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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 10-QSB

|                                                            |     |  |                                                                                   
|----------------------------------------------------------- | --- |  | ----------------------------------------------------------------------------------
|                                                            | [X] |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                           
|For the quarterly period ended June 30, 2003               
|                                                           
|OR                                                         
|                                                           
|                                                            | [ ] |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                           
|For the transition period from ____________ to ____________

Commission file number 0-16686

Chiral Quest, Inc.

(Exact Name of Registrant as Specified in Its Charter)

| |                                                                         |  |                                               
| | ----------------------------------------------------------------------- |  | ----------------------------------------------
| | Minnesota
(State or other jurisdiction ofincorporation or organization) |  | 58-1486040(I.R.S. Employer Identification No.)

1981 Pine Hall Drive, State College, Pennsylvania 16801
(Address of principal executive offices)

(814) 234-5054
(Issuers telephone number)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

As of August 12, 2003, there were 13,001,018 shares of the issuers common
stock, $.01 par value, outstanding.





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TABLE OF CONTENTS



|                                                   |                                                                    |  |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                    
|                                                   | Item 1. Financial Statements                                      
|                                                   | Item 2. Managements Discussion and Analysis or Plan of Operation.
|                                                   | Item 3. Controls and Procedures                                   
|PART II  OTHER INFORMATION                       
|                                                   | Item 1. Legal Proceedings.                                        
|                                                   | Item 2. Changes in Securities and Use of Proceeds                 
|                                                   | Item 6. Exhibits and Reports on Form 8-K                          
|SIGNATURES                                        
|Exhibit Index                                     
|EX-4.1 Option Agreement No. LL-1 dated May 6, 2003
|EX-4.2 Form of Option Agreement dated May 6, 2003 
|EX-4.3 Schedule of Options                        
|EX-10.1 Consulting Agreement dated May 15, 2003   
|EX-31.1 Certification of CEO and CFO              
|EX-32.1 Certification Pursuant to Section 906     



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Index

|        |  |                                                           |  |      |    | 
|------- |  | --------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                           |  | Page
|        |  |                                                           |  |     
|PART I  |  | FINANCIAL INFORMATION                                     |  |      |    | 
|Item 1  |  | Condensed Consolidated Financial Statements               |  |      | 3  | 
|Item 2  |  | Managements Discussion and Analysis or Plan of Operation |  |      | 18 | 
|Item 3  |  | Controls and Procedures                                   |  |      | 30 | 
|PART II |  | OTHER INFORMATION                                         |  |      |    | 
|Item 1  |  | Legal Proceedings                                         |  |      | 31 | 
|Item 2  |  | Changes in Securities and Use of Proceeds                 |  |      | 31 | 
|Item 6  |  | Exhibits and Reports on Form 8-K                          |  |      | 31 | 
|        |  | Signatures                                                |  |      | 32 | 
|        |  | Exhibit Index                                             |  |      | 33 | 

Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-QSB that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. We
intend that all forward-looking statements be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. In
particular, the Managements Discussion and Analysis or Plan of Operation
section in Part I, Item 2 of this quarterly report include forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as we expect, anticipate,
believe, and intend and similar expressions to identify forward-looking
statements. A number of important factors could, individually or in the
aggregate, cause actual results to differ materially from those expressed or
implied in any forward-looking statements. Such factors include, but are not
limited to the risks identified under the section entitled Risk Factors
following Item 2 in Part I of this Report.

2



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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

CHIRAL QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

ASSETS

|                                                                                                                                                          |                                         |   |               |           |              |   |            |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | - | ------------- | --------- | ------------ | - | ---------- | -------- | -
|                                                                                                                                                          |                                         |   | June 30, 2003 |           | December 31,
|                                                                                                                                                          |                                         |   | (Unaudited)   |           | 2002        
|                                                                                                                                                          |                                         |   |               |           |             
|CURRENT ASSETS                                                                                                                                            |                                         |   |               |           |              |   |            |         
|Cash and cash equivalents                                                                                                                                 |                                         | $ | 1,790,874     |           |              | $ | 33,520     |         
|Accounts receivable, net of allowance for doubtful
accounts of $50,000 at June 30, 2003 and December 31, 2002                                             |                                         |   | 60,330        |           |              |   | 12,456     |         
|Inventory                                                                                                                                                 |                                         |   | 38,512        |           |              |   | 28,422     |         
|Prepaid expenses                                                                                                                                          |                                         |   | 17,830        |           |              |   |           |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|                                                                                                                                                          | Total Current Assets                    |   |               | 1,907,546 |              |   |            | 74,398   |  
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                                        |                                         |   | 186,498       |           |              |   | 67,011     |         
|SECURITY DEPOSIT  RENT                                                                                                                                   |                                         |   | 20,000        |           |              |   |           |         
|INTELLECTUAL PROPERTY RIGHTS, NET                                                                                                                         |                                         |   | 325,650       |           |              |   | 318,320    |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|TOTAL ASSETS                                                                                                                                              |                                         | $ | 2,439,694     |           |              | $ | 459,729    |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                                         |                                         |   |               |           |              |   |            |         
|CURRENT LIABILITIES                                                                                                                                       |                                         |   |               |           |              |   |            |         
|Accounts payable                                                                                                                                          |                                         | $ | 210,606       |           |              | $ | 111,832    |         
|Accrued expenses and other                                                                                                                                |                                         |   | 181,713       |           |              |   | 105,377    |         
|Due to related party                                                                                                                                      |                                         |   | 16,663        |           |              |   |           |         
|Notes payable                                                                                                                                             |                                         |   |              |           |              |   | 336,625    |         
|Deferred revenue                                                                                                                                          |                                         |   | 133,967       |           |              |   | 133,967    |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|                                                                                                                                                          | Total Current Liabilities               |   |               | 542,949   |              |   |            | 687,801  |  
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|LONG-TERM LIABILITIES                                                                                                                                     |                                         |   |               |           |              |   |            |         
|Deferred revenue                                                                                                                                          |                                         |   | 106,099       |           |              |   | 173,083    |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|                                                                                                                                                          | Total Long-Term Liabilities             |   |               | 106,099   |              |   |            | 173,083  |  
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|TOTAL LIABILITIES                                                                                                                                         |                                         |   | 649,048       |           |              |   | 860,884    |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|COMMITMENTS AND CONTINGENCIES                                                                                                                             |                                         |   |               |           |              |   |            |         
|STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                                                         |                                         |   |               |           |              |   |            |         
|Common stock, $.01 par value, 50,000,000 authorized,
13,001,018 and 8,652,298 issued and outstanding at
June 30, 2003 and December 31, 2002, respectively |                                         |   | 130,010       |           |              |   | 86,523     |         
|Additional paid-in capital                                                                                                                                |                                         |   | 4,858,553     |           |              |   | 1,261,527  |         
|Deferred consulting expense                                                                                                                               |                                         |   | (902,636      | )         |              |   | (356,400   | )       
|Accumulated deficit                                                                                                                                       |                                         |   | (2,295,281    | )         |              |   | (1,392,805 | )       
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|                                                                                                                                                          | Total Stockholders Equity (Deficiency) |   |               | 1,790,646 |              |   |            | (401,155 | )
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)                                                                                                   |                                         | $ | 2,439,694     |           |              | $ | 459,729    |         
|                                                                                                                                                          |                                         |   |               |           |              |   |            |         

See accompanying notes to condensed consolidated financial statements.

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CHIRAL QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |         |          |  
|------------------------------------------------------- | ----------------------------------- | ------------------------ | ---------- | ------------- | -------- | ------------- | --------- | ------------- | ------- | ------------- | ---------- | ------- | --------- | - | --------- | ------- | -------- | -
|                                                        |                                     |                          |            | For the Three |          | For the Three |           | For the Six   |         | For the Six  
|                                                        |                                     |                          |            | Months Ended  |          | Months Ended  |           | Months Ended  |         | Months Ended 
|                                                        |                                     |                          |            | June 30, 2003 |          | June 30, 2002 |           | June 30, 2003 |         | June 30, 2002
|                                                        |                                     |                          |            |               |          |               |           |               |         |              
|REVENUE                                                 |                                     | $                        | 59,382     |               |          | $             | 61,191    |               |         | $             | 131,441    |         |           | $ | 111,484   |        
|COST OF GOODS SOLD                                      |                                     |                          | (7,528     | )             |          |               | (1,286    | )             |         |               | (25,387    | )       |           |   | (5,456    | )      
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|GROSS MARGIN                                            |                                     |                          | 51,854     |               |          |               | 59,905    |               |         |               | 106,054    |         |           |   | 106,028   |        
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|OPERATING EXPENSES                                      |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|                                                        | Management and consulting fees      |                          |            | 71,335        |          |               |           | 54,400        |         |               |            | 126,009 |           |   |           | 119,800 |         
|                                                        | Research and development            |                          |            | 110,242       |          |               |           | 11,634        |         |               |            | 206,475 |           |   |           | 46,536  |         
|                                                        | Selling, general and administrative |                          |            | 259,882       |          |               |           | 17,527        |         |               |            | 423,366 |           |   |           | 36,128  |         
|                                                        | Compensation                        |                          |            | 146,595       |          |               |           | 42,765        |         |               |            | 217,720 |           |   |           | 90,631  |         
|                                                        | Depreciation and amortization       |                          |            | 32,716        |          |               |           | 10,536        |         |               |            | 42,640  |           |   |           | 21,067  |         
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|                                                        |                                     | Total Operating Expenses |            |               | 620,770  |               |           |               | 136,862 |               |            |         | 1,016,210 |   |           |         | 314,162  |  
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|                                                        |                                     | LOSS FROM OPERATIONS     |            |               | (568,916 | )             |           |               | (76,957 | )             |            |         | (910,156  | ) |           |         | (208,134 | )
|                                                        |                                     | INTEREST EXPENSE         |            |               |         |               |           |               |        |               |            |         | (2,809    | ) |           |         |         |  
|                                                        |                                     | INTEREST INCOME          |            |               | 4,730    |               |           |               |        |               |            |         | 10,489    |   |           |         |         |  
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|NET LOSS                                                |                                     | $                        | (564,186   | )             |          | $             | (76,957   | )             |         | $             | (902,476   | )       |           | $ | (208,134  | )      
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|NET LOSS PER COMMON SHARE  BASIC
AND DILUTED           |                                     | $                        | (.04       | )             |          | $             | (.01      | )             |         | $             | (.08       | )       |           | $ | (.02      | )      
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        
|WEIGHTED AVERAGE SHARES OUTSTANDING
 BASIC AND DILUTED |                                     |                          | 13,001,018 |               |          |               | 8,652,298 |               |         |               | 11,937,998 |         |           |   | 8,652,298 |        
|                                                        |                                     |                          |            |               |          |               |           |               |         |               |            |         |           |   |           |        

See accompanying notes to condensed consolidated financial statements.

