43,635,000)
                                             ==================================================

BASIC AND DILUTED LOSS PER COMMON SHARE      $      (0.37)      $     (12.54)
                                             ===============================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
- BASIC AND DILUTED                            10,379,064            287,000
                                             ===============================

</TABLE>

                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-5
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
     FOR THE PERIOD MARCH 15, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 2003
                                   AS RESTATED

<TABLE>
<CAPTION>
                                                                                                                        Additional
                                                                                  Number                                 Paid-In-
                                                                                    of                   Unearned        Capital
                                                                                  shares       Par     Compensation        (As
                                                                                  issued      value      Expense         Restated)
                                                                                 ---------------------------------------------------
<S>                                                                               <C>         <C>          <C>        <C>
  Common stock issued to Dr. Pandey in 1990 in exchange
    for equipment recorded at transferor's cost                                       --      $   --       $   --      $  125,000

  Laboratory and research equipment contributed to capital
    by Dr. Pandey in 1990 and 1991                                                    --          --           --         341,000

  Contribution to capital relating to unconsummated acquisition
    in 1992                                                                           --          --           --          95,000

  Exchange of securities of newly formed parent for outstanding
    securities of entities owned by Dr. Pandey                                     1,000          --           --      13,840,000

  Initial public offering in 1995 at  $5 per share, less related expenses          1,000          --           --       4,543,000

  Stock options granted at exercise prices below market:
                        1994                                                          --          --           --          51,000
                        1995                                                          --          --           --       1,110,000
                        1996                                                          --          --           --          18,000
                        1997                                                          --          --           --          31,000

  Private placements, less related expenses:
    In 1995 at  $3.00 per share                                                       --          --           --         389,000
    In 1996 at  $3.00 per share, net of a related 66,000 shares
      returned by Dr. Pandey                                                          --          --           --          53,000
    In 1997 at  $0.05 per share                                                   15,000          --           --       2,291,000

  Shares issued in 1996 at  $0.38 per share upon termination of
    agreement to sell a minority interest in a subsidiary                             --          --           --         100,000

  Conversion of preferred stock into common stock at  $1.25 to
     $1.75 per share less related costs:
                        In 1996                                                    1,000          --           --       1,995,000
                        In 1997                                                   15,000       1,000           --       2,131,000

  Conversion of debt into common stock in 1996 at  $0.25 per
    share                                                                             --          --           --         369,000

  Shares issued in settlement of a lawsuit in 1996 valued at
     $1.31 per share                                                                  --          --           --          33,000

  Conversion of Dr. Pandey's preferred stock and debt into
    common stock in 1997 at  $0.0625 per share                                     6,000          --           --       1,214,000

  Other                                                                               --          --           --          16,000

  Private placement at  $0.05 per share                                            4,000          --           --         559,000

  Contribution to capital by stockholders of equity interest in Xechem India          --          --           --          79,000

  Conversion of debt into common stock  at  $0.05 per share                        3,000          --           --         440,000

  Stock issued to Fortress Financial at  $0.0001 per share                            --          --           --              --

  Return of capital to David Blech or his designees                                   --          --           --        (261,000)

  Sale of common stock in 1999 pursuant to Blech agreement at  $0.01 per share    15,000       1,000           --         444,000

  Conversion of debt due related parties in 1999 at  $0.01 per share              15,000          --           --         360,000

  Shares issued to directors , employees and consultants in 1999
    for services valued at  $0.037 per share                                       4,000          --           --         410,000
  Capital arising from issuance of Class C Stock (Note 7):
        Series 4                                                                      --          --           --         400,000
        Series 5                                                                      --          --           --       1,564,000

   Net loss from inception to December 31, 1999
                                                                                 ------------------------------------------------
BALANCES AT DECEMBER 31, 1999                                                     80,000      $2,000       $   --     $32,740,000

 Stock options exercised at $ .01 per share                                           --          --           --           4,000

<CAPTION>
                                                                                        Deficit
                                                                                      Accumulated
                                                                                         During             Total
                                                                                      Development           Equity
                                                                                         Stage            (Deficit)
                                                                                ----------------------------------------------------
<S>                                                                                    <C>                 <C>
  Common stock issued to Dr. Pandey in 1990 in exchange
    for equipment recorded at transferor's cost

  Laboratory and research equipment contributed to capital
    by Dr. Pandey in 1990 and 1991

  Contribution to capital relating to unconsummated acquisition
    in 1992

  Exchange of securities of newly formed parent for outstanding
    securities of entities owned by Dr. Pandey

  Initial public offering in 1995 at  $5 per share, less related expenses

  Stock options granted at exercise prices below market:
                        1994
                        1995
                        1996
                        1997

  Private placements, less related expenses:
    In 1995 at  $3.00 per share
    In 1996 at  $3.00 per share, net of a related 66,000 shares
      returned by Dr. Pandey
    In 1997 at  $0.05 per share

  Shares issued in 1996 at  $0.38 per share upon termination of
    agreement to sell a minority interest in a subsidiary

  Conversion of preferred stock into common stock at  $1.25 to
     $1.75 per share less related costs:
                        In 1996
                        In 1997

  Conversion of debt into common stock in 1996 at  $0.25 per
    share

  Shares issued in settlement of a lawsuit in 1996 valued at
     $1.31 per share

  Conversion of Dr. Pandey's preferred stock and debt into
    common stock in 1997 at  $0.0625 per share

  Other

  Private placement at  $0.05 per share

  Contribution to capital by stockholders of equity interest in Xechem India

  Conversion of debt into common stock  at  $0.05 per share

  Stock issued to Fortress Financial at  $0.0001 per share

  Return of capital to David Blech or his designees

  Sale of common stock in 1999 pursuant to Blech agreement at  $0.01 per share

  Conversion of debt due related parties in 1999 at  $0.01 per share

  Shares issued to directors , employees and consultants in 1999
    for services valued at  $0.037 per share
  Capital arising from issuance of Class C Stock (Note 7):
        Series 4
        Series 5

   Net loss from inception to December 31, 1999                                          (32,493,000)
                                                                                 ------------------------------------------------
BALANCES AT DECEMBER 31, 1999                                                          $ (32,493,000)      249,000

 Stock options exercised at $ .01 per share
</TABLE>

                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-6
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
     FOR THE PERIOD MARCH 15, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 2003
                                   AS RESTATED

<TABLE>
<CAPTION>
                                                                                                                        Additional
                                                                                  Number                                 Paid-In-
                                                                                    of                   Unearned        Capital
                                                                                  shares       Par     Compensation        (As
                                                                                  issued      value      Expense         Restated)
                                                                             -------------------------------------------------------
<S>                                                                          <C>              <C>        <C>             <C>
  Issuance of 1,500,000 options at $.01 per share
     with a FMV of $.06  per share for services rendered                             --            --            --          75,000

 Conversion of Class C preferred stock to common shares                          27,000         1,000            --          (1,000)

 Conversion of debt to shares of Common Stock @ $0.01 per share                   5,000            --            --         164,000

 Private placement of shares of Common Stock @ $0.08  per share                      --            --            --          80,000

 Issuance of Common Stock @ $0.096  per share for services rendered               1,000            --            --         107,000

 Stock options exercised at $.01 per share with a FMV of $0.076  per share           --            --            --           5,000

 Conversion of debt to shares of Common Stock @ $0.01 per share                   1,000            --            --          22,000

 Stock options exercised at $.01 per share                                           --            --            --           1,000

 Beneficial Conversion feature of notes payable                                      --            --            --         286,000

 Charge to operations resulting from Options granted to Directors,
  Consultants and Employees                                                          --            --            --         192,000

 Unearned Stock Compensation Expense Related to
  Options granted to Directors,Consultants and Employees                             --            --      (406,000)        406,000

 Increase in Equity Interest in Xechem India                                         --            --            --          19,000

    Net loss for year ended December 31, 2000                                        --            --            --              --

                                                                             ------------------------------------------------------
BALANCES AT DECEMBER 31, 2000                                                   114,000      $  3,000     $(406,000)    $34,100,000

 Stock issued for services rendered                                               2,000            --            --          68,000

  Amortization of unearned stock compensation                                        --            --       197,000              --

 Stock options exercised at $.01 per share                                           --            --            --           6,000

 Beneficial Conversion feature of notes payable                                      --            --            --         216,000

 Unearned Stock Compensation Expense Related to
  Options granted to Directors and Employees                                         --            --       (75,000)         76,000

 Stock Options Granted to Consultants                                                --            --            --          16,000

 Stock issued for cancellation of indebtedness                                    1,000            --            --          15,000

Shares issued upon conversion of debentures                                       9,000         1,000            --          68,000

    Net loss for year ended December 31, 2001                                        --            --            --              --

                                                                             ------------------------------------------------------
BALANCES AT DECEMBER 31, 2001                                                   126,000      $  4,000     $(284,000)    $34,565,000

Shares issued upon conversion of debentures @ $.001 per share                    44,000         1,000                       188,000

Stock issued for services rendered @ $.007 per share                                 --                                      10,000

Stock options exercised @ $.01/share                                                 --

Amortization of unearned stock compensation                                                                  45,000

Beneficial conversion feature of notes payable                                                                               52,000

Shares issued upon conversion of debentures@ $.001 per share                     20,000         1,000                        74,000

Amortization of unearned stock compensation                                                                  44,000

Stock options issued @ $.006/share : 16,000,000 options                                                    (160,000)        160,000

Amortization of stock options compensatory charge over service period                                        40,000

<CAPTION>
                                                                                        Deficit
                                                                                      Accumulated
                                                                                         During             Total
                                                                                      Development           Equity
                                                                                         Stage            (Deficit)
                                                                             -------------------------------------------------------
<S>                                                                             <C>                    <C>
  Issuance of 1,500,000 options at $.01 per share
     with a FMV of $.06  per share for services rendered

 Conversion of Class C preferred stock to common shares

 Conversion of debt to shares of Common Stock @ $0.01 per share

 Private placement of shares of Common Stock @ $0.08  per share

 Issuance of Common Stock @ $0.096  per share for services rendered

 Stock options exercised at $.01 per share with a FMV of $0.076  per share

 Conversion of debt to shares of Common Stock @ $0.01 per share

 Stock options exercised at $.01 per share

 Beneficial Conversion feature of notes payable

 Charge to operations resulting from Options granted to Directors,
  Consultants and Employees

 Unearned Stock Compensation Expense Related to
  Options granted to Directors,Consultants and Employees

 Increase in Equity Interest in Xechem India

    Net loss for year ended December 31, 2000                                      (1,971,000)

                                                                             -------------------------------------------------------
BALANCES AT DECEMBER 31, 2000                                                   $ (34,464,000)           (767,000)

 Stock issued for services rendered

  Amortization of unearned stock compensation

 Stock options exercised at $.01 per share

 Beneficial Conversion feature of notes payable

 Unearned Stock Compensation Expense Related to
  Options granted to Directors and Employees

 Stock Options Granted to Consultants

 Stock issued for cancellation of indebtedness

Shares issued upon conversion of debentures

    Net loss for year ended December 31, 2001                                      (1,744,000)

                                                                             -------------------------------------------------------
BALANCES AT DECEMBER 31, 2001                                                   $ (36,208,000)         (1,923,000)

Shares issued upon conversion of debentures @ $.001 per share

Stock issued for services rendered @ $.007 per share

Stock options exercised @ $.01/share

Amortization of unearned stock compensation

Beneficial conversion feature of notes payable

Shares issued upon conversion of debentures@ $.001 per share

Amortization of unearned stock compensation

Stock options issued @ $.006/share : 16,000,000 options

Amortization of stock options compensatory charge over service period
</TABLE>

                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-7
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
     FOR THE PERIOD MARCH 15, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 2003
                                   AS RESTATED

<TABLE>
<CAPTION>
                                                                                                                        Additional
                                                                                  Number                                  Paid-In-
                                                                                    of                   Unearned         Capital
                                                                                  shares       Par     Compensation         (As
                                                                                  issued      value      Expense         Restated)
                                                                             -------------------------------------------------------
<S>                                                                          <C>              <C>        <C>             <C>
Stock options exercised @ $.006/share                                             2,000                                      30,000

Beneficial conversion feature of debentures                                                                                 148,000

Record value of warrants issued                                                                                             272,000

Beneficial conversion feature of notes payable                                                                               35,000

Shares issued upon conversion of debentures@ $.001 per share                     95,000         3,000                       318,000

Stock issued for services rendered @ $.003 per share                              7,000                                      60,000

Amortization of unearned stock compensation                                                                  45,000

Amortization of beneficial conversion feature of notes payable                                                              104,000

Amortization of stock options compensatory charge over service period                                        40,000

Shares issued upon conversion of debentures@ $.0005 per share                   362,000        11,000                       533,000

Stock issued for services rendered @ $.0007 per share                             3,000                                       7,000

Amortization of unearned stock compensation                                                                  32,000

Amortization of beneficial conversion feature of notes payable                                                              662,000

Amortization of stock options compensatory charge over service period                                        40,000

Finders fee for convertible debt issuance                                                                                  (130,000)

Record debt discount on notes & debentures                                                                                1,068,000

Cost incurred with stock options issued for service                                                                          18,000

  Net loss for the year ended December 31, 2002

                                                                             ------------------------------------------------------
BALANCES AT DECEMBER 31, 2002 (AS RECLASSIFIED)                                 659,000      $ 20,000     $(158,000)    $38,174,000

Effect of Reverse Stock Split                                                                 (19,000)                       19,000

Shares issued upon conversion of notes @ an avg of $.0002 per share             422,000                                     254,000

Shares issued upon conversion of notes @ an avg of $.00006 per share            972,000                                     171,000

Shares issued upon conversion of notes & debentures @ $.000025 per share      1,091,000                                      84,000

Shares issued upon conversion of notes @ an avg of $.06 per share               789,000                                      47,000

Shares issued upon conversion of notes @ an avg of $.055 per share               63,000                                       3,000

Shares issued upon conversion of notes @ an avg of $.03 per share            10,673,000                                     320,000

Shares issued upon conversion of notes @ an avg of $.0025 per share          49,571,000                                     125,000

