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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-KSB

|  |                                                                                    
|- | -----------------------------------------------------------------------------------
|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934   
|  |                                                                                    
|  | For the fiscal year ended
December 31,
  2006                                      
|  |                                                                                    
|o | TRANSITIONREPORT UNDER SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                    
|  | For
  the transition period from _____________ to ______________                   

Commission file number 000-51294

METAMORPHIX, INC.

(Name of small business issuer in its charter)

|                                                                        |  |                                            
|----------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                |  | 52-1923417                                 
|                                                                        |  |                                            
|(State or Other
  Jurisdiction of Incorporation or Organization)        |  | (I.R.S. Employer
  Identification No.)     
|                                                                        |  |                                            
|8000 Virginia Manor Road Suite 140
  Beltsville, Maryland               |  | 20705                                      
|                                                                        |  |                                            
|(Address of Principal
  Executive Offices)                              |  | (Zip Code)                                 
|                                                                        |  |                                            
|(301) 617-9080                                                         
|                                                                       
|(Issuers Telephone
  Number)                                          
|                                                                       
|Securities
  to be registered under Section 12 (b) of the Exchange Act:
|                                                                        |  |                                            
|Title
  of Each Class                                                   |  | Name
  of Each Exchange on Which Registered
|                                                                        |  |                                            
|None                                                                    |  | None                                       
|                                                                        |  |                                            
|Securities
  to be registered under Section 12 (g) of the Exchange Act:
|                                                                        |  |                                            
|Common
  Stock, $0.001 par value                                       
|                                                                       
|(Title
  of Class)                                                     

Check
    whether the issuer is not required to file reports pursuant to Section 13
    or 15(d) of the Exchange Act. Yes o No x

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

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

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

The
Registrants revenues for the fiscal year ended December 31, 2006 were $3.4
million.

The
Registrants common equity is not publicly traded; therefore, an aggregate
market value of the voting and non-voting common equity held by non-affiliates
can not be determined at this time.

As
of February 28, 2007, the Registrant had 21,075,141 shares of its common stock
outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

None.

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

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TABLE OF
CONTENTS

|           |                                                                                                                                           |  |     
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |                                                                                                                                           |  | Page
|           |                                                                                                                                           |  |     
|PART I     |                                                                                                                                           |  |     
|           |                                                                                                                                           |  |     
|Item 1.    | Description
  of Business                                                                                                                 |  | 1   
|Item 2.    | Description
  of Properties                                                                                                               |  | 28  
|Item 3.    | Legal
  Proceedings                                                                                                                       |  | 29  
|Item 4.    | Submission
  of Matters to a Vote of Security Holders                                                                                     |  | 29  
|           |                                                                                                                                           |  |     
|PART II    |                                                                                                                                           |  |     
|           |                                                                                                                                           |  |     
|Item 5.    | Market
  for Common Equity, Related Stockholder Matters and Small Business Issuer
  Purchases of Equity Securities                        |  | 29  
|Item 6.    | Managements
  Discussion and Analysis or Plan of Operation                                                                               |  | 31  
|Item 7.    | Financial
  Statements                                                                                                                    |  | 44  
|Item 8.    | Changes
  and Disagreements with Accountants on Accounting And Financial Disclosure                                                       |  | 44  
|Item 8A.   | Controls
  and Procedures                                                                                                                 |  | 44  
|Item 8B.   | Other
  Information                                                                                                                       |  | 44  
|           |                                                                                                                                           |  |     
|PART III   |                                                                                                                                           |  |     
|           |                                                                                                                                           |  |     
|Item 9.    | Directors,
  Executive Officers, Promoters, Control Persons and Corporate Governance;
  Compliance With Section 16(a) of the Exchange Act |  | 45  
|Item 10.   | Executive
  Compensation                                                                                                                  |  | 53  
|Item 11.   | Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters                                        |  | 59  
|Item 12.   | Certain
  Relationships and Related Transactions, and Director Independence                                                               |  | 62  
|           |                                                                                                                                           |  |     
|Item 13.   | Exhibits                                                                                                                                  |  | 64  
|Item 14.   | Principal
  Accountant Fees and Services                                                                                                  |  | 67  
|           |                                                                                                                                           |  |     
|SIGNATURES |                                                                                                                                           |  | 68  

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PART I

FORWARD-LOOKING STATEMENTS

Statements
in this Form 10-KSB that are not descriptions of historical facts are
forward-looking statements within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Reference is made in
particular to the description of our plans and objectives for future
operations, assumptions underlying such plans and objectives, and other forward
looking terminology such as may, expects, believes, anticipates,
intends, estimates, projects, or similar terms, variations of such terms
or the negative of such terms. Forward-looking statements are based on
managements current expectations. Actual results could differ materially from
those currently anticipated due to a number of factors, including those set
forth under Description of Business. The safe harbors for forward looking
statements provided by Section 21E of the Exchange Act do not apply to
statements made in this Form 10-KSB. Except as required by applicable law, we
do not plan to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. You should
not place undue reliance on our forward-looking statements. You should also be
aware that any of the events described under Risk factors and elsewhere in
this registration statement could harm our business, prospects, operating
results and financial condition. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.

ITEM 1. DESCRIPTION OF BUSINESS

Overview

We are a life science company. We use our two
fundamental
proprietary technologiesanimal genomics and growth and differentiation
factors, or GDFs, to discover, develop and commercialize products that we
believe will increase livestock quality and production efficiency, improve
companion animal health and potentially treat human muscle degenerative
diseases and metabolic disorders.

Genomics
refers to the sequencing and analysis of the genetic makeup of an organism. Our
proprietary animal genomics technologies are intended to provide trait
identification and predictive diagnostic tools for producers and breeders of
beef and dairy cattle, swine, and poultry. We believe that these tools will
enable livestock producers and breeders and feedlot operators to improve
substantially their production efficiency and help them meet consumer demand
for high quality meat products. We believe that animal genomics also has
potential for diagnostic use in companion animals, including dogs, cats and
horses, to detect disease predisposition, and behavioral and/or performance
traits. Commercialization of these diagnostic products for livestock production
and animal health does not require FDA approval. Our near-term products are
tools that do not involve any animal pharmaceutical drugs or genetic altering
of the animal.

We
have established several relationships through which we commercialize our beef
and swine animal genomics technology, and expect to commercialize our chicken
genomic technology. We have exclusive agreements with 1) Cargill Incorporated,
or Cargill, the worlds second largest beef processor and feedlot operator, 2)
the Monsanto Company, or Monsanto, a world leader in swine breeding and 3)
Hubbard S.A.S., or Hubbard, a world leading chicken breeder. We describe these
agreements in more detail under Licenses, Acquisitions, and Collaborative
Agreements. We also have agreements to provide DNA testing services for the
American Kennel Club, the worlds largest canine registry, United

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Kennel Club, American Angus
Association, the worlds largest beef cattle registry, Red Angus Association,
American Limousin Association, and American Bucking Bull Association. These
non-exclusive DNA testing service contracts are made in the ordinary course of
business and contain standard fee-per-test terms with contracts being renewable
every three years by mutual consent of the parties. Additionally, these
agreements detail DNA sample submission format, specifications for data
analysis and delivery, and proper archiving of samples after analysis.

Our
second technology platform is based on GDFs which are proteins that bind to
receptors on the cell surface, with the primary result of activating cellular
proliferation and/or differentiation. Our GDF development activities are
focused on GDF-8, also known as Myostatin, a naturally occurring protein that
acts to limit skeletal muscle development. Myostatin is one of eight GDFs to
which we have exclusive rights for use in animals. We believe the inhibition of
Myostatin has use in the livestock industry to facilitate the production of
beef cattle, swine and poultry with more meat and less waste. We also believe
that Myostatin can potentially be used in humans to treat muscle degenerative
diseases, including muscular dystrophy, muscle wasting (Cachexia), age-related
muscle loss (Sarcopenia), Lou Gehrigs disease (ALS), and metabolic disorders,
such as Type II Diabetes and obesity.

We
have entered into relationships to commercialize both agricultural and human
therapeutic applications of our GDF technology. We have entered into
collaborative agreements with the top two chicken producer-processors in the
United States, Tyson
Poultry, Inc., or Tyson, and Pilgrims Pride Corporation, or Pilgrims Pride, and
have formed a joint venture with Willmar Poultry Company, Inc., or Willmar, the
worlds largest supplier of day old poults, for the development of Myostatin
applications in turkeys. We have granted an exclusive license to Wyeth for the
human therapeutic application of our GDF technology including Myostatin, under
which Wyeth has completed Phase II clinical trials to evaluate a
Myostatin-based product as a therapeutic for Becker, Facioscapulohumeral, and
Limb-Girdle forms of muscular dystrophy. We describe these relationships and
agreements under Licenses, Acquisitions, and Collaborative Agreements.

We
were incorporated as a Delaware corporation in September 1994. Between
incorporation and 1997, our activities consisted of research performed by Dr.
Se-Jin Lee at his laboratory at The Johns Hopkins University School of Medicine
to focus on the discovery, characterization, development and commercialization
of GDFs. After Dr. Lee published a paper on Myostatin in 1997, we began to
explore business opportunities to use the Myostatin technology for human and
agricultural applications. In 1999, we licensed to Wyeth human therapeutic
applications of our GDF technology in exchange for which Wyeth assigned 2.7
million shares of our Series A Preferred Stock and 900,000 shares of our Series
B Preferred Stock (95% of their total holdings) to us, as well as our receiving
the right to future milestone and royalty payments. We accounted for the stock
assignment as a repurchase and subsequently cancelled those shares. Between
2000 and 2002, we granted options to license our Myostatin technology to the
top two U.S. chicken producers, Tyson and Pilgrims Pride, and entered into a
joint venture with a leading supplier of turkey poults, Willmar, to
commercialize Myostatin in the North American chicken and turkey markets.

Our
business activities in the area of animal genomics commenced in February 2002,
when we acquired some of the animal-related assets of the Celera Genomics Group
of Applera Corporation, or Celera, and licensed Celeras chicken, swine and
cattle genome databases for agricultural use within specified fields. In May
2002, we entered into our Joint Development and Marketing Agreement with
Cargill, in June 2004, we entered into our Swine Improvement Agreement with
Monsanto and in January 2007, we entered into a Joint Research and Marker
Development Agreement with Hubbard to develop improved breeds of chicken as
described under Licenses, Acquisitions, and Collaborative Agreements.

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We
operate our GDF business in Beltsville, Maryland, where our corporate
headquarters are located. Our animal genomics business operates in Davis,
California.

The Livestock
Industry

According
to the Congressional Research Services 2006 Report on The U.S. Farm Economy
(February 2006), livestock receipts for the 2004 calendar year were $123.5
billion. In addition,
The United Nations 1999 report on World Population Prospects states that the
global demand for meat, milk and eggs will increase threefold by the year 2020.
The United Nations report indicated that the two factors that will be primarily
responsible for this increase in demand are the expanding world population and
changes in dietary habits. The worlds population, which is approximately 6.5
billion, is projected to reach 7.7 billion by 2020. According to the U.S.
Census Bureau, the U.S. population alone is expanding at a rate of 1.1% per
year and expected to increase to 561 million people by 2050. As incomes rise in
Asia, Europe, Central America and the United States, the demand for meat
products is also expected to rise as diets shift from mainly carbohydrates to
protein sources. Global meat demand is expected to be 60% greater in 2020 than
in 1999 with 88% of this increase attributed to developing countries.

During
the last ten years, there has been significant consolidation and vertical integration
within the cattle, swine and poultry sectors of the global livestock industry.
Historically, the global livestock market has been characterized by high volume
and low margins. However, we believe that some of the economic factors that
caused this consolidation will create increasing demand for technologies such
as ours.

Our Strategy

Our business strategy is to generate
near-term profitability from our animal genomics product opportunities by
producing a pipeline of innovative products to address the needs of the global
livestock industry while at the same time building long-term value from our GDF
technology in both human therapeutic and agricultural sectors. To implement our
strategy, we will seek to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Develop and license products based on our animal genomics
  technology that will add value to major market participants in the livestock
  and animal health industries. Our commercialization strategy focuses on licensing our genomics
  technology to the consolidated and vertically integrated livestock industry,
  in particular, breeders, producers and processors. We have completed this
  objective and structured our licensing agreements in the major livestock
  species to provide us with license fees and milestone payments to fund the
  cost of product development and after commercialization, royalty payments
  based on various measures of the value created for the licensees through the
  use of our technologies.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | License our GDF-8 technology
  to an animal health company for livestock and companion animal applications.
  Licensees are expected to undertake the additional research, development and
  regulatory activities required to commercialize the Myostatin technology at
  their own cost. We expect to receive development milestone payments and
  royalties on the sale of Myostatin-based products.                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | License our GDF technologies to pharmaceutical companies
  for human health applications. With our license to Wyeth, this objective has been completed. We are
  entitled to receive development milestone payments and royalties should Wyeth
  prove successful in developing and commercializing our GDF technology.                                                                                                                                                                                                                                                                                                                                                                                                                           

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Our Proprietary Technologies and Products

By
drawing on our two fundamental proprietary technologies  animal genomics and
GDFs we seek to develop products that will significantly increase quality and
production efficiency in all major livestock species, including cattle, swine
and poultry. We also use these technologies to develop products and services
that improve companion animal and livestock health and that can be used to
verify animal parentage and identification. We also intend to seek to discover, and license to pharmaceutical
companies, technologies that can be used to develop therapies for better
management of human metabolic and muscular degenerative diseases. We describe
these technologies and our current products below. Several of our technologies
involve commercial agreements which we have entered into with various parties.
We describe some aspects of these agreements below, and they are described in
more detail under Licenses, Acquisitions and Collaborative Agreements.

Animal
Genomics

Genomics,
the sequencing and analysis of the genetic make-up of organisms, and
proteomics, the identification and analysis of the proteins encoded by genes,
are two disciplines that enable the profiling of individual organisms to define
normal physiological variation and disease states. Discoveries in the areas of
genomics and proteomics have produced a new industry based on diagnostics and
drug development for disease prevention and treatment. We believe that
analogous opportunities exist with respect to animal health and agriculture.
Additionally, we believe genomics offers the opportunity to create superior
livestock breeds in terms of production efficiency, disease resistance, meat
quality and nutrition.

A
genome is the entire genetic information (DNA) possessed by an organism. DNA is
made up of sub-units called nucleotides, and a single nucleotide polymorphism,
or SNP, is a DNA sequence variation occurring when a single nucleotide in the
genome is altered. Genetic markers, based on SNPs, are abundant and
distributed throughout an animals DNA. SNPs can be used as a predictive,
diagnostic tool to determine the specific regions of DNA contributing to a
desired trait. Through our proprietary access to whole genome information, we
have validated dense SNP maps in cattle, swine and poultry. These SNP maps,
when used as part of our GENIUS-Whole Genome
SystemÔ, correlate SNP patterns with complex traits.
We expect that these predictive diagnostics will provide producer/processors
and breeders with precise, molecular-based tools with which to make informed
decisions that improve livestock growth potential, meat quality, production
efficiency and nutritional value. These tools can also be used to improve
selection of genetically superior animals in breeding programs.

The
commercial opportunities for our genomic technology vary according to the
livestock sector. For cattle, the use of SNP-based, predictive diagnostics for
each animal entering the feedlot phase of production is a commercially viable
concept due to the high value of each individual animal. We believe, as a
result of discussions with our collaborative partner, Cargill, that the ability
to identify superior cattle at the beginning of production would result not
only in substantial cost savings, but would enable the processor to brand or
certify meat that contains traits desired by the consumer. Within the cow/calf
and breeder phases of cattle production, we and Cargill have launched
predictive tests for marbling and tenderness which enable the selection of
genetically superior animals. The tenderness test is being sold for $65 per
animal, the marbling test for $145 per animal and both tests for $180 per
animal.