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CHIRAL QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)

|                                                |  |              |            |         |  |            |         |             |  |              |           |              |  |   |          |   |  |   |            |   |  |   |           |  
|----------------------------------------------- |  | ------------ | ---------- | ------- |  | ---------- | ------- | ----------- |  | ------------ | --------- | ------------ |  | - | -------- | - |  | - | ---------- | - |  | - | --------- | -
|                                                |  |              |            |         |  |            |         |             |  | Additional   |           | Deferred     |  |   |          |   |  |   |            |  
|                                                |  | Common Stock |            | Paid-In |  | Consulting |         | Accumulated |  | Total Equity
|                                                |  | Shares       |            | Amount  |  | Capital    |         | Expense     |  | Deficit      |           | (Deficiency)
|                                                |  |              |            |         |  |            |         |             |  |              |           |             
|Balance, December
31, 2002                      |  |              | 8,652,298  |         |  | $          | 86,523  |             |  | $            | 1,261,527 |              |  | $ | (356,400 | ) |  | $ | (1,392,805 | ) |  | $ | (401,155  | )
|Recapitalization of
the Company (See
Note 1(A)) |  |              | 4,348,720  |         |  |            | 43,487  |             |  |              | 2,964,211 |              |  |   |         |   |  |   |           |   |  |   | 3,007,698 |  
|Options issued for
services and rent            |  |              |           |         |  |            |        |             |  |              | 632,815   |              |  |   | (622,970 | ) |  |   |           |   |  |   | 9,845     |  
|Amortization of
deferred consulting
expense     |  |              |           |         |  |            |        |             |  |              |          |              |  |   | 76,734   |   |  |   |           |   |  |   | 76,734    |  
|Net loss                                        |  |              |           |         |  |            |        |             |  |              |          |              |  |   |         |   |  |   | (902,476   | ) |  |   | (902,476  | )
|                                                |  |              |            |         |  |            |         |             |  |              |           |              |  |   |          |   |  |   |            |   |  |   |           |  
|BALANCE, JUNE 30,
2003                          |  |              | 13,001,018 |         |  | $          | 130,010 |             |  | $            | 4,858,553 |              |  | $ | (902,636 | ) |  | $ | (2,295,281 | ) |  | $ | 1,790,646 |  
|                                                |  |              |            |         |  |            |         |             |  |              |           |              |  |   |          |   |  |   |            |   |  |   |           |  

See accompanying notes to condensed consolidated financial statements.

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CHIRAL QUEST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |          |   |         |  
|----------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | --------------------------------------------------- | ------- | ------------- | --------- | ------------- | -------- | - | ------- | -
|                                                |                                                                                           |                                             |           |                                                     |         | For the Six   |           | For the Six  
|                                                |                                                                                           |                                             |           |                                                     |         | Months Ended  |           | Months Ended 
|                                                |                                                                                           |                                             |           |                                                     |         | June 30, 2003 |           | June 30, 2002
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |              
|CASH FLOWS FROM OPERATING ACTIVITIES:           |                                                                                           |                                             |           |                                                     |         |               |           |              
|                                                | Net loss                                                                                  |                                             | $         | (902,476                                            | )       |               | $         | (208,134      | )       
|                                                | Adjustments to reconcile net loss to net cash (used in)
provided by operating activities: |                                             |           |                                                     |         |               |           |               |         
|                                                |                                                                                           | Depreciation and amortization               |           |                                                     | 42,640  |               |           |               | 21,067   |  
|                                                |                                                                                           | Amortization of deferred consulting expense |           |                                                     | 76,734  |               |           |               | 64,800   |  
|                                                | Changes in operating assets and liabilities:                                              |                                             |           |                                                     |         |               |           |               |         
|                                                |                                                                                           | (Increase) decrease in accounts receivable  |           |                                                     | (47,874 | )             |           |               | 13,542   |  
|                                                |                                                                                           | (Increase) in inventory                     |           |                                                     | (10,090 | )             |           |               |         |  
|                                                |                                                                                           | (Increase) in prepaid expenses (cash only)  |           |                                                     | (7,985  | )             |           |               |         |  
|                                                |                                                                                           | (Increase) in security deposit              |           |                                                     | (20,000 | )             |           |               |         |  
|                                                |                                                                                           | Increase (decrease) in accounts payable     |           |                                                     | 98,774  |               |           |               | (79,845  | )
|                                                |                                                                                           | Increase (decrease) in accrued expenses     |           |                                                     | 66,791  |               |           |               | (110,979 | )
|                                                |                                                                                           | Increase (decrease) in due to related party |           |                                                     | 16,663  |               |           |               |         |  
|                                                |                                                                                           | (Decrease) increase in deferred revenue     |           |                                                     | (66,984 | )             |           |               | 329,744  |  
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|                                                |                                                                                           |                                             |           | Net Cash (Used In) Provided By Operating Activities |         |               | (753,807  | )             |          |   | 30,195  |  
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|CASH FLOWS FROM INVESTING ACTIVITIES:           |                                                                                           |                                             |           |                                                     |         |               |           |              
|                                                | Payments for purchased property, plant and equipment                                      |                                             |           | (139,297                                            | )       |               |           | 8,684         |         
|                                                | Payments for intellectual property rights                                                 |                                             |           | (30,160                                             | )       |               |           | (27,578       | )       
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|                                                |                                                                                           |                                             |           | Net Cash Used In Investing Activities               |         |               | (169,457  | )             |          |   | (18,894 | )
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|CASH FLOWS FROM FINANCING ACTIVITIES:           |                                                                                           |                                             |           |                                                     |         |               |           |              
|                                                | Payment of notes payable                                                                  |                                             |           | (336,625                                            | )       |               |           |              |         
|                                                | Exercise of unit options                                                                  |                                             |           |                                                    |         |               |           | 7,500         |         
|                                                | Payment of loans payable                                                                  |                                             |           |                                                    |         |               |           | (50,000       | )       
|                                                | Cash received in merger and recapitalization                                              |                                             |           | 3,017,243                                           |         |               |           |              |         
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|                                                |                                                                                           |                                             |           | Net Cash Provided By (Used In) Financing Activities |         |               | 2,680,618 |               |          |   | (42,500 | )
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|NET INCREASE IN CASH                            |                                                                                           |                                             | 1,757,354 |                                                     |         |               | (31,199   | )            
|CASH AND CASH EQUIVALENTS  BEGINNING OF PERIOD |                                                                                           |                                             | 33,520    |                                                     |         |               | 45,008    |              
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         
|CASH AND CASH EQUIVALENTS  END OF PERIOD       |                                                                                           | $                                           | 1,790,874 |                                                     |         | $             | 13,809    |              
|                                                |                                                                                           |                                             |           |                                                     |         |               |           |               |         

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the six months ended June 30, 2003, the Company issued 8,652,298 shares
of common stock related to the merger (See Note 1). In connection with
the merger, the Companys accrued expenses, common stock and
additional-paid-in capital (APIC) were increased by $9,545, $43,487 and
$2,964,211, respectively. In addition, $9,485 was charged to Prepaid Rent
and credited to APIC for the value of 20,000 options issued to a landlord
under a new lease agreement signed in May 2003 and $622,970 was charged to
Deferred Consulting in June 2003 and credited to APIC for the value of
740,052 options issued to consultants and scientific board members (See
Note 5).

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CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS



| |                         
| | ------------------------
| | (A) Nature of Operations



| |  | On February 18, 2003, Chiral Quest, LLC merged (the Merger) with and into
CQ Acquisition, Inc., a wholly owned subsidiary of Surg II, Inc. (Surg), a
reporting public corporation with no current operations. Each membership
interest of Chiral Quest, LLC issued and outstanding on February 18, 2003
(Effective Date) was automatically converted into 0.752374 shares of Surg
common stock. There were 4,348,720 shares of Surg common stock issued and
outstanding and options to purchase an additional 682,875 shares immediately
prior to the Effective Date. At the Effective Date, Chiral Quest, LLC had
11,500,000 member equity units outstanding. Accordingly, as a result of the
Merger, Surg issued 8,652,298 shares of its common stock to the former
members of Chiral Quest, LLC. In addition, immediately prior to the
Effective Date, there were non-vested contingent options and warrants
outstanding to purchase an aggregate of up to 1,210,000 of Chiral Quest
LLCs member equity units, which following the merger represented the right
to purchase an aggregate of up to 910,374 shares of Surg common stock at
$1.49 per share. In connection with the Merger, Surg changed its name to
Chiral Quest, Inc. (together with its subsidiaries, the Company or Chiral
Quest).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Generally accepted accounting principles in the United States of America
require the company whose equity holders retain a majority interest in a
business combination be treated as the acquiror for accounting purposes.
Since, following the Merger, the former members of Chiral Quest, LLC held
approximately two-thirds of the outstanding common stock of the Company, the
Merger was accounted for as a reverse acquisition with Chiral Quest, LLC as
the accounting acquiror (legal acquiree) and Surg as the accounting acquiree
(legal acquiror). Accordingly, when we discuss financial and other
information of the Company or Chiral Quest, we are referring to Chiral
Quest, LLCs financial and other information, unless the context indicates
otherwise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Chiral Quest provides chiral products and services to the pharmaceutical and
fine chemical industries. Chiral Quest develops chemical catalysts used in
the synthesis of desired isomers of chiral molecules using asymmetrical
catalysis technology (the Technology) owned by the Pennsylvania State
University Research Foundation (PSRF), the Universitys technology
transfer unit. Chiral Quest has a worldwide, exclusive license from PSRF
for the inventions covered by the license. The original license agreement
was entered into on November 8, 2000 (See Note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                          
| | -------------------------
| | (B) Basis of Presentation