Amortization of unearned stock compensation                                                                 158,000

Fair value of shares to be issued in conjunction with loans                                                                  78,000

Fair value of shares to be issued in conjunction with consulting                                                             25,000

Issuance of warrants                                                                                                      2,647,000

Beneficial conversion feature of loans                                                                                       70,000

  Net loss for the year ended December 31, 2003

                                                                             ------------------------------------------------------
BALANCES AT DECEMBER 31, 2003                                                64,240,000      $  1,000     $      --     $42,017,000
                                                                             ------------------------------------------------------

<CAPTION>
                                                                                        Deficit
                                                                                      Accumulated
                                                                                         During             Total
                                                                                      Development           Equity
                                                                                         Stage            (Deficit)
                                                                             -------------------------------------------------------
<S>                                                                             <C>                    <C>
Stock options exercised @ $.006/share

Beneficial conversion feature of debentures

Record value of warrants issued

Beneficial conversion feature of notes payable

Shares issued upon conversion of debentures@ $.001 per share

Stock issued for services rendered @ $.003 per share

Amortization of unearned stock compensation

Amortization of beneficial conversion feature of notes payable

Amortization of stock options compensatory charge over service period

Shares issued upon conversion of debentures@ $.0005 per share

Stock issued for services rendered @ $.0007 per share

Amortization of unearned stock compensation

Amortization of beneficial conversion feature of notes payable

Amortization of stock options compensatory charge over service period

Finders fee for convertible debt issuance

Record debt discount on notes & debentures

Cost incurred with stock options issued for service

  Net loss for the year ended December 31, 2002                                    (3,599,000)
                                                                             -------------------------------------------------------
                                                                                $ (39,807,000)         (1,771,000)
BALANCES AT DECEMBER 31, 2002 (AS RECLASSIFIED)

Effect of Reverse Stock Split

Shares issued upon conversion of notes @ an avg of $.0002 per share

Shares issued upon conversion of notes @ an avg of $.00006 per share

Shares issued upon conversion of notes & debentures @ $.000025 per share

Shares issued upon conversion of notes @ an avg of $.06 per share

Shares issued upon conversion of notes @ an avg of $.055 per share

Shares issued upon conversion of notes @ an avg of $.03 per share

Shares issued upon conversion of notes @ an avg of $.0025 per share

Amortization of unearned stock compensation

Fair value of shares to be issued in conjunction with loans

Fair value of shares to be issued in conjunction with consulting

Issuance of warrants

Beneficial conversion feature of loans

  Net loss for the year ended December 31, 2003                                    (3,828,000)

                                                                             -------------------------------------------------------
BALANCES AT DECEMBER 31, 2003                                                   $ (43,635,000)         (1,617,000)
                                                                             =======================================================
</TABLE>

                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-8
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                Cumulative from
                                                                                                                 March 15, 1990
                                                                                                              (date of inception)
                                                                                     Years ended December 31,   to December 31,
                                                                                  ----------------------------    ------------
                                                                                      2003            2002            2003
                                                                                  ------------    ------------    ------------
                                                                                  AS RESTATED                     AS RESTATED
                                                                                  -----------                     -----------
<S>                                                                               <C>             <C>             <C>
Cash flows from operating activities:
    Net loss                                                                      $ (3,828,000)   $ (3,599,000)   $(43,635,000)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
      Depreciation                                                                      81,000         118,000       1,168,000
      Amortization                                                                      68,000          68,000         877,000
      Amortization of beneficial conversion features                                   970,000         453,000       1,423,000
      Amortization of warrants issued                                                  136,000          79,000         215,000
      Stock options issued                                                                  --         160,000         160,000
      Unearned compensation                                                            158,000         126,000         284,000
      Interest and compensation expense in connection
        with issuance of equity securities                                             309,000       1,079,000      18,902,000
      Write down of inventories                                                          5,000              --       1,344,000
      Write down of patents                                                                 --              --         517,000
      Loss on investment in related party                                                   --              --          89,000
     Amortization of deferred consulting charge                                         55,000              --          55,000

    Changes in operating assets and liabilities (Increase) decrease in:
        Accounts receivable-Net Operating Loss                                              --         452,000              --
        Accounts receivable                                                             (5,000)         40,000         (27,000)
        Inventories                                                                         --          (4,000)     (1,339,000)
        Prepaid expenses and other current assest                                     (108,000)             --          19,000
        Other                                                                               --          (5,000)        (20,000)
      Increase (decrease) in:
        Accounts payable                                                               (36,000)       (320,000)        624,000
        Other current liabilities                                                       (1,000)        (64,000)        (35,000)
        Accrued expenses                                                               240,000         145,000         968,000
                                                                                  ------------    ------------    ------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES                                         (1,956,000)     (1,272,000)    (18,411,000)
                                                                                  ------------    ------------    ------------
</TABLE>

                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-9
<PAGE>

                   XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (continued)

<TABLE>
<CAPTION>
                                                                                                                Cumulative from
                                                                                                                 March 15, 1990
                                                                                                              (date of inception)
                                                                                     Years ended December 31,   to December 31,
                                                                                  ----------------------------    ------------
                                                                                      2003            2002            2003
                                                                                  ------------    ------------    ------------
                                                                                  AS RESTATED                     AS RESTATED
                                                                                  -----------                     -----------
<S>                                                                               <C>             <C>             <C>
Net cash flows from operating activities                                            (1,956,000)     (1,272,000)    (18,411,000)
                                                                                  ------------    ------------    ------------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
    Patent issuance costs                                                                   --              --        (548,000)
    Purchases of equipment and leasehold improvements                                  (20,000)        (21,000)     (2,121,000)
    Investment in unconsolidated entity and others                                          --              --         (23,000)
    Other                                                                                   --              --          (8,000)
                                                                                  ------------    ------------    ------------

NET CASH FLOWS USED IN INVESTING ACTIVITIES:                                           (20,000)        (21,000)     (2,700,000)
                                                                                  ------------    ------------    ------------

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
    Proceeds from related party loans                                                  142,000          95,000       2,197,000
    Proceeds from notes payable and convertible notes                                2,367,000       1,178,000       4,173,000
    Proceeds from short term loans                                                          --          55,000       4,166,000
    Capital contribution                                                                    --              --          95,000
    Net payments on capital leases                                                     (13,000)         (7,000)        (20,000)
    Payments on interim loans                                                               --        (110,000)       (608,000)
    Payments on notes payable - others                                                      --         (54,000)       (579,000)
    Payments on stockholder loans                                                      (75,000)             --        (647,000)
    Proceeds from issuance of capital stock                                                 --          30,000      12,914,000
                                                                                  ------------    ------------    ------------

    NET CASH FLOWS FROM FINANCING ACTIVITIES:                                        2,421,000       1,187,000      21,691,000
                                                                                  ------------    ------------    ------------

    NET CHANGE IN CASH                                                                 445,000        (106,000)        580,000
CASH, BEGINNING OF PERIOD                                                              135,000         241,000              --
                                                                                  ------------    ------------    ------------
CASH, END OF PERIOD                                                               $    580,000    $    135,000    $    580,000
                                                                                  ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the periods for:
                                                                                  ------------    ------------    ------------
      Interest paid - related party                                               $     33,000    $     27,000    $    284,000
                                                                                  ============    ============    ============
      Interest paid - other                                                       $      3,000    $      8,000    $    179,000
                                                                                  ============    ============    ============

NONCASH FINANCING AND INVESTING ACTIVITIES

   Net assets of Xechem India contributed to capital and
    minority interest                                                             $         --    $         --    $    118,000
                                                                                  ============    ============    ============

   Liabilities exchanged for preferred and common stock                           $         --    $     95,000    $  1,271,000
                                                                                  ============    ============    ============

   Equipment purchased through financing                                          $    102,000    $     32,000    $    134,000
                                                                                  ============    ============    ============

   Securities issued as payment on related party note                             $         --    $     20,000    $     20,000
                                                                                  ============    ============    ============

   Shares issued upon conversion of debentures, notes
       and related interst                                                        $  1,003,000    $     16,000    $  1,137,000
                                                                                  ============    ============    ============

  Convertible notes refinanced by notes payable                                   $    367,000    $         --    $    367,000
                                                                                  ============    ============    ============

   Warrants Issued                                                                $         --    $    193,000    $    193,000
                                                                                  ============    ============    ============

   Warrants Issued for services                                                   $  1,330,000    $         --    $  1,330,000
                                                                                  ============    ============    ============

   Debt Discount related to financing agreements                                  $     70,000    $         --    $     70,000
                                                                                  ============    ============    ============
</TABLE>


                 The notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-10
<PAGE>

XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF THE BUSINESS

We are engaged in one business segment, 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,  NICOSAN(TM) (HEMOXIN(TM)),  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 recently  acquired  Ceptor  Corporation  ("Ceptor") (see Note 17 - Subsequent
Events).  Ceptor has a proprietary,  platform technology that is being developed
to treat muscular dystrophy,  multiple sclerosis,  Amyotrophic Lateral Sclerosis
(ALS),  epilepsy,  retinal  degeneration  ototoxicity,  nerve damage, and muscle
wasting.

Additionally,  we provide technical and analytical laboratory services including
the testing of chemicals, cosmetics, food, household and pharmaceutical products
on a contract  basis.  We also provide  consulting  services for development and
pilot-plant  production of pharmaceuticals for companies on a contract basis. We
also  developed  and  market a  natural  food  and  dietary  supplement  line of
products.

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. We do not have any products approved for sale outside of
Africa (see Note 7) at the present time.  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.


                                      F-11
<PAGE>

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include  the  accounts  of  Xechem  International,  Inc.  and  its  wholly-owned
subsidiaries,  Xechem, Inc., Xechem  Laboratories,  Inc.,  XetaPharm,  Inc., and
Xechem (India) Pvt. Ltd. which is  substantially  owned by Xechem  (collectively
the "Company"). All inter-company transactions and balances have been eliminated
in consolidation.

We own 45% of Xechem China  ("China").  Xechem's  investment in China is carried
under the equity method of  accounting,  as we do not control the  operations of
this joint venture (see Note 10).

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."

RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
with the current year's presentation (also, see Note 2).

REVENUE  RECOGNITION - We record revenue when all contracted  services have been
performed or when products have been shipped to the customer.

FINANCIAL INSTRUMENTS - Financial instruments include cash, accounts receivable,
accounts payable,  accrued expenses,  notes and loans payable. The fair value of
such  instruments  approximates  the carrying  value.  The amounts  reported for
financial  instruments are considered to be reasonable  approximations  of their
fair values, based on information available to management.  The use of different
assumptions and/or estimation  methodologies could have a material effect on the
estimated fair value amounts.

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.  As of December 31,  2003,  we do not have any
derivative instruments.

CONCENTRATION   OF  CREDIT  RISK  -  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.

INVENTORIES  -  Inventories  are  stated  at the  lower of cost or  market  on a
first-in,  first-out  basis.  Inventories at December 31, 2002 were  principally
comprised of raw materials from our subsidiary  Xechem (India) Pvt. Ltd. In 2003
the India inventory was completely reserved for due to age and inactivity.


                                      F-12
<PAGE>

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 then
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  is included in the  consolidated  statements  of
operations,  as the  effects  are  not  material.  Transaction  adjustments  are
included in operations.

EQUIPMENT AND LEASEHOLD  IMPROVEMENTS - Equipment and leasehold improvements are
recorded  at  stated  cost  less  accumulated  depreciation.   Depreciation  and
amortization are provided using the straight-line method over estimated lives of
5 to 15 years. Depreciation and amortization expense for equipment and leasehold
improvements  for the years ended  December 31, 2003 and 2002 was  approximately
$149,000 and  $186,000,  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.

ASSETS UNDER  CAPITAL  LEASE - Certain  equipment  is leased from third  parties
through lease  agreements  and are treated as capital  leases (see Note 15). The
Company  anticipates  acquiring  the machines at the stated option prices at the
end of the lease terms. These assets are included in equipment.

DEFERRED CONSULTING CHARGES - Deferred consulting charges represent the value of
warrants  issued in  connection  with a long-term  consulting  arrangement.  The
charges are amortized over the life of the contract.

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.

CONCENTRATION  OF  DEBT - We have a  concentration  of debt  with  one  creditor
(Marjorie Chassman,  "Chassman"). Under the terms of the agreement (see Note 17-
Subsequent Events) we are to receive significant  advances during 2004 which are
necessary  to fund our  current  operations  and have  issued  to this  investor
options to convert  various debt into common stock.  We are therefore  dependent
upon this debt holder to meet their  funding  requirements.  In  addition,  this
investor and her affiliates hold the outstanding convertible notes (see Note 12)
and convertible debentures (see Note 13) as of December 31, 2003.

RESEARCH AND  DEVELOPMENT  COSTS -  Expenditures  for  research and  development
activities are charged to operations as incurred.

STOCK-BASED  COMPENSATION - 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. 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  decreased  to the pro forma  amounts  indicated in the
table below.


                                      F-13
<PAGE>

                                                     Year Ended December 31,
                                                          2003         2002
                                                     ---------    ---------
Net Loss (in Thousands):
     As Reported                                     $  (3,828)   $  (3,599)
     Pro Forma                                       $  (3,388)   $  (3,618)

Net Loss Per Share:
     As Reported                                     $   (0.37)   $  (12.54)
     Pro Forma                                       $   (0.33)   $  (12.54)

In 2003,  no options  were granted to  employees,  directors,  consultants,  and
attorneys as incentives and bonuses.

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.

ADVERTISING COSTS - Advertising costs are expensed as incurred.  During 2003 and
2002, advertising expenses were approximately $26,000 and $56,000, respectively.

ESTIMATES - In preparing  financial  statements  in  conformity  with  generally
accepted  accounting  principles  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.