In
order to support development and commercialization of our genomic technology we
have entered into contracts with livestock production and/or breeding
companies. Under our Joint Development and Marketing Agreement with Cargill, we
and Cargill agreed to jointly develop and commercialize products for the cattle
industry intended to be predictive of traits that improve production economics
or meet consumer demands for quality, consistency and tenderness. We received a
combined

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total of $10,200,000 in
payments for the successful completion of all milestones set forth in the work
plan delineated in the Cargill agreement which was completed in September 2004.
These payments consisted of a $2,040,000 up-front payment, a $2,260,000
milestone payment upon the completion of the SNP validation phase, a $5,500,000
payment upon the completion of a two part association study correlating a
pattern of SNPs with the desirable traits and the final $400,000 milestone
payment after the successful initial validation of the diagnostic traits. This
collaboration has resulted in the development of sets of genetic markers which
can predict traits that would be of interest to feedlot operators and cattle
breeders. In January 2007, we began the commercialization of this selection
tool to the beef cattle breeders and cattle/calf producers (cattle/calf
operators) which allows for the selection of animals based on superior
marbling, high average daily weight gain and tenderness traits. We expect to
commercialize a feedlot management tool with Cargill resulting from this
collaboration in the fourth quarter of 2007.

The
feedlot pre-commercial phase of the collaboration, which is essentially a beta
test on a commercial population of beef cattle, began in late 2005 and was
completed in late 2006. As of the end of December 2006, we have tested
approximately 28,000 animals generating revenue of approximately $400,000.
Cargill is now evaluating the data from the pre-commercial phase in order to
optimize animal management practices at the feedlot level. The analysis is
expected to be completed in the second quarter of 2007. We expect Cargill will
divide its feedlot population into outcome groups based on their genetic potential
as determined by our feedlot management tool. Production inputs are varied for
each outcome group based on their predicted performance. The initial samples
were collected exclusively from Cargills own feedlots. Cargills alliance
partners, leading feedlot operators that supply Cargills processing
facilities, have also participated in the study. If this study is successful,
we, jointly with Cargill, expect to commercialize the technology for use in the
cattle feedlot industry in the fourth quarter of 2007.

Our
technology also includes our GENIUS-Whole Genome
SystemÔ  for swine,
which utilizes a map of approximately 600,000 SNPs, and associated
intellectual property. We have licensed this technology to Monsanto to enable
it to provide high-quality genetic information to pork producers, packers and
to consumers. Using our GENIUS-Whole Genome
SystemÔ, Monsanto released in January 2007, a new
swine sire line which has increased average daily weight gain over the life of
the animal by 11% over existing commercial lines. Monsanto expects to release a
sow line by mid-2007. When these two lines are mated, the average daily weight
gain is expected to increase further compared to existing commercial lines.
This improvement is expected to reduce the number of days on feed (120 days
versus 150 days) thereby lowering feed costs. MetaMorphix is entitled to
royalties on Monsantos sales of these, as well as other new swine lines, which
provide more production efficient animals and higher quality meat products. We received $1,000,000 from Monsanto in June
2004 as a license fee for access to our database.

We
are exploring opportunities for our GENIUS-Whole Genome
SystemÔ  with Hubbard, a leading chicken breeder. Our agreement with Hubbard is described in
more detail under Licenses,
Acquisitions and Collaborative Agreements.

We
are also commercializing products based on our animal genomic SNP technology in
the companion animal sector. Our initial product, a canine heritage diagnostic
tool, Canine HeritageÔ Breed Test, can differentiate between canine breeds in
mixed breed canines. For purebred dogs, the diagnostic tool can be used to
certify the breed. The Canine Heritage application can potentially allow owners
to better manage the health of their animals regarding breed specific diseases.
We began marketing the canine heritage diagnostic tool in February 2007.

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Lastly,
we anticipate that we will use our highly informative SNPs as part of a gene
discovery program. To that end, we have entered into a license agreement with
Genetic Technologies Limited, or GTG, dated September 17, 2004, for the rights
    to utilize U.S. patent #5,612,179 and #5,851,762, for the duration of their
    patent life, in our research and commercialization effort. Under the terms
    of this agreement, we have paid GTG a license issue fee and are contractually
    obligated to pay license annuity fees for applications in livestock, aquaculture
    and companion animals.

Current
Animal Genomic Parentage and Breed Testing Services

We
are currently providing genotyping services to the livestock (cattle) and
companion animal industries using DNA-based systems. Our genotyping products
were developed using internal research and development resources. This
development process produced DNA specific markers that could be used for
various applications that include the ability to identify one individual animal
from another, verify parentage, breed composition and determine specific
commercial traits. Once these markers were identified, we produced assays to
routinely screen animal samples.

We
have created novel uses for our parent verification services in the beef
industry. Our customers include cattle breed associations that are accustomed
to verifying the pedigrees for certain categories of animals. These DNA-based
tests are used by breed registries and commercial enterprises to maintain breed
integrity and provide information to breeders to be used in making breeding
decisions. For the cattle industry, we have entered into a license agreement
with Marshfield Clinic, or Marshfield, for the rights to U.S. patent #5,075,217
for the duration of the patent life, to be used in cattle parentage testing.
For this right, we pay to Marshfield/Linkage Genetics a quarterly fee.

We
currently market the following DNA-based testing products to cattle breeders:
Tru-Gain, Tru-Marbling, Tru-Tenderness, Tru-Parentage, Tru-Identity,
Tru-CoatColor and Tru-Polled®. The Tru-Gain product predicts the ability of
cattle to gain weight in pounds per day under feedlot conditions. Tru-Marbling
and Tru-Tenderness predict the amount of marbling (intra-muscular fat
deposition) and meat tenderness in cattle, respectively. Our Tru-Parentage and
Tru-Identity products are used by cattle breed associations and cattle
registries to identify correct parentage and protect the integrity of registry
records. Our Homozygous Black test, Tru-CoatColor, enables animal breeders to
determine the genetics of coat color of an animal. Our Tru-Polled® product
includes the testing to determine the genetics of polled (hornless) cattle and
assess the probability that they will produce polled progeny during subsequent
matings. Polled cattle are more desirable due to decreased expense associated
with horn removal and increased value of the hide due to decreases in injury
rates during transportation and in feedlots.

We
are the principal provider of DNA-based parentage verification and identity
testing to the American Angus Association, the worlds largest beef cattle breed
association, and the American Kennel Club, the largest canine registry in the
world. For the years ended December 31, 2006 and 2005, revenues from sales of
these products and services were $2,997,286 and $2,306,060, respectively.

We
provide DNA testing for several canine registries and have worked with both
large and small organizations to establish and build DNA testing programs to
fulfill each of their needs. This test allows canine genetic identity to be
certified.

In
February 2007, we launched our Canine Heritage Breed Test which determines
breed composition of dogs. For mixed breed dogs, it can provide the owner with
valuable information on the composition of the breed mix. This information
allows pet owners to better manage diseases that are associated with specific
breeds. For pure bred dogs, the test provides a genetic validation of the
breed. The Canine HeritageÔ
Breed Test is currently being sold for
$65 per dog.

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We
are dependent on a few major suppliers from which we purchase equipment,
reagents and other supplies used for genomic testing. These reagents and
supplies are often proprietary and are not easily replaced, since the testing
is very specialized.

Growth
and Differentiation Factor (GDF) Technology

Pursuant
to an Amended and Restated Collaboration Agreement between us, Genetics
Institute and Johns Hopkins, we have the exclusive right to develop and
commercialize eight of the fifteen GDFs discovered by Johns Hopkins and
Genetics Institute. We have retained the right to agricultural and veterinary
applications of the factors we selected under the terms of the agreement. We
have granted Wyeth the exclusive right to pursue human therapeutic applications
for our entire GDF portfolio in exchange for milestone payments, royalties and
access to research and development advances.

Myostatin

Our
initial focus in the GDF portfolio has been on Myostatin (GDF-8), a
naturally-occurring, patented protein that acts to limit skeletal muscle
development. Based on the data we have analyzed from published sources, we
believe that our Myostatin-based technology will benefit the global livestock
industry by improving production efficiencies, reducing production time,
improving quality and nutritional value and decreasing the production of animal
waste. The inactivation or inhibition of Myostatin in animals has been shown to
result in dramatic increases in skeletal muscle mass and reduction in fat
(McPherron and Lee, Nature 387:87-90). We have a research initiative
focused on the testing and identification of Myostatin inhibitors in poultry
and swine.

We
have entered into letters of intent and limited licenses with two of the top
U.S. leading chicken processors, Tyson Foods and Pilgrims Pride, pursuant to
which the companies have agreed to participate in commercial scale trials of
Myostatin inhibitors to ascertain the economic value of this technology to
their operations. The letters of intent and limited licenses provide that we and
the companies will negotiate in good faith to enter into long-term license
agreements. We are also seeking partners for the cattle and swine market
segments for testing of Myostatin inhibitors. We may be unable to enter definitive license agreements with any such
entities.

Pursuant
to our cross-licensing arrangement with Wyeth, we have agreed to share the
results of our Myostatin research, as well as reagents and product candidates.

Other
GDFs in Development

In
addition to Myostatin, we have the opportunity to pursue the development of up
to seven other proprietary GDFs as novel agricultural products. GDF-9 has been
identified as playing a key role in the development of the fertilized embryo.
Based on work investigating the role of GDF-9 in ovarian function and
follicular development by Juengal et al. (published in Animal Reproductive
Science in 2004 and in Human Reproductive Update in 2005), we believe that a
potential agricultural use for this growth factor is in the regulation of
livestock fertility. We also believe that potential human uses include the
treatment of infertility and nonsteroidal contraception. We do not intend to
devote any significant resources to additional growth and differentiation
factors during the foreseeable future as we expect that any funds available to
pursue our GDF technology will be allocated to Myostatin.

We
anticipate that we will lower the annual license fees owed related to the
technology acquired during the BioStar acquisition as we will be terminating
the Vido Technology License Agreement between the University of Saskatchewan
and MetaMorphix International, our wholly-owned subsidiary. The technology had
been assigned to us in 2000. We do not envision that we will utilize the Adjuvant

7

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technology
claims within U.S. patent #5,951,988 or its related patent family in order to
immunize livestock.  Currently, we are
obligated to pay minimum royalty fees of $200,000 CAD, or approximately
$176,000 USD.

Human
Applications

We
have granted Wyeth an exclusive license for human applications of our GDF
portfolio.  Wyeth has a significant
development program for Myostatin based on this license.  Phase II clinical trials for Myostatin as a
therapeutic for treatment of Muscular Dystrophy have been completed. Myostatin
is being evaluated for treatment of other muscle degenerative diseases,
including muscle wasting (Cachexia), age related muscle loss (Sarcopenia), Lou
Gehrigs disease (ALS), and metabolic disorders such as Type II Diabetes and
obesity. We have the potential to collect up to $10,300,000 in developmental
milestone payments as well as royalties on product sales of between 4.5% and
6.5% in the event Wyeth successfully commercializes any human applications for
Myostatin.

Numerous
scientific studies support that Myostatin inhibitors may have significant
potential as treatments for muscular degenerative diseases such as Muscular
Dystrophy, muscle wasting (Cachexia), Sarcopenia (age-related loss of muscle)
as well as the metabolic diseases Type II Diabetes and obesity. For example,
McPherron and Lee, in a publication in the Journal of Clinical Investigation
(vol. 109, 2002), show the effect of Myostatin inactivation on body fat and
glucose utilization.  Other publications
such as Zimmers et al. in Science (vol. 296, 2002) show the induction of
Cachexia, or wasting syndrome, by over-expression of Myostatin.  These and other similar studies were carried
out in animal models for human physiology and disease.  Such models have been widely accepted as a
basis for the investigation of new drug candidates for human medical
applications.

In
June 2004, Wyeth announced that it filed an Investigative New Drug, or IND,
application with the U.S. Food and Drug Administration, or FDA, for MYO-029, an
antibody against Myostatin for the treatment of Muscular Dystrophy and
Sarcopenia.  Phase I trials for Muscular
Dystrophy have been completed and as of August 2006, we have learned that Wyeth
has completed Phase II of the trials.
Because the regulatory approval process for human therapeutics is
extremely lengthy, costly and uncertain, we do not anticipate receiving any
royalty revenues from this license arrangement in the near term, if ever.  We will receive a substantial milestone payment
if and when Wyeth enters Phase III for MYO-029.

Licenses,
Acquisitions and Collaborative Agreements

General

We
obtained exclusive rights to our livestock genomic technology from the Celera
Genomics Group and our GDF technology from The Johns Hopkins University and
Wyeth.  A discussion of the rights for
each technology, as well as subsequent development and commercialization
agreements are described below.

Animal Genomics

Celera
Acquisition

On
February 28, 2002, we acquired some of the animal-related assets of the Celera
Genomics Group of Applera Corporation.
The assets acquired consisted of (1) a canine and cattle genotyping
business operating in Davis, California, and (2) an exclusive, perpetual
world-wide license to certain cattle, swine and poultry database products; SNP
maps; and software.  In consideration
for these assets

8

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and licenses,
we issued 2,000,000 shares of Series E Convertible Preferred Stock to Celera
and made a deferred cash payment of $2,000,000.  Under the Celera License Agreement, Celera granted to us a
non-exclusive, perpetual worldwide license (with no right to sublicense) to
access and to use certain of its cattle, swine and poultry genomic database
products, SNP maps and tools (e.g. software) in connection with livestock and
aquaculture production. Our license was subsequently converted to an exclusive
license in June 2004.  Pursuant to the
Celera License Agreement, we also have a right of first offer for Celeras
services for genome and SNP map production for food producing animals other
than cattle, swine and poultry in connection with livestock and aquaculture
production.  Collectively, we refer to
this acquisition as Celera AgGen, which we operate through MMI Genomics, Inc.,
our wholly owned subsidiary in Davis, California.

The
Celera License Agreement contains revenue sharing and royalty provisions that
obligate us to pay Celera 3% of any economic consideration we receive from a
contract or business relationship in the cattle area for a period of 15 years
to the extent such royalty exceeds a cumulative amount of $500,000 annually,
and 20% of any consideration we receive from a collaboration entered into prior
to February 28, 2006 in the swine sector.
We are not obligated to pay a royalty on any swine collaboration entered
into after February 28, 2006.
Cattle-related payments will be offset against a $500,000 annual payment
we are required to make to Celera under the agreement.  We received $1,000,000 from a swine
collaborative partner, and were required to pay $1,000,000 to Celera for the
right to grant a sub-license to that partner.
This $1,000,000 will be excluded from the calculation of economic
consideration due to Celera when calculating a revenue sharing payment.

Pursuant
to a separate agreement entered into with Celera, we were obligated to make
quarterly payments of $125,000 for subscription-based access to Celeras human
genome database and analysis software.
The present value of the $500,000 annual payments for fifteen years and
the $125,000 quarterly payments for three years was calculated to be $6,268,051
at the time of acquisition.  When
combined with the $2,000,000 deferred cash payment, the $262,796 of acquisition
costs, and the value of the Series E Convertible Preferred Stock, the total
purchase price was $43,530,847. In the event of a breach of a representation or
obligation by a party under the Celera License Agreement, the non-defaulting
party may deliver notice to such defaulting party.  If such default has not been cured by the end of the applicable
thirty-day cure period, the agreement will be terminated.  No such notice has been served by either
party.  The agreement may also be
terminated in the event of a bankruptcy or insolvency event of one of the
parties.  We are currently past-due with
respect to minimum royalty payments due to Celera.

We
are currently past-due with respect to minimum royalty payments due to Celera,
however, it is our intention to pay any past due amounts and avoid a default,
as soon as sufficient funding is secured.
At December 31, 2006, the total amount due to Celera was $6,196,648, of
which $2,525,712 is currently payable and the remaining $3,670,936 is
classified as long term.  Of the amount
currently payable, $2,038,800 is past-due.