| |  | The accompanying condensed consolidated financial statements include the
accounts of Chiral Quest and its subsidiaries. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the
instructions to Form 10-QSB and do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the results for the interim
periods have been included. Operating results for the three and six months
ended June 30, 2003 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2003. The accompanying
condensed consolidated financial statements and the information included
under the heading Managements Discussion and Analysis should be read in
conjunction with the Companys consolidated financial statements and related
notes included in the Companys Current Report on Form 8-K/A filed with the
Securities and Exchange Commission (SEC) on May 5, 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |                           
| | --------------------------
| | (C) Basis of Consolidation



| |  | The accompanying June 30, 2003 condensed consolidated financial statements,
after giving effect to the recapitalization, include the consolidated
balance sheets of the Company and its wholly owned subsidiaries CQ
Acquisition, Inc. and Chiral Quest, Ltd. at historical cost and the
consolidated statements of operations of the accounting acquiror for the
three and six months ended June 30, 2003 and that of the acquiree for the
period since the Merger. All significant intercompany transactions and
balances have been eliminated in consolidation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The statements of operations presented for the three and six months ended
June 30, 2002 and the statements of cash flows for the six months ended June
30, 2002 are that of the accounting acquiror. Certain prior year balances
have been reclassified to conform to the current year presentation.                                                                                                                                                                                                                                                              



| |                              
| | -----------------------------
| | (D) Cash and Cash Equivalents



| |  | The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
| |  | -----------------------------------------------------------------------------------------------------------------------------



| |              
| | -------------
| | (E) Inventory



| |  | Inventory, consisting of mixtures of raw material compounds and
completed proprietary ligands, is stated at the lower of cost or market.
The compounds are intermediates in the production of finished product
ligands that are sometimes also used by the Company for further research and
development of the Technology. The completed ligands are sold to third
parties (See Note 2).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                           
| | --------------------------
| | (F) Property and Equipment



| |  | Property and equipment is depreciated over the estimated useful lives of the
assets, principally using the straight-line method. For tax purposes,
accelerated methods are used. The estimated useful lives used for
depreciation and amortization were three, five and seven years for leasehold
improvements, laboratory/computer equipment and office equipment,
respectively (See Note 3).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                
| | ---------------
| | (G) Intangibles



| |  | Under Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142),
subsequent to June 30, 2002, goodwill should not be amortized. Effective
January 1, 2002, intangibles existing as of June 30, 2001 having a finite
life will be amortized and those with indefinite lives will no longer be
amortized, but rather, evaluated for impairment on an annual basis using a
fair value based test. Intangibles of the Company as of June 30, 2003 and
December 31, 2002 consisted of rights to PSRFs intellectual property, which
are classified as Intellectual Property Rights in the accompanying balance
sheets. As of June 30, 2003 and December 31, 2002, Intellectual Property
Rights are $325,650, net of accumulated amortization of $36,748, and
$318,320 net of accumulated amortization of $13,918, respectively. See Note
4 for more discussion on the Companys Rights to Intellectual Property.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                        
| | -----------------------
| | (H) Revenue Recognition



| |  | Revenues from the Companys rights to PSRFs intellectual property are
recognized upon a signed agreement with the customer or remittance of an
invoice and allocated over the applicable periods. The revenues are
comprised principally of the licensing of PSRFs Technology. The Company
assumes the financial risks related to these revenues by financing the
research and development of
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |  | PSRFs technology as well as the defense of
PSRFs patents. Deferred revenue in the accompanying balance sheets
represents amounts prepaid by customers to the Company for services. These
deferred amounts will be amortized into revenue over the applicable periods.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In addition, the Company records revenue from the sale of manufactured
proprietary ligands (ligands). The revenue is recognized in full upon the
shipping and invoicing of the ligands to the customer.                                                              



| |                 
| | ----------------
| | (I) Income Taxes



| |  | From inception in October 2000 through September 30, 2002, the Company
elected to be treated as a partnership for federal and state income tax
purposes. As such, the Company did not pay income taxes, as any income or
loss through September 30, 2002 was included in the tax returns of the
individual equity holders. Accordingly, no provision was made for income
taxes in the accompanying financial statements through September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of October 1, 2002, the Company elected to be treated as a Subchapter C
corporation for income tax purposes and has adopted SFAS No. 109 Accounting
for Income Taxes. Under Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
|
| |  | A deferred tax asset as of June 30, 2003, consisting primarily of the tax
effect of net operating loss carryforwards of approximately $1,159,976, has
been fully offset by a valuation allowance because it is managements belief
that realization of such amount is not considered more likely than not.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                             
| | ----------------------------
| | (J) Stock-Based Compensation



| |  | The Company accounts for its employee and director stock option plans in
accordance with APB Opinion No. 25, Accounting For Stock Issued To
Employees, and related interpretations. The Company measures compensation
expense for employee and director stock options as the aggregate difference
between the market value of its common stock and exercise prices of the
options on the date that both the number of shares the grantee is entitled
to receive and the exercise prices are known. Compensation expense
associated with restricted stock grants is equal to the market value of the
shares on the date of grant and is recorded pro rata over the required
holding period. If the Company had elected to recognize compensation cost
for all outstanding options granted by the Company by applying the fair
value recognition provisions of SFAS No. 148 to stock-based employee
compensation, net income (loss) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                         |  |                    |          |                  |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | -------- | ---------------- |  | - | -------- | -
|                                                                                                                         |  | Three Months Ended |          | Six Months Ended
|                                                                                                                         |  | June 30, 2003      |          | June 30, 2003   
|                                                                                                                         |  |                    |          |                 
|Net income (loss)                                                                                                        |  |                    |          |                  |  |   |          |  
|As reported                                                                                                              |  | $                  | (564,186 | )                |  | $ | (902,476 | )
|Total stock-based employee compensation
expense using fair value based method for
all awards, net of related tax effects |  |                    | (15,789  | )                |  |   | (131,614 | )
|                                                                                                                         |  |                    |          |                  |  |   |          |  

9



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)

|                                                     |  |   |          |   |  |   |            |  
|---------------------------------------------------- |  | - | -------- | - |  | - | ---------- | -
|Pro Forma                                            |  | $ | (579,975 | ) |  | $ | (1,034,090 | )
|                                                     |  |   |          |   |  |   |            |  
|Basic and diluted net income (loss)
per common share |  |   |          |   |  |   |            |  
|As reported                                          |  | $ | (.04     | ) |  | $ | (.08       | )
|Pro forma                                            |  | $ | (.04     | ) |  | $ | (.09       | )



| |  | In addition, options are issued to non-employees such as consultants and
scientific board members. Any options issued to non-employees are recorded
in the financial statements in Deferred Consulting in the Equity section
using the fair value method and then amortized to consulting expense over
the applicable periods. See Note 5 for more discussion on the Companys
stock-based compensation.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                     
| | --------------------
| | (K) Use of Estimates



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



| |                                    
| | -----------------------------------
| | (L) Impairment of Long-Lived Assets



| |  | The Company evaluates the recoverability of the Intellectual Property
Rights, where indicators of impairment are present, by reviewing current and
projected profitability or undiscounted cash flows of such assets.
Intangible assets that are subject to amortization are reviewed for
potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Intangible assets not subject to
amortization are tested for impairment at least annually. For the six
months ended June 30, 2003 and 2002, the Company determined that, based on
estimated future cash flows, the carrying amount of the Intellectual
Property Rights equals the fair value. Accordingly, no impairment loss was
required for the six months ended June 30, 2003 and 2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                     
| | ------------------------------------
| | (M) Research and Development Expense



| |  | Research and development (R&D) costs are expensed as incurred. These
expenses include the
cost of the Companys proprietary R&D efforts, as well as costs incurred in
connection with the Companys third-party collaboration efforts. For the
three months ended June 30, 2003 and 2002, $110,242 and $11,634,
respectively, had been charged to R&D expense. For the six months ended June
30, 2003 and 2002, $206,475 and $46,536, respectively, had been charged to
R&D expense.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                   
| | ------------------
| | (N) Loss Per Share



| |  | Basic and diluted net loss per common share for all periods presented is
computed based on the weighted average common shares outstanding during the
year as defined by Statement of Financial
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |  | Accounting Standards No. 128,
Earnings Per Share. The assumed exercise of common stock equivalents was
not utilized since the effect would be anti-dilutive.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                     
| | ------------------------------------
| | (O) Recent Accounting Pronouncements



| |  | In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 rescinds the provisions of SFAS No. 4,
which requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS
No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the
provisions of SFAS No. 13 to require that certain lease modifications be
treated as sale leaseback transactions. The provisions of SFAS No. 145
related to classification of debt extinguishments are effective for fiscal
years beginning after May 15, 2002, with earlier application encouraged.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In July 2002, FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS No. 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS No. 146, the Company will record a liability for a cost associated with
an exit or disposal activity when that liability is incurred and can be
measured at fair value. SFAS No. 146 will require the Company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated
and in any subsequent period until the activity is completed. SFAS No. 146
is effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. Under SFAS No. 146, a
company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.
|
| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure  an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock Based
Compensation to provide alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based
compensation. Additionally, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require disclosure in the significant accounting policy
footnote of both annual and interim financial statements of the method of
accounting for stock based-compensation and the related pro-forma
disclosures when the intrinsic value method continues to be used. The
statement is effective for fiscal years beginning after December 15, 2002,
and disclosures are effective for the first fiscal quarter beginning after
December 15, 2002.                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. This statement is effective for contracts entered into or
modified after June 30, 2003 and all of its provisions should be applied
prospectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|

11



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |  | In May 2003, the FASB issued SFAS No. 150, Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting
guidance contained in SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet.                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | SFAS No. 150 affects the issuers accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts,
which involves instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets. The third type of
instruments that are liabilities under this Statement is obligations that
can be settled with shares, the monetary value of which is fixed, tied
solely or predominantly to a variable such as a market index, or varies
inversely with the value of the issuers shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a
derivative in its entirety.
|
| |  | Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are
consistent with the FASBs proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing
its own shares. This Statement shall be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise shall be effective
at the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of a non-public
entity, as to which the effective date is for fiscal periods beginning after
December 15, 2003.                                                                     
|
| |  | Management does not expect the impact from these statements pronouncements
to have a material impact on the Companys consolidated financial position
or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