                                      F-14
<PAGE>

NET LOSS PER SHARE - Basic loss per share is computed by dividing loss available
to  common  stockholders  by  the  weighted-average   number  of  common  shares
outstanding  for the period.  Diluted loss per share is computed by dividing the
loss for the period by the weighted-average  number of common shares outstanding
for the period  adjusted for the diluted  effect of any  potential  common stock
issueable  during  the  period.  The  shares  issueable  upon  the  exercise  of
outstanding  warrants,  options and  convertible  debentures  have been excluded
since the effect  would be  anti-dilutive,  due to net  losses  for all  periods
presented.  Accordingly,  diluted  loss per share is the same as basic  loss per
share for all periods reported.

EFFECTS OF RECENT  ACCOUNTING  PRONOUNCEMENTS  - In November  2002, the Emerging
Issues Task Force,  "EITF",  reached a consensus  on Issue No.  00-21,  "Revenue
Arrangements with Multiple  Elements" (EITF No. 00-21),  which addresses certain
aspects of  accounting  for  arrangements  that  include  multiple  products  or
services.  Specifically  this issue states that in an arrangement  with multiple
deliverables,  the  delivered  items  should be  considered  a separate  unit of
accounting  if: (1) the  delivered  items have value to the  customer on a stand
alone basis,  (2) there is objective and reliable  evidence of the fair value of
the  undelivered  items,  and (3) the  arrangement  includes a general  right of
return  relative to the  delivered  item,  and  delivery or  performance  of the
undelivered items is considered probable and substantially  within the Company's
control.  Additionally,  the  Issue  states  that the  consideration  should  be
allocated among the separate units of accounting  based upon their relative fair
values.  If there is objective  and  reliable  evidence of the fair value of the
undelivered  items in an  arrangement,  but no such  evidence for the  delivered
items,  then the residual  method should be used to allocate the  consideration.
Under  the  residual  method,  the  amount  of  consideration  allocated  to the
delivered items equals the total  consideration less the aggregate fair value of
the undelivered items. Accordingly, the application of EITF No. 00-21 may impact
the timing of revenue recognition as well as the allocation between products and
services.  The  adoption of EITF No. 00-21 for  transactions  entered into after
July 1, 2003 did not have a  significant  impact on our  consolidated  financial
statements.

In  January   2003,   the  FASB  issued   Interpretation   No.  46  ("FIN  46"),
"Consolidation of Variable Interest  Entities".  The primary  objectives of this
interpretation  are to provide  guidance on the  identification  of entities for
which  control is  achieved  through  means  other than  through  voting  rights
("variable  interest  entities")  and how to determine  when and which  business
enterprise (the "primary  beneficiary") should consolidate the variable interest
entity.  This new model for  consolidation  applies to an entity in which either
(i) the equity investors (if any) do not have a controlling  financial interest;
or (ii) the equity  investment at risk is  insufficient to finance that entity's
activities  without  receiving  additional  subordinated  financial support from
other parties.  In addition,  FIN 46 requires that the primary  beneficiary,  as
well as all other enterprises with a significant  variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46 were effective
for financial  statements  issued after January 31, 2003. In December  2003, the
FASB issued FIN 46 (revised December 2003),  "Consolidation of Variable Interest
Entities"  ("FIN 46-R") to address  certain FIN 46  implementation  issues.  The
effective  dates  and  impact  of FIN 46  and  FIN  46-R  are  as  follows:  (i)
Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company
must apply either the  provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first  interim or annual  reporting  period  ending after
December 15, 2003. (ii) Non-SPEs  created prior to February 1, 2003. The Company
is  required  to  adopt  FIN  46-R at the end of the  first  interim  or  annual
reporting period ending after March 15, 2004. (iii) All entities,  regardless of
whether an SPE, that were created subsequent to January 31, 2003. The provisions
of FIN 46 were  applicable  for variable  interests in entities  obtained  after
January 31, 2003. In 2003 the Company  identified its 45% ownership  interest in
Xechem  Pharmaceuticals,  Nigeria,  Limited ("Xechem Nigeria") as an arrangement
with a  variable  interest  entity  that  will  require  consolidation  of their
financial  information  in our  financial  statements  at a future  date.  As of
December 31, 2003,  Xechem  Nigeria has not  commenced  operations,  and we have
expended funds in conjunction with various expenses  incurred with the formation
of Xechem Nigeria.


                                      F-15
<PAGE>

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments  with  Characteristics  of both Liability and Equity".  SFAS No. 150
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial instruments with characteristics of both liability and equity. It also
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some  circumstances).  Many of those  instruments
were  previously  classified as equity.  SFAS No. 150 is effective for financial
instruments  entered  into or modified  after May 15,  2003,  and  otherwise  is
effective at the beginning of the first interim period  beginning after June 15,
2003. It is to be implemented by reporting a cumulative effect of a change in an
accounting  principal of financial  instruments created before the issuance date
of the  Statement and still  existing at the beginning of the interim  period of
adoption.  Restatement  is not  permitted.  The adoption of SFAS No. 150 did not
have a material  impact on our  consolidated  financial  position  or results of
operations.

NOTE 2 RECLASSIFICATION

Subsequent  to the  issuance  of its  financial  statements  for the year  ended
December  31,  2002,  management  determined  that  certain  amounts in the 2002
financial  statements  should  be  reclassified.   The  unamortized   beneficial
conversion  features  associated with  convertible  notes and debentures was not
reflected  in the  statement  of  stockholders  `equity  (deficit)  or shown net
against the underlying  debt.  This  reclassification  resulted in a decrease in
convertible  notes  from  $1,308,000  to  $368,000,  a decrease  in  convertible
debentures  from $144,000 to $16,000,  an increase in additional paid in capital
from  $37,106,000 to $38,174,000 and an increase in total  stockholders'  equity
from a deficit of $100,000 to equity of $1,771,000.

NOTE 3 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,  2003  and  2002  and we have an  accumulated  deficit  and
cumulative  negative cash flows from operations since  inception.  We are in the
development  stage and have realized  minimal revenues to date. 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 two  recent  financing
agreements.


                                      F-16
<PAGE>

      1. We have entered into a letter agreement  ("Chassman  Agreement")  dated
      November 11, 2003 with Chassman and designees  (the  "Investor")  to issue
      $6,000,000 of unsecured promissory notes (the "New Notes") over a 12 month
      period, to be funded:  (i) $700,000 by November 25, 2003; (ii) $650,000 by
      December 24,  2003;  (iii)  $500,000  per month for January and  February,
      2004; (iv) $450,000 for March, April and May, 2004; (v) $400,000 for June,
      July, August, September and October, 2004; and (vi) $300,000 for November,
      2004.  Proceeds from the loans for 2004 are due on the first  business day
      of the month,  subject to a 30-day grace  period.  The New Notes will bear
      interest  at 8% per  annum  and  mature  18  months  from  the date of the
      agreement.  The funding of the New Notes was conditioned upon satisfaction
      and  subject to all of other  matters  discussed  below and  execution  of
      definitive documents consistent with the letter agreement.

      2. We have entered into a series of  definitive  agreements  with Alembic,
      Limited  ("Alembic Loan") on April 7, 2004 which  contemplates the funding
      of a $3,000,000  convertible loan in six $500,000 tranches,  issuance of a
      warrant  to  purchase  10,000,000  shares of common  stock and  payment of
      certain royalties to Alembic over a fifteen year period in connection with
      sales  of  NICOSAN(TM)/HEMOXIN(TM)  in  Africa,  and a lesser  royalty  in
      connection  with sales of such product in the United States (see Note 17 -
      Subsequent Events).

In view of the matters described in the previous paragraph,  recoverability of a
major portion of the recorded  asset amounts shown in the  accompanying  balance
sheet is dependent upon our continued operations,  which, in turn, are dependent
upon our ability to meet our financing requirements on a continuous basis and to
succeed in our future  operations.  However,  there can be no assurances that we
will be able to meet  our  financing  requirements  and  succeed  in our  future
operations.  The financial statements do not include any adjustments relating to
the  recoverability  and  classification of recorded asset amounts or amounts of
liabilities  that  might  be  necessary  should  we be  unable  to  continue  in
existence.

MANAGEMENT'S PLANS WITH RESPECT TO THIS SITUATION INCLUDE THE FOLLOWING:

We have financed research and development activities principally through capital
contributions  and loans made by our stockholders,  other investors,  banks, and
through funds received from the sale of State of New Jersey NOL's (net operating
losses) through the New Jersey State Tax Credit Transfer program.

During the year ended December 31, 2003 compared to the year ending December 31,
2002, we have maintained  administrative  and research  expenses and our monthly
cash  requirements.  For the  year  ending  December  31,  2004 as our  business
development activities increase we expect the following:

In 2004 we are  finalizing  testing  and  formulation  of our new  nutraceutical
NICOSAN(TM),  a sickle cell drug.  We plan on starting  construction  of our own
facility in Nigeria in 2004, beginning production by the end of the year and for
sales to begin in Nigeria in the first quarter of 2005.

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  2004,  we  anticipate  that  these
development  activities  may  allow us to enter  into more  favorable  licensing
and/or investment arrangements.


                                      F-17
<PAGE>

We secured financing through two loans, the Chassman  Agreement ($6 million loan
commitment)  and the Alembic  Loan ($3 million  commitment),  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. We also plan to
continue receiving cash from the sale of our New Jersey net operating losses.

NOTE 4 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, 2003,  we had net  operating  loss  carryforwards
("NOL") for federal income tax purposes of approximately $27.2 million, of which
a  portion  begins  to  expire  in 2009 and  fully  expires  in 2023.  As Xechem
continues to sell stock, Xechem 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 the  percentage  (approximately  4%) of the
fair market value of the Company at the time of any such ownership changes.

As of December 31, 2003 and 2002, we have a deferred tax asset of  approximately
$9 million and $8 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 it will not be realized.

The provision for income taxes is summarized as follows:

                                                 2003            2002
                                                 ----            ----
Federal
            Current                          $        --     $        --
            Deferred (benefit), net          $  (926,000)    $  (938,000)
            Valuation allowance              $   926,000     $   938,000
      Total Federal                          $        --     $        --

State
            Current                          $   (90,000)    $  (243,000)
            Deferred (benefit), net          $  (237,000)    $  (129,000)
            Valuation allowance              $   237,000     $   129,000
      Total State                            $   (90,000)    $  (243,000)
Total income tax benefit                     $   (90,000)    $  (243,000)

Significant components of deferred tax assets and liabilities as of December 31,
2003 and 2002 are as follows:

                                                 2003            2002
                                                 ----            ----
Deferred tax assets:
     Net operating loss carryforwards        $ 9,025,000     $ 8,099,000
     Total deferred tax assets before
        valuation allowance                  $ 9,025,000     $ 8,099,000

     Valuation allowance                     $(9,025,000)    $(8,099,000)
Net deferred tax asset                       $        --     $        --


A reconciliation from the Federal income tax benefit at the statutory rate to
the effective rate is as follows:

                                                    2003            2002
                                                    ----            ----
Tax benefit at Federal statutory rate              (34.0)%         (34.0)%
State income taxes, net of Federal benefit          (1.6)%            --
Permanent difference                                17.5%            6.1%
Valuation allowance                                 16.5%           27.9%

Effective tax rate                                  (1.6)%            --

As of December 31, 2003, we recorded no 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, 2003. 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 2003,  we  received  approval  from the New Jersey  Economic
Development  Authority ("NJEDA") to sell approximately  $109,000 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 2003 and
2002,  Xechem and its subsidiaries  transferred the tax benefits of $109,000 and
$303,000 in exchange for $100,000 and $243,000 respectively, pursuant to the New
Jersey State Tax Credit Transfer  program.  We received  $90,000 net pursuant to
this program in December 2003.


                                      F-18
<PAGE>

Since 1994, the Company has approximate net operating loss carryforwards for
Federal income tax purposes, which expire as follows:

                 Amount                 Expiration Date
              -----------               ---------------
               $3,170,000                     2009
                3,183,000                     2010
                3,218,000                     2011
                3,762,000                     2012
                1,992,000                     2018
                2,257,000                     2019
                1,863,000                     2020
                1,604,000                     2021
                3,482,000                     2022
                2,636,000                     2023
              -----------
              $27,167,000

NOTE 5 RELATED PARTY TRANSACTIONS

Notes Payable - Related Party consists of the following:

                                                               December 31,
                                                               ------------
                                                             2003         2002
                                                           --------     --------
Loans Payable - Dr. Renuka Misra (1)                       $298,000     $298,000
Loans Payable - Beverly Robbins (2)                         218,000      195,000
Loans Payable - Xechem China (3)                            140,000      140,000
Loans Payable - Dr. Pandey (4)                              200,000      244,000
Loans Payable - Family Members of Dr. Pandey (5)             88,000           --
                                                           --------     --------
Sub-total                                                   944,000      877,000
Less Debt Discount                                            9,000           --
                                                           --------     --------
Total Notes Payable                                         935,000      877,000
Less Current Portion                                        595,000      493,000
                                                           --------     --------
Total Long Term Notes Payable                              $340,000     $384,000
                                                           ========     ========

(1) Xechem has a note payable to Dr. Renuka Misra, director of Natural Products,
for approximately $298,000 with 12% annual interest due September 20, 2004.

(2) Xechem has  received  funding from Beverly  Robbins,  a sales and  marketing
representative  totaling $218,000 and $195,000 as of December 31, 2003 and 2002,
respectively. The note requires monthly interest payments and is due on demand.

(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 2003 or 2002
and no  foreseeable  profits in the near future there will not be any short-term
repayment to Xechem China (see Note 10).


                                      F-19
<PAGE>

(4) Xechem owes Dr. Pandey,  Chairman of the Board,  $783,000 as of December 31,
2003 from an interest  bearing advance of $200,000 at 10% per annum (above) and,
accrued  interest of $199,000 and accrued salary of $384,000,  which is included
in accrued expenses to related  parties.  The advance will be due when Xechem is
no  longer a  development  stage  entity;  according  to  terms of the  Chassman
Agreement,  Dr.  Pandey was to be repaid  $150,000 from proceeds of the loan, of
which $75,000 was repaid as of December 31, 2003.  At December 31, 2002,  Xechem
owed Dr. Pandey $776,000.