Cargill
Agreement

On
May 9, 2002, we entered into a Joint Development and Marketing Agreement, or
the Cargill Agreement, with Excel Corporation (a subsidiary of Cargill) and
Cargill, through its Caprock Business unit, or Cargill.  Under the terms of the agreement, the
parties agreed to jointly develop and commercialize products for the cattle
industry intended to be predictive of traits that improve production economics or
meet consumer demands for quality, consistency and tenderness. To date, we have
received full payment, comprised of a $2,040,000 up-front payment, a $2,260,000
milestone payment with the completion of the SNP validation phase, $5,500,000
with the completion of a two part association study correlating a pattern of
SNPs with the desirable traits and the final $400,000 milestone payment after
the successful initial validation of the diagnostic traits.  The third stage of the collaboration is
Cargills

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implementation
of the SNP-based predictive diagnostic tools in a beta-test population of
commercial cattle, known as the pre-commercial phase.  This pre-commercial phase began in late 2005 and was completed in
late 2006. As of the end of December 2006, we have tested approximately 28,000
animals generating revenue of approximately $400,000. Cargill is now evaluating
the data from the pre-commercial testing phase in order to optimize animal
management practices at the feedlot level, which is expected to be completed in
the second quarter of 2007. We expect Cargill will divide its feedlot
population into outcome groups based on their genetic potential as determined
by our feedlot management tool.
Production inputs are varied for each outcome group based on their
predicted performance.  The initial samples
were collected exclusively from Cargills own feedlots.  Cargills alliance partners, leading feedlot
operators that supply Cargills processing facilities, have also participated
in the study.    If this study is
successful, we, jointly with Cargill, expect to commercialize the technology
for use in the cattle industry in 2007.

All
information and data resulting from our efforts under the work plan will be the
joint intellectual property of the parties.
After the term of the Cargill Agreement, the parties may commercialize
joint intellectual property subject to certain royalty payments being made to
the other party.  In accordance with the
Cargill Agreement, upon the completion of the beta test, the parties have
agreed to negotiate in good faith to enter into a Joint Commercialization
Agreement.  Among other provisions, we
anticipate, based on preliminary discussions with Cargill, that the Joint
Commercialization Agreement will provide for the equal division of all profits
and losses between the parties and that technologies and products developed
thereunder will have a target price equal to approximately 30% of the value
added through the use of the predictive diagnostic tools.  We believe that we will enter into this
Joint Commercialization Agreement in mid-2007, and the duration of this
agreement will be no less than five years.
The final agreement we reach with Cargill, however, may not be on these
terms.  For eighteen months beginning in
November 2004, Cargill had the exclusive right to use the joint intellectual
property on a commercial scale in its feedlots with all samples to be analyzed
at our genotyping facility on a fee-for-service basis. This period of exclusivity has
been extended through October 1, 2007.

Monsanto
Agreement

In
June 2004, we entered into a Swine Improvement Agreement with Monsanto.  Under the collaboration, we are providing
Monsanto with an exclusive royalty-bearing license to access our swine GENIUS-Whole Genome SystemÔ which utilizes a map of approximately 600,000 SNPs, and the
associated intellectual property.  Monsanto will be obligated to pay royalties to us of up to 17.5%
of increased revenues from base year revenues calculated for the 12 month
period immediately prior to product introduction if the research performed using
the database creates new breeds and/or product enhancements.  If revenues decrease as compared to the base
year revenues, a credit will be calculated to be applied against future
royalties.  We received $1,000,000 from
Monsanto in June 2004 as an exclusive license fee for access to our database.

In
early 2007, Monsanto began commercialization of its GXÔ
Terminal Sire line with improved production traits employing our GENIUS-Whole Genome SystemÔ
technology.  This commercialization has
generated revenue on which we earn royalty revenue.

Hubbard
Agreement

On January 25,
2007, we executed an agreement with Hubbard S.A.S.. Under the terms of this
agreement, we, jointly with Hubbard, will develop predictive markers using the GENIUS -
Whole
Genome System for broilers (chicken meat).  We will underwrite the cost of validating a
set of markers for chicken as well as the genotyping costs of the association
study which identifies predictive markers.
Hubbard will be responsible for generating the phenotypic information
used in the association study.

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Hubbard will
have an exclusive license to use these markers to develop new broiler breeds
and we will be entitled to receive a royalty on their revenues generated from
these new breeds. We have exclusive rights to use the validated SNP map for
other applications not exploited by Hubbard.

Growth and Differentiation Factor Technology

Amended
and Restated Collaboration Agreement with Genetics Institute and The Johns Hopkins
University

On
January 26, 1999, we entered into an Amended and Restated Collaboration
Agreement, or the Collaboration Agreement, with The Johns Hopkins University
School of Medicine and Genetics Institute, Inc. (now a division of Wyeth) whereby
the parties amended, restated and replaced their 1994 Collaboration Agreement,
with respect to the discovery and characterization of GDFs in the TGF-ß
superfamily.  The Collaboration
Agreement provided for a sponsored research plan to be conducted by Johns
Hopkins and a collaborative research plan that included requirements for
mutual reporting of findings, to be conducted by us and Wyeth.  The Collaboration Agreement also continued
and confirmed our exclusive, worldwide, royalty bearing licenses to Myostatin
(GDF-8)  and certain other GDFs (and
Johns Hopkins and Wyeths patent rights in such factors) and non-exclusive,
perpetual royalty-free licenses to Johns Hopkins and Wyeths know-how relating
to such factor patent rights, in each case, for commercialization within the
agricultural and veterinary fields.  We
have also granted an exclusive, worldwide, royalty bearing license to Wyeth
with respect to GDF-8 (Myostatin) and certain other GDFs (and Johns Hopkins
and our patent rights in such factor) and a non-exclusive, perpetual,
royalty-free license in our and Johns Hopkins know-how relating to such factor
patent rights, in each case, for commercialization in the field of human
therapeutics.  Under this Collaboration
Agreement, we have the potential for $10,300,000 in developmental milestone
payments as well as royalties on product sales in the event Wyeth successfully
commercializes any human applications for Myostatin technology.  The milestone payments are triggered as the
technology progresses through the regulatory review process and includes; a
$500,000 payment which has been received for the filing of an IND, a second
payment which is due upon commencement of Phase III clinical trials, a third
payment upon acceptance of the NDA (New Drug Application) for regulatory review
and lastly a payment upon receipt of regulatory approval.  Potential royalties from sales of Myostatin
and other human GDFs commercialized by Wyeth range from 0.5% to 6.5%.  The royalty rate depends upon certain
variables such as the number of GDFs commercialized, and whether the product is
covered by a valid claim of patents owned by us, Wyeth or jointly held.

The
Collaboration Agreement provides for the payment of nominal annual licensing
and maintenance fees by us to Johns Hopkins. In addition, Johns Hopkins will be
entitled to royalties of 3.5% on sales by us and our sublicenses of Johns
Hopkins licensed products.

Under
the Collaboration Agreement, we owe to Johns Hopkins reasonable efforts in
their scientific and business judgment to seek commercialization of each GDF.
Licenses granted under the Collaboration Agreement continue in effect until the
expiration of the last patent licensed.
However, the Collaboration Agreement stipulates that failure to achieve
certain payment and performance milestones may cause termination of the
licenses granted to us in the Collaboration Agreement.  We have met the required development
milestone which required that a minimum of $2.5 million be spent over the five
year period beginning on January 27, 1999 and ending on January 27, 2004.
However, we are currently in arrears at December 31, 2006 with respect to
$369,541 of patent fees and $755,000 of maintenance fees and research funding
which would permit Johns Hopkins to provide us with a 60-day notice-and-cure
letter (after which 60-day period, Johns Hopkins would have the right to
terminate the license and other rights granted by Johns Hopkins to
MetaMorphix). It is our intention to pay all past-due amounts and avoid a
default as soon as sufficient funding is secured.  The Collaboration Agreement had previously

11

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been amended
twice by the parties  first on January 22, 2002 and again on September 30,
2002  in each case to extend the term of the sponsored research plan conducted
by Johns Hopkins.

As
part of our original agreement with Genetics Institute (predecessor to Wyeth),
we received a $2,200,000 unsecured loan from Genetics Institute that was due
and payable on January 1, 2005 in cash or, at our option if our common stock is
then publicly traded, in common stock at a per share price equal to the average
closing price for the ten trading days ending on the fifth day prior to the
maturity date.  Genetics Institute had
the right, on or before December 31, 2004, to convert the loan into common
stock at a per share price equal to (1) if publicly traded, 125% of the initial
public offering, or IPO, price or (2) if not publicly traded, a price to be
negotiated in good faith by Genetics Institute and us.  In January 2005, Wyeth and we agreed to
extend the repayment period to January 1, 2008, the current note expiration
date.  Interest will now accrue on the
original principal, $2,200,000 plus accrued interest of $988,601 at the prime
rate. At its option, Wyeth may offset any amounts due us against our
obligation. Wyeth also has the option to convert to equity or call the note
upon the closing of an IPO.  Failure to
repay the Wyeth loan will result in the imposition of a penalty interest rate
of two (2) percentage points above the prime rate, and possible action for
collection but will not constitute a default under the Collaboration Agreement.
Wyeth does not have the right to terminate the Collaboration Agreement for
non-repayment of this note.

The
Collaboration Agreement terminates upon the expiration of the last patent to be
filed, which currently is November 10, 2025.

Cross-License Agreement with
Wyeth

On
October 14, 2002, we entered into a Cross License Agreement with Wyeth by and through
Genetics Institute, or the Cross License, in order to expand the sharing of
research information and reagents to include present and future confidential
information and reagents with regard to Myostatin and the parties existing
cross licenses under the Collaboration Agreement.  Additionally, under the Cross License, each party received from
the other, to the extent not granted under the Collaboration Agreement, an
exclusive, worldwide, royalty-bearing license under each respective partys
Myostatin technology and the right to commercialize Myostatin licensed products
in the agricultural and veterinary field, with respect to us, and the human
therapeutic field, with respect to Wyeth.
Upon the expiration of any patent rights licensed under the Cross License,
each licensor shall retain a fully-paid, royalty-free, perpetual, irrevocable,
non-exclusive license to use the other partys related know-how.

The
Cross License entitles us to receive a royalty of up to 4.5% of net sales, as
defined in the Collaboration Agreement, and an additional 2.0% of net sales
upon Wyeths use of our technology, as defined in the Cross License, in the
event Wyeth is successful in commercializing Myostatin for human therapeutic
application.  We are obligated to pay Wyeth
a maximum royalty of 2% of net sales should we choose to utilize Wyeth
technology, as defined in the Cross License, in commercializing Myostatin
within the agricultural or veterinary field.
The Cross License will terminate upon the expiration of the last
exclusive license granted thereunder or earlier in the event of a breach of the
terms of the Cross License.

Chicken
Commercial Licensing

On
July 28, 2000, we entered into a Letter of Intent and Limited License Agreement
with Tyson Poultry, Inc., or Tyson, and on November 10, 2000, we entered into a
substantially similar Letter of Intent and Limited License and Option Agreement
with Pilgrims Pride Corporation, or Pilgrims Pride.  The parties have entered into the aforementioned agreements to
facilitate the testing of Myostatin blocker technology in broiler chicken
production and to facilitate negotiating the terms of the proposed long-term

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license
agreements.  On October 10, 2000,
MetaMorphix and Pilgrims Pride entered into a Letter of Intent Regarding
Limited License in the Republic of Mexico.

These
agreements include an option to license Myostatin technology for use by Tyson
in U.S. chicken production and for use by Pilgrims Pride in chicken production
in both the U.S. and Mexico on predefined terms upon the successful completion
of large-scale trials by the poultry producers.  For the option to the technology, both chicken production
companies have paid us $250,000. License fees to cover development costs are to
be paid once a product candidate has been agreed upon by the parties.
Additionally, we are to receive 30% of the value added by the technology on a
per treated bird basis.

Turkey
Myostatin Joint Venture

On
September 4, 2002, we entered into a joint venture with Willmar, a leading
supplier of day-old poults and vaccination equipment to the U.S. and Canadian
turkey production industry, and formed the Willmar/MetaMorphix Turkey Joint
Venture, LLC, or the Joint Venture, and entered into a related Limited
Liability Company Agreement, or the LLC Agreement.  The Joint Venture was formed for the purpose of developing and
commercializing Myostatin related products in the turkey market using the value
added strategy described above.
Pursuant to the LLC Agreement, each of Willmar and we have granted to
the Joint Venture an exclusive license in its respective Myostatin technology
(owned or subsequently owned) for use in the turkey market in North
America.  The LLC Agreement provides
that all costs and profits will be shared 50-50 and targets a price for
potential customers in excess of 30% of the value added to their
livestock.  To date, there have been no
transactions to account for under this Joint Venture.

Research and Development

During
the years ended December 31, 2004, 2005 and 2006, we spent $4,364,421,
$4,311,880, and $2,599,724 respectively, on research and development.  It is anticipated that the majority of the
costs associated with development of our genomic predictive diagnostic tools
will be funded by proceeds of contracts with our collaborative partners and
will be expensed as costs of goods sold.

Patents and Proprietary Rights

At
December 31, 2006, we either own or have licensed to us 45 issued U.S. patents,
52 issued foreign patents, and 119 patents pending.  The majority of these issued domestic and foreign patents relate
to our GDF technology.  These patents
have been exclusively licensed from The Johns Hopkins University for exclusive
use in the non-human field.  The
exclusive use of these patents forms the basis of the development of our GDF
technology and is critical to our business.
Many of the remaining patents have been internally developed.  These patents form the basis for our ability
to operate and commercialize the genomic technologies in the livestock and
companion animal sectors. Our patents expire at various dates, during the
period commencing on March 19, 2013 through November 10, 2025.There
are a large number of applications pending in both the U.S. and foreign patent
authorities.  Patent prosecution and
maintenance expense represents one of our significant business expense
elements.  We are not involved in any
patent litigation anywhere in the world.
We remain confident that we have adequate patent protection for our key
technologies.  We also rely on trade
secret protection for our confidential and proprietary information.  We require each of our employees,
consultants and advisors to execute a confidentiality agreement upon the
commencement of employment with us.  The
agreements generally provide that all trade secrets and inventions conceived by
the individual and all confidential information developed or made known to the
individual during the term of his or her relationship with us shall be our exclusive
property and shall be kept confidential and not disclosed to third parties,
except in specified

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circumstances.  We have six registered trademarks and
fourteen trademarks are currently being prosecuted.

Government Regulation

Animal
Health and Agriculture

Our
research, development, manufacturing, and marketing of our animal health and
agricultural product candidates, if any, are, with the exception of our
in-house canine and cattle genotyping services and SNP-based, predictive diagnostics,
subject to regulatory approval processes administered by the FDA, the United
States Department of Agriculture (USDA) and other regulatory agencies in the
United States and abroad.  We are not
currently seeking any product approvals through the FDA, USDA or other
applicable regulatory agencies, foreign or domestic, nor are we expecting to do
so within the next year.

The
manufacture and sale of animal pharmaceuticals are regulated by the Center for
Veterinary Medicine, or CVM, of the FDA.
A new animal drug may not be commercially marketed in the United States
unless it has been approved as safe and effective by CVM.  Approval may be requested by filing a New
Animal Drug Application, or NADA, with CVM containing substantial evidence as to
the safety and effectiveness of the drug.
Data regarding manufacturing methods and controls are also required to
be submitted with the NADA.
Manufacturers of animal drugs must also comply with Good Manufacturing
Practices and Good Laboratory Practices.
Sales of animal drugs in countries outside the United States require
compliance with the laws of those countries, which may be extensive.

Human
Therapeutics

The
FDA and comparable regulatory agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products.  These agencies and other federal, state and
local entities regulate research and development activities and the testing,
manufacture, quality control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of product candidates.