NOTE 2 INVENTORY



| |  | The principal components of inventory as of June 30, 2003 and December 31,
2002 are as follows:
| |  | -----------------------------------------------------------------------------------------------

|                       |                 |   |               |        |              |   |        |        | 
|---------------------- | --------------- | - | ------------- | ------ | ------------ | - | ------ | ------ | 
|                       |                 |   | June 30, 2003 |        | December 31,
|                       |                 |   | (Unaudited)   |        | 2002        
|                       |                 |   |               |        |             
|Raw material compounds |                 | $ | 24,723        |        |              | $ | 28,422 |       
|Finished goods         |                 |   | 13,789        |        |              |   |       |       
|                       |                 |   |               |        |              |   |        |       
|                       | Total Inventory |   | $             | 38,512 |              |   | $      | 28,422 | 
|                       |                 |   |               |        |              |   |        |       

NOTE 3 PROPERTY, PLANT AND EQUIPMENT, NET



| |  | The major classes of equipment and the related estimated useful lives are as
follows:
| |  | -------------------------------------------------------------------------------------

|                          |  |               |         |              |  |      |         |   |  |         |  | 
|------------------------- |  | ------------- | ------- | ------------ |  | ---- | ------- | - |  | ------- |  | 
|                          |  | June 30, 2003 |         | December 31, |  |      |         |  
|                          |  | (Unaudited)   |         | 2002         |  | Life
|                          |  |               |         |              |  |     
|Laboratory equipment      |  | $             | 197,926 |              |  | $    | 112,044 |   |  |         |  | 
|Accumulated depreciation  |  |               | (62,518 | )            |  |      | (47,020 | ) |  | 5 Years
|                          |  |               |         |              |  |      |         |   |  |         |  | 
|Laboratory equipment, net |  |               | 135,408 |              |  |      | 65,024  |   |  |         |  | 
|                          |  |               |         |              |  |      |         |   |  |         |  | 
|Office equipment          |  | $             | 2,291   |              |  | $    | 2,291   |   |  |         |  | 
|Accumulated depreciation  |  |               | (468    | )            |  |      | (304    | ) |  | 7 Years
|                          |  |               |         |              |  |      |         |   |  |         |  | 

12



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)

|                            |  |   |         |   |  |   |        |  |  |         |  | 
|--------------------------- |  | - | ------- | - |  | - | ------ |  |  | ------- |  | 
|Office equipment, net       |  |   | 1,823   |   |  |   | 1,987  |  |  |         |  | 
|                            |  |   |         |   |  |   |        |  |  |         |  | 
|Computer equipment          |  | $ | 9,118   |   |  | $ |       |  |  |         |  | 
|                            |  |   |         |   |  |   |        |  |  |         |  | 
|Accumulated depreciation    |  |   | (456    | ) |  |   |       |  |  | 5 Years
|                            |  |   |         |   |  |   |        |  |  |         |  | 
|Computer equipment, net     |  |   | 8,662   |   |  |   |       |  |  |         |  | 
|                            |  |   |         |   |  |   |        |  |  |         |  | 
|Leasehold improvements      |  | $ | 44,297  |   |  | $ |       |  |  |         |  | 
|Accumulated amortization    |  |   | (3,692  | ) |  |   |       |  |  | 3 Years
|                            |  |   |         |   |  |   |        |  |  |         |  | 
|Leasehold improvements, net |  |   | 40,605  |   |  |   |       |  |  |         |  | 
|                            |  |   |         |   |  |   |        |  |  |         |  | 
|Total                       |  | $ | 186,498 |   |  | $ | 67,011 |  |  |         |  | 
|                            |  |   |         |   |  |   |        |  |  |         |  | 



| |  | Depreciation and amortization expense for property, plant and equipment for
the three months ended June 30, 2003 and 2002 was $14,125 and $6,135,
respectively. Depreciation and amortization expense for property, plant and
equipment for the six months ended June 30, 2003 and 2002 was $19,809 and
$12,270, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 4 RIGHTS TO INTELLECTUAL PROPERTY



| |  | The Companys exclusive right to certain PSRF patents, in the aggregate, are
of material importance for the Companys survival. These PSRF patents
result from inventions by the Companys Chief Technology Officer (CTO),
who is also an employee at Pennsylvania State University. The PSRF patents
cover chemical formulations, processes for or intermediates useful in the
manufacture of products and the uses of products. Protection for PSRFs
individual products extends for varying periods in accordance with the date
of grant and the legal life of patents in the various countries. The
protection afforded, which may also vary from country to country, depends
upon the type of patent and its scope of coverage. The Company is
financially responsible for all aspects of these PSRF inventions, including
legal and R&D expenses associated with the chemical developments. As of
November 8, 2002, PSRF is not obligated to license future inventions by the
CTO to the Company.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the three months ended June 30, 2003 and 2002, the Company
capitalized $22,807 and $11,877, respectively, in legal fees, U.S. Patent
office handling fees and other expenses incurred in the defense of the
patents. During the six months ended June 30, 2003 and 2002, the Company
capitalized approximately $30,160 and $27,578, respectively. Expenses
incurred for research and development of the patents were expensed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Intellectual Property Rights are being amortized over the lives of the
underlying patents, which generally are twenty years. Amortization expense
recorded for the three months ended June 30, 2003 and 2002 was $18,591 and
$4,401, respectively. Amortization expense recorded for the six months
ended June 30, 2003 and 2002 was $22,830 and $8,797, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

NOTE 5 STOCKHOLDERS EQUITY AND NOTES PAYABLE



| |  | The Company accounts for equity based compensation in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation. The standard requires the Company to adopt the
fair value method with respect to equity-based compensation of consultants
and other non-employees.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In connection with two 5-year consulting agreements entered into by the
Company in 2000, the Company issued 4,062,820 shares of common stock. As a
result of these agreements, the Company                                                                                                                                

13



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##### Table of Contents



CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |  | recorded current charges to
operations of $32,400 and $64,800 for the three and six months ended June
30, 2003 and 2002, respectively. The Company also recorded a deferred
consulting expense, which is recognized as an offset to equity, of $291,600
and $356,400 as of June 30, 2003 and December 31, 2002, respectively, as a
result of these agreements. The deferred consulting expense is being
amortized over the lives of the agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company did not adopt the fair value method, in accordance with SFAS 123
(as amended by SFAS 148), with respect to employee stock options. The
Company accounts for employee stock options under the intrinsic value
method in accordance with Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees. In December 2000, the Company
granted an employee 1,128,562 options for services rendered to the Company.
During January 2001, this employee purchased 564,281 shares of common stock
subject to the option an exercise price of $.0133 per share for total
proceeds of $7,500. During June 2002, the employee purchased the remaining
564,281 shares subject to the option at an exercise price of $.0133 per
share for total proceeds of $7,500. The option issuance did not result in
charges to operations for the three and six months ended June 30, 2003 and
2002.
|
| |  | During 2002, the Company granted options to purchase 865,230 shares of its
common stock to its CEO as required by his employment agreement with the
Company. The options vest equally over a three-year period commencing with
the date of the Merger (See Note 1), are exercisable at $1.4886 per share
and are for services to be rendered to the Company over the vesting period.
The option issuance did not result in charges to operations for the three
and six months ended June 30, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | During July 2002, two of the Companys former shareholders (the Sellers)
sold all of their interest in the Company to another individual. The total
number of shares sold was 4,589,481, giving the individual a then 53%
ownership in the Company. The individual is paying the purchase price for
his shares to the Sellers in six quarterly installments. As of June 30,
2003, the individual is current on his quarterly payments. Should the
individual default on his payments to the Sellers, the shares will revert
back to the Sellers. Subsequent to the purchase of the shares from the
Sellers, the individual sold a substantial portion of his shares to certain
other individuals who are restricted from selling their shares purchased
from the individual until such time as the Sellers have been paid in full
for the interests he purchased from them.                                         
|
| |  | In connection with the Merger (see Note 1), the Company issued options to
purchase 550,000 shares of common stock at an exercise price of $1.25 to an
independent consultant for services related to the Merger. The value of the
options were treated as Merger transaction costs and charged directly to
equity in the accompanying financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | During April 2003, the Company issued options to purchase an aggregate of
167,500 shares of common stock at an exercise price of $1.50 to three
employees. The total value of the option issuance of $157,650 was valued
using the Black-Scholes pricing model with the following assumptions: a
risk-free interest rate ranging from 3.98% to 4.0%, volatility ranging from
67.24% to 67.38%, lives of ten years and an annual rate of quarterly
dividend of 0%. Since the Company uses the intrinsic value method for
employee option issuances, none of the expense is recorded in the financial
statements as of June 30, 2003.                                                                                                                                                                                                                                                                                   
|
| |  | During May 2003, the Company issued options to purchase an aggregate of
20,000 shares of common stock to the landlord of new office space that the
Company is leasing in New Jersey. The                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |  | option issuance resulted in a charge
to Prepaid Rent of $9,845 and it will be amortized to rent expense over the
applicable vesting periods beginning in July 2003. The option issuance did
not result in charges to operations for the three and six months ended June
30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2003, the Company issued options to purchase an aggregate of 30,000
shares of common stock at an exercise price of $1.50 to two employees. The
total value of the option issuance of $12,690 was valued using the
Black-Scholes pricing model with the following assumptions: a risk-free
interest rate of 2.35%, volatility of 74.03%, estimated lives of five years
and an annual rate of quarterly dividend of 0%. Since the Company uses the
intrinsic value method for employee option issuances, none of the expense is
recorded in the financial statements for the three and six months ended
June 30, 2003.                                                                                                                                                                                                                                                                                               
|
| |  | In June 2003, the Company issued options to purchase an aggregate of 740,052
shares of common stock at exercise prices ranging between $1.49 and $1.50
per share to two consultants (including 650,052 options issued to the CTO)
and two members of the Companys Scientific Advisory Board. The total value
of the option issuances of $622,970 was valued using the Black-Scholes
pricing model with the following assumptions: a risk-free interest rate
ranging from 2.32% to 2.49%, volatility ranging from 86.63% to 87.94%, lives
of five years and an annual rate of quarterly dividend of 0%. The option
issuances were charged to Deferred Consulting expense in the Equity section
of the balance sheet and are being amortized to consulting expense over the
applicable vesting periods. For the three and six months ended June 30,
2003 total charges to operations for these option issuances was $11,934.