(5) In 2003, we have received $88,000 from members of Dr. Pandey's family in the
form of eight  short-term  notes.  The due dates of the notes  range  from three
months to one year  with  interest  from 8% - 12% with  accrued  interest  as of
December 31, 2003 of $4,033.  Four 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, 2003 the underlying 360,000 shares remain to be issued.
Two notes totaling  $20,000 can be converted into common stock with a conversion
price of $ 0.01.  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.

Interest expense for related parties totaled  approximately  $72,000 and $70,000
for the years ended December 31, 2003 and 2002, respectively.

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 will initially 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 7).


                                      F-20
<PAGE>

NOTE 6 ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:


--------------------------------------------------------------------------------
                                                             December 31,
--------------------------------------------------------------------------------
                                                               2003         2002
--------------------------------------------------------------------------------
General Account Payable and Accrued Expenses               $162,000     $280,000
--------------------------------------------------------------------------------
Accrued Legal                                               457,000      357,000
--------------------------------------------------------------------------------
Operating  Expenses                                         262,000      111,000
--------------------------------------------------------------------------------
License Agreement Fees                                      100,000      100,000
--------------------------------------------------------------------------------
TOTAL ACCOUNTS PAYABLE AND ACCRUED EXPENSES                $981,000     $848,000
--------------------------------------------------------------------------------

NOTE 7 COMMITMENTS AND CONTINGENCIES

EMPLOYMENT CONTRACTS

Employment  Contracts - Dr. Pandey has been  employed  pursuant to an employment
agreement dated February 1994, which expired on its tenth anniversary. The Board
of Directors has approved an increase in his base  compensation  to $350,000 per
annum and further agreed pursuant to the Chassman  Agreement to the grant of the
common stock purchase option referenced below (yet to be codified in writing). A
renewed  employment  agreement has not yet been  negotiated or finalized.  It is
expected that Dr.  Pandey's  employment  agreement,  when and if executed,  will
contain a provision  similar to the former agreement 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;
(ii) shares  issuable to William Pursley  pursuant to his option  agreement (the
option agreement,  as negotiated in final, calls for 43,000,000  shares);  (iii)
shares  issuable  with respect to conversion  to equity,  if any,  regarding the
$1,134,000  in loans (the "BMS  Loans")  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 909 and 14 additional
Class C shares to Dr.  Pandey in 2003 and 2002  respectively  with voting rights
equal to 909,000 and 138,797 of common stock respectively.  We need to issue 680
additional  shares to bring his percentage of voting stock to 20% as of December
31, 2003.

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, 2003 and 2002 unpaid compensation  totaled  approximately  $384,000
and $331,000, respectively.

In November,  as per the Chassman Agreement,  William Pursley was to become Vice
Chairman of the Company with  oversight  of  marketing,  regulatory  affairs and
strategic planning for the Company.  He received a $25,000 signing bonus and was
to be paid  consulting fess of $10,000 per month. He was also to receive options
the fully diluted common stock outstanding after  recapitalization at a price of
$0.0025 per share.  This option  agreement was  negotiated in final in 2004 (see
Note 17 - Subsequent  Events).  In December Mr. Pursley became President and COO
of Xechem  International  Inc. at a base salary of $330,000  annually.  In March
2004 Mr. Pursley  resigned his position with Xechem to become  President and CEO
of Ceptor (See Note 17 - Subsequent Events).


                                      F-21
<PAGE>

OPERATING LEASES - We have a five-year lease on our facilities, which commenced
on July 1, 2002, and ends June 30, 2007. Fixed rent expense for the next four
years is as follows:

              ----------------------------------------------
                      YEAR           ANNUAL RENT COMMITMENT
              ----------------------------------------------
                      2004                   170,600
              ----------------------------------------------
                      2005                   177,400
              ----------------------------------------------
                      2006                   184,500
              ----------------------------------------------
              2007 and thereafter             94,000
              ----------------------------------------------
                     Total                  $626,500
              ----------------------------------------------

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.

As of December 31, 2003,  approximately  $88,000 of past due rent is included in
accounts  payable  and the unpaid  security  deposit of $26,000 is  included  in
accrued expenses.

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  $183,000 and $128,000 for the
years ended December 31, 2003 and 2002, respectively.

In August of 2001 Dr.  Pandey  entered  into a new 36-month car lease with GMAC,
payable by Xechem.  Total  commitments  under this lease are $5,832 due in equal
monthly payments of $729 in 2004.

LICENSE  AGREEMENT - On July 18, 2002, we signed an exclusive  worldwide license
for the manufacturing,  marketing,  distribution, and sales of NIPRISAN(TM) from
the National  Institute of  Pharmaceutical  Research and Development  ("NIPRD"),
government  of  Nigeria,  for the  treatment  of sickle  cell  disease  ("SCD").
NICOSAN(TM) is our name for the non-toxic  phytopharmaceutical  product formerly
named  NIPRISAN(TM),  a  nutraceutical.  We  are  currently  in the  process  of
completing for submission of an Investigational New Drug Application ("IND") 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. 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 NICOSAN(TM) in Nigeria in a three-party
agreement with Alembic Limited (see Note 17 - Subsequent Events).


                                      F-22
<PAGE>

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 accounts payable at December 31, 2003 and 2002. There has been no
activity in 2003 and 2002.  Under the terms of the contract we are liable for an
additional  $100,000  which we do not  expect  to pay and,  therefore,  have not
recorded it in our results of operations or accrued  expenses as of December 31,
2003.

PHARM-OLAM  AGREEMENT  - In  October  2003 we  entered  into an  agreement  with
Pharm-Olam  International  Ltd.  to  perform a Phase  IIB  study of  HEMOXIN(TM)
(Niprisan),  a novel  phytopharma-ceutical,  in adult  patients with sickle cell
anemia.  The study  should take 12.5  months with a total cost of  approximately
$193,000 with a $58,000 initial payment made on November 4, 2003.

WOLFE  AXELROD  AGREEMENT - In December  2003 we entered into an agreement  with
Wolfe Axelrod  Weinberger to serve as our financial public relations counsel for
a program of financial communications and investor relations. Under the terms of
the  agreement,  we are  obligated for a  twenty-four  month period,  commencing
December 15,  2003,  with  monthly  fees of $8,000,  increasing  to $10,000 upon
completion  of the Alembic  financing  (see Note 17 -  Subsequent  Events)  plus
direct  and  indirect  expenses.  In  addition,  we agreed to issue a warrant to
purchase  7,500,000  shares of our common  stock (see Note 8). The fair value of
the warrant,  calculated using the Black Scholes pricing model, of approximately
$1,330,000  has  been  allocated  to paid in  capital.  The  resulting  deferred
consulting  charge  is being  amortized  over the life of the  agreement.  As of
December  31, 2003,  the  unamortized  balance of  approximately  $1,275,000  is
included in deferred consulting charge.

PENDING LITIGATION - 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 violations of federal and state antitrust laws. The case,
filed in the United States District Court, Northern District of Illinois, arises
out of Bristol-Meyers 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.

Our lawsuit alleges that Bristol-Myers Squibb is liable for violation of Section
2 of the  Sherman  Act (15 USC 2). We are seeking an award in damages in the sum
of at least $50 million  dollars and said damages to be trebled to at least $150
million dollars. The case was dismissed in late 2003, and we have since filed an
appeal of the dismissal with the U.S. Court of Appeals for the Seventh  Circuit.
The appeal has been briefed and is awaiting  further action by the Court.  There
can be no assurances as to the outcome of this lawsuit.


                                      F-23
<PAGE>

In April 2003, a suit was filed against us by our former patent counsel,  Dorsey
Whitney,  LLP seeking legal fees and costs. We settled the lawsuit on August 25,
2003 by entering into a stipulation  for confession of judgment in the amount of
$200,000,  which is  included  in  accounts  payable as of  December  31,  2003.
Execution of the judgment by agreement has been delayed for 12 months. To secure
the judgment,  we have granted to our former counsel a security  interest in the
net proceeds of our lawsuit against  Bristol Myers Squibb,  exclusive of the 40%
interest in such lawsuit proceeds assigned to Marjorie Chassman and exclusive of
all contingency legal fees payable by us in connection with the lawsuit. As part
of the settlement, we provided releases to our former counsel.

Subject to the uncertainty in all  litigation,  we do not believe at the present
time that the resolution of these legal proceedings is likely to have a material
adverse effect on our financial position, results of operations or cash flows.

With  respect  to all  litigation,  as  additional  information  concerning  the
estimates  used by us become  known,  we reassess our  position  with respect to
accrued liabilities and other potential exposures.

NOTE 8 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 December 2003 the Board approved a new Long Term Incentive Plan ("LTIP"). The
LTIP is effective,  but is subject to  ratification by shareholders in order for
qualified  incentive stock options  granted under the LTIP to receive  favorable
tax treatment.  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 forty  million  (40,000,000).  The number of Shares with respect to which
Awards may be granted to a participant during any calendar year shall not exceed
twenty million  (20,000,000).  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.


                                      F-24
<PAGE>

A summary of stock option activity under the Original Plan is as follows (shares
in thousands):

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                     2002             2002              2003             2003
----------------------------------------------------------------------------------------------------
                                   Shares       Weighted-Average       Shares       Weighted-Average
                                                 Exercise Price                      Exercise Price
----------------------------------------------------------------------------------------------------
<S>                                  <C>            <C>                <C>             <C>
OUTSTANDING ON JANUARY 1,            7,639          $  75.00           58,152          $   6.00
----------------------------------------------------------------------------------------------------
Granted                             50,850          $  15.00                0                --
----------------------------------------------------------------------------------------------------
Exercised                               (4)         $  30.00                0                --
----------------------------------------------------------------------------------------------------
Forfeited/Expired                     (333)         $  21.00           (4,711)         $   1.51
----------------------------------------------------------------------------------------------------
    OUTSTANDING ON
     DECEMBER 31,                   58,152          $   6.00           53,441          $   6.36
----------------------------------------------------------------------------------------------------
    EXERCISABLE ON
     DECEMBER 31,                   23,510          $  12.00           39,006          $   8.02
----------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information about stock options at December 31,
2003:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                    OUTSTANDING STOCK OPTIONS                          EXERCISABLE STOCK OPTIONS
------------------------------------------------------------------------------------------------------------------------------------
  Range of Exercise Prices       Shares           Weighted-Average          Weighted-Average        Shares        Weighted-Average
                                                Remaining Contractual        Exercise Price                        Exercise Price
                                                        Life
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>                  <C>                       <C>               <C>             <C>                        <C>
   $1.50 to $1020.00             53,698                    9.6               $4.59           38,963                     $5.75
------------------------------------------------------------------------------------------------------------------------------------
$1,980.00 to $15,000.00              43                    4.7           $2,730.23               43                 $2,730.23
------------------------------------------------------------------------------------------------------------------------------------
        TOTALS                   53,741                    9.6                6.36           39,006                     $8.02
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Compensation cost for the stock options issued in prior years at exercise prices
below fair market value has been determined  based on the intrinsic value at the
grant dates for awards under the plan, which resulted in compensation expense of
approximately $158,000 in 2003 and $166,000 in 2002.

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 2002:  (i) dividend  yields of 0%; (ii) expected
volatility of approximately  159%;  (iii) risk-free  interest rates of 4.00; and
(iv)  expected  life of 10 years.  The  weighted-average  fair  value of options
granted was $291,000 for the year ended December 31, 2002. There were no options
granted in 2003.


                                      F-25
<PAGE>

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 loan  according to terms.  As of December
31, 2003 6,750,000 warrants were due to be delivered. (see Note 14).

In 2003 in connection with the Wolfe Axelrod 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 ($.1955) (see Note 7).

As of December  31,  2003,  we have the  following  warrants to purchase  common
stock:

--------------------------------------------------------------------------------
 NUMBER OF SHARES             WARRANT EXERCISE           WARRANT EXPIRATION DATE
  TO BE PURCHASED              PRICE PER SHARE
--------------------------------------------------------------------------------
         11,853                    $ 30.0000                     May 23, 2007
--------------------------------------------------------------------------------
      7,500,000                     $ 0.1955                 December 9, 2008
--------------------------------------------------------------------------------
      6,750,000                     $ 0.0025                 October 27, 2008
--------------------------------------------------------------------------------

NOTE 9 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.

Xechem  recognized a charge to operations of $70,000 for the year ended December
31, 2002 for shares of common stock issued to consultants.

In February  2003,  the Board of Directors  approved a one share for 3,000 share
reverse  split of its shares of Common  Stock.  A reverse  split was  previously
approved by holders of a majority of Xechem's voting stock, subject to the Board
setting  the amount of the split.  Under the  Amendment  to the  Certificate  of
Incorporation,  the company has the authority to issue 500,000,000,000 shares as
follows:

        Class A Voting Preferred Stock, $.00001 par            2,500 shares
        Class B 8% Preferred Stock, $.00001 par                1,150 shares
        Class C Preferred Stock, $.00001 par               2,996,350 shares
        Common Stock, $.00001 par                    499,950,000,000 shares
        Unallocated                                       47,000,000 shares

All  documentation  was finalized to affect the reverse split, and the first day
of trading,  post split,  was May 28,  2003.  All  references  in the  financial
statements  to the number of shares  outstanding,  per share amounts and warrant
and stock  option  data of our common  stock have been  restated  to reflect the
effect of the stock split for all periods presented.

As of December 31, 2003 we need to issue  360,000  shares of our common stock in
connection  with certain related party notes (see Note 4). There was a charge to
interest  of  $77,800  for the fair  value of the  common  stock on the date the
agreement was entered into.


                                      F-26
<PAGE>

In 2003 we have received $88,000 from members of Dr. Pandey's family in the form
of eight short-term notes. The due dates of the notes range from three months to
one year with  interest  from 8% - 12% with accrued  interest as of December 31,
2003 of $4,033.  Four 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, 2003 the underlying  360,000 shares remain to be issued.  Two notes
totaling $20,000 can be converted into common stock with a conversion price of $
0.01. 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.

As of December 31, 2003 we need to issue  200,000  shares of our common stock in
connection  with an agreement  with Ibis  Consulting  Group.  This resulted in a
charge to operations of $25,000.