The
process required by the FDA before product candidates may be marketed in the
United States generally involves the following:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Preclinical
  laboratory and animal tests;                                                                                                     
| |   |                                                                                                                                                
| |  | Submission
  to the FDA of an Investigational New Drug, or IND, application which must
  become effective before clinical trials may begin;    
| |   |                                                                                                                                                
| |  | Adequate and
  well-controlled human clinical trials to establish the safety and efficacy of
  the proposed pharmaceutical in intended use; and
| |   |                                                                                                                                                
| |  | Submission
  to the FDA of a New Drug Application that must be approved.                                                                       

The testing
and approval process requires substantial time, effort, and financial resources
and we cannot be certain that our collaborators will be granted any approval on
a timely basis, if at all.

Preclinical
studies include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, as well as animal studies to assess its potential
safety and efficacy.  The results of the
preclinical studies are then submitted, together with manufacturing information
and analytical data, to the FDA as part of an IND application, which must
become effective before human clinical trials may

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begin.  The IND automatically becomes effective 30
days after the FDA acknowledges that the filing is complete, unless the FDA,
within the 30-day time period, raises concerns or questions about the conduct
of the preclinical trials as outlined in the IND.  In such a case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can begin.  Further, an independent Institutional Review
Board at each medical center proposing to conduct the clinical trials must
review and approve any clinical study.

Human
clinical trials are typically conducted in three sequential phases which may
overlap:

| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I: The
  drug is initially administered into healthy human subjects or subjects with
  the target condition and tested for safety, dosage tolerance, absorption,
  metabolism, distribution and excretion.                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                
| |  | Phase II:
  The drug is administered to a limited subject population to identify possible
  adverse effects and safety risks, to determine the efficacy of the product
  for specific targeted diseases and to determine dosage tolerance and optimal
  dosage.                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                
| |  | Phase III:
  When Phase II evaluations demonstrate that a dosage range of the drug is
  effective and has an acceptable safety profile, Phase III clinical trials are
  undertaken to further evaluate dosage, clinical efficacy and to further test
  for safety in an expanded population at geographically dispersed clinical
  study sites.

In
the case of product candidates for severe or life-threatening diseases such as
Muscular Dystrophy, the initial human testing is often conducted in affected
subjects rather than in healthy volunteers.
Since these subjects already have the target condition, these clinical
trials may provide initial evidence of efficacy traditionally obtained in Phase
II clinical trials and thus these clinical trials are frequently referred to as
Phase Ib clinical trials.

We
cannot be certain that Wyeth will commence or successfully complete Phase III
testing of the product candidates within any specific time period, if at
all.  Furthermore, the FDA or the
Institutional Review Boards or the sponsor may suspend clinical trials at any
time on various grounds, including a finding that the subjects are being
exposed to an unacceptable health risk.

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

Satisfaction
of the above FDA requirements or similar requirements of state, local and
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially, based upon the type, complexity and novelty of
the pharmaceutical product candidate.
Government regulation may delay or prevent marketing of potential
products for a considerable period of time and to impose costly procedures upon
our activities.  We cannot be certain
that the FDA or any other regulatory agency will grant approval for any of our
licensees product candidates on a timely basis, if at all.  Success in preclinical or early stage
clinical trials does not assure success in later stage clinical trials.

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Data obtained
from preclinical and clinical activities is not always conclusive and may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval.  Even if a product
candidate receives regulatory approval, the approval may be significantly
limited to specific indications.  Further,
even after regulatory approval is obtained, later discovery of previously
unknown problems with a product may result in restrictions on the product or
even complete withdrawal of the product from the market.  Delays in obtaining, or failures to obtain
regulatory approvals would have a material adverse effect on our business,
whereby we would be unable to achieve product line revenues that are critical
to our business plan.Marketing product candidates abroad will require similar
regulatory approvals and is subject to similar risks.  In addition, we cannot predict what adverse governmental
regulations may arise from future United States or foreign governmental action.

Any
products manufactured or distributed through our license pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the drug.  Drug
manufacturers and their subcontractors are required to register their establishments
with the FDA and certain state agencies, and are subject to periodic
unannounced inspections by the FDA and certain state agencies for compliance
with current Good Manufacturing Practices, which impose certain procedural and
documentation requirements upon us and our third-party manufacturers.  We cannot be certain that our collaborative
partner or their present or future suppliers will be able to comply with the
current Good Manufacturing Practices and other FDA regulatory requirements.

The
FDA regulates drug labeling and promotion activities.  The FDA has actively enforced regulations prohibiting the
marketing of products for unapproved uses.
Under the Modernization Act of 1997, the FDA will permit the promotion
of a drug for an unapproved use in certain circumstances, but subject to very
stringent requirements.

Companies
and their product candidates are also subject to a variety of state laws and
regulations in those states or localities where they are or will be marketed.  Any applicable state or local regulations
may hinder the ability to market our product candidates in those states or
localities.

The
FDAs policies may change and additional government regulations may be enacted
which could prevent or delay regulatory approval of our collaborators potential
products.  Moreover, increased attention
to the containment of health care costs in the United States and in foreign
markets could result in new government regulations which could severely limit
our ability to achieve our goals.  We
cannot predict the likelihood, nature or extent of adverse governmental
regulation which might arise from future legislative or administrative action,
either in the United States or abroad.

Foreign
Regulation and Product Approval

Outside
the United States, the ability to market a product candidate is contingent upon
receiving a marketing authorization from the appropriate regulatory
authorities.  The requirements governing
the conduct of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country.  At present, foreign marketing authorizations are applied for at a
national level, although within the European Community, or EC, registration
procedures are available to companies wishing to market a product in more than
one EC member state.  If the regulatory
authority is satisfied that adequate evidence of safety, quality and efficacy
has been presented, a marketing authorization will be granted.  This foreign regulatory approval process
involves all of the risks associated with FDA clearance discussed above.  Currently, we are not seeking any product
approvals in any foreign countries.

16

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Other
Regulations

We
are also subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances.  We may incur
significant costs to comply with such laws and regulations now or in the
future.

Marketing and Sales

Our
principal customer base consists of breeders, producers and processors in the
cattle, swine and poultry industries and companion animal breeders and owners
principally throughout the United States. We believe that products for cattle
and companion animals represent the largest source of near-term future
revenues.  Consequently, most of our
marketing efforts are devoted to these areas. We further seek to focus our
marketing efforts or increase our visibility to these groups in a number of
ways:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct Sales.  We have a direct field sales force that
  actively solicits business from both cattle and companion animal breed
  registries, makes sales presentations on our products and capabilities and
  initiates contractual sales agreements.                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | In-House Customer Service Center.  We maintain a customer service center in
  our Davis, California facility to answer customer questions related to our
  cattle and canine products, facilitate the tracking of customer samples that
  we receive and expedite results back to our customers.                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Trade Shows and Conferences.  Many livestock associations conduct annual
  conventions, trade shows or conferences which typically include a series of
  speakers and/or workshops, and an exhibition area where industry affiliates
  can promote their products.  We attend
  a number of these shows per year and present as a speaker or panelist on
  topics related to animal genomic technology and/or promote our technologies.                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Trade Journals Advertising and Articles.  There are numerous publications aimed at
  the livestock industry, several of which focus on the cattle livestock
  industry and in which we advertise.
  Our advertisements target specific customers who are most likely to
  use our predictive diagnostic products.
  In addition, we contribute to articles in trade and scientific
  journals on the use of genomics and predictive diagnostic tools in breeding
  strategies.

Competition

The
animal genomics industry has experienced consolidation in recent years.  Besides us, we believe that there are
several other companies that would be considered our competitors in the animal
genomics industry.  We believe we are
one of the industry leaders due to our exclusive access to whole genome
technology and key customer relationships with Cargill, Hubbard and Monsanto,
which we believe provide us with research and timing competitive advantages.

We
are aware that other companies have developed, are developing, or have licenses
to genomic technologies.  Public tools
that are broadly available to potential competitors in most major livestock
species include partial genome sequences, the use of express sequence tags
(ESTs), microsatellites (repeated sequence polymorphisms), and quantitative
trait loci (QTLs).  Although useful, we
believe these tools permit examination of relatively small regions of the
genome and comparative gross mapping in contrast to our use of the entire
genomic sequence and high-density SNP maps. Public funding has invested
significantly in large-scale sequencing efforts and as a result, whole genome
sequences and SNP

17

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maps for
chicken and cattle have recently become publicly available.  We expect our field to become more
competitive with companies and academic institutions seeking to develop
competitive technologies and products as a result of access to these genomic
and SNP databases.  We believe that even
though these whole genome sequences are now publicly available, a great deal of
scientific and bioinformatics expertise and infrastructure are still required
to identify and validate SNPs and create dense SNP maps that can be used for
the identification of predictive diagnostic tools in livestock
populations.  Although there can be no
assurance that other companies will not be successful in developing predictive
diagnostic tools, we believe we are well-positioned to make significant
progress in all major livestock species and to be the first company to market
SNP diagnostics derived from the whole genome that will create significant and
lasting value for the livestock industry.

While
we do not believe there is any direct competition to our Myostatin technology,
there is competition mainly from producers of performance enhancers such as
low-level antibiotics and hormone products that stimulate growth.

Customers

Four
customers comprised an aggregate of 83.2% of our total accounts receivable at
December 31, 2006, and three customers
comprised an aggregate of 50.7% of our total accounts receivable at December
31, 2005. Our customers are primarily associations which purchase our parentage
and identification genotyping services.
We have not experienced any significant credit losses and do not require
collateral on receivables.

Revenue
from one customer, Cargill, represented 12.4%, 0.0%, and 55.2% of our total
revenues for the years ended December 31, 2006, 2005 and 2004,
respectively.  Revenue from another
customer, the American Kennel Club, or AKC, was 34.8%, 38.1%, and 16.8% of our
total revenues for the years ended December 31, 2006, 2005 and 2004,
respectively.

Employees

As
of December 31, 2006, we had a total of 36 employees: 26 in Davis, California
and 10 in Beltsville, Maryland.  No
employees are represented by labor organizations and there are no collective
bargaining agreements.  We consider
relations with our employees to be good.

Corporate Information

We
were incorporated in Delaware in 1994.
Our principal executive office is located at 8000 Virginia Manor Road,
Suite 140, Beltsville, Maryland 20705, and our telephone number is (301)
617-9080.  Our website address is www.metamorphixinc.com.
Information contained on our website does not constitute part of the document.

18

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RISK FACTORS

INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER THE
FOLLOWING RISK FACTORS AS WILL AS THE OTHER INFORMATION IN THIS FORM 10-KSB
BEFORE DECIDING TO INVEST IN OUR SHARES OF COMMON STOCK. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS WOULD SUFFER. IF THIS HAPPENS, YOU MIGHT LOSE ALL OR PART OF YOUR
INVESTMENT.

Risks Related to Our Business

Our
recurring losses, negative cash flows from operations, working capital
deficiency and significant accumulated deficit raise substantial doubt about
our ability to continue as a going concern

Our history
of negative operating results and the fact that our current assets are
significantly less than our current liabilities indicate that we may not be
able to continue as a going concern, as discussed in Note 1 to the financial
statements on page F-8. Our independent registered public accounting firm has
included in their report on our consolidated financial statements for 2006 an
explanatory paragraph that states our recurring losses and negative cash flows
from operations, working capital deficiency and significant accumulated deficit
raise substantial doubt about our ability to continue as a going concern.

In the
course of our operations, we have sustained operating losses and negative cash
flows from operations and expect such losses to continue in the foreseeable
future. We intend to finance our operations primarily through future debt and
equity financings and future revenues, although we may not be successful.

We have a history of operating losses and may never achieve
profitable operations.

We
were formed in 1994 and to date have been engaged primarily in research and
development activities. We generated material revenues from operations for the
first time in 2002. We have incurred losses from operations since our inception
and we anticipate incurring operating losses at least through 2007 and possibly
thereafter. These losses, among other things, have had and will continue to
have an adverse effect on our stockholders equity and working capital. We may
not be able to generate sufficient revenues from operations to achieve or
sustain positive cash flow or profitability.

We require additional funding and may be unable to obtain
funding on acceptable terms.

We
have incurred negative cash flows since inception and have expended, and expect
to continue to expend, substantial funds for working capital to continue our
research and development programs and operate our business. At December 31,
2006, we had $277,680 of cash and cash equivalents. If, in the future, we begin
to generate positive cash flow from our operations, we will still need to seek
additional financing to continue our research and development activities and
fund our business operations. If we are unable to generate adequate revenues,
enter into a corporate collaboration, complete a debt or equity offering, or
otherwise obtain sufficient financing when and if needed, we may be required to
reduce, defer or discontinue one or more of our research and development
programs. We may not be able to:

|  |                                                     
|- | ----------------------------------------------------
| | find financing on terms acceptable to us, if at all;

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|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | receive payments due to us in a timely manner, if at all, pursuant to
  any collaboration arrangements into which we have entered;                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | generate revenues that will reach projected levels;                                                                                                                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | keep a substantial portion of the proceeds from any financing from
  being used to repay existing debt or other obligations;                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | keep expenditures from exceeding current expectations; or                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | incur expenditures for research and development activities, progress
  of research collaborations, additions to our technologies, changes in or
  terminations of relationships with strategic partners, changes in the focus,
  direction or costs of our research and development programs, competitive and
  technological advances, or other factors below the amount than is presently
  anticipated.

Accordingly,
we may require additional funds to implement our business plan even if we
obtain additional financing to implement our business plan. If adequate funds
are not available to us through additional financings, we may be required to:

|  |                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | delay, reduce the scope of, or eliminate, one or more of our research
  and development programs or forfeit our rights to future technologies;                                                                                                    
|  |                                                                                                                                                                                                                                                   
| | obtain funds through arrangements with collaborative partners or
  others that may require us to relinquish rights to certain technologies,
  product candidates or products that we would otherwise seek to develop or
  commercialize ourselves;
|  |                                                                                                                                                                                                                                                   
| | license the rights to products on terms that are unfavorable to us;
  or                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                   
| | enter into a corporate restructuring, bankruptcy or liquidation
  proceeding.                                                                                                                                                                     

20

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We have substantial outstanding indebtedness, including
amounts owed to members of current and former management that we may be unable
to repay or convert to equity.

At
December 31, 2006, we had $40,975,000 of outstanding indebtedness in the form
of short-term and long-term promissory notes. Of such amount, $4,396,000
principal amount is past due. We will need to raise additional funds through
financings or future revenue to repay our outstanding indebtedness. Any funds
that we raise that are applied to repay our outstanding indebtedness will not
be available to fund our business. We may be unable to raise the funds
necessary to repay our debt and the holders of past due amounts may seek to
enforce their rights against us.

At
December 31, 2006, we had $264,000 principal amount of outstanding indebtedness
to Edwin C. Quattlebaum, our Chief Executive Officer, President and Co-Chairman
of the Board, representing working capital advances he made to us, which
indebtedness is evidenced by demand notes bearing interest at the prime rate
plus 1% and which provide for repayment at such time as we have sufficient
resources. An additional $625,500 principal amount of debt that is evidenced by
a substantially similar note is owed to a former director of ours who is
currently in bankruptcy (see Legal Proceedings). We also have an accrued
liability of $962,000 for deferred bonus payments (declared and estimated) to
our named executive officers, which were earned from 1999 through 2006.

Our genomic technologies are being developed and products
and services from this emergent technology may never be successfully
commercialized.

Our
genomic technologies are based on the use of SNPs for the identification of
desirable traits in livestock. Not all services derived from this technology
may become commercially viable. Other than current regular revenues derived
from our commercial genotyping operations, some or all products or services
which we may develop may prove to be uneconomical or otherwise commercially
unfeasible, such outcomes would severely limit our near-term prospects. The
successful development of this technology is subject to the risks of failure
generally inherent in the development of any innovative technologies and
products derived therefrom. These risks include the possibilities that:

|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
| | third parties hold proprietary rights that preclude us from marketing
  one or more of its proposed products; or
|  |                                                                                                                 
| | third parties have superior technologies and/or market superior or
  equivalent products.                       