NOTE 6 AGREEMENTS



| |  | Pursuant to a January 2002 agreement between the Company and a
pharmaceutical product development customer, the Company granted the
customer a worldwide, non-exclusive, royalty free license to certain of the
Companys Intellectual Property Rights for research purposes only in
connection with certain of the customers compounds. The customer paid the
Company a non-refundable license fee of $400,000 in 2002. The fee is being
amortized to revenue through September 2005. For the three months ended
June 30, 2003 and 2002, the Company has recognized income of $28,560 and
$28,169, respectively, in relation to this agreement. For the six months
ended June 30, 2003 and 2002, the Company has recognized income of $57,120
and $56,338, respectively, in relation to this license agreement.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In August 2002, the Company entered into a one-year scientific research
agreement with another pharmaceutical product development customer to assist
in the completion of a feasibility screening program and report. In
consideration for the experimental activity, the customer paid a fee of
$30,000. The fee is being amortized to revenue through August 2003. For
the three months ended June 30, 2003 and 2002, the Company recognized income
of $4,932 and $0, respectively. For the six months ended June 30, 2003 and
2002, the Company has recognized income of $9,864 and $0, respectively.                                                                                                                                                                                                         
|
| |  | In May 2003 the Company entered into a four-year consulting agreement with
the CTO at an annual rate of $120,000 per year. In addition, the CTO
received an option to purchase 650,052 shares of common stock at $1.49 per
share as mentioned in Note 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In May 2003, the Company entered into an option agreement with the Science
and Technology Bureau of Jiashan County, China (Jiashan), whereby the
Company has an option to acquire a laboratory facility in an industrial park
near Shanghai. Jiashan is currently building 4,000 square meters of
laboratory space built to the Companys specifications. The Company will
not pay rent                                                                                                                                                                                                                                                                                                                                                                                                                        

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CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)



| |  | for the initial 3 years of the lease, following which the
Company, at its sole option, may rent the space for annual rent of no more
than US$60,000 (based on the approximate conversion rate at June 30, 2003).
In addition, the Company will have the option to purchase the lab on
commercially reasonable terms. Should the Company wish to occupy the
laboratory after its completion (estimated to be in the fourth quarter of
2003 or first quarter of 2004), it will begin to pay a maintenance fee of
$4,500 per month. For purposes of entering the lease, the Company has
established a wholly owned subsidiary in Hong Kong, Chiral Quest Ltd., which
in turn will be the sole shareholder of a subsidiary in the Peoples
Republic of China (the China Sub). The Company will provide at least
$65,000 of capital to the China Sub by the end of the year. In addition,
the Company was also granted the option to purchase approximately 13 acres
of land adjacent to the industrial park where the lab will be established.
As of June 30, 2003, the Company is still completing its due diligence
regarding this potential operation and has not yet committed to the exercise
of the option.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 7 BUSINESS AND CREDIT CONCENTRATIONS



| |  | The Company had two customers who accounted for approximately 43% and 11%,
respectively of net revenue for the six months ended June 30, 2003. The
Company had two customers who accounted for approximately 60% and 17%,
respectively of net revenue for the six months ended June 30, 2002.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company had two customers who accounted for approximately 34% and 27%,
respectively, of net customer accounts receivable as of June 30, 2003,
respectively.                                                                                                                              

NOTE 8 COMMITMENTS AND CONTINGENCIES



| |  | In May 2003, the Company signed an agreement to lease laboratory and office
space located in Monmouth Junction, New Jersey. The lease commenced
effective June 1, 2003 and is for a three-year term with a total base rent
of $354,240 to be paid in monthly installments that increase after
each year. Due to the escalation clause in the lease, the Company is
straight-lining the expense of the lease over the term of the lease and has
therefore recorded deferred rent of $410, which is included in accrued
expenses and other in the accompanying balance sheet. Rent expense
recognized for the three months ended June 2003 was $16,949. The Company
also issued the landlord 20,000 options as described in Note 5. The future
minimum lease payments under this lease are as follows: $56,580 for the
remainder of 2003, $116,030 for 2004, $120,950 for 2005, and $51,250 for
2006.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2002, the Company received a cease and desist letter from a
competitor apprising the Company of the existence of a U.S. Patent. In
October 2002, the Company and such competitor entered into a mutual
confidentiality agreement in which each party agreed to exchange technology
information in order to more fully evaluate whether either is infringing
upon the rights of the other.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Also, the Company received an additional patent notification letter from
another competitor apprising them of the existence of another U.S. Patent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | As of June 30, 2003, no civil actions have been filed in either of the above
instances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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CHIRAL QUEST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
(UNAUDITED)

NOTE 9 RELATED PARTY TRANSACTIONS



| |  | The original purchaser of the 53% ownership discussed in Note 5 above is
also the managing member of Paramount Capital Investments, LLC
(Paramount), which has been performing certain administrative functions
for the Company since July 12, 2002, and financed the Company through loans
for working capital evidenced by a series of promissory notes (the Notes)
aggregating $376,625. The Notes bore interest at 5% and were repaid
including interest in full on February 28, 2003, and subsequently cancelled.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Additionally, since September 1, 2002, the Company has been paying $4,000
per month to Paramount for administrative services. For the three and six
month period ended June 30, 2003 this resulted in charges to operations of
$12,000 and $24,000, respectively.                                                                                                                                                                                                                                                         

NOTE 10 SUBSEQUENT EVENTS



| |  | In July 2003, a member of the board of directors received an option to
purchase 50,000 shares of common stock, exercisable at a price of $1.70 per
share. These options will vest over a three year period.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






Item 2. Managements Discussion and Analysis or Plan of Operation.

Overview

Until January 22, 2002, we were engaged in the design, development, manufacture
and sale of medical and surgical wound drainage products. On January 22, 2002,
we sold substantially all of our operating assets, leaving us with no sources
of revenue.

On February 18, 2003, we completed a reverse acquisition of privately-held
Chiral Quest, LLC. In accordance with this transaction we issued approximately
two-thirds of our outstanding common stock (after giving effect to the
transaction) to the former members of Chiral Quest, LLC, a Pennsylvania limited
liability company. Following the acquisition, we adopted the business plan of
Chiral Quest, LLC as our business plan and changed our name to Chiral Quest,
Inc. Accordingly, when we refer to business or financial information relating
to us or our company, we are referring to the business and financial
information of Chiral Quest, LLC, unless the context indicates otherwise.

Since our inception in October 2000, we have focused our efforts and resources
on the development of asymmetric catalysis technology, our primary intellectual
property to which we hold an exclusive worldwide license from the Pennsylvania
State Research Foundation (PSRF). Our license from PSRF covers certain
inventions discovered by our CTO prior to November 8, 2002.

Since inception we have incurred a cumulative deficit of $2,295,281 through
June 30, 2003. We expect our operating losses to increase significantly over
the next several years, primarily due to expansion of our research and
development programs, the hiring of additional chemists, and the expansion of
our manufacturing capabilities.

Our ability to achieve profitability depends upon, among other things, our
ability to discover and develop products (specifically new ligands), and to
develop our products on a commercial scale through a cost effective and
efficient process. To the extent that we are unable to produce, directly or
indirectly, ligands in quantities required for commercial use, we will not
realize any substantial revenues from our technology. Moreover, there can be
no assurance that we will ever achieve significant revenues or profitable
operations from the sale of any of our products or technologies. Risks
associated with our business are more thoroughly addressed in the section
entitled Risk Factors.

Since our inception, we have generated sales revenue but not yet generated any
net profits. Our management believes that our research and development (R&D)
and manufacturing capacity will need to grow in order for us to be able to
obtain significant licensing and manufacturing agreements with large fine
chemical and pharmaceutical companies.

Results of Operations  Three Months Ended June 30, 2003 vs. 2002

Our revenues for the three months ended June 30, 2003 were $59,382, as compared
to $61,191 during the three months ended June 30, 2002. Cost of goods sold for
the three months ended June 30, 2003 was $7,528 as compared to $1,286 during
the three months ended June 30, 2002.

For the three months ended June 30, 2003, approximately 57% of total revenue
was derived from option fee income pertaining to the licensing of our
intellectual property and 43% of total revenue was derived from sales of our
ligands and feasibility screening services sold to third parties. It is
anticipated that sales of our ligands, molecular building blocks and customized
chiral services will comprise the majority of our revenues in the future as we
expand our manufacturing capabilities.

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Our research and development expenses for the three months ended June 30, 2003
were $110,242, as compared to $11,634 during the three months ended June 30,
2002. This increase was primarily caused by increased utilization of the Penn
State research resources in connection with the development of new ligands. Our
current agreement with Penn State obligates us to fund four Penn State
post-doctorate fellows to produce research quantities of chiral ligands to
Chiral Quest. This arrangement expires on October 15, 2003. In order to obtain
research quantities of ligands after October 15, 2003, we will have to either
enter into a new agreement with Penn State or find another source. There is no
guarantee that we will be able to enter into such new agreement or find an
alternative source for its ligands on commercially reasonable terms. In
addition, during the second quarter we opened additional laboratory facilities
that will enable the Company to produce both research and commercial quantities
of our ligands. In connection with the new facilities numerous lab supplies
and chemicals were purchased. We may also outsource certain manufacturing
requirements. Accordingly, the Company expects R&D and manufacturing costs to
continue to increase significantly in the third and fourth quarters due to the
new facilities and the possible increased cost of using facilities and chemists
at Penn State.

Management and consulting fees for the three months ended June 30, 2003 were
$71,335, as compared to $54,400 during the three months ended June 30, 2002.
The overall change for the three months ended June 30, 2003 versus 2002 was
caused by a reduction in management fee expense and an increase in consulting
fee expense. Management fee expense was only $4,000 per month during the three
months ended June 30, 2003 compared to $11,000 per month for April and May
during the three months ended June 30, 2002. Consulting fees for the three
months ended June 30, 2003 increased due to the new consultant agreement
entered with the Chief Technology Officer at a rate of $10,000 per month
effective May 15, 2003. In addition, consulting expense increased from the
amortization of stock options issued to consultants and scientific advisory
board members during the second quarter of 2003.