As of December 31, 2003, we had reserved shares of commons stock for issuance as
follows:

Exercise of common stock options                           53,741,000
Exercise of common stock purchase warrants                 37,511,853

The  following  table  summarizes  the  number of  shares  of  common  stock and
preferred stock outstanding at December 31, 2003 and 2002:

--------------------------------------------------------------------------------
                                         DECEMBER 31, 2003     DECEMBER 31, 2002
--------------------------------------------------------------------------------
COMMON STOCK                                    64,240,000               659,235
--------------------------------------------------------------------------------
CLASS A VOTING PREFERRED STOCK                       2,500                 2,500
--------------------------------------------------------------------------------
CLASS B PREFERRED STOCK                                  0                     0
--------------------------------------------------------------------------------
CLASS C  - SERIES 6 PREFERRED STOCK                    923                    14
--------------------------------------------------------------------------------

CLASS A VOTING PREFERRED STOCK - There are currently outstanding 2,500 shares of
Class A Preferred  Stock.  The holder of Class A Preferred  Stock is entitled to
receive  dividends of $.00001 per share,  and $.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 1,000 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. Dr. Pandey owns all of the outstanding  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, 2003 Dr. Pandey is still
the holder of record.

CLASS B 8% PREFERRED  STOCK - The 8% Preferred  Stock is entitled to  cumulative
dividends on the  liquidation  preference  at the rate of 8% per annum,  payable
quarterly.  The 8% 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%  Preferred  Stock may,  at each  holder's  option,
convert such 8% 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 least 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% 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-27
<PAGE>

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 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.  This
option was exercised in October of 2001.

In 2002 we increased the authorized  shares of Class C, Preferred  Voting Stock,
par value $0.00001 per share to 49,996,350. A total of 14 shares were issued and
outstanding to Dr. Pandey as of December 31, 2002.

In 2003 we had a  reverse  stock  split  of  3,000-1.  Because  of this  all the
outstanding  Class C, Preferred Voting Stock was cancelled and a new certificate
was issued to Dr. Pandey for 923 shares,  which were  outstanding as of December
31, 2003.

NOTE 10 - 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-28
<PAGE>

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, 2003 and  December  31,  2002.  Xechem has no
obligation to fund any loses or commitments of Xechem-China (see Note 5).

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 2003 or 2002.

NOTE 11 - NOTE PAYABLE BANK

Note payable bank at December  31, 2003 and 2002 totaled  approximately  $55,000
for each  year.  This  loan  has  been  collateralized  by all  tangible  assets
including accounts receivables. The $55,000 loan represents borrowings against a
$ 55,000 line-of-credit at interest rate of 6.00% as of December 31, 2003 (6.25%
at  December  31,  2003) from the Bank of New York.  The  line-of-credit  renews
annually.

NOTE 12 - CONVERTIBLE NOTES

Convertible notes consists of the following:

                                                          December 31,
                                                          ------------
                                                    2003                 2002
                                                    ----                 ----
Unsecured Convertible Notes (A)                  $  317,000           $1,134,000
Convertible Notes (B)                                    --              367,000
Subtotal-Convertible Notes
                                                 ----------          -----------
                                                    317,000            1,501,000
Less Unamortized Debt Discount                       99,000            1,133,000
                                                 ----------            ---------
Total Convertible Notes                          $  218,000           $  368,000
                                                 ==========            =========

(A) On May  23,  2002  we  received  approximately  $1,134,000  from  "Unsecured
Convertible  Notes" less $130,000 in legal and finder's  fees. The term of these
notes is for two (2) years with simple  interest  accruing at the annual rate of
8% payable on May 23, 2004 (the Maturity Date). These notes are convertible into
shares of our common stock after six months from receipt,  the conversion  price
of the Notes is the lower of $0.005 or 50% of the lowest  closing  bid price for
the Shares on the OTC Pink Sheets,  the OTC Bulletin Board,  the NASDAQ SmallCap
or NMS  Markets  or any stock  exchange,  or if not then  trading  on any of the
foregoing,  such other principal  market or exchange where the Shares are listed
or traded for 30 trading days prior to but not including the date of conversion.
In addition, certain the holders of Unsecured Convertible Notes were issued five
year warrants to purchase  11,853 shares of common stock at an exercise price of
$30 per share,  with  .01333  warrants  issued for each $1.00 of  investment  in
notes.  These notes may not be redeemed or paid before the Maturity Date without
consent  of  the  Borrower.   The  estimated  fair  value  of  the  warrants  of
approximately  $271,000 and the  intrinsic  value of the  beneficial  conversion
feature of approximately  $834,000 have been allocated to paid-in capital.  This
resulting  debt  discount is being  amortized on a straight  line basis over the
term of the notes.


                                      F-29
<PAGE>

The  interest on those notes  accrues and is payable upon  maturity  and, at the
option of the holder, may be converted into common stock, by a defined formula.

During 2003 we had the following activity concerning the "Unsecured  Convertible
Notes":

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Balance 01/01/03      Additions        Convered Principal      Converted Interest     Shares Issued       Balance 12/31/03
----------------------------------------------------------------------------------------------------------------------------
<S>                   <C>              <C>                     <C>                    <C>                 <C>
$ 1,134,000           $50,000          $867,000                $69,000                62,680,970           $317,000
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The $50,000 additional note is due is in two years with simple interest accruing
at the annual rate of 8% payable on June 5, 2005 (the Maturity Date).  This note
is  convertible  into shares of our common  stock,  par value  $.00001 per share
after six months from receipt, the conversion price of the Notes is the lower of
$0.005 or 50% of the  lowest  closing  bid price for the  Shares on the OTC Pink
Sheets,  the OTC Bulletin Board, the NASDAQ SmallCap or NMS Markets or any stock
exchange,  or if not then trading on any of the foregoing,  such other principal
market or  exchange  where the Shares  are listed or traded for 30 trading  days
prior to but not including the date of  conversion.  The intrinsic  value of the
beneficial  conversion feature of $50,000 has been allocated to paid-in capital.
This  resulting  debt discount is being  amortized on a straight line basis over
the term of the note.

As of  December  31,  2003 we have  accrued  interest  relating  to the notes of
approximately $35,000.

(B) During 2002, we issued convertible notes totaling $367,000.  The term of the
notes is 2 years from the date of issuance and they are immediately  convertible
at $.0025 per share. The intrinsic value of the beneficial conversion feature of
$367,000 has been allocated to paid-in capital.  This resulting debt discount is
being amortized on a straight line basis over the term of the note.  These notes
were refinanced during 2003 (see Note 14).

NOTE 13 - CONVERTIBLE DEBENTURES

As of December  31, 2003 and 2002 we had  approximately  $84,000 and $144,000 in
outstanding  debentures  bearing  interest  at 8%  and  maturing  in  2011.  The
debentures were  convertible six months after issuance at $7.50 per shares.  The
intrinsic value of the beneficial  conversion feature of approximately  $144,000
has been  allocated to paid-in  capital.  This  resulting debt discount is being
amortized  over the term of the note.  In March 2003 we converted  approximately
$68,000  of  principal  and  interest  into  900,087   shares  of  common  stock
post-split. In October 2003, after a series of modifications, the debentures are
convertible  into common  stock using a  conversion  price of $ 0.0025 (see Note
14).

Xechem  has  reserved  the right to repay  these  Debentures  in full or in part
without  penalty at any time.  Xechem must give  fifteen (15) days notice to the
payee of its intention to prepay.  At December 31, 2003 there was  approximately
$14,000 in accrued interest relating to the debentures.


                                      F-30
<PAGE>

NOTE 14 -NOTES PAYABLE

Notes Payable consists of the following:

                                                          December 31,
                                                          ------------
                                                    2003                 2002
                                                -----------          -----------
Secured Notes Payable(A)                        $ 1,134,000          $        --
$6,000,000 Unsecured Loan(B)                      1,350,000                   --

Less debt discount                               (1,238,000)
Alembic, Ltd.(C)                                    200,000                   --
                                                -----------          -----------
Total Notes Payable                               1,446,000                   --
Less Current Portion                                200,000                   --
                                                -----------          -----------
Total Long Term Notes Payable                   $ 1,246,000          $        --
                                                ===========          ===========

(A) The  convertible  debentures  totaling  $367,000  at  December  31, 2002 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 new term notes bearing simple interest at 8% per annum, due
on the earliest to occur of the settlement,  dismissal or final  adjudication of
the Bristol-Myers  Squibb lawsuit (the "BMS Lawsuit"),  plus 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 have  granted the term loan  holders a security  interest in the BMS
lawsuit.  These notes will be due on the later of 18 months from the date of the
Note Purchase Agreement or final disposition of the Bristol Myers Squibb lawsuit
(provided that the additional interest, if any, as referenced above, will be due
on disposition of the lawsuit).  As of December 31, 2003 we accrued  interest of
approximately  $71,000  associated  with  this  loan.  The  Bristol-Myers-Squibb
lawsuit   alleges   damages   due  to   alleged   anticompetitive   actions   by
Bristol-Myers-Squibb  in connection  with its activities  related to paclitaxel.
Our lawsuit was dismissed in 2003, and we have filed an appeal of the dismissal,
which appeal is presently pending before the U.S. Court of Appeals.

(B)Agreement to Fund $6,000,000 Unsecured Loan:

We have  entered  into a letter  agreement  ("Note  Purchase  Agreement")  dated
November  11,  2003  with  Chassman  and  designees  (the  "Investor")  to issue
$6,000,000  of  unsecured  promissory  notes (the "New  Notes")  over a 12 month
period,  to be funded:  (i)  $700,000 by November  25,  2003;  (ii)  $650,000 by
December 24, 2003; (iii) $500,000 per month for January and February, 2004; (iv)
$450,000 for March,  April and May, 2004; (v) $400,000 for June,  July,  August,
September and October, 2004; and (vi) $300,000 for November, 2004. Proceeds from
the loans for 2004 are due on the first business day of the month,  subject to a
30-day grace period. The New Notes will bear interest at 8% per annum and mature
18  months  from the date of the  agreement.  The  funding  of the New Notes was
conditioned  upon  satisfaction  and subject to all of other  matters  discussed
below  and  execution  of  definitive   documents  consistent  with  the  letter
agreement.

We had previously issued a series of convertible notes (the "Convertible Notes")
that were convertible into our common stock at a conversion rate equal to 50% of
the lowest bid price of our stock for the 30-day  period  immediately  preceding
the  date of  conversion.  The  Note  Purchase  Agreement  acknowledges  that in
consideration  for $175,000 of  pre-closing  advances on October 27,  2003,  the
terms of all Convertible  Notes and Debentures held or subsequently  acquired by
the  Investor  on or  following  October 27,  2003 are to be  convertible  as to
principal  plus accrued,  unpaid  interest at a conversion  price of $0.0025 per
share.  It is estimated that this would result in the issuance of  approximately
210,000,000  shares,  if all affected  Convertible  Notes as of October 27, 2003
were  converted.  The  Convertible  Notes  will  continue  to be  subject to the
limitation that the holder not own in excess of 4.9% of our  outstanding  common
stock at any time after giving effect to the conversion.


                                      F-31
<PAGE>

In addition,  we granted the Investor  five year warrants to purchase 30 million
shares of  Xechem  common  stock at an  exercise  price of  $.0025,  subject  to
anti-dilution  terms. The warrants will not be exercisable  until one year after
issuance. The warrants will be earned as funding of the loan is completed, as of
December 31, 2003 6,750,000  warrants have been earned.  As of December 31, 2003
we recognized expenses of approximately  $79,000 and debt discount of $1,238,000
in connection with these warrants.

As of December 31, 2003 we have received  $1,350,000 from this loan and recorded
$9,600 in accrued  interest.  This  agreement  has not been  signed in its final
form,  however,  the Company and the  Investor do not  anticipate  any  material
differences from the facts stated above.

(C) In December we received a $200,000 advance from Alembic, Ltd. a new investor
in the Company. This amount was applied to a financing agreement entered into in
2004 (see Note 17 - Subsequent Events).

NOTE 15 - OBLIGATIONS UNDER CAPITAL LEASE

The  Company is the lessee of  machinery  and  equipment  under  capital  leases
expiring  through 2006.  The assets and  liabilities  under  capital  leases are
recorded at the lower of the present value of the minimum lease  payments or the
fair  value of the  asset.  The  assets  are  amortized  over the lower of their
related lease terms or their estimated productive lives.

Obligations under capital leases consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                                                      2003             2002
                                                                                                    --------         --------
<S>                                                                                                 <C>              <C>
     Equipment lease - Vanguard Capital Partners, LLC., effective interest of 18.64
     percent per annum, final payments due in 2006, secured by equipment                            $ 20,000         $     --

     Equipment lease - M & C Leasing Co., Inc., effective interest of 13.54 percent per
     annum, final payments due in 2008, secured by equipment                                          75,000
                                                                                                    --------         --------

     Equipment lease - Avaya Finance Corp., effective interest of 14.00 percent per
     annum, final payments due in 2004, secured by equipment                                           4,000            7,000

     Equipment lease - Citicorp Vendor Financing, Inc., effective interest of
     14.0 percent per annum, final payment due in 2006, secured by equipment                          14,000           17,000
                                                                                                    --------         --------

     Obligations Under Capital Leases                                                                113,000           24,000

     Less Current Portion                                                                             27,000            6,000
                                                                                                    --------         --------

     Obligations Under Capital Leases, Less Current Portion                                         $ 86,000         $ 18,000
                                                                                                    ========         ========
</TABLE>


      A summary of property held under capital  leases  included in equipment is
      as follows at December 31:

<TABLE>
<CAPTION>
                                                                                                       2003             2002
                                                                                                     --------         --------
<S>                                                                                                  <C>              <C>
      Machinery and Equipment                                                                        $144,000         $ 31,000
      Less Accumulated Amortization                                                                    19,000            7,000
                                                                                                     --------         --------
         Property Held Under Capital Leases, Net                                                     $125,000         $ 24,000
                                                                                                     ========         ========
</TABLE>

      Amortization on assets under capital leases charged to expense in 2003 and
      2002 was $6,000 and $26,350, respectively.