If we do not meet objectives under our license agreement
with Celera, we will not maintain exclusive rights to the genomic technology.

Under
our license agreement with Celera, we are obligated to make certain payments in
order to maintain our exclusive rights under the license agreement to Celeras
cattle, swine and poultry genomic sequencing tools and technology. At December
31, 2006, we were in arrears with respect to $100,000 of quarterly payments to
Celera and a royalty obligation of $1,938,800. We may not be able to satisfy
the prescribed conditions for maintaining the license. The failure to maintain
an exclusive license to the genomic sequencing technology would negatively
impact our ability to commercialize any products or services based on this
platform technology.

Due to
past-due minimum royalty payments we have been unable to make, we are currently
in breach of the Celera Licensing Agreement, which could result in Celera
exercising their option to terminate the contract, which would revoke the use
of the technology and reduce our expected future revenue and cash flows.

21

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At
December 31, 2006, we were past due in paying minimum royalties to Celera in
the amount of $2,038,800. Celera has the right under the agreement to terminate
our rights to the technology, which includes the world-wide license to
certain cattle, swine and poultry database products; single nucleotide
polymorphism, or SNP, maps, and software. If we were to lose our rights to this
technology, we would be unable to complete our product commercialization
strategy, thereby reducing the amount of expected revenue and cash flows.

We face uncertainty of the outcome of litigation.

On
    March 15, 2007, we became aware of a claim against us from holders of two
    10% convertible promissory notes, for breaches of contract for non-repayment
    of principle and interest due on July 31, 2006. The original amount of the
    notes was $150,000 and $50,000, and principle currently past due is $120,000
    and $50,000. The amount of the claim, which includes principle and accrued
    interest through the date of the claim, is $200,074. We have the amounts
    recorded as liabilities on the financial statements at December 31, 2006.

Our Myostatin technology for use in agriculture is being
  developed and may never be successfully commercialized.

Our
proposed Myostatin technology for agricultural uses is in the early
developmental stage and will require time-consuming and costly research and
development, testing, and regulatory clearances prior to commercialization.
Accordingly, we do not expect to develop any proposed product candidates from
these technologies for commercial sale for three to five years, if ever. The
successful development of any of these technologies and any subsequent product
candidates is subject to the risks of failure generally inherent in the
development of any innovative technologies and products derived therefrom.
These risks include the possibilities that:

|  |                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | to the extent regulatory clearance is mandated, the proposed products
  may be found or believed to be ineffective or toxic, or otherwise fail to
  receive necessary regulatory clearances;
|  |                                                                                                                                                                                             
| | the technologies or any proposed products derived from the
  technologies are uneconomical to manufacture or market or do not achieve
  broad market acceptance;                            
|  |                                                                                                                                                                                             
| | third parties hold proprietary rights that preclude us from marketing
  one or more of our proposed product candidates; or                                                                  
|  |                                                                                                                                                                                             
| | third parties have superior technologies and/or market superior or
  equivalent products.                                                                                                   

The
failure of our research and development activities to result in any
commercially viable Myostatin technology or products, or any significant delay
in completion of such commercialization, would limit our Growth and
Differentiation Factors Technology.

Our success in developing our product candidates depends
upon the performance of our licensees and collaborative partners, without which
our product lines may never be successfully commercialized.

Our
strategy involves entering into multiple, concurrent strategic alliances with
corporate partners to pursue development and commercialization of our two
primary technologies. Our development and commercialization of our Myostatin
products in the non-vertically integrated cattle, aquaculture and companion
animal industries will depend in part on our ability to enter into a
collaborative agreement with one or more animal healthcare companies with the
resources to develop, obtain regulatory approvals for and market any of such
products. We are dependent upon the expertise and dedication of our outside
collaborators to develop and market products. Similarly, we are completely
dependent upon Wyeth with respect to the development and commercialization of
any human applications of our growth and differentiation factors. Any failure
of any one or more of our collaborative partners to develop commercially viable
products could cause us to curtail or cease operations.

Any
failure on the part of our licensees or collaborators to perform or satisfy
their obligations to us could lead to delays in the development or
commercialization of our product candidates and affect our ability to realize
product revenues. Disagreements with our licensees or collaborators could
require or result in litigation or arbitration, which could be time-consuming
and expensive. If we fail to maintain

22

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our
existing agreements or establish new agreements as necessary, we could be
required to undertake development, manufacturing and commercialization
activities solely at our own expense. This would significantly increase our
capital requirements and may also delay the commercialization of our
technologies and services.

Due to
past-due patent and research fees we have been unable to pay to Johns Hopkins,
we are currently in breach of the Amended and Restated Collaboration Agreement
with The Johns Hopkins University School of Medicine and Genetics Institute,
Inc. (now a division of Wyeth), which could result in Johns Hopkins exercising
their option to terminate the contract, which would revoke the use of the
technology and reduce our expected future revenue and cash flows.

At
December 31, 2006, we were past due in paying patent fees to Johns Hopkins in
the amount of $369,541 and research funding in the amount of $755,000. Johns
Hopkins has the right under the Amended and Restated Collaboration Agreement to
terminate our rights to the growth and differentiation technology. If we
were to lose our rights to this technology, we would be unable to complete our
product commercialization strategy, thereby reducing the amount of expected
revenue and cash flows.

Our Myostatin business is subject to government regulation
and the costs and uncertainty of the regulatory approval and compliance
process.

Our
research, development, manufacturing, and marketing of our animal health and
agricultural product candidates are, with the exception of genomic diagnostics
and related services, subject to regulatory approval processes administered by
the FDA, USDA, and other regulatory agencies in the United States and abroad.
The process of obtaining FDA, USDA and other required regulatory approvals for
drug and biologic products, including required regulatory trials for animal and
human safety, is lengthy, expensive and uncertain. Even after expenditure of
significant time and financial and other resources, we may not be able to
obtain necessary regulatory approvals for clinical testing or for the
manufacturing or marketing of any products requiring such approval. If
regulatory approvals are not obtained, we will not be able to generate revenues
from these types of products. In addition, we or our collaborators may
encounter significant delays or excessive costs in our and/or their efforts to
secure necessary approvals or licenses. Even if regulatory clearance is
obtained, a marketed product is subject to ongoing review, and later discovery
of previously unknown defects or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a
product or withdrawal of the product from the market, as well as possible civil
or criminal sanctions.

The
research, development, manufacture and marketing of human therapeutic products
are subject to an extensive regulatory approval process by the FDA and other
regulatory agencies in the United States and other countries. The process of
obtaining required regulatory approvals for human drugs is lengthy, expensive
and uncertain. In order to obtain the regulatory approvals needed to
commercialize any human therapeutic product, it must be demonstrated that the product
candidate is safe and effective for use in humans for each target indication.
Clinical trials conducted for such purpose are subject to substantial oversight
by institutional review boards and the FDA and may be curtailed or terminated
at any time for any of the following reasons:

|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
| | unanticipated, adverse or ambiguous results;                                                  
|  |                                                                                               
| | undesirable side effects which delay or extend the trials;                                    
|  |                                                                                               
| | the inability to locate, recruit and qualify a sufficient number of
  patients for the trials;
|  |                                                                                               
| | regulatory delays or other regulatory actions; or                                             

23

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|  |                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | difficulties in manufacturing sufficient quantities of the particular
  product candidate or any other components needed for preclinical testing or
  clinical trials.

We
may not be able to obtain regulatory approval for any human therapeutic product
based on our technology. Even if regulatory clearance is obtained, post-market
evaluation of a product, if required, could result in restrictions on a
products marketing or withdrawal of the product from the market as well as
possible civil and criminal sanctions.

We
and our collaborative partners may be subject to additional regulation under
state and federal laws, including requirements regarding occupational safety,
laboratory practices, environmental protection and hazardous substance control,
and may be subject to other local, state, federal and foreign regulation. We
cannot predict the impact of such regulation on us, although it could seriously
impact our business.

Finally,
while our genomic technology is not currently subject to government regulation,
regulatory requirements may be imposed in the future, compliance with which
could have a negative impact on the commercial or economic viability of these
products and services.

Our technologies may not meet with consumer acceptance,
which would reduce our future revenues

Currently,
although Myostatin inhibitor technology does not affect DNA and therefore will
not modify the genetics of these animals, adverse publicity may nevertheless
arise in connection with the use of the technology that we are developing.
While there are a number of drug delivery systems available, we have not
determined the appropriate system to employ. Our technology or any products
derived therefrom may cause controversy comparable to that which arose with the
use of hormones and other additives in the milk production industry. Our
technology may be viewed with the same distrust. A lack of consumer or industry
acceptance would have an adverse impact on our business, financial condition
and future prospects.

We face competition and the risk of technological
obsolescence.

The
animal health and agricultural industries, and related biotechnology,
pharmaceutical, and biopharmaceutical industries are intensely competitive.
Competition from other companies and other research and academic institutions
may increase. Many of these companies have substantially greater financial and
other resources and research and development capabilities than us and have
substantially greater experience in undertaking preclinical and clinical
testing of products, obtaining regulatory approvals and manufacturing and
marketing products. Moreover, the biotechnology, pharmaceutical and
biopharmaceutical industries, in the animal health and agricultural areas, are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. We may not be able to develop products that are more effective or
achieve greater market acceptance than competitive products, or that our
competitors will not succeed in developing products and technologies that are
more effective than those being developed by us or that would render our
agricultural products and technologies less competitive or obsolete.

With
respect to potential human therapeutic products, our collaborative partner will
face competition from companies that are developing products for the treatment
of the diseases and disorders we have targeted. Our collaborative partner may
also compete with universities and other research institutions in the
development of products, technologies and processes, as well as the recruitment
of highly qualified personnel. These competitors may succeed in developing
technologies or products that

24

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are
more effective than the ones under development by Wyeth or that render its
proposed products noncompetitive or obsolete.

We are dependent on a small number of key personnel and
consultants the loss of whom could threaten our ability to operate our business
successfully.

As
a small company with 36 full-time employees, our success depends on the
continuing contributions of our management team and scientific personnel. We
are highly dependent on the services of Dr. Edwin C. Quattlebaum, our
Co-Chairman, President and Chief Executive Officer, as well as the other
principal members of our management and scientific staff. Our success depends
in large part upon our ability to attract and retain highly qualified
personnel. We face intense competition in our hiring efforts with other
pharmaceutical and biotechnology companies, as well as universities and
nonprofit research organizations, and we may have to pay higher salaries to
attract and retain qualified personnel. The loss of one or more of such
individuals, or our inability to attract additional qualified personnel, could
substantially impair our ability to implement our business plan.

We have limited manufacturing and marketing capability.

We
do not generally expect to engage directly in commercial scale manufacturing or
marketing of Myostatin products in the near term, but may elect to do so in
certain cases. We do not, generally, have the capacity or experience to
manufacture products in large quantities or to market our products. If we elect
to perform these functions, we will be required either to develop these
capacities or contract with others to perform some or all of these tasks. We
may be dependent to a significant extent on corporate partners, licensees or
other entities for manufacturing and marketing of products. If we engage
directly in wider manufacturing or marketing, we will require substantial
additional funds and personnel and we will also be required to comply with
extensive regulations applicable to companies engaged in the production of
biotech products. We may not be able to obtain necessary funding or develop or
contract for these capacities in a timely manner, on acceptable terms or at
all.

If we cannot protect our intellectual property rights, our
ability to develop and commercialize our products will be severely limited.

Our
success will depend in part on our and our licensors ability to obtain,
maintain and enforce patent protection for each partys technologies, compounds
and products, if any, resulting from these technologies. Without protection for
the intellectual property we use, other companies could offer substantially
identical products for sale without incurring the sizable discovery,
development and licensing costs that we have incurred. Our ability to recover
these expenditures and realize profits upon the sale of products could be
diminished.

We
have patent applications filed and pending in the United States and abroad for
our own technologies, and for technologies that we have developed from our
in-licensed technologies. The process of obtaining patents can be time
consuming and expensive with no certainty of success. Even if we spend the
necessary time and money, a patent may not issue or it may insufficiently
protect the technology it was intended to protect. We can never be certain that
we were the first to develop the technology or that we were the first to file a
patent application for the particular technology because many U.S. patent
applications are confidential until a patent issues, and publications in the
scientific or patent literature lag behind actual discoveries. The degree of
future protection for our proprietary rights will remain uncertain if our
pending patent applications are not approved for any reason or if we are unable
to develop additional proprietary technologies that are patentable.
Furthermore, third parties may independently develop similar or alternative
technologies, duplicate some or all of our technologies, design around our
patented technologies or challenge our issued patents or the patents of our
licensors.

25

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In
any litigation where our patents or our licensors patents are asserted, a
court may determine that the patents are invalid or unenforceable. Even if the
validity or enforceability of these patents is upheld by a court, a court may
not prevent alleged infringement on the grounds that such activity is not
covered by the patent claims. Any litigation, whether to enforce our rights to
use these patents or to defend against allegations that we infringe third party
rights, will be costly, time consuming, and may distract management from other
important tasks.

As
is commonplace in the biotechnology and pharmaceutical industry, we employ
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors.
To the extent our employees are involved in research areas which are similar to
those areas in which they were involved at their former employers, we may be
subject to claims that such employees and/or we have inadvertently or otherwise
used or disclosed the alleged trade secrets or other proprietary information of
the former employers. Litigation may be necessary to defend against such
claims, which could result in substantial costs and be a distraction to
management, even if we are successful in defending such claims.

We
also rely in our business on trade secrets, know-how and other proprietary
information. We seek to protect this information, in part, through the use of
confidentiality agreements with employees, consultants, advisors and others.
Nonetheless, these agreements may not provide adequate protection for our trade
secrets, know-how or other proprietary information and prevent their
unauthorized use or disclosure. To the extent that consultants, key employees
or other third parties apply technological information independently developed
by them or by others to our proposed products, disputes may arise as to the
proprietary rights to such information which may not be resolved in our favor.
The risk that other parties may breach confidentiality agreements or that our
trade secrets become known or independently discovered by competitors, could
adversely affect us by enabling our competitors, who may have greater
experience and financial resources to copy or use our trade secrets and other
proprietary information in the advancement of their products, methods or
technologies.

Our success also depends on our ability to operate and
commercialize products without infringing on the patents or proprietary rights
of others.

Third
parties may claim that we or our licensors or suppliers are infringing their
patents or are misappropriating their proprietary information. In the event of
a successful claim against us or our licensors or suppliers for infringement of
the patents or proprietary rights of others, we may be required to:

|  |                                                
|- | -----------------------------------------------
| | pay substantial damages;                       
|  |                                                
| | stop using our technologies;                   
|  |                                                
| | stop certain research and development efforts; 
|  |                                                
| | develop non-infringing products or methods; or 
|  |                                                
| | obtain one or more licenses from third parties.

A
license required under any such patents or proprietary rights may not be
available to us, or may not be available on acceptable terms. If we or our
licensors or suppliers are sued for infringement we could encounter substantial
delays in, or be prohibited from developing, manufacturing and commercializing
our product candidates.

26

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Risks Related to the Ownership
of Our Securities

Our failure to comply with the reporting requirements of the
Exchange Act could lead to an enforcement action against us by the Commission
or materially delay or prevent us from affecting an initial public offering of
our securities or merging with a public company.