Selling, general and administrative (SG&A) expense for the three months ended
June 30, 2003 was $259,882 as compared to $17,527 during the three months ended
June 30, 2002. This increase in SG&A expenses was primarily due to higher
legal and accounting fees following the Companys reverse merger transaction
with Surg II, Inc. and our subsequent reporting obligations under the
Securities Exchange Act of 1934, as amended. SG&A expenses also increased due
to increased travel expenses for new business development opportunities in
Europe and Asia.

Compensation expense was $146,595 for the three months ended June 30, 2003
compared to $42,765 for the three months ended June 30, 2002. This increase
was caused primarily by the new CEO (hired in November 2002) receiving an
annual base salary of $205,000 effective at the date of our merger with Sung
II, Inc., as provided in his employment agreement. In addition, compensation
expense increased due to the hiring of several chemists to work at the new
laboratory facility that was leased in the second quarter of 2003.

Interest income for the three months ended June 30, 2003 was $4,730, as
compared to $0 during the three months ended June 30, 2002. The increase in
interest income was caused by significantly higher cash reserves obtained after
the merger.

Our net loss for the three months ended June 30, 2003 was $564,186 compared to
$76,957 for the three months ended June 30, 2002. The increased losses for the
three months ended June 30, 2003 compared to 2002 were primarily due to higher
research and development expenses incurred with Penn State, increased legal and
accounting expenses in connection with becoming a public company, and higher
payroll expenses associated with having more employees. We expect losses to
continue and increase in the next year as the company attempts to expand its
laboratory space, purchase more chemicals and raw
material compounds, hire additional employees, and incur public filing and
regulatory expenses as well as higher legal and accounting fees in connection
therewith.

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Results of Operations  Six Months Ended June 30, 2003 vs. 2002

Our revenues for the six months ended June 30, 2003 were $131,441, as compared
to $111,484 during the six months ended June 30, 2002. Cost of goods sold for
the six months ended June 30, 2003 was $25,387, as compared to $5,456 during
the six months ended June 30, 2002. Upon the expected hiring of a Director of
Business Development later in 2003 or early 2004, it is anticipated that sales
will increase significantly in future years.

Our research and development expenses for the six months ended June 30, 2003
were $206,475, as compared to $46,536 during the six months ended June 30,
2002. This increase was primarily caused by increased utilization of the Penn
State research resources in connection with the development of new ligands. R&D
expense also was higher because of the new laboratory facilities that were
leased in the second quarter of 2003.

Management and consulting fees for the six months ended June 30, 2003 were
$126,009 as compared to $119,800 during the six months ended June 30, 2002.
The overall change for the six months ended June 30, 2003 versus 2002 was
caused by a reduction in management fee expense and an increase in consulting
fee expense. Management fee expense was only $24,000 for the six months ended
June 30, 2003 compared to $55,000 for the six months ended June 30, 2002.
Consulting fees for the six months ended June 30, 2003 increased due to a new
consultant agreement with the Chief Technology Officer at an annual rate of
$120,000 effective May 15, 2003 and the amortization of stock options issued to
consultants in the second quarter of 2003.

S,G & A expense for the six months ended June 30, 2003 was $423,366 as compared
to $36,128 during the six months ended June 30, 2002. The increase in SG&A
expense was caused primarily by higher legal and accounting fees in connection
with the merger in the first quarter of 2003 as well as ongoing legal and
accounting fees for SEC filings. SG&A expenses also increased due to increased
travel expenses for new business development opportunities in Europe and Asia.

Compensation expense was $217,720 for the six months ended June 30, 2003
compared to $90,631 for the six months ended June 30, 2002. This increase was
caused primarily by the new CEO (hired in November 2002) receiving an annual
base salary of $205,000 effective at the date of our merger with Sung II, Inc.,
as provided in his employment agreement. In addition, compensation expense
increased due to the hiring of several chemists to work at the new laboratory
facility that was leased in the second quarter of 2003.

Interest expense for the six months ended June 30, 2003 was $2,809, as compared
to $0 during the six months ended June 30, 2002. This increase was caused by
the promissory notes owed to an affiliate which were fully paid and discharged
in February 2003. There were no promissory notes outstanding during the six
months ended June 30, 2002.

Interest income for the six months ended June 30, 2003 was $10,489, as compared
to $0 during the six months ended June 30, 2002. The increase in interest
income was caused by significantly higher cash reserves obtained after the
merger.

Our net loss for the six months ended June 30, 2003 was $902,476 compared to
$208,134 for the six months ended June 30, 2002. The increased losses for the
six months ended June 30, 2003 compared to
2002 were primarily due to higher research and development expenses, expenses
in connection with the merger and becoming a public company, and higher payroll
costs. We expect losses to continue and increase in the next year as the
company attempts to expand its laboratory space, purchase more chemicals and
raw material compounds, hire additional employees, and incur public filing and
regulatory expenses as well as higher legal and accounting fees in connection
therewith.

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Liquidity and Capital Resources

As of June 30, 2003, we had working capital of $1,364,597 and cash and cash
equivalents of $1,790,874. We anticipate that our current working capital will
be sufficient to fund operations for approximately 6-8 months excluding
revenues. If we are unable to significantly increase our revenues in the next 6
months, we will most likely require additional financing in order to continue
operations. The most likely source of financing includes private placements of
our stock or a bridge loan to the company from outside investors or a bank.

Our working capital requirements will depend upon numerous factors, including
without limitation the progress of our research and development programs, the
resources we devote to developing manufacturing and marketing capabilities,
technological advances, the status of competitors, and our ability to establish
sales arrangements with new customers. Working capital will also be affected
by new leases for office and laboratory space that were entered into during the
second quarter of 2003.

Critical Accounting Policies

Review of Impairment of Intellectual Property Rights

The Company evaluates the recoverability of the Intellectual Property Rights,
where indicators of impairment are present, by reviewing current and projected
profitability or undiscounted cash flows of such assets. Intangible assets
that are subject to amortization are reviewed for potential impairment whenever
events or circumstances indicate that carrying amounts may not be recoverable.
Intangible assets not subject to amortization are tested for impairment at
least annually. For the three months ended June 30, 2003 the Company
determined that, based on estimated future cash flows, the carrying amount of
the Intellectual Property Rights, equals the fair value. Accordingly, no
impairment loss was required for the three months ended June 30, 2003. Please
refer to Note 1 of the condensed consolidated financial statements as of June
30, 2003 for a complete description of our significant accounting policies.

Revenue Recognition

Revenues from the Companys rights to PSRFs intellectual property are
recognized upon a signed agreement with the customer or remittance of an
invoice and allocated over the applicable periods. The revenues are comprised
principally of the licensing of PSRFs Technology. The Company assumes the
financial risks related to these revenues by financing the research and
development of PSRFs technology as well as the defense of PSRFs patents.
Deferred revenue in the accompanying balance sheets represents amounts prepaid
by customers to the Company for services. These deferred amounts will be
amortized into revenue over the applicable periods.

In addition the Company records revenue from the sale of manufactured
proprietary ligands (ligands). The revenue is recognized in full upon the
shipping and invoicing of the ligands to the customer.

Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 rescinds the provisions of SFAS No. 4,
which requires companies to classify certain gains and losses from debt
extinguishments as extraordinary items, eliminates the provisions of SFAS No.
44 regarding transition to the Motor Carrier Act of 1980 and amends the
provisions of SFAS No. 13 to require that certain lease modifications be
treated as sale leaseback transactions. The provisions of SFAS No. 145 related
to classification of debt extinguishments are effective for fiscal years
beginning after May 15, 2002, with earlier application encouraged.

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In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS No. 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS No. 146, the Company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be measured
at fair value. SFAS No. 146 will require the Company to disclose information
about its exit and disposal activities, the related costs, and changes in those
costs in the notes to the interim and annual financial statements that include
the period in which an exit activity is initiated and in any subsequent period
until the activity is completed. SFAS No. 146 is effective prospectively for
exit or disposal activities initiated after December 31, 2002, with earlier
adoption encouraged. Under SFAS No. 146, a company cannot restate its
previously issued financial statements and the new statement grandfathers the
accounting for liabilities that a company had previously recorded under
Emerging Issues Task Force Issue 94-3.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure  an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock Based
Compensation and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based
compensation. Additionally, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require disclosure in the significant accounting policy
footnote of both annual and interim financial statements of the method of
accounting for stock based-compensation and the related pro-forma disclosures
when the intrinsic value method continues to be used. The statement is
effective for fiscal years beginning after December 15, 2002, and disclosures
are effective for the first fiscal quarter beginning after December 15, 2002.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
changes in SFAS No. 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. This statement is
effective for contracts entered into or modified after June 30, 2003 and all of
its provisions should be applied prospectively.

In May 2003, the FASB issued SFAS No. 150, Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
changes the accounting for certain financial instruments with characteristics
of both liabilities and equity that, under previous pronouncements, issuers
could account for as equity. The new accounting guidance contained in SFAS
No. 150 requires that those instruments be classified as liabilities in the
balance sheet.

SFAS No. 150 affects the issuers accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets.
A second type includes put options and forward purchase contracts, which
involves instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments
that are liabilities under this Statement is obligations that can be settled
with shares, the monetary value of which is fixed, tied solely or predominantly
to a variable such as a market index, or varies inversely with the value of the
issuers shares. SFAS No. 150 does not apply to features embedded in a
financial instrument that is not a derivative in its entirety.

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Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are
consistent with the FASBs proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing its
own shares. This Statement shall be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003, except
for mandatorily redeemable financial instruments of a non-public entity, as to
which the effective date is for fiscal periods beginning after December 15,
2003.

We believe that the adoption of these pronouncements will not have a material
impact on our financial position or results of operations.

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RISK FACTORS

Risks Relating to Our Operations

We have no meaningful operating history on which to evaluate our business or prospects.

Since we only commenced operations in October 2000, we have only a limited
operating history on which you can base an evaluation of our business and
prospects. Accordingly, our business prospects must be considered in the light
of the risks, uncertainties, expenses and difficulties frequently encountered
by companies in their early stages of development, particularly companies in
new and rapidly evolving markets, such as the fine chemical, pharmaceutical and
biotechnology markets.

Our management anticipates incurring losses for the foreseeable future.