                                      F-32
<PAGE>

      Minimum future lease payments under capital leases as of December 31, 2003
      for each of the next five years and in the aggregate area:

           Year                                                     Amount
           ----                                                     ------
           2004                                                   $     41,000
           2005                                                         37,000
           2006                                                         35,000
           2007                                                         22,000
           2008                                                         13,000
                                                                  ------------
               Total Minimum Lease Payments                            148,000

               Less Imputed Interest                                    35,000
                                                                  ------------

               Present Value of Net Minimum Lease Payment         $    113,000
                                                                  ============

NOTE 16 - 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 2003 and 2002,  respectively,  the Company contributed $19,200
and  $17,050  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.


NOTE 17 - SUBSEQUENT EVENTS

(1) ALEMBIC TRANSACTIONS

On April 7, 2004,  Xechem  executed  definitive  documents with Alembic  Limited
("Alembic"),  a pharmaceutical  company based in India. The documents relate to:
(i) a  commitment  to loan  $3,000,000  to Xechem;  (ii) a license,  royalty and
distribution  rights  agreement  ("Xechem  Nigeria  Agreement")  related  to the
production,  sale  and  licensing  of  NICOSAN(TM)/HEMOXIN(TM)   through  Xechem
Nigeria, a majority-owned subsidiary of Xechem; and (iii) a five-year warrant to
purchase  10,000,000  shares of Xechem common stock at $0.20 per share. The loan
is in connection with the Company's planned approval for sale and development of
a    manufacturing    facility,    in   Nigeria,    for   the    production   of
NICOSAN(TM)/HEMOXIN(TM),"  a drug  used to treat  sickle  cell  anemia,  through
Xechem Nigeria.  NICOSAN(TM)/HEMOXIN(TM)  has been granted orphan drug status by
the FDA in the United States; however, sales will not be permitted in the United
States unless appropriate FDA regulatory approval is attained for the product.

The $3,000,000 loan to the Company is to be funded with six payments of $500,000
each,  with the first  made on the date of the  closing of the  transaction  and
subsequent payments to be made each thirty days thereafter.  Upon the signing of
the Memorandum of Understanding  ("MOU") which predated the loan, Alembic funded
$200,000 in escrow, which is to be applied toward the $3,000,000 loan amount.

In the Xechem Nigeria Agreement,  the Company granted to Alembic a 15% ownership
interest in Xechem  Nigeria  (with  antidilution  rights  regarding its next two
rounds    of    financing),    which   has   been    formed    to    manufacture
NICOSAN(TM)/HEMOXIN(TM)  and to  distribute  the  product in Nigeria  and nearby
countries. This royalty is in addition to the royalty payable by Xechem to NIPRD
of 7.5% of gross revenues on NICOSAN(TM)/HEMOXIN(TM).  Xechem has also agreed in
the MOU to use its best  efforts to cause a designee of  Alembic's to be elected
to its Board of Directors.  The Xechem Nigeria  Agreement also grants to Alembic
the right of first offer to act as Xechem  Nigeria's  distributor of the product
in Africa and India. The warrant and Alembic's right with regard to distribution
in Africa and India  will lapse if Alembic  fails to fund the loan on any of the
designated dates or within 30 days thereafter.

The loan will be convertible,  at Alembic's  option,  at a 30%, 40%, 50% and 60%
discount to the average  closing  price of Xechem's  common  stock on the first,
second,  third and fourth anniversaries of the closing date,  respectively.  The
Xechem  Nigeria  Agreement  also provides that Alembic will receive a royalty of
15% of the gross  collected  revenues from sales of  NICOSAN(TM)/HEMOXIN(TM)  in
Nigeria  for a period of five years from the date of the product  launch  (i.e.,
when the Nigerian  manufacturing  facility is fully approved by all governmental
and regulatory bodies),  10% of gross collected revenues for the succeeding five
years,  and 5% of gross  collected  revenues for the succeeding  five years.  In
addition,  Xechem has agreed to pay  Alembic a royalty of 1% of gross  collected
revenues  in  connection  with its sales of  NICOSAN(TM)/HEMOXIN(TM)  outside of
Nigeria. The Xechem Nigeria Agreement also provides that Xechem will be entitled
to a royalty of 30% of the first year's revenues and 25% of revenues  thereafter
from  the  sale  of  NICOSAN(TM)/HEMOXIN(TM),  provided  that  such  royalty  is
subordinated to that payable to Alembic, as referenced above.


                                      F-33
<PAGE>

(2)CEPTOR TRANSACTIONS

On January 27,  2004,  we issued  6,000 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. The new Class
C Series 7  Preferred  Stock  has a  $6,000,000  liquidation  preference  and is
convertible into 30,000,000  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. We also agreed to provide a contingent
award of $1,000,000 of our stock to certain former Ceptor shareholders  (payable
in Xechem  stock  valued at the lesser of $0.20 per share or market  value) upon
the  achievement of a designated  milestone for each product  developed with the
technology.  Ceptor  is  a  research  drug  company  focusing  on  neuromuscular
diseases, which include therapeutics for muscular dystrophy, multiple sclerosis,
ALS and epilepsy.

On March 31, 2004, we entered into an agreement with Ceptor and William  Pursley
("Pursley"),  intended  to provide a  framework  for  independent  financing  of
Ceptor.  The  agreement  calls for  Pursley to act full time as chief  executive
officer of Ceptor pursuant to two-year term, subject to automatic renewal absent
delivery of  non-renewal.  It calls for base  compensation of $330,000 per annum
and a five year option to  purchase  443,000,000  shares of common  stock of the
Company at a purchase  price of $.0025 per share  subject to vesting  provisions
stipulated in the option  agreement.  As part of the Agreement,  Mr. Pursley has
resigned from his positions as president, chief operating officer, vice chairman
and as a member  of the  Board of  Directors  of  Xechem.

The Ceptor agreement contemplates that Ceptor will seek to obtain bridge funding
to be followed by a subsequent round of capital infusion.  Ceptor has engaged in
dialogue  regarding  such  proposed  financing,  however  as of the date of this
document no binding  commitments  have been  received and no  assurances  can be
provided that future  financing will be obtained.  Xechem has funded $300,000 of
capital contributions to date to Ceptor, and has further agreed,  subject to the
full  funding by  Marjorie  Chassman of her loan  obligations  to Xechem for the
months of April and May of 2004, to fund an  additional  $125,000 on May 1, 2004
and June 1, 2004 to  Ceptor.  All such  funding  would be in the form of capital
contributions.

The Ceptor agreement  contemplates  that Ceptor will take the necessary steps to
effect a stock split so that after the split,  Xechem will 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 has further agreed to issue to 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.  These
numbers are subject to proportionate increase or decrease.

The Ceptor agreement  provides that Xechem will 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 future  financing  received by Ceptor other
than the  contemplated  bridge  financing.  At the end of two  years if the full
$2,000,000  has not been paid out to Xechem,  it shall have 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 (expected to be not
less than $250,000 or more than $1,000,000), Xechem has agreed that in the event
such a loan is funded  and is not paid off when due,  it will  permit the bridge
lender to convert the unpaid  indebtedness owing with respect to the bridge loan
into Xechem  common stock at the lesser of seven cents 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 has been
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 all
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,  and
one-half of its shares for an additional 180-day period.


                                      F-34
<PAGE>

Pro-forma results of operations as if the transaction had occurred on January 1,
2003 are  considered  not to vary  materially  from the results of operations as
reported in these financial statements.

(3) CONSULTING AGREEMENTS

In January 2004, we entered into a consulting agreement with Dr. Alfred Stracher
for a period of sixty months.  In consideration for the services to be rendered,
we are obligated to pay a total of $276,000, plus expenses as allowed for in the
agreement.

In January 2004, we entered into a consulting  agreement with Dr. Leo Kesner for
a period of sixty months. In consideration  for the services to be rendered,  we
are  obligated to pay a total of $276,000,  plus  expenses as allowed for in the
agreement.

In February 2004, we entered into a consulting agreement with CEOcast,  Inc. for
investor  relations with a term of three months and fess of $50,000 plus certain
expenses as allowed for in the agreement.

In  February  2004,  we entered  into a  research  agreement  with The  Research
Foundation of State University of New York. In consideration for the research to
be performed,  we are  obligated to pay $9,000 per month  commencing in February
2004 through January 2005, for a total of $108,000.

(4) OPTIONS

At the February 18, 2004 Board of Directors meeting Steve Burg and Leonard Mudry
were both awarded 10-year options to purchase  5,000,000  shares of common stock
each at $0.01 per share.  This will  result in a charge to  operations  over the
life of the options of $1,300,000.

At the March 18, 2004 Board of Directors meeting Dr. Soji Adelaja was granted an
option to acquire  5,000,000 shares of common stock of the Company,  purchasable
at $0.0025 per share,  vesting  according to the following  schedule (based upon
continued  service as a director of the Company):  250,000  shares  presently on
each of June  30,  September  30 and  December  31 of  2004,  and an  additional
1,000,000  shares on each of December 31, 2005,  2006,  2007 and 2008.This  will
result in a charge to  operations  over the life of the options of $437,500.  At
the same meeting the Board granted  500,000  options to purchase common stock to
each of Bhuwan Pandey and Anil Bensali,  exercisable  within 10 years  following
grant at the  closing  price of the  Company's  stock as of the day  immediately
preceding the date of grant per share.4 In addition,  the Company further grants
options (at the same price per share) to each of them to purchase the  following
number of shares (i.e. not to exceed 750,000 shares as to each of them), subject
to vesting upon launch of Hemoxin no later than March 31, 2005,  for  commercial
sale in Nigeria on or before the following dates: 750,000 shares if launch on or
before 12/31/04;  650,000 shares if launch on or before 1/31/05;  550,000 shares
if launch on or before  2/28/05;  450,000 shares if launch on or before 3/31/05;
no shares if launch is after 3/31/05.


                                      F-35
<PAGE>

(5) STOCK ISSUED

Subsequent  to December 31, 2003, we issued  133,690,440  shares of common stock
upon the  conversion  of  approximately  $293,000 and $42,000 of  principal  and
interest, respectively of convertible notes and debentures.

In March  2004,  200,000  shares of our common  stock were  issued to Dr.  David
Jacobs for services  rendered in full payment of "The Orphan Drug  Application."
Operations were charged $15,000 for his services.

NOTE 18 - RESTATEMENT

Subsequent  to the  issuance  of our  financials  statements  for the year ended
December 31, 2003,  management  determined that certain amounts  reported in the
2003 financial statements should be restated to reflect the correction of errors
made. The reclassification as of December 31, 2003, had the following effects:


                                      F-36
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS                                                      As Previously Reported           As Restated
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                   <C>
   Cash                                                                                    $    580,000          $    580,000
   Accounts receivable, net of allowance of $7,000 (2003)                                        27,000                27,000
   Inventory                                                                                         --                    --
   Prepaid expenses and other current assets                                                    109,000               109,000

   TOTAL CURRENT ASSETS                                                                         716,000               716,000

 Equipment, less accumulated depreciation of $1,266,000 (2003)                                  423,000               423,000
 Leasehold improvements, less accumulated amortization of $705,000 (2003)                       310,000               310,000
 Deposits                                                                                        53,000                53,000
 Deferred financing charges *1 *2                                                            13,985,000                    --
 Deferred consulting charge                                                                   1,275,000             1,275,000

TOTAL ASSETS                                                                               $ 16,762,000          $  2,777,000
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-37
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                   <C>
CURRENT LIABILITIES
   Accounts payable                                                                        $    601,000          $    601,000
   Accrued expenses to related parties                                                          594,000               594,000
   Accrued expenses to others                                                                   380,000               380,000
   Note payable to bank                                                                          55,000                55,000
   Notes payable to related party                                                               595,000               595,000
   Notes payable                                                                                200,000               200,000
   Convertible notes, net of discount of $99,000 (2003)                                         218,000               218,000
   Capital leases: short-term                                                                    27,000                27,000
   Other current liabilities                                                                     35,000                35,000

     TOTAL CURRENT LIABILITIES                                                                2,705,000             2,705,000
Notes payable net of discount of $1,238,000 in 2003 *2                                        2,484,000             1,246,000
Notes payable to related parties                                                                340,000               340,000
Capital leases: long term                                                                        86,000                86,000
Convertible debentures, net of discount of $67,000 (2003)                                        17,000                17,000

TOTAL LIABILITIES                                                                             5,632,000             4,394,000
COMMITMENTS & CONTINGENCIES

STOCKHOLDERS EQUITY (DEFICIT)
   Class A voting preferred stock,$ .00001 par value, 2,500 shares
     authorized; 2,500 shares issued and outstanding (2003 and 2002)                                 --
   Class B 8% preferred stock,$ .00001 par value, 1,150 shares
     authorized; none outstanding                                                                    --
   Class C preferred stock,$ .00001 par value, 2,996,350 shares authorized;
     923 issued and outstanding in (2003) and 14  issued and outstanding in (2002)                   --
   Common stock,$.00001 par value, 499,950,000,000 shares authorized;
     64,240,000 (2003) and 659,000 (2002)  issued and outstanding                                 1,000                 1,000
   Unearned compensation expense                                                                     --                    --
   Additional paid in capital  *1 *2                                                         56,433,000            42,017,000
   Deficit accumulated during development stage *1 *2                                       (45,304,000)          (43,635,000)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-38
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                   <C>
   TOTAL STOCKHOLDERS EQUITY (DEFICIT)                                                       11,130,000            (1,617,000)

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                        $ 16,762,000          $  2,777,000
                                                                                 AS PREVIOUSLY REPORTED           AS RESTATED
RESTATED PORTIONS OF THE CONSOLIDATED STATEMENTS OF OPERATIONS

Interest Expense *2                                                                          (3,193,000)           (1,524,000)
Net Loss before Income Taxes *2                                                              (5,587,000)           (3,918,000)
NET LOSS *2                                                                                  (5,497,000)           (3,828,000)
Basic and diluted loss per share - Basic and Diluted                          (0.53)                (0.37)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


1.  Our  accounting  treatment  of the  intrinsic  value  of the  change  in the
beneficial conversion feature resulted in an overstatement to deferred financing
costs  of  $10,478,000  as of  December  31,  2003.  Additionally,  due  to  the
inappropriate  capitalization of costs we recognized  $1,310,000 of amortization
expense during the year.