Since
December 31, 2004, we have met both the security holder and total asset levels
that obligated us to become a publicly reporting company during 2005. This
obligation is imposed by the federal securities laws despite the fact that our
securities are not publicly traded. In May 2005, we filed a registration
statement on Form 10-SB with the SEC. As a public reporting company under
Section 12(g) of the Exchange Act, we are required to file annual and quarterly
reports with respect to our business and financial condition and current
reports with respect to material events. To date, we have complied with all of
the required filings; however, they were not done in a timely manner. We
received a comment letter from the SEC dated June 2, 2005, for which a response
was provided in a letter by us dated October 3, 2006. Changes to our original
filing as a result of that comment letter and a subsequent comment letter dated
November 13, 2006 are reflected in Form 10-KSB/A (Amendment No. 1) filed
on December 15, 2006. A comment
letter was also received on January 12, 2007. We did not amend our Form 10-SB
again as a result of that letter. Instead, we are insuring that those comments
are addressed in this Form 10-KSB. Our history of non-compliance could limit
our ability to affect an initial public offering of our common stock or merge
with a publicly-traded company.

There will not be a public market for our common stock which
may prevent future investment on which we are dependent.

It
is unlikely that a public market for our common stock will be created until
such time, if ever, as we undertake an initial public offering of our
securities. Accordingly, investors will not be able to sell their common stock
should they desire to do so, or may be able to do so only at lower than desired
prices, which may prevent future investment in our common stock.

The existence of a significant number of securities
exercisable for, or convertible into, shares of our common stock may reduce
your percentage ownership in us.

As of
December 31, 2006, we had outstanding convertible debt, preferred stock,
options and warrants which are exercisable for, or convertible into, an
aggregate of approximately 45,567,000 shares of common stock. In addition,
certain of these securities contain provisions which would increase the number
of shares of common stock issuable upon exercise or conversion thereof if we
were to issue shares of common stock or other securities with an effective
purchase price of less than $4.00 per share. Furthermore, certain of these
securities contain conversion or exercise prices that are measured as a
discount to our initial offering price, if one were to occur. The issuance of
additional shares of common stock upon the exercise or conversion of these
securities will reduce your percentage ownership in us.

27

---



Our preferred
stockholders have control over our actions.

For so long
as our Preferred Stock remains outstanding, the holders of each class of our
Preferred Stock have the right to approve the creation of any new class of
capital stock (or the modification of the terms of any existing class of
capital stock) having rights or preferences that would adversely effect or be
detrimental to the holders of each such existing class of Preferred stock. In
addition, pursuant to our Shareholders Agreement, dated February 28, 2002, we
may not sell or dispose of all or substantially all of our assets or consummate
certain mergers or take certain other material actions without the approval of
New Frontiers Capital, LLC, our largest holder of Series E Convertible
Preferred Stock. In addition, certain holders of our Series E Convertible
Preferred Stock and holders of our 10% Secured Convertible Promissory Notes
have pre-emptive rights, which entitle such holders to acquire up to their pro
rata share of new equity securities offered by us. These approval rights and
pre-emptive rights could inhibit our ability to raise additional capital or
undertake transactions that our board of directors may deem to be in the best
interests of our stockholders. In addition to the foregoing, the holders of our
Series E Convertible Preferred Stock, when combined with their various other
holdings in us, currently have 26.3% voting control.

|        |                        
|------- | -----------------------
|ITEM 2. | DESCRIPTION OF PROPERTY

We
conduct our principal operations at leased facilities described below. We
believe that our existing facilities are suitable for their use and will be
adequate to meet our needs for the foreseeable future. We also believe that any
additional space needed in the future will be available at commercially reasonable
rates.

|                                                                                     |  |                                                                              |  |                        |  |                                     |  |                                
|------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------- |  | ---------------------- |  | ----------------------------------- |  | -------------------------------
|Entity Name; Location                                                                |  | Use                                                                          |  | Square
  Feet
  Leased |  | 2006 Annual 
  Base Rent 
  Amounts |  | Term of Lease                  
|                                                                                     |  |                                                                              |  |                        |  |                                     |  |                                
|MetaMorphix,
  Inc.
  8000 Virginia Manor 
  Road
  Suite 140
  Beltsville, MD 20705 |  | Corp.
  Headquarters, Growth Differentiation Factors, Research & Development |  | 30,380                 |  | $463,427                            |  | Lease
  expires April 30, 2012.
|                                                                                     |  |                                                                              |  |                        |  |                                     |  |                                
|MMI
  Genomics, Inc.
  1756 Picasso Avenue
  Davis, CA 95616                         |  | Genomics
  Research and Operations                                           |  | 12,104                 |  | $268,339                            |  | Lease
  expires May 31, 2012.  

28

---



|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

On
June 20, 2005, we became aware of a lawsuit and claim against us from Regions
Bank for $731,000. Samuel R. Dunlap, a former Company director, who recently
exited bankruptcy, pledged a $731,000 Promissory Note made by us to Mr. Dunlap
as security for a $5.0 million loan from Regions Bank. Regions Bank has sued
    us for payment of this Note. The amount that is owed is in dispute (due to
    offsets made at Mr. Dunlaps direction prior to the bankruptcy). We
    also contend that the conditions precedent to the maturity of the loan have
    not occurred. We note that our December 31, 2006 consolidated condensed financial
    statements reflect principal of $625,498 being owed as of such date (reflecting
    the offsets). Regions Bank asserts that we (in the operation of our securities
    transfer function) and our legal counsel enabled Mr. Dunlap to pledge one
    of his several Warrants to another creditor in breach of an already existing
    Commercial Pledge Agreement between the Bank and Mr. Dunlap. This litigation
    remains in the discovery phase at this time. It was filed in the Superior
    Court of Hall County, State Court of Georgia. We will indemnify and hold
    harmless our legal counsel, who is also our Secretary, in this matter.

On
March 15, 2007, we became aware of a claim against us from the holders of two
    10% convertible promissory notes, for breaches of contract for non-repayment
    of principal and interest due on July 31, 2006. The original amount of the
    notes was $150,000 and $50,000, and principal currently past due is $120,000
    and $50,000. The amount of the claim, which includes principal and accrued
    interest through the date of the claim, is $200,074. The claim was filed
    in the Supreme Court of the State of New York. We have the amounts recorded
    as liabilities on the financial statements at December 31, 2006.

In
    addition, during 2006, we settled and dismissed eight collection lawsuits
    for a total cost of $257,503. At present, there are no such cases pending,
except for the actions noted above to collect on the promissory notes.

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

No
matters were submitted to a vote of our stockholders during the fiscal quarter
ended December 31, 2006.

PART II

|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED
  STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Listing.

Our
shares of common stock are not listed on any stock market or exchange.

Market
Information.

As
of December 31, 2006, we have warrants outstanding to purchase 9,979,840 shares
of our common stock, options outstanding to purchase 10,550,729 shares of our
common stock, and convertible notes which may be converted into 9,154,765
shares of our common stock.

Any
person who may be deemed an affiliate of ours (as the term affiliate is
defined in the Exchange Act of 1934) may be eligible to sell their shares
pursuant to the provisions of Rule 144 promulgated under the Securities Act of
1933. Generally, Rule 144 provides that a person or persons who acquired stock
in a non-public transaction and has owned the stock for more than one year
prior to the

29

---



proposed sale
may sell within a three month period no more than one per cent of the then
issued and outstanding shares of common stock or the average weekly reported
trading volume on all national securities exchange and through NASDAQ during
the four calendar weeks preceding the proposed sale. At December 31, 2006,
20,369,718 out of 21,075,141 shares of our common stock were held by investors
who have owned the shares for more than one year. Any shares sold pursuant to
Rule 144 may adversely affect the market price of our common stock. Sales under
Rule 144 may adversely affect the market price for our shares in any market
that may exist.

Holders
of Record.

As
of December 31, 2006, 21,075,141 shares of common stock were issued and
outstanding and held by approximately 550 holders of record.

Dividends.

We
have not declared any dividends on our common stock to date, and we do not
intend to declare dividends on our common stock in the foreseeable future. We
currently intend to retain any future earnings to fund the development and
growth of our business.

The
terms of our 12.5% Convertible Secured Promissory Notes restrict us from
declaring or paying dividends, except as set forth in the respective
certificate of designation. No other current debt agreement has a restriction
on dividends.

Equity
Compensation Plan Information.

The
following table provides information as of December 31, 2006 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plans:

|                                                                    |  |                                                                                             |            |                                                                     |   |                                                                                                       |  |  |        | 
|------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | ---------- | ------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------- |  |  | ------ | 
|Plan category                                                       |  | Number of 
  securities to be 
  issued upon exercise 
  of outstanding 
  options/warrants |            | Weighted-average exercise price of
  outstanding
  options/warrants |   | Number of securities
  remaining available 
  for future issuance
  under equity
  compensation plans | 
|                                                                    |  |                                                                                             |            |                                                                     |   |                                                                                                       | 
|Equity compensation plans approved by
  security holders (1)(2)     |  |                                                                                             | 7,312,155  |                                                                     | $ | 3.67                                                                                                  |  |  |       | 
|Equity compensation plans not approved by
  security holders (1)(3) |  |                                                                                             | 3,238,575  |                                                                     |   | 3.63                                                                                                  |  |  | 89,999 | 
|                                                                    |  |                                                                                             |            |                                                                     |   |                                                                                                       |  |  |        | 
|Total                                                               |  |                                                                                             | 10,550,730 |                                                                     | $ | 3.66                                                                                                  |  |  | 89,999 | 
|                                                                    |  |                                                                                             |            |                                                                     |   |                                                                                                       |  |  |        | 

---

|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                               
|(1) | Please see
  Item 6 Executive Compensation  Employees Stock Option Plans for a
  description of the material features of each of our plans.
|    |                                                                                                                                               
|(2) | In November
  2006, our 1996 Employees Incentive Stock Option Plan expired.                                                                   
|    |                                                                                                                                               
|(3) | This
  represents the Non-Qualified Plan, which is not required to be approved by
  security holders.                                         

30

---



The
following sets forth information regarding sales of our unregistered securities
during the last year:

In
December 2005 through December 2006, we issued an aggregate of $13,807,763
principal amount of 10.0% Secured Convertible Promissory Notes and warrants to
purchase 1,932,600 shares of common stock to a group of accredited investors in
a private placement for aggregate consideration of $13,712,385. We incurred
issue costs of $976,756 for legal fees and commissions, and issue costs of
$83,777 relating to warrants to purchase 149,458 shares of our common stock
which were issued to financial advisors in connection with this offering.

|        |                                                          
|------- | ---------------------------------------------------------
|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The
following discussion and analysis of our consolidated financial condition and
results of operations should be read in conjunction with our audited
consolidated financial statements and related notes included in this Form
10-KSB. This discussion and analysis contains forward-looking statements that
are subject to risks, uncertainties and other factors, including, but not
limited to, those discussed under Risk Factors and elsewhere in this Form
10-KSB, that could cause our actual results, performance, prospects or
opportunities to differ materially from those expressed in, or implied by,
these forward-looking statements. See Forward-Looking Statements.

Overview

We
are a life science Company. We use our two fundamental proprietary
technologiesanimal genomics and GDFs to discover, develop and commercialize
products we believe will increase livestock quality and production efficiency,
improve companion animal health and potentially treat human muscle degenerative
diseases and metabolic disorders.

We
commenced operations on September 2, 1994. Our corporate headquarters in
Beltsville, Maryland (administrative segment) is also the primary location for
our GDF research and development effort. MMI Genomics Inc., in Davis,
California, our wholly owned subsidiary, which we acquired from Celera in
February 2002, is the primary location responsible for our ongoing genotyping
business and genomic research activities.

Genomics
refers to the sequencing and analysis of the genetic makeup of an organism. Our
proprietary animal genomics technologies are intended to provide trait
identification and predictive diagnostic tools for producers and breeders of
beef and dairy cattle, swine, and poultry. We believe that these tools will
enable livestock producers and breeders and feedlot operators to improve
substantially their production efficiency and help them meet consumer demand
for high quality meat products. We believe that animal genomics also has
potential for diagnostic use in companion animals, including dogs, cats and
horses, to detect disease predisposition, and behavioral and performance
traits. Commercialization of these diagnostic products for livestock production
and animal health does not require FDA approval. Our near-term products are tools
that do not involve any animal pharmaceutical drugs or genetic altering of the
animal.

We
have established several relationships through which we expect to commercialize
our animal genomics technology. We have exclusive development and marketing
agreements with Cargill Incorporated, or Cargill, the worlds second largest
beef processor and feedlot operator, the Monsanto Company, or Monsanto, a world
leader in swine breeding, and Hubbard, a leading broiler chicken breeder. We
describe these agreements in more detail under Licenses, Acquisitions, and
Collaborative

31

---



Agreements.
We also have agreements to provide DNA testing services for the American Kennel
Club, the worlds largest canine registry, United Kennel Club, American Angus
Association, the worlds largest beef cattle registry, Red Angus Association of
America, American Limousin Association, and American Bucking Bull Association.
We generate operating revenues from various genotyping services for the clients
noted above.

Our
strategy is to develop revenue from the genomics near term opportunities,
particularly the livestock, trait identification tool, breeding identification
tool and canine breed specific tool. In the medium term we expect to generate
additional revenue from our swine breeding tools and in the long-term from our
GDF technology. With regard to our GDF technology, our strategy has remained to
license out our technology to large pharmaceuticals, which have both the
financial resources and research experience to develop these products in a
timely and cost effective manner.

We
believe that to be financially sound and successful, in addition to having
short, medium and long revenue objectives, we must be able to generate revenues
from various activities for purposes of risk diversification.

We
have also derived revenues from upfront and milestone payments from our
corporate partners, including Cargill, Wyeth and Monsanto.

We
analyze our business and operations in terms of two business segmentsGDFs
(Beltsville, MD), and Animal Genomics (Davis, CA.). Both segments are dedicated
to discovering and commercializing multiple technology platforms to improve the
food supply and human health. In September 2005, we made the decision to
consolidate the research efforts of our Immunopharmaceutical segment into the
GDF segment in order to maximize efficiency, and our facility in Canada was
closed. In connection with this closure, we accrued approximately $267,000 at
September 30, 2005 in severance benefits for the 11 employees who were
involuntarily terminated. Of the original severance accrual, $198,000 remains
accrued and unpaid at December 31, 2006.

Critical Accounting Policies

The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates are based on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. Actual results could differ from those estimates.
While our significant accounting policies are described in more detail in the
notes to our consolidated financial statements, we believe the following
accounting policies to be critical to the judgments and estimates used in the
preparation of our consolidated financial statements.

Revenue Recognition

Our revenue
recognition policies are in accordance with the Securities and Exchange
Commissions (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104,
Revenue Recognition. We have license and development agreements with several
pharmaceutical, biotechnology, and food production companies. The agreements typically
include nonrefundable license fees paid to us, funding of research and
development by the counterparty, payments to us based upon achievement of
certain milestones and royalties on net product sales. Revenues, including
nonrefundable license fees, are recognized when we have a contractual right to
receive such payments, provided a contractual arrangement exists, the contract

32

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price is fixed and determinable, the collection of the resulting
receivable is reasonably assured, and we have no further performance
obligations under the arrangement.

When we
have performance obligations under an arrangement, revenue recognition is
deferred until the obligations are fulfilled. Where our level-of-effort is
relatively constant over the performance period, the revenue is recognized on a
straight-line basis. The straight-line basis is used when performance
corresponds to the passage of time, such as exclusivity rights. Where our
level-of-effort is not relatively constant over the performance period, we
recognize revenue on a systematic basis based on when effort is expended. The
systematic basis includes cost based estimates to establish level-of-effort
progress.

Research
and development revenues and other revenues from milestone payments are
deferred until achievement of the related milestone; provided we have no
continuing performance obligations and the milestone payment is reasonable in
relation to the effort expended or the risk associated with its achievement.
Typical terms of these agreements with collaborative partners include work
plans to jointly develop and commercialize products. Achievement of steps
within the work plan triggers milestone payments. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue over
the term of the arrangement as we complete our performance obligations. We
allocate the consideration to each of the deliverables (i.e. milestones) on a
contract though an analysis of costs incurred as they related to specific steps
with a work plan. This treatment is in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition, Selected Revenue Recognition Issues 
Section 3: Delivery and Performance,as the costs incurred coincide with
proportionate performance of the services.