For the six months ended June 30, 2003, we had a net loss of $902,476,
and since our inception in October 2000 through June 30, 2003, we have incurred
an aggregate net loss of $2,295,281. As of June 30, 2003, we had total assets
of approximately $2.4 million, of which approximately $1.8 million was cash or
cash equivalents. Our management expects operating losses to continue for the
foreseeable future and there can be no assurance that we will ever be able to
operate profitably.

We will require additional financing in order to complete the development of
our products and services and otherwise develop our business operations. Such
financing may not be available on acceptable terms, or even at all.

We anticipate that our current capital will be adequate to fund our
operations through at least fiscal 2003. However, changes may occur that would
consume available capital resources before that time. Our combined capital
requirements will depend on numerous factors, including competing technological
and market developments; changes in our existing collaborative relationships;
the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights and the outcome of any potentially related
litigation or other dispute; the purchase of additional capital equipment;
acquisition of technologies; and the development and regulatory approval
progress of our customers product candidates into which our technology will be
incorporated.

Additional capital which may be needed by us in the future may not be
available on reasonable terms, or at all. If adequate financing is not
available, we may be required to terminate or significantly curtail our
operations, or enter into arrangements with collaborative partners or others
that may require us to relinquish rights to certain of our technologies, or
potential markets that it would not otherwise relinquish.

Potential fluctuations in results of operations; difficulty in predicting
results of operations.

As we develop our business, we expect our revenues and operating results
to vary significantly from quarter-to-quarter. As a result, quarter-to-quarter
comparisons of our revenues and operating results may not be meaningful. In
addition, due to the fact that we have little or no significant operating
history with our new technology, we cannot predict our future revenues or
results of operations accurately. Our current and future expense levels are
based largely on planned expenditures and estimates of future revenues.
Accordingly, we may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenues relative to our planned expenditures could have an immediate
adverse effect on our business and results of operations.

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We may be unable to develop successful customer relationships.

We intend to establish relationships with various types of customers and
partners, such as pharmaceutical and fine chemical manufacturers. Each of these
relationships will involve negotiation of terms and fees. We cannot be certain
that we will be able to negotiate profitable relationships or that we can
successfully fulfill our obligations under development agreements that will
allow us to continue these relationships.

Our future success is highly dependent on the continued availability of Dr.
Xumu Zhang and other key employees and consultants.

In connection with the continued development of our products and services,
we are substantially dependent upon on the continued service of our existing
research personnel, including in particular, Dr. Xumu Zhang. Dr. Zhang, an
associate professor at Penn State, serves as our chief technology officer and
provides essential services to us pursuant to a consulting agreement. Although
we maintain key-man life insurance with respect to Dr. Zhang, the loss of his
services would have a material adverse effect on our business. We also employ
other research scientists who are critical to our success. Although our
employees and consultants have entered into confidentiality agreements, most
have not entered into noncompete agreements with us. The loss of one or more of
our research personnel, especially Dr. Zhang, could prevent or delay the
ongoing development of our products and services, which would materially and
adversely affect our business.

Our license agreement with Penn State Research Foundation (PSRF) may be
terminated if we do not achieve certain milestones.

Our business is based on technically complex products and services. We do
not directly own our technology, but rather have the exclusive, worldwide right
to use it pursuant to a license agreement with PSRF. Currently, our commercial
success depends entirely on this licensed technology. Pursuant to the license
agreement, we are required to use our best efforts to achieve gross revenue
(as defined in the license agreement) of at least $250,000 in 2004, at least
$350,000 in 2005 and at least $500,000 in 2006. In the event we fail to achieve
these milestones, or otherwise materially breach the license agreement, PSRF
has the right, but not the obligation, to terminate the license. Unless we
subsequently develop our own technology independent of PSRF, termination of
this license would preclude us from implementing our business plan.

We currently rely heavily on our relationship with Penn State.

In addition to the license agreement with PSRF, we rely heavily on our
relationship with Penn State for research and development activities. Our
current agreement with Penn State requires us to fund four Penn State
post-doctorate fellows to produce research quantities of chiral ligands to us.
This arrangement expires on October 15, 2003. We have no agreement with Penn
State to produce ligands in commercial quantities and Penn State does not
currently have such capabilities. Should the post-doctoral fellows at Penn
State fail to produce the chiral ligands in sufficient quantities or cease to
produce the ligands altogether and we are unable to produce replacement
quantities at our New Jersey laboratory, it could materially and adversely
affect our business operations. In order to obtain research quantities of
ligands after October 15, 2003, we will have to either enter into a new
agreement with Penn State, increase production at our New Jersey laboratory or
find another source. There is no guarantee that we will be able to enter into
such new agreement or find an alternative source for our ligands, including
increasing production at our New Jersey laboratory, on commercially reasonable
terms. Any material interruption in the supply of the ligands will have a
material adverse effect on our business.

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We may rely heavily on third parties to formulate and manufacture our products.

We currently lack the resources to formulate or manufacture our own
products on a commercial scale. Our researchers currently only have the
ability to develop our ligands in research quantities, although we expect to
have the capacity to develop at least some ligands on a commercial scale at our
New Jersey laboratory. If any of our customers require our ligands in
commercial quantities in the near term and we are unable to produce sufficient
quantities at our New Jersey laboratory, we may have to rely on one or more
third-party contractors to manufacture the ligands to satisfy the needs of such
customers. Reliance on one or more third-party manufacturers exposes us to
certain risks, including the following:



| |  |  | We may be unable to replace manufacturers on commercially reasonable
terms or at all because the number of potential manufacturers is
limited, and the United States Food and Drug Administration (FDA), or
such similar regulatory authorities, may have to approve any replacement
contractor;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Third-party manufacturers might be unable to formulate and
manufacture our ligands in the volume and of the quality required to
meet customers clinical and commercial needs;                                                                                                                    
|
| |  |  | Our existing and future contract manufacturers may not perform as
agreed or may not remain in the contract manufacturing business for the
time required to supply our customers to complete their clinical trials
or to successfully produce, store and distribute our products;                  
|
| |  |  | Drug manufacturers are subject to ongoing periodic unannounced
inspections by the FDA and corresponding state agencies to ensure strict
compliance with good manufacturing practice and other government
regulations and corresponding foreign standards, which we would be
unable to control; and
|
| |  |  | If any third-party manufacturer makes improvements in the
manufacturing process for our products, we may not own, or may have to
share, the intellectual property rights to the innovation.                                                                                                       

Each of these risks could delay the clinical trials conducted by our customers,
approvals required by regulatory authorities, and the commercialization of some
of our customers product candidates. These risks could also result in higher
costs to the customer or could deprive us of potential product revenues.

We will need to create and grow our scientific, sales and support operations.

We will need to create and substantially grow our direct and indirect
sales operations, both domestically and internationally, in order to create and
increase market awareness and sales of our products and services. The sale of
our products and services will require the engagement of sophisticated and
highly knowledgeable sales personnel. Similarly, the anticipated complexity of
our products and services and the difficulty of customizing them will require
us to hire research and development personnel, and customer service and support
personnel, highly trained in chiral chemistry and chemical engineering.
Competition among us and others to retain qualified sales personnel, chemists
and chemical engineers is intense due to the limited number of available
qualified candidates for such positions. Many of our competitors are in a
financial position to offer potential employees of our company greater
compensation and benefits than those which may be offered by us. Failure to
recruit and retain such persons will have a material adverse effect on our
business operations.

Our future success is dependent on the management of our potential growth.

Our future success depends upon our ability to grow our business. Such
growth, if it occurs, will require us to establish management and operating
systems, hire additional support technical and sales

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personnel, and establish
and maintain our own independent office, research and production facilities.
Failure to manage that growth efficiently could have a material adverse effect
on our business.

We currently have limited capabilities and experience in manufacturing our
products on a commercial scale.

We currently have only limited experience or ability to directly
manufacture or market any chemical or pharmaceutical products in commercial
quantities that may be developed under our collaborative arrangements. Although
we have limited capabilities to manufacture our ligands on a commercial scale
at our New Jersey facility, we intend to rely primarily on third parties to
manufacture most of our ligands on a commercial scale.

In addition, we have not yet developed a cost effective and efficient
commercial manufacturing process for our ligands, and may never be able to do
so. To the extent we are unable to produce, directly or indirectly, our ligands
in quantities required for commercial use, we will not realize any benefits
from our technology. Further, in the event we decide to establish a
manufacturing facility in the future, we may require substantial additional
funds, and will be required to hire and train a significant number of
additional personnel, and, in certain circumstances, may need to comply with
the extensive FDA good manufacturing practice regulations applicable to such
a facility.

A small group of persons will be able to exert significant control over us.

Our officers and directors beneficially own or control approximately 32% of our
outstanding common stock. Individually and in the aggregate, these persons have
significant influence over the management of our business, the election of
directors and all matters requiring shareholder approval. In particular, this
concentration of ownership may have the effect of facilitating, delaying,
deferring or preventing a potential acquisition of our company and may
adversely affect the market price of our common stock. Additionally, our
treasurer and four of the persons on our Board of Directors are employees of
Paramount Capital, Inc., or one of its affiliates. Dr. Lindsay A. Rosenwald is
the chairman and sole owner of Paramount Capital, Inc., and such affiliates.
Dr. Rosenwald beneficially owns 4.9% of our outstanding common stock, and
several trusts for the benefit of Dr. Rosenwald and his family will
beneficially own 14.7% of our outstanding common stock. Dr. Rosenwald does not
have the legal authority to exercise voting power or investment discretion over
the shares held by those trusts; however, as a result of the foregoing, Dr.
Rosenwald may have the ability to exert significant influence over us.

Risks Relating to Our Industry

We face intense competition.

We compete directly with the in-house research departments of fine
chemical, pharmaceutical and biotechnology companies, as well as contract
research companies, and research and academic institutions. Many of our
competitors have greater financial and other resources than us. As new
companies enter the market and as more advanced technologies become available,
we expect to face increased competition. In the future, any one of our
competitors may develop technological advances that render our current or
future products and services obsolete. While we plan to develop new and better
technologies, which will give us competitive advantages, our competitors plan
to do the same. We may not be able to develop the technologies we need to
successfully compete in the future, and our competitors may be able to develop
such technologies before we do. Consequently, we may not be able to
successfully compete in the future.

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The fine chemical, pharmaceutical and biotechnology industries involve rapidly
changing technologies.