2. We also  over  capitalized  the  value  of  unissued  and  unearned  warrants
associated  with the same  transaction.  This  resulted in an  overstatement  to
deferred  financing  costs of $3,507,000 as of December 31, 2003.  Additionally,
due to the  inappropriate  capitalization  of costs we  recognized  $438,000  of
amortization  expense during the year. The restatement of the warrants  resulted
in debt discount associated with the new financing of $1,238,000 as of December
31, 2003 and amortized expenses of $79,000.


                                      F-39

<PAGE>

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

      Our Audit  Committee  of the Board of  Directors  annually  considers  and
recommends to the Board the selection of our independent public accountants.  As
recommended  by our Audit  Committee,  our Board of Directors  in December  2003
decided  engaged  WithumSmith+Brown  P.C.  to  serve as our  independent  public
accountants for the remainder of 2003 and the years thereafter.

      The report of Wiss on our  financial  statements  for the last fiscal year
contained no adverse  opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles, except for the
uncertainty  paragraph  regarding  our ability to continue as a going concern as
noted in the report on our financial statements for the years ended December 31,
2002.

      During  our most  recent  fiscal  year and  through  the date of this Form
10-KSB,  there  were no  disagreements  with Wiss on any  matter  of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure which, if not resolved to Wiss's  satisfaction,  would have cause them
to make reference to the subject  matter in connection  with their report on our
consolidated  financial  statements for such years.  In addition,  there were no
reportable events, as listed in Item 304(a) (1) (v) of Regulation S-K.

      Our  Audit  committee  had  received  a letter  from Wiss &  Company,  LLP
("Wiss"),  the Company's  independent  accountants,  dated September 30, 2003 in
which Wiss  informed  the Company that it had decided to  discontinue  providing
audit services to SEC clients and was exiting this practice area.


                                       42
<PAGE>

ITEM 8.A   CONTROL PROCEDURES

      We  maintain  a system of  controls  and  procedures  designed  to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures  included  in this  report as well as to the  safeguard  assets from
unauthorized  use or disposition.  However,  no cost effective  internal control
system  will  preclude  all  errors  and   irregularities,   and  management  is
necessarily  required  to apply its  judgment  in  evaluating  the  cost-benefit
relationship of possible  controls and procedures.  Also, we have investments in
certain  unconsolidated  entities that we do not control or manage. As we do not
control or manage these  entities,  our disclosure  controls and procedures with
respect to such entities are necessarily more limited than those we maintain.

      We  evaluate  the  effectiveness  of  the  design  and  operation  of  our
disclosure   controls  and  procedures   under  the  supervision  and  with  the
participation  of management,  including our chief  executive  officer and chief
financial officer, within 90 days prior to the filling date of the report. Based
upon that evaluation,  our chief executive  officer and chief financial  officer
concluded  that our  disclosure  controls and procedures are effective in timely
alerting  them to material  information  required to be included in our periodic
securities  exchange commission filings. No significant changes were made to our
internal controls or other factors that could significant  effect these controls
subsequent to the date of their evaluation.


                                       43
<PAGE>

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

      The names of the  directors  and  executive  officers  of Xechem and their
respective ages and positions with Xechem are as follows:

-------------------------------------------------------------------------------
NAME                                 AGE     POSITION WITH XECHEM
-------------------------------------------------------------------------------
Dr. Ramesh C. Pandey (1)(4)          65      Chief Executive Officer,
                                             President, Chairman of the Board of
                                             Directors, Secretary and Treasurer.
-------------------------------------------------------------------------------
Stephen F. Burg (1)(2)(3)(4)         66      Director and Assistant Treasurer
-------------------------------------------------------------------------------
Leonard Mudry (1)(2)(3)(4)           66      Director
-------------------------------------------------------------------------------
Adesoji Adelaja, Ph.D.               52      Director
-------------------------------------------------------------------------------

(1)   Member of Stock Option Committee
(2)   Member of Compensation Committee.
(3)   Member of Audit Committee.
(4)   Member of Nominating committee

      All  directors  hold office until their  successors  have been elected and
qualified or until their earlier  resignation or removal.  Directors are elected
annually and serve without remuneration for service as directors. Officers serve
at the discretion of the Board of Directors.  There are no family  relationships
among any of our directors or executive officers.

      RAMESH C.  PANDEY,  PH.D.,  is our  founder.  He has been 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.

      STEPHEN F. BURG has been a director  since  1996.  Mr. Burg has been 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.


                                       44
<PAGE>

      LEONARD MUDRY became a director in January 2004.  Mr. Mudry is currently a
consultant to a number of companies.  From October 1998 to May 2000, he held the
position  of  business  consultant  with  Strategic  Business   Organisation  in
Cranford,  NJ. Mr. Mudry was Senior  Vice-President of Finance and Operations of
Xechem  International Inc. from May 1994 to September 1998.From February 1991 to
April 1994, he was Vice  President  -Operations  of MediGebe,  Inc., a pre-natal
testing   company.   Prior   to   joining   MediGene,   Mr.   Mudry   was   Vice
President-Operations/Finance  for Princeton  Diagnostic  Labs from March 1990 to
January  1991;  Senior Vice  President and Chief  Financial  Officer of American
Medical  Laboratories  from January 1987 to March 1990;  held various  positions
with Hoffman-LaRoche, Inc. and its subsidiaries, a major pharmaceutical company,
from 1969 to 1987.

      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.


SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE

      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.

COMMITTEES

      Our Stock Option Committee, established in May 1995, presently consists of
Dr. Pandey and Mr. Burg. The Stock Option  Committee  administers the 1995 Stock
Option Plan and reviews and  recommends to the Board of Directors  stock options
to be granted.

      Our Compensation Committee, established in May 1995, presently consists of
Mr. Burg.  The  Compensation  Committee  reviews and  recommends to the Board of
Directors  the  compensation  and benefits of all officers of Xechem and reviews
general policy  matters  relating to  compensation  and benefits of employees of
Xechem.

      Our Audit Committee,  established in May 1995,  presently  consists of Mr.
Burg and Mr. Mudry.  The Audit  Committee  reviews with our  independent  public
accountants  the scope and timing of their audit services and any other services
they are asked to perform,  the accountants  report on our financial  statements
following completion of their audit and our policies and procedures with respect


                                       45
<PAGE>

to internal accounting and financial controls. In addition,  the Audit Committee
makes annual  recommendations  to the Board of Directors for the  appointment of
independent accountants for the ensuing year.


ITEM 10.    EXECUTIVE COMPENSATION

Compensation of Directors.

      Directors do not receive any standard compensation for services.  Mr. Burg
was paid $12,500 in consulting fees during 2003.

Executive Compensation.

      Set forth below is information  concerning the compensation for 2001, 2002
and  2003  for our  President  and  Chief  Executive  Officer,  who is the  only
executive officer of Xechem whose compensation exceeded $100,000:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                                     ALL OTHER
                             ANNUAL COMPENSATION                  AWARDS               PAYOUTS     COMPENSATION
---------------------------------------------------------------------------------------------------------------

                                             OTHER       RESTRICTED   SECURITIES
                                            ANNUAL         STOCK      UNDER-LYING      LTIP
       YEAR            SALARY     BONUS  COMPENSATION      AWARDS       OPTIONS       PAYOUTS
--------------------------------------------------------------------------------------------------------------
<S>                    <C>        <C>    <C>             <C>          <C>              <C>         <C>
Dr. Ramesh Pandey

2000                   $140,000     0      $   688       $1,563,000        0              0             0
2001                   $140,000     0      $ 1,380           0             0              0             0
2002                   $140,000     0      $   709           0             0              0             0
2003                   $150,000     0      $ 1,164           0             0              0             0
--------------------------------------------------------------------------------------------------------------
</TABLE>

EMPLOYMENT AGREEMENTS

      Dr. Pandey has been employed  pursuant to an  employment  agreement  dated
February,  1994, which expired on its tenth anniversary.  The Board of Directors
has  approved  an increase in his base  compensation  to $350,000  per annum and
further  agreed  pursuant  to the Note  Purchase  Agreement  to the grant of the
common stock purchase option referenced below (yet to be codified in writing). A
renewed  employment  agreement has not yet been  negotiated or finalized.  It is
expected that Dr.  Pandey's  employment  agreement,  when and if executed,  will
contain a provision  similar to the former agreement 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 us during Dr. Pandey's tenure with us whether prior to or


                                       46
<PAGE>

after the term of the  employment  agreement.  In addition,  as set forth in the
Note Purchase Agreement, Dr. Pandey is to be granted an option to purchase a 20%
interest in our common stock,  subject to the antidilution rights detailed above
in "Recapitalization of Company."

      Dr. Pandey,  under his prior  employment  agreement,  was also entitled to
purchase  voting  stock  equal to 20% of the  outstanding  voting  stock  issued
through  December,  2003, and accordingly,  we issued 923 and 39,407  additional
Class C Preferred shares to Dr. Pandey in 2003 and 2002 respectively with voting
rights equal to 9,230,000 and 416,390,000  shares of common stock,  respectively
(pre-split  shares).  We need to  issue  680  additional  shares  to  bring  his
percentage of voting stock to 20% as of December 31, 2003.

STOCK PLAN

      Effective  December 1993, our sole  stockholder  approved the Share Option
Plan  (the  "Plan"),  which  we have  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 two 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 the  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  58,846  (pre-split)  shares of Common Stock,
with 53,741 (pre-split) shares still outstanding under the Plan.

      A new long term  incentive  program  was  adopted in 2004  calling for the
issuance of options, restricted stock or other equity based compensation awards,
equivalent to 40,000,000 shares of Common Stock.


                                       47
<PAGE>

   AGGREGATE OPTION EXERCISES IN FISCAL 2003 AND FISCAL YEAR-END OPTION VALUES

      The following table provides  information on option  exercises  during the
year ended  December 31, 2003 by the directors and executive  officers of Xechem
and the value of such  parties'  unexercised  stock  options as of December  31,
2003.

<TABLE>
<CAPTION>
=============================================================================================================

                                                        NUMBER OF SECURITIES       VALUE OF UNEXERCISED
                                                       UNDERLYING UNEXERCISED      IN-THE-MONEY OPTIONS
                                                        OPTIONS AT 12/31/03           AT 12/31/03 (1)
-------------------------------------------------------------------------------------------------------------
                            SHARES
                         ACQUIRED ON      VALUE
        NAME             EXERCISE (#)    REALIZED  EXERCISABLE    UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
                              (3)          ($)         (3)
-------------------------------------------------------------------------------------------------------------
<S>                      <C>             <C>       <C>            <C>             <C>           <C>
Dr. Ramesh C. Pandey         13 (2)         0          500              0              $0            $0

Stephen F. Burg               0             0        2,673              0              $0            $0

=============================================================================================================
</TABLE>

(1)   Represents the excess, if any, of the closing price of the Common Stock as
      quoted on the OTC Bulletin  Board on December 31, 2002  ($.0008)  over the
      exercise price of the options,  multiplied by the corresponding  number of
      underlying shares.
(2)   Class C, Series 6 Voting  Preferred  Stock,  Par Value $0.00001 per share,
      10,000 votes per share.
(3)   All shares are post-split.

      There  were no options  granted  for  Common  Stock  during the year ended
December 31, 2003 to the directors and executive officers of Xechem.

      We have not granted any Long-Term  Incentive  Plan-Awards  during the year
ended December 31, 2003.


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  2,  2004  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  executive  officers as a group.  As of April 2, 2004 we had
165,750,348 Common Shares issued and outstanding, 2,500 Class A Preferred Shares
outstanding  and 923 shares of Class C, Series 6 Preferred  Shares  outstanding.
Ramesh C. Pandey owns all of the  outstanding  Class A preferred stock and Class
C, Series 6 Preferred Shares.  Except as otherwise indicated in the footnotes to
the table,  the persons named below have sole voting and  investment  power with
respect to the shares beneficially owned by such persons.