We defer
upfront payments received until such a time as they are earned as the products
and/or services are delivered and/or performed over the term of the
arrangement. The revenue is then recognized systematically over the periods that
the fees are earned. In June 2004, we entered into a Swine
Improvement Agreement with Monsanto Company, which gives Monsanto an exclusive
royalty-based license to use our porcine genetic database, which consists of
over 600,000 SNPs, and the associated intellectual property. We will provide
consulting and support in the use of its database resource. Monsanto will be
obligated to pay royalties to us if the research performed using the database
creates product enhancements which generate increased revenues. We received
$1,000,000 from Monsanto in June 2004 as an access fee for the database. We
recorded deferred revenue upon receipt of the payment, and are amortizing the
fee on a straight-line basis over the license exclusivity period of 5 years. We
recognized revenue of $200,004, $200,004 and $116,669 for the years ended
December 31, 2006, 2005 and 2004, respectively, and the remainder is recorded
as deferred revenue at December 31, 2006.

In
2002, we entered into Letters of Intent and Limited License and Option
Agreements with two chicken producers for use of Myostatin technology within
the United States. Additionally, one of the chicken producers has rights to
utilize the Myostatin technology within Mexico. The Agreements include an
option to license Myostatin technology in chicken on predefined terms upon the
successful completion of large-scale trials. For the option to the technology,
both chicken production companies have paid us $250,000. License fees to cover
development costs are to be paid once a product candidate has been developed
and tested by the parties. Additionally, we are to receive a portion of the
value added by the technology on a per treated bird basis. The $500,000 in
up-front fees was deferred upon receipt, and to date, has not been earned by us
since the product has yet to be delivered. The fees were recorded as deferred
revenue at December 31, 2006 and 2005.

We
currently provide parentage and genotyping services. These services are
provided to the livestock and companion animal industries and are performed by
using a DNA-based test on samples provided. We recognize revenue for genotyping
services at the time the services are provided on a test by

33

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test basis and no additional performance is required by us. The revenue
is then considered realized and earned. Amounts received prior to being earned
are recorded as deferred revenue until earned.

For
    our Canine HeritageÔ Breed Test
product, we sell the test kits for a price to be paid up-front by the customer.
The revenue is deferred until the test sample results are complete and sent to
the customer.

Impairment of Long-Lived Assets

We
evaluate our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. The calculation of future net cash flows
involves estimates and assumptions which could be impacted by changes in the
economic climate, product acceptance, or changes in costs. Any impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less estimated costs to sell.

Stock-Based Compensation

In
2003, we elected to adopt the fair value based method of accounting for
employee stock options as set forth in Statement of Financial Accounting
Standard, or SFAS, No. 123, Accounting for Stock-Based Compensation, using the
retroactive restatement method described in SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure.Under the fair value
based method of accounting, compensation cost is measured at the grant date
based on the value of the award and is recognized as expense over the vesting
period.

Effective
January 1, 2004, we adopted SFAS No. 123(R), Share-Based Payment.SFAS No.
123(R) which, among other things, requires nonpublic entities to use a
calculated value, similar to the fair value based method of accounting set
forth in SFAS No. 123. The adoption of SFAS No. 123(R) did not have a material
impact on our results of operations or financial position.

We
also follow guidance as prescribed in Emerging Issues Task Force Abstract, or
EITF, No. 96-18, Accounting for equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods and
Services.

The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the weighted average assumptions
in accordance with SFAS No. 123(R). Expected volatility is based on the average
historical volatilities on the stock of similar companies in the agricultural
and biotech industries that are publicly traded. The average historical
volatilities were calculated using the time period corresponding to the vesting
period. We use historical data to estimate a weighted-average percentage of
forfeitures within the valuation model. The expected term of options granted
represents the period of time the options granted are expected to be
outstanding. The risk free rate for periods within the contractual life of the
option is based on the U.S. Treasury constant maturities in effect at the time
of the grant and for instruments with a life equal to the vesting period of the
grant.

Management,
with the assistance from a valuation specialist, determined the fair value of
our common stock for each quarter during the period January 1, 2005 through
September 30, 2006 (valuations are calculated through the end of the prior
quarter in order to ensure complete financial information is

34

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used). The
analyses were performed retrospectively and not contemporaneously, because
during this period, our efforts were focused on product development and filing
our initial 10-SB filing. As a result, our financial and managerial resources
were limited. The valuation analyses considered the guidance set forth in the
AICPA Audit and Accounting Practice Aid Series, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation (the Guide). Accordingly,
the valuation allocates the value of the business enterprise among our classes
of stock with consideration given to the methodologies prescribed in the Guide.

Determining
the fair value of our stock requires making complex and subjective judgments.
The valuation of the business enterprise is based on a discounted future cash
flow approach that uses managements estimates of revenue, anticipated growth
rates, and estimated costs. The estimates are consistent with the plans and
estimates being used to manage the business. There is inherent uncertainty in
making these estimates. The risks associated with achieving the forecasts were
assessed in the selection of the appropriate discount rates, as well as
probability weighting certain revenue based on the likelihood of achieving
specific milestones. If different discount rates and probabilities had been
used, the valuations would have been different.

The
enterprise value was then allocated to preferred and common shares. The
allocation of value to the preferred stock was based on treating the preferred
shares as if they were converted to common stock. Therefore, the value of the
preferred stock was estimated as the fully diluted per share value of equity as
if all preferred shares were converted to common shares. A discount for lack of
marketability was applied to the portion of business enterprise allocated to
the common stock. The discount was based on specific characteristics of the
underlying stock. Had a different methodology been used to allocate the
business enterprise value or a different discount for lack of marketability
been used, the allocations between preferred and common shares and the
resulting value of common stock would have been different.

The
results of the analyses indicated the following fair values (fair values calculated
for the dates below are utilized for activity in the subsequent quarter):

|                   |  |                                            |   |      |  |  |  | 
|------------------ |  | ------------------------------------------ | - | ---- |  |  |  | 
|Date               |  | Fair Value
  per
  share of
  Common Stock |  
|                   |  |                                            |   |     
|                   |  |                                            |  
|March 31, 2005     |  |                                            | $ | 3.15 |  | 
|                  
|June 30, 2005      |  |                                            | $ | 3.00 |  | 
|                  
|September 30, 2005 |  |                                            | $ | 2.95 |  | 
|                  
|December 31, 2005  |  |                                            | $ | 3.20 |  | 
|                  
|March 31, 2006     |  |                                            | $ | 3.15 |  | 
|                  
|June 30, 2006      |  |                                            | $ | 3.25 |  | 
|                  
|September 30, 2006 |  |                                            | $ | 3.35 |  | 

These
fair value amounts were used in our Black-Scholes option pricing calculations
in order to determine the proper stock option and warrant accounting.
Valuations are calculated through the end of the prior quarter in order to
ensure complete financial information is used.

35

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Summary of
Contractual Obligations

The
following table summarizes our contractual obligations as of December 31, 2006:

|                                                                                                |  |                        |            |                    |   |            |  |           |            |                     |   |           |  |   |           | 
|----------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ------------------ | - | ---------- |  | --------- | ---------- | ------------------- | - | --------- |  | - | --------- | 
|                                                                                                |  | Payments due by period |           
|                                                                                                |  |                        |           
|                                                                                                |  | Total                  |            | Less than 1
  year |   | 1-3 years  |  | 3-5 years |            | More than 5
  years |  
|Debt Obligations  includes short-term and long-term promissory
  notes, gross of debt discount |  | $                      | 40,974,953 |                    | $ | 4,439,389  |  | $         | 32,208,394 |                     | $ | 4,327,170 |  | $ |          | 
|                                                                                               
|Capital
  lease obligations  for equipment                                                     |  |                        | 156,178    |                    |   | 42,390     |  |           | 71,545     |                     |   | 34,960    |  |   | 7,283     | 
|                                                                                               
|Employment
  related obligations (1)                                                            |  |                        | 4,912,670  |                    |   | 4,912,670  |  |           |           |                     |   |          |  |   |          | 
|                                                                                               
|Interest
  obligations  on promissory notes                                                    |  |                        | 5,376,299  |                    |   | 2,903,556  |  |           | 1,940,052  |                     |   | 532,691   |  |   |          | 
|                                                                                               
|Operating
  lease obligations  property and other leases                                       |  |                        | 4,184,621  |                    |   | 863,328    |  |           | 1,512,188  |                     |   | 1,632,856 |  |   | 176,249   | 
|                                                                                               
|Celera
  purchase obligation  minimum royalties due                                            |  |                        | 6,196,648  |                    |   | 2,525,712  |  |           | 580,112    |                     |   | 650,633   |  |   | 2,440,191 | 
|                                                                                                |  |                        |            |                    |   |            |  |           |            |                     |   |           |  |   |           | 
|                                                                                               
|                                                                                                |  | $                      | 61,801,369 |                    | $ | 15,687,045 |  | $         | 36,312,291 |                     | $ | 7,178,310 |  | $ | 2,623,723 | 
|                                                                                                |  |                        |            |                    |   |            |  |           |            |                     |   |           |  |   |           | 

(1) Employment
related obligations consist of employment contracts of $1,009,000 (agreements
with four employees, including three executives and one scientist, which
require payments by us totaling approximately $1,009,000 annually based on
their current salaries), accrued bonuses of $3,411,988, accrued salaries of
$241,706, and accrued severance of $249,976.

Description of Our Revenues, Costs and
Expenses

Revenues

Revenues
consist of fees for our parentage and identification genotyping services and
upfront and milestone payments from our collaborative partners and licensees.
We have deferred revenue recognition for upfront and milestone payments where
we have future performance obligations.

Research
and Development Expenses

Research and development
expenses consist primarily of salaries and related expenses for personnel, fees
paid to professional service providers in conjunction with independently
monitoring our clinical trials and acquiring and evaluating data in conjunction
with our clinical trials, costs of contract manufacturing services, costs of
materials used in clinical trials and research and development, depreciation of
capital resources used to develop our products, costs of facilities and the
legal costs of

36

---



pursuing patent protection
of our intellectual property. Research
and development costs also include stock-based compensation expense and
collaborative agreements requiring us to pay periodic license fees, research
payments, additional payments, royalty fees, and milestone payments. We expense research and development costs as
incurred. We expect our research and development expenses to increase as we
continue to develop our product candidates. From inception through December 31,
2006, we expensed an aggregate of $34.0 million, including stock-based
compensation expenses of $3.4 million, on research and development.

General
and Administrative Expenses

General
and administrative expenses consist primarily of salaries and other related
costs for personnel serving executive, finance, sales and marketing, business
development, information technology and human resource functions. Other costs
include facility costs not otherwise included in research and development expense
and professional fees for legal and accounting services. We expect that our
general and administrative expenses will increase as we add personnel and
become subject to the reporting obligations applicable to public companies.
From inception through December 31, 2006, we expensed an aggregate of $57.5
million, including stock-based compensation expenses of $17.6 million, on
general and administrative expenses.

Share-Based
Payments

In
2003, we elected to adopt the fair value based method of accounting for
employee stock options as set forth in Statement of Financial Accounting
Standard, or SFAS, No. 123,Accounting for Stock-Based Compensation,
using the retroactive restatement method described in SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. Under the
fair value based method of accounting, compensation cost is measured at the
grant date based on the value of the award and is recognized as expense over
the vesting period.

Effective
January 1, 2004, we adopted SFAS No. 123(R), Share-Based Payment. SFAS
No. 123(R) which, among other things, requires nonpublic entities to use a
calculated value, similar to the fair value based method of accounting set
forth in SFAS No. 123. The adoption of SFAS No. 123(R) did not have a material
impact on our results of operations or financial position.

We
utilize the Black-Scholes option pricing valuation model to calculate the value
of share-based payments in accordance with SFAS No. 123(R), or calculated
value.

Compensation
expense for options granted to employees amounted to $1,981,830, $2,435,631,
and $2,241,091 for the years ended December 31, 2006, 2005, and 2004,
respectively. Compensation expense for options granted to employees are classified
between research and development and general and administrative expense based
on employee job function.

Compensation
expense for options granted to non-employees amounted to $740,200, $951,734,
and $1,119,224 for the years ended December 31, 2006, 2005, and 2004,
respectively.

37

---



Results of Operations

The
following is a summary of our operating results for the three years ended
December 31:

|                                                                 |  |      |             |      |   |             |   |   |             |  
|---------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                 |  | 2006 |             | 2005 |   | 2004        |  
|                                                                 |  |      |             |      |   |             |  
|                                                                
|Revenue                                                          |  |      |             |      |   |             |   |   |             |  
|                                                                
|Cattle
  parentage and identification genotyping service revenue |  | $    | 882,787     |      | $ | 876,389     |   | $ | 705,916     |  
|                                                                
|Canine
  parentage and identification genotyping service revenue |  |      | 1,401,554   |      |   | 1,265,403   |   |   | 1,229,711   |  
|                                                                
|Cattle
  feedlot genotyping revenue                              |  |      | 416,903     |      |   |            |   |   |            |  
|                                                                
|Cattle
  Tru-Polled® genotyping revenue                          |  |      | 293,042     |      |   | 164,268     |   |   |            |  
|                                                                
|Swine royalty
  revenue                                          |  |      | 97,788      |      |   |            |   |   |            |  
|                                                                
|Genomic
  research project milestone revenue                     |  |      |            |      |   |            |   |   | 3,150,000   |  
|                                                                
|Growth
  differentiation research project milestone revenue      |  |      |            |      |   |            |   |   | 500,000     |  
|                                                                
|License fee
  revenue                                            |  |      | 210,004     |      |   | 210,004     |   |   | 119,169     |  
|                                                                
|Other
  genomic service revenue                                  |  |      | 53,506      |      |   |            |   |   |            |  
|                                                                 |  |      |             |      |   |             |   |   |             |  
|                                                                
|Total Revenue                                                    |  | $    | 3,355,585   |      | $ | 2,516,064   |   | $ | 5,704,796   |  
|                                                                
|Cost of
  revenue                                                |  |      | (2,177,672  | )    |   | (1,552,312  | ) |   | (5,306,663  | )
|                                                                
|Research and
  development expense                               |  |      | (2,599,724  | )    |   | (4,311,880  | ) |   | (4,364,421  | )
|                                                                
|General and
  administrative expense                             |  |      | (8,314,841  | )    |   | (10,041,448 | ) |   | (10,698,706 | )
|                                                                
|Depreciation
  and amortization expense                          |  |      | (343,003    | )    |   | (2,432,992  | ) |   | (12,991,210 | )
|                                                                
|Interest
  expense and accretion of debt discount                |  |      | (6,643,336  | )    |   | (5,384,033  | ) |   | (18,984,610 | )
|                                                                
|Debt
  conversion expense                                        |  |      |            |      |   | (93,696     | ) |   | (3,281,462  | )
|                                                                
|Debt issue
  costs                                               |  |      | (1,938,189  | )    |   | (2,119,070  | ) |   | (2,297,702  | )
|                                                                
|Other income
  (loss)                                            |  |      | (16,038     | )    |   | (192,457    | ) |   | 36,516      |  
|                                                                 |  |      |             |      |   |             |   |   |             |  
|                                                                
|Net loss                                                         |  | $    | (18,677,218 | )    | $ | (23,611,824 | ) | $ | (52,183,462 | )
|                                                                 |  |      |             |      |   |             |   |   |             |  

Comparison
of the Years Ended December 31, 2006 and 2005

Revenue. Our revenue for the year
ended December 31,
2006 was $3,355,585, which was an increase of $839,521, or 33.4%, from the
$2,516,064 during the same period of 2005, primarily due to a steady increase
in the cattle and canine parentage identification genotyping service revenue of
$142,549, as well as new genotyping revenue of $416,903 from the Cargill
feedlot program. The Tru-Polled

38

---



product was formally
commercialized in 2006 and had an increase of $128,774. We also earned royalty
revenue from Monsanto during 2006, as they introduced new swine product lines
which utilize our technology.

We
expect revenue from the livestock genomics business to increase during the next
two years as a result of the commercialization of the technologies currently
under collaborative research projects. However, there is no guarantee such
increase will ever take place and investors are cautioned against placing undue
certainty on our projections.

Cost of
Revenues. Cost of
revenues for the year ended December 31, 2006 were $2,177,672, a $625,360, or
40.3% increase from the $1,552,312 for 2005. Gross profit as a percentage of
revenues decreased from 38.3% in 2005 to 35.1% in 2006 due to the lower sample
volumes associated with newly commercialized products. We expect the gross
margin will increase in the future as sample volumes increase and production
efficiencies are achieved.

Research
and Development.
Research and development costs were $2,599,724 for the year ended December 31,
2006 compared to $4,311,880 for 2005. This $1,712,156, or 39.7%, decrease was
primarily due to lower employee related costs of $674,172 as a result of our
closure of the Canadian facility in the third quarter of 2005, as well as a
$970,667 decrease in employee related costs resulting from the reduction in our
Beltsville research team.

General
and Administrative.
General and administrative costs were $8,314,841 for the year ended December
31, 2006 compared to $10,041,448 for 2005. This $1,726,607, or 17.2%, decrease
was primarily due to a decrease in employee related costs. The decrease in
employee related costs includes a $538,000 reduction in stock compensation
expense and a $1,076,000 reduction in salary, bonus, taxes, and benefit
expenses due to changes in staffing.

Depreciation
and Amortization.
Depreciation and amortization decreased $2,089,989, or 85.9%, to $343,003 for
the year ended December 31, 2006 from $2,432,992 for 2005 primarily due to the
completion of the intangible asset amortization in February 2005. The
intangible assets were related to the intellectual property associated with the
Celera genomics acquisition in February 2002. The amortization expense relating
to this intangible asset was approximately $1.0 million per month.

Interest
Expense. Interest
expense and accretion of debt discount increased $1,259,303 to $6,643,336 for
the year ended December 31, 2006 from $5,384,033 for 2005. This 23.4% increase
was primarily due to the increase in the amount of promissory notes
outstanding. The Company generated net proceeds from 10% note issuances of $9.2
million in 2006. Additionally, interest expense increased due to the additional
12.5% notes which were issued to satisfy accrued interest payable.

Debt
Conversion Expense. There was no debt conversion expense in 2006 as no debt was converted to equity
during the year. In 2005, holders of our 8% Secured Convertible Promissory
Notes and our 10.9% Secured Convertible Promissory Notes converted $143,992 of
principal and interest into 16,882 shares of our Series G Convertible Preferred
Stock and warrants to purchase 21,368 shares of our common stock. The 2005
expense represents the fair value of the securities and warrants issued in
excess of the fair value of securities issuable pursuant to the original
conversion terms of those notes.

Debt Issue
Costs. Debt issue costs
decreased $180,881, or 8.5%, to $1,938,189 for the year ended December 31, 2006
from $2,119,070 for the same period of 2005. This decrease is due to
commissions on and the calculated value of warrants issued with short-term
loans in 2005. Debt issue costs associated with long-term notes issued in 2006
were deferred and will be amortized over the 3 year life of the notes.

39

---



Other
Expense.Other expense
was $16,038 for the year ended December 31, 2006 as compared to $192,457 for
2005. This change was primarily due to the loss recorded on the disposal of
assets from MetaMorphix Canada, Inc. in 2005.

Net Loss. Net loss decreased
$4,934,606, or 20.9%, for
the year ended December 31, 2006 from the year ended December 31, 2005, due to
a combination of the factors described above.

Comparison
of the Years Ended December 31, 2005 and 2004

Revenue. Our revenue for the year
ended December 31,
2005 was $2,516,064, which was a decrease of $3,188,732, or 55.9%, from the
$5,704,796 during the same period of 2004, primarily due to the difference in
genomic research project milestone revenue. In 2004, we earned $3,150,000 in
milestone revenue relating to the Cargill collaborative research project.
Revenue from our parentage and identification genotyping services increased
$364,205, or 19.6%, in 2005 from 2004 due to the increased volume of tests
services performed.

Cost of
Revenues. Cost of
revenues for the year ended December 31, 2005 were $1,552,312, a $3,754,351, or
70.7% decrease from the $5,306,663 for 2004. This decrease was primarily
related to level of personnel costs and consumables used in 2004 to support the
Cargill collaborative research project, which ended in 2004. The personnel
costs and consumables in 2004 were used to complete the project steps, which
triggered milestone revenue recognition throughout the year.

Research
and Development.
Research and development costs were $4,311,880 for the year ended December 31,
2005 compared to $4,364,421 for 2004. This $52,541, or 1.2%, increase was
primarily due to additional personnel costs (representing those employees who
had previously worked on the Cargill project and were classified as cost of
revenue) and severance accruals for MetaMorphix and MetaMorphix Canada R&D
employees, partially offset by lower stock compensation expenses for employees,
lower contractual analytic services, and lower patent legal fees.

General
and Administrative.
General and administrative costs were $10,041,448 for the year ended December
31, 2005 compared to $10,698,706 for 2004. This $657,258, or 6.1%, decrease was
primarily due to a decrease in employee related expenses of approximately
$78,000, a decrease in professional and consulting fees of approximately
$751,000, partially offset by an increase of allocated expenses (e.g. rents,
utilities, and insurance) attributable to general and administrative expenses
of approximately $555,000.

Depreciation
and Amortization.
Depreciation and amortization decreased $10,558,218, or 81.3%, to $2,432,992
for the year ended December 31, 2005 from $12,991,210 for 2004 primarily due to
the completion of the intangible asset amortization in February 2005. The
intangible assets were related to the intellectual property associated with the
Celera genomics acquisition in February 2002. The amortization expense relating
to this intangible asset was approximately $3.2 million per quarter.

Interest
Expense. Interest
expense and accretion of debt discount decreased $13,600,577 to $5,384,033 for
the year ended December 31, 2005 from $18,984,610 for 2004. This 71.6% decrease
was primarily due to the decrease in the number and value of penalty warrants
issued as well as the value of contingently adjustable terms on warrants
related to the 12.5% Convertible Secured Promissory Notes. The penalty warrants
issued in the second quarter of 2004 primarily related to the Series C, D, and
E bridge loans.

Debt
Conversion Expense. Debt
conversion expense was $93,696 for the year ended December 31, 2005 compared to
$3,281,462 for 2004. This $3,187,766, or 97.1%, decrease relates to the volume
of

40

---



conversion that took place
during the periods. In the first quarter of 2005, holders of our 8% Secured
Convertible Promissory Notes and our 10.9% Secured Convertible Promissory Notes
converted $143,992 of principal and interest into shares of our Series G
Convertible Preferred Stock and warrants to purchase shares of our common
stock. In the same period of 2004, holders of our 8% Secured Convertible
Promissory Notes and our 10.9% Secured Convertible Promissory Notes converted
$3,805,539 of principal and interest into shares of our Series F Convertible
Preferred Stock and warrants to purchase shares of our common stock. The
expense represents the fair value of the securities and warrants issued in
excess of the fair value of securities issuable pursuant to the original
conversion terms of those notes.

Debt Issue
Costs. Debt issue costs
decreased $178,632, or 7.8%, to $2,119,070 for the year ended December 31, 2005
from $2,297,702 for the same period of 2004. This decrease is due to debt issue
costs relating to short term debt in 2004, which consisted of bridge
conversions and a rights offering, offset by a full years worth of deferred
debt issue cost amortization in 2005.

Other
Expense.Other expense
was $192,457 for the year ended December 31, 2005 as compared to other income
of $36,516 for 2004. This change was primarily due to the loss recorded on the
disposal of assets from MetaMorphix Canada, Inc.

Net Loss. Net loss decreased
$28,571,638, or 54.8%, for
the year ended December 31, 2005 from the year ended December 31, 2004, due to
a combination of the factors described above.

Beneficial Conversion Feature

The
12.5% Convertible Secured Promissory Notes issued in 2004 and 2003, the shares
of Series F Convertible Preferred Stock issued in 2004 from the rights
offering, and the shares of Series G Convertible Preferred Stock issued in 2004
all contained embedded beneficial conversion features as defined in No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios. The calculated value associated with the beneficial conversion feature was
$71,932 for the Series F Convertible Preferred Stock and $1,042,198 for the
Series G Convertible Preferred Stock. We immediately recognized the beneficial
conversion feature of the preferred shares as a deemed dividend in 2004.

For
the 12.5% Convertible Secured Promissory Notes, the value of this beneficial
conversion feature was calculated to be $2,136,848 and $1,830,143 relating to
the notes issued in 2004 and 2003, respectively. Allocating debt issuance
proceeds to the beneficial conversion feature resulted in the debt being
recorded at a discount which will be amortized to interest expense over the
life of the debt.

The
10.0% Secured Convertible Promissory Notes and the shares of Series G
Convertible Preferred Stock issued in 2005 and 2006 did not contain embedded
beneficial conversion features.

Liquidity and Capital Resources

Since
inception, we have financed cash flow requirements through the issuance of
common and preferred stock for cash and services and the issuance of long- and
short-term notes. Often, we issue warrants together with such securities. We
are currently experiencing substantial cash flow difficulties and we anticipate
that we will continue to experience cash flow difficulties for an indefinite
period. As a result, we have no plans to make any material capital
expenditures. At December 31, 2006 and 2005, we had a working capital deficit
of $25,896,882 and $24,767,525, respectively, which deficit has since
increased. At December 31, 2006, we had $277,680 of cash and cash equivalents
on hand. With this

41

---



level of cash,
we are unable to satisfy our current and expected cash requirements, including
vendor charges, fixed operating costs, and payroll related obligations for
2007.

In
order to meet our cash requirements, we will have to raise additional
financing. The sale of additional debt, if we are successful in raising funds,
would, among other things, continue to adversely impact our balance sheet,
increase our expenses and increase our cash flow requirements. The sale of
equity securities would, among other things, result in additional dilution to
our stockholders. Due to the risks involved to investors, we have historically
been forced to offer return rates higher than market rates to attract
financing.

Discussion of Cash Flows

The
following table summarizes our primary sources and uses of cash for the years
ended December 31:

|                                                                   |  |      |            |      |   |            |   |   |             |  
|------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | - | - | ----------- | -
|                                                                   |  | 2006 |            | 2005 |   | 2004       |  
|                                                                   |  |      |            |      |   |            |  
|                                                                  
|Net cash provided by (used
  in):                                  |  |      |            |      |   |            |   |   |             |  
|                                                                  
|Operating activities                                               |  | $    | (9,911,066 | )    | $ | (5,280,884 | ) | $ | (12,404,945 | )
|                                                                  
|Investing activities                                               |  |      | (21,132    | )    |   | (49,050    | ) |   | (276,039    | )
|                                                                  
|Financing activities                                               |  |      | 8,827,653  |      |   | 6,225,395  |   |   | 13,122,750  |  
|                                                                  
|Effect of exchange rate
  differences on cash and cash equivalents |  |      |           |      |   | (21,209    | ) |   | (17,025     | )
|                                                                   |  |      |            |      |   |            |   |   |             |  
|                                                                  
|Net (decrease) increase in
  cash and cash equivalents             |  | $    | (1,104,545 | )    | $ | 874,252    |   | $ | 424,741     |  
|                                                                   |  |      |            |      |   |            |   |   |             |  

Operating Activities. Net cash used in operating activities was
$9.9 million in 2006 compared to $5.3 million in 2005. This increase was
primarily due to a $7.8 million decrease in the change in accounts payable and
accrued expenses and accrued compensation, a $2.1 million decrease in
depreciation, and a $1.1 million decrease in share-based payment expense. These
items were partially offset by a $4.9 million decrease in net loss and a $1.4
million increase in accrued interest. In 2006, we used cash available to pay
down accounts payable, accrued expenses, and accrued compensation by $2.6
million, as compared to 2005, when the liabilities increased.

Net cash used in operating
activities was $5.3 million in 2005 compared to $12.4 million in 2004. This
increase was primarily due to a $28.6 million decrease in net loss and a $5.3
million increase in accounts payable and accrued expenses, partially offset by
a $10.5 million decrease in depreciation and amortization, and a $14.4 million
decrease in share-based payment expense.

Investing Activities. Net cash used in investing activities was
$21,132 in 2006, $49,050 in 2005, and $276,039 in 2004. The changes in net cash
used in investing activities primarily relate to the timing and level of our
purchases of property and equipment.

Financing Activities. Net cash provided by financing activities
totaled $8.8 million in 2006 compared to $6.2 million in 2005. This increase
was primarily due to higher proceeds from debt offerings, and lower debt issue
costs, offset by higher principal payments on notes and lower proceeds from
stock issuances

42

---



Net cash provided by
financing activities totaled $6.2 million in 2005 compared to $13.1 million in
2004. This decrease was primarily due to lower proceeds from stock offerings of
$10.7 million, partially offset by a decrease in note repayments of $3.1
million and lower debt issue costs of $1.0 million.

Penalty Warrants

During the year ended December 31, 2004, we
issued penalty warrants to purchase 3,325,000 shares of common stock with an
initial exercise price of $6.00. Penalty warrants were granted because the
Series C, D, and E Bridge Loans were not repaid in full by the due date. These
warrants had a calculated value of $2,262,531 which was recorded as interest
expense in 2004. The exercise price of the penalty warrants was adjusted to
$4.00 in 2004 due to the triggering of a contingently adjustable exercise price
clause in the warrant document. The calculated value of this adjustment was
$1,777,950, which was recorded as interest expense in 2004.

In the year
ended December 31, 2004, we issued penalty warrants to purchase 296,000 shares
of common stock with an initial exercise price of $4.00 and $6.00. The penalty
warrants had a calculated value of $264,193 which was recorded as interest
expense in 2004. The exercise price of the $6.00 warrants was subsequently
adjusted down to $4.00 due to a contingently adjustable exercise price clause
in the warrant document. The calculated value of the exercise price adjustment
was $88,764, which was recorded as interest expense in 2003. In 2005, we issued
penalty warrants to purchase 40,000 shares of common stock with an exercise
price of $4.00. The penalty warrants had a calculated value of $18,032 which
was recorded as interest expense in 2005. These penalty warrants were issued
due to the past-due balances on the loans and expire in 2014.

We issued
penalty warrants, each with an exercise price of $8.00 per share, to purchase
1,614,582 shares of common stock as of December 31, 2004. These warrants expire
in 2014, were valued at $655,443 and were expensed as interest expense in 2004.
In 2005, we issued additional penalty warrants, each with an exercise price of
$8.00 per share, to purchase 1,461,346 shares of common stock. These warrants
were valued at $205,692 and were expensed as interest expense in 2005. Based on
the warrant exchange discussed in Note 14 to the consolidated financial
statements, the warrant exchange completed by us in 2005 served to amend the
terms of the original note agreement. The amendment was to eliminate the
obligation to issue penalty warrants into the future.

We have
issued warrants to purchase common stock to note holders at times when we were
unable to repay the notes at their contractual maturity, and when certain
corporate goals have not been met (e.g., completing an initial public offering
of our stock within a certain timeframe). While issuing warrants does not
require a cash commitment, it has resulted in dilution to our stockholders.
There were no penalty warrants issued during the year ended December 31, 2006.

We have
issued warrants to purchase our common stock as an incentive to invest in our
debt instruments and as payment to financial advisors.

Income Taxes

We
have filed the required federal and state tax returns for the calendar years
2003, 2004 and 2005. These tax returns were filed late as a result of
unavailable financing that caused a delay in us obtaining the necessary audits
and tax compliance work to file such returns. Given the level of losses
incurred for those periods, no taxes or interest will be due. We may incur late
filing penalties which management expects to be minimal.

43

---



Off-