Rapid technological change and uncertainty due to new and emerging
technologies characterize the drug and fine chemical development industries. We
may not be able to develop, integrate and market, on a timely basis, the new
and enhanced products and services necessary to keep pace with competitors.
Failure to anticipate or to respond to changing technologies, or significant
delays in product development or introduction, could cause our customers to
delay or decide against purchases of our products or services.

Many of our customers and potential customers are pharmaceutical and
biotechnology companies, and we are and will be subject to risks, uncertainties
and trends that affect companies in these industries.

For the foreseeable future, we will derive a substantial portion of our
revenue from pharmaceutical and biotechnology companies. As a result, we will
be subject to risks and uncertainties that affect the pharmaceutical and
biotechnology industries and possible reduction and delays in research and
development expenditures by companies in these industries. Our future revenues
may also be adversely affected by consolidation in the pharmaceutical and
biotechnology industries, which will reduce the number of potential customers.

Further, pharmaceutical and biotechnology companies face significant
regulation by governmental entities in the United States and other countries.
The nature and the extent to which such regulation may apply to our customers
will vary depending on the nature of any such customers products. Virtually
all pharmaceutical products developed by our customers will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human pharmaceutical therapeutic products are subject to rigorous preclinical
and clinical testing and other approval procedures by the U.S. Food and Drug
Administration and by foreign regulatory authorities. Various federal and, in
some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming, can cause significant delays in the
commercialization of a drug, and often require the expenditure of substantial
resources. To the extent our customers experience significant delays in
obtaining the necessary regulatory approvals to market their pharmaceutical
products, or are unable to obtain such approvals at all, these customers will
not purchase our proprietary ligands and other services used in the manufacture
of the ultimate pharmaceutical product.

We may be held liable for harm caused by drugs that our customers develop and
test.

Our ligands may be used by our customers to produce drugs that are used by
humans. If any of the drugs cause injuries or illness to people, we may be
required to incur substantial costs in defending against such claims and may be
required to pay damages to those persons. Although we intend to obtain
liability insurance and will use commercially reasonable efforts to obtain
indemnification from our customers for their use of our products, such
protections may not be sufficient to protect us from the cost of such claims.
Damages awarded in a product liability action could be substantial and could
have a material negative impact on our financial condition.

We may be held liable for contamination or other harm caused by hazardous
materials that we use.

Some of our research and development processes involve the use of
hazardous materials and, therefore, it is subject to federal, state and local
regulation governing the use, manufacture, handling, storage and disposal of
hazardous materials. We cannot completely eliminate the risk of contamination

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or injury resulting from hazardous materials and we may incur liability as a
result of any contamination or injury. We may also incur expenses relating to
compliance with environmental laws. Such expenses or liability could have a
significant negative impact on our financial condition.

Risks Relating to Our Technology

We may not be able to license technologies that we need to conduct our
business.

In addition to the technologies that we develop, we will rely heavily on
technologies that we license from other companies or institutions. We may not
be able to license technologies that we need in the future or we may be unable
to license such technologies on a commercially reasonable basis. Although our
license agreement with the Penn State Foundation provides that we are entitled
to use any improvements subsequently made to the technologies we currently
license, the Penn State Foundations obligation to license, for no additional
consideration, any new technologies subsequently discovered by Dr. Zhang and
researchers at Penn State expired on November 8, 2002. If we are unable to
license the technologies we need in the future, or to license or otherwise
acquire such technologies on commercially reasonable terms, we could experience
increased costs and, therefore, reduced profits, or be unable to engage in
certain activities that require those technologies. Accordingly, failure to
license the technologies we need in the future or failure to license or
otherwise acquire such technologies on commercially reasonable terms could have
a material adverse effect on our business operations.

Our success will depend on our ability to protect our proprietary technology.

Our rights to a substantial portion of our technology are as the exclusive
licensee to several United States patents and a number of United States and
foreign pending patent applications held by the Penn State Foundation including
the ligands that comprise our Toolbox. These patents and patent applications
are based primarily upon the work of Dr. Zhang, our chief technology officer,
who is also an associate professor at Penn State. Our success will depend
largely on our ability, and the ability of our licensors and licensees, to
obtain patents for their technologies and products, if any, resulting from the
application of such technologies, defend patents once obtained, and maintain
trade secrets.

If we are unable to protect our intellectual property, or incur significant
expense in doing so, our business, operating results and financial condition
may be materially adversely affected. Any steps we take to protect our
intellectual property may be inadequate, time consuming and expensive.

Our success and ability to compete are substantially dependent upon our
internally developed products and services, which we currently protect, and
will protect in the future, through the use of United States and foreign
patents, and to the extent such products and services are not patentable, we
will rely on trade secret protection. As with other knowledge-based products,
however, our patent positions rest on complex factual and legal issues that are
not entirely resolved and there can be no assurance that the patents utilized
by us will adequately protect our proprietary products and services. Although
we have taken steps to protect our unpatented trade secrets and know-how, in
part through the control of access to such information and through the use of
confidentiality agreements with our employees, consultants and certain of our
contractors, customers and potential customers, 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 be
independently developed or discovered by competitors. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. We anticipate that
policing unauthorized use of our products will be difficult, and we cannot be
certain that the steps we intend to take to prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States, will be successful.
Other businesses may also independently develop substantially equivalent
information.

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Foreign laws may not afford us sufficient protection for our intellectual
property and, in certain cases, we may not seek patent protection outside the
United States.

We believe that our success will depend, in part, upon our ability to
obtain international protection for our intellectual property. We have existing
foreign customers and believe we will have access to large markets oversees.
However, the laws of some foreign countries may not be as comprehensive as
those of the U.S. and may not be sufficient to protect our proprietary rights
abroad. In addition, in certain cases, we may decide not to pursue patent
protection outside the United States, because of cost and confidentiality
concerns. Accordingly, our international competitors could obtain foreign
patent protection for, and market overseas, technology for which we are seeking
U.S. patent protection, though such competitors patent protection generally
requires such competitors to make their patent filings prior to information on
our relevant inventions becoming sufficiently available under local law as to
block the availability of such competitors patent protection.

Our technology may infringe on the proprietary rights of others.

We anticipate that other patents that we license or may license in the
future will be increasingly subject to infringement claims due to the rapid
development of chiral chemistry and competitors in our industry. In fact, one
potential competitor, Solvias, AG, based in Basel, Switzerland, notified us of
its claim that one of the patented ligands that we license from the Penn State
Foundation infringes on a patent that Solvias licenses from BASF Group, AG. We
believe our patent position is strong and have entered into confidentiality
agreements with Solvias to discuss its claims. We do not believe the Solvias
matter will have a material effect on our operations and business prospects
even if the matter was settled or finally adjudicated on terms unfavorable to
us. Additionally, some of our other competitors or potential competitors may
have filed or intend to file patent applications that may make claims that
conflict with our own patent claims. We cannot be certain that these
competitors or other third parties will not assert infringement claims against
us with respect to our products and technology. Any infringement claim,
including Solvias claim, regardless of its merit, could be time-consuming and
expensive to defend. Such claims may also require us to enter into royalty or
licensing agreements in order to continue using our technology. In the event we
could not afford to defend our self against an infringement claim or are
not able to enter into a license or royalty agreement on commercially
favorable terms, or at all, we may be required to abandon the technology that
is subject to such claims.




Item 3. Controls and Procedures

As of the end of this fiscal quarter, we carried out an evaluation, under
the supervision and with the participation of our chief executive and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in alerting them on a
timely basis to material information required to be disclosed in our periodic
reports to the Securities and Exchange Commission. There have been no
significant changes in our internal controls or in other factors which could
significantly affect internal controls subsequent to such evaluation.

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PART II  OTHER INFORMATION




Item 1. Legal Proceedings.

We are not a party to any material legal proceedings.




Item 2. Changes in Securities and Use of Proceeds

In May 2003, the Company issued options to purchase an aggregate of 20,000
shares of its common stock to its New Jersey landlord as partial consideration
for office space that the Company leases. The Company relied on the exemption
from federal registration under Section 4(2) of the Securities Act of 1933, as
amended, based on its belief that the issuance of the options did not involve a
public offering and that landlord is an accredited investor.




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

|            |  |                                                                                     
|----------- |  | ------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                         
|            |  |                                                                                     
|4.1         |  | Option Agreement No. LL-1 dated May 6,2003 issued to Princeton Corporate Plaza, LLC.
|4.2         |  | Form of Option Agreement dated May 6,2003 issued to Princeton Corporate Plaza, LLC. 
|4.3         |  | Schedule of Options substantially identical to Exhibit 4.2.                         
|10.1        |  | Consulting Agreement dated May 15, 2003 between the Company and Xumu Zhang.         
|31.1        |  | Certification of Chief Executive Officer and Chief Financial Officer.               
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

On March 5, 2003, we filed a Current Report on Form 8-K dated February 18,
2003 disclosing under Item 2 thereof our merger transaction with Chiral Quest,
LLC. On May 5, 2003, we amended the current report to include financial
statements and pro forma information, as required by Item 7 of Form 8-K.

On April 25, 2003, we filed a Current Report on Form 8-K dated April 21,
2003 disclosing a change of accountants under Item 4, dismissing Virchow,
Krause & Company, LLP and engaging Weinberg & Company, P.A. to be its principal
independent accountants.

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SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                      |  |                    |                                                                                                      | 
|--------------------- |  | ------------------ | ---------------------------------------------------------------------------------------------------- | 
|                      |  | CHIRAL QUEST, INC.
|                     
|Date: August 14, 2003 |  | By:                | /s/  Alan D. RothAlan D. Roth
    President, Chief Executive Officer
    and Chief Financial Officer

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Exhibit Index

|            |  |                                                                                     
|----------- |  | ------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                         
|            |  |                                                                                     
|4.1         |  | Option Agreement No. LL-1 dated May 6,2003 issued to Princeton Corporate Plaza, LLC.
|4.2         |  | Form of Option Agreement dated May 6,2003 issued to Princeton Corporate Plaza, LLC. 
|4.3         |  | Schedule of Options substantially identical to Exhibit 4.2.                         
|10.1        |  | Consulting Agreement dated May 15, 2003 between the Company and Xumu Zhang.         
|31.1        |  | Certification of Chief Executive Officer and Chief Financial Officer.               
|32.1        |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            

33