                                       48
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                COMMON STOCK                 CLASS A PREFERRED STOCK
--------------------------------------------------------------------------------------------------------
Name and Address                          Number of         Percent         Number of       Percent of
                                            Shares          of Class         Shares           Class
--------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>           <C>              <C>
William Pursley (12)                     43,000,000(13)      19.6%             --                --
--------------------------------------------------------------------------------------------------------
Stephen F. Burg (3)                       5,002,673(7)       2.28%             --                --
--------------------------------------------------------------------------------------------------------
Ramesh C. Pandey, Ph.D. (4)                  20,640(8)        .01%          2,500(1)            100%
--------------------------------------------------------------------------------------------------------
Leonard Mudry (5)                         5,002,888(9)       2.28%             --                --
--------------------------------------------------------------------------------------------------------
Adesoji Adelaja (6)                         267,390(10)       .12%             --                --
--------------------------------------------------------------------------------------------------------
All directors and executive              10,293,591(11)      4.70%          2,500(1)            100%
officers as a group (4 persons)
--------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                    CLASS C PREFERRED STOCK
----------------------------------------------------------------------------------------
Name and Address                    Number of       Percent        Percent of Voting
                                     Shares         of Class         Stock (1)(2)
----------------------------------------------------------------------------------------
<S>                                  <C>            <C>                   <C>
William Pursley (12)                     --             --                15.70%
----------------------------------------------------------------------------------------
Stephen F. Burg (3)                      --             --                 1.83%
----------------------------------------------------------------------------------------
Ramesh C. Pandey, Ph.D. (4)             923(2)         100%                4.29%
----------------------------------------------------------------------------------------
Leonard Mudry (5)                        --             --                 1.83%
----------------------------------------------------------------------------------------
Adesoji Adelaja (6)                      --             --                  .10%
----------------------------------------------------------------------------------------
All directors and executive             923(2)         100%                15.71%
officers as a group (4 persons)
----------------------------------------------------------------------------------------
</TABLE>

(1)   GIVES  EFFECT  TO THE  VOTING  RIGHTS  OF 2,500  SHARES  OF CLASS A VOTING
      PREFERRED  STOCK,  ALL OF WHICH ARE OWNED BY DR.  PANDEY AND WHICH ENTITLE
      HIM TO CAST 1,000 VOTES PER SHARE ON ALL MATTERS AS TO WHICH  SHAREHOLDERS
      ARE ENTITLED TO VOTE.
(2)   GIVES  EFFECT TO THE  VOTING  RIGHTS  OF  95,055  SHARES OF CLASS C VOTING
      PREFERRED  STOCK,  ALL OF WHICH ARE OWNED BY DR.  PANDEY AND WHICH ENTITLE
      HIM TO CAST 10,000 VOTES PER SHARE ON ALL MATTERS AS TO WHICH SHAREHOLDERS
      ARE ENTITLED TO VOTE.
(3)   THE  ADDRESS OF STEPHEN  BURG IS 3257 WINGED  FOOT  DRIVE,  FAIRFIELD,  CA
      94533.
(4)   THE ADDRESS OF DR. PANDEY IS C/O XECHEM  INTERNATIONAL,  INC.,  100 JERSEY
      AVENUE,  BUILDING B, SUITE 310, NEW BRUNSWICK,  NEW JERSEY 08901, DOES NOT
      INCLUDE OPTIONS ISSUABLE AS CONTEMPLATED IN NOTE PURCHASE  AGREEMENT WHICH
      HAVE NOT YET BEEN CODIFIED IN AN OPTION  AGREEMENT  BETWEEN DR. PANDEY AND
      US.
(5)   THE ADDRESS OF MR.  MUDRY IS C/O XECHEM  INTERNATIONAL,  INC.,  100 JERSEY
      AVENUE, BUILDING B, SUITE 310, NEW BRUNSWICK, NEW JERSEY 08901
(6)   THE ADDRESS OF DR. ADESOJI ADELAJA IS C/O XECHEM INTERNATIONAL,  INC., 100
      JERSEY AVENUE, BUILDING B, SUITE 310, NEW BRUNSWICK, NEW JERSEY 08901
(7)   INCLUDES 5,002,673 SHARES THAT ARE PRESENTLY EXERCISABLE OPTIONS.
(8)   INCLUDES 500 SHARES THAT ARE PRESENTLY EXERCISABLE OPTIONS.
(9)   INCLUDES 5,002,388 SHARES THAT ARE PRESENTLY EXERCISABLE OPTIONS.
(10)  DOES NOT INCLUDE  4,750,000 SHARES SUBJECT TO THE ADELAJA  OPTIONS,  WHICH
      PRESENTLY ARE NOT EXERCISABLE, AND WILL NOT BE EXERCISABLE IN 60 DAYS FROM
      APRIL  2,  2004;  HOWEVER  INCLUDES  250,000  SHARES  THAT  ARE  PRESENTLY
      EXERCISABLE.
(11)  DOES NOT INCLUDE 4,750,000 SHARES SUBJECT TO THE DIRECTORS OPTIONS,  WHICH
      PRESENTLY ARE NOT EXERCISABLE, AND WILL NOT BE EXERCISABLE IN 60 DAYS FROM
      APRIL 2, 2004;  HOWEVER  INCLUDES  10,255,561  SHARES  THAT ARE  PRESENTLY
      EXERCISABLE.
(12)  THE ADDRESS OF MR.  PURSLEY IS 1138 CORBETT RD.,  MONKTON MD. 21111.
(13)  INCLUDES 43,000,000 SHARES THAT ARE PRESENTLY EXERCISABLE OPTIONS.


                                       49
<PAGE>

As of December 31, 2003 we had the following  compensation plans under which our
equity securities are authorized for issuance:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Plan Category           Number of             Weighted average      Number of
                        securities to be      exercise price of     securities
                        issued upon           outstanding           remaining available
                        exercise of           options, warrants     for future issuance
                        outstanding           and rights            under equity
                        options, warrants                           compensation plans
                        and rights                                  (excluding
                                                                    securities effected
                                                                    in column (a))
-----------------------------------------------------------------------------------------
<S>                        <C>                     <C>                     <C>
Equity compensation        37,565,594              16.62                   0
plans approved by
security holders
-----------------------------------------------------------------------------------------
Equity compensation            0                     0                 40,000,000
plans not approved by
security holders
-----------------------------------------------------------------------------------------
Total                      37,565,594              16.62               40,000,000

-----------------------------------------------------------------------------------------
</TABLE>


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Subject to obtaining necessary  regulatory  approvals in India, Dr. Pandey
has  transferred his interest in Xechem India to us for no  consideration  other
than  reimbursement  of amounts  (equal to  approximately  $5,000).  Dr.  Pandey
advanced for  organizational  expenses.  Dr. Pandey's brothers own the remaining
equity in Xechem India. At December 31, 2003, we own substantially all of Xechem
India.  We  anticipate  that some of the  equity in  Xechem  India  will be made
available to other,  unrelated,  persons in India. Both of Dr. Pandey's brothers
and Mr. Anil Sharma, a chartered accountant, serve as directors of Xechem India.
No  compensation  is paid to Dr.  Pandey,  his  relatives or Mr. Anil Sharma for
service as directors. See Item 1, Description of Business - Raw Material Supply.

      We currently  receive our supplies of plant  extracts  from India  through
informal   collaborative   relationships.   Dr.  Pandey  and  his  brothers  had
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 will


                                       50
<PAGE>

initially  own the  remaining  equity in Xechem  India,  some or all of which we
anticipate  will be made available to other,  unrelated,  persons in India.  The
minority interest in Xechem India is not material.

      Effective  June 25,  1996,  an  entity  wholly-owned  by Dr.  Pandey  (the
"Holding Company") became a member of Vineyard Productions, L.L.C. ("Vineyard"),
which in June 1994 acquired the building in which we lease its offices. Prior to
making such  investment,  Dr.  Pandey  informed  the Board of  Directors  of the
opportunity  for  such  investment,  and the  Board  determined  that we was not
interested in such  opportunity  and approved Dr. Pandey making the  investment.
Our  lease  was  entered  into  prior to that  date  (with a prior  owner of the
building) and has not been modified  subsequent thereto. We have a new five-year
lease,  which commenced on July 1, 2002. Rent expense  amounted to approximately
$183,000  and  $128,000  for the  years  ended  December  31,  2003  and  2002 ,
respectively.  At  December  31,  2003,  we owed  rental  payments to the lessor
totaling approximately $80,000 and a security deposit of $26,000 upon payment of
the security deposit the old rental payments will be reduced to $51,658.92.

      In 2003 we had a reverse  stock  split of 3000-1  because  of this all the
outstanding  Class C, Preferred  Voting Stock was canceled and a new certificate
was issued to Dr. Pandey for 923 shares,  which were  outstanding as of December
31, 2003.

      We owe Dr. Pandey, Chairman of the Board, $783,000 as of December 31, 2003
from an interest bearing advance of $200,000 at 10% per annum,  accrued interest
of $199,000, and accrued salary of $384,000. The advance will be due when we are
no longer a development entity; according to terms of the Chassman agreement Dr.
Pandey was to be repaid  $150,000 from proceeds of loan as of filing date he has
received $140,000, At December 31, 2002, we owed Dr. Pandey $776,000.

      We also have a note  payable  to Dr.  Renuka  Misra,  director  of Natural
Products, for $298,300 with 12% annual interest due September 20, 2004.

      We have  received  funding from  Beverly  Robbins,  a sales and  marketing
representative  totaling  $218,000 and $195,000 as of December 31, 2003 and 2002
respectively.

      In 2003 we have received  $88,000 from members of Dr.  Pandey's  family in
the  form of eight  short-term  notes.  These  notes  are all for one year  with
interest from 8% - 12% with accrued  interest as of December 31, 2003 of $4,033.
Four 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.  Two notes totaling  $20,000
can be converted into common stock with 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 on
a straight line basis over the term of the notes.

      Interest  expense for related  parties totaled  approximately  $72,000 and
$70,000 for the years ended December 31, 2003 and 2002, respectively.


                                       51
<PAGE>

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

EXHIBIT NO.

3(i)(a)     Certificate of Incorporation(1)

3(i)(b)     Certificate of Correction to Certificate of Incorporation(1)

3(ii)       By-Laws(1)

3(i)(c)     Certificate of Amendment to Certificate of Incorporation(2)

3(i)(c)     Certificate of Amendment to Certificate of Incorporation(3)

3(i)(c)(A)  Certificate of Amendment to Certificate of Incorporation.(4)

3(i)(c)(B)  Certificate of Amendment to Certificate of Incorporation5

3(i)(d)     Certificate  of  Designations,  Preferences  and  Rights  of Class C
            Shares (Class C Series 1 Preferred Stock)(3)

3(i)(e)     Certificate of Designations,  Preferences and Rights (Class C Series
            2 and Series 3 Preferred Stock)(3)

3(i)(f)     Certificate of Elimination  (Class C Series 1, Series 2 and Series 3
            Preferred Stock)(3)

3(i)(g)     Certificate  of  Designations,  Preferences  and  Rights  of Class C
            Shares(6) (Class C Series 6 Preferred Stock)

4.1         Representative Unsecured Debenture(4)

4.2         Representative Unsecured Note(5)

4.3         Representative  Subscription  Agreement  for  Purchase of  Unsecured
            Notes(5)

4.4         Representative  Subscription  Agreement  for  Purchase of  Unsecured
            Debentures(4)

4.5         Representative Warrant to Purchase Shares of Common Stock5

10.2        Form of Pandey Option(1)

10.3        Form of Employment Agreement between Xechem and Dr. Pandey(1)

--------------------------------

(1)   Incorporated  by referenced from our  Registration  Statement on Form SB-2
      (SEC File No.  33-75300NY)  referencing  the exhibit  numbers used in such
      Registration Statement.

(2)   Incorporated  by reference  from our Annual  Report on Form 10-KSB for the
      year ended December 31, 1995.

(3)   Incorporated  by reference  from our Annual  Report on Form 10-KSB for the
      year ended  December  31,  1996.

(4)   Incorporated by reference from our Registration Statement on Form S-3 (SEC
      File No. 333-71742).

(5)   Incorporated by reference from our Registration Statement on Form S-3 (SEC
      File No. 333-97345).

(6)   Incorporated  by reference  from our  Registration  Statement on Form SB-2
      (SEC File NO. 333-97345).


                                       52
<PAGE>

10.17       Patents(1)

10.18       Indemnity agreement between Xechem and Ramesh C. Pandey(1)

10.28       Xechem International, Inc. Amended and Restated Stock Option Plan(2)

10.29       Stockholders   Agreement   dated  November  18,  1996  among  Xechem
            International, Inc., David Blech and Ramesh C. Pandey(7)

10.30       2004 Long Term Incentive Plan

10.31       Royalty,  Distribution Rights and Joint Cooperation  Agreement Among
            Xechem International,  Inc., Xechem Pharmaceuticals Nigeria, Limited
            and Alembic, Limited

10.32       Fund of $3,000,000 Promissory Note to Alembic, Limited

10.33       Ceptor  Agreement among Ceptor  Corporation,  Xechem  International,
            Inc. and William Pursley

10.34       Employment Agreement between Ceptor Corporation and William Pursley

10.35       Amended  and  Restated   Stock  Option   Agreement   between  Xechem
            International, Inc. and William Pursley

------------------------------
(7)   Incorporated  by reference from our Form 8-K Current Report dated November
      18, 1996.


                                       53
<PAGE>

PRINCIPAL ACCOUNTING FEES AND SERVICES

AUDIT FEES:  The audit fees for 2003 from  WithumSmith  + Brown P.C. are $30,000
for the  annual  audit and review of Form  10-KSB and $3,000 for each  quarterly
review as compared  to 2002 from Wiss & Co. LLP of $25,000 for the annual  audit
and review of Form 10-KSB and $3,000 for each quarterly review.

TAX  FEES:  The fees for our  corporate  tax  return  for 2003 will be $6,000 as
compared to $ 7,000 for 2002 returns.

ALL  OTHER  FEES:  There  have  been  no fees  from  our  principal  accountants
WithumSmith + Brown for 2003;  however we did have a charges from Wiss & Co, LLP
of approximately $1,300 and anticipate  approximately another $ 3,000 for review
of 2003 financial statements as compared to $7,000 from our previous auditor for
review of 2002 financial statements.

All fees and the retaining of auditors was done by our audit  committee with the
approval of our Board of Directors.


                                       54
<PAGE>

                                   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.

                                                  /s/Ramesh C. Pandey
                                                  -----------------------
Date: March 09, 2005                              Ramesh 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:  March 09, 2005
        -------------------
        Ramesh C. Pandey, Ph.D.
        Chief Executive Officer, President and
        Chairman of the Board of Directors and
        Chief Accounting Officer
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
By:     /s/Stephen F. Burg                             Date:  March 09, 2005
        ------------------
        Stephen F. Burg
        Director
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
By:     /s/ Leonard Mudry                              Date:  March 09, 2005
        -----------------
        Leonard Mudry
        Director
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
By:     /s/Adesoji Adelaja                             Date:  March 09, 2005
        ------------------
        Adesoji Adelaja, Ph.D.
        Director
-------------------------------------------------------------------------------


                                       55
<PAGE>

                                  EXHIBIT INDEX


Number      Exhibit

10.30       2004 Long Term Incentive Plan

10.31       Royalty,  Distribution Rights and Joint Cooperation  Agreement Among
            Xechem International,  Inc., Xechem Pharmaceuticals Nigeria, Limited
            and Alembic, Limited

10.32       Fund of $3,000,000 Promissory Note to Alembic, Limited

10.33       Ceptor  Agreement among Ceptor  Corporation,  Xechem  International,
            Inc. and William Pursley

10.34       Employment Agreement between Ceptor Corporation and William Pursley

10.35       Amended  and  Restated   Stock  Option   Agreement   between  Xechem
            International, Inc. and William Pursley

21          Subsidiaries of Xechem

23.2        Consent of Wiss & Co. LLP

31.1        Certification

31.2        Certification

32          Certification


                                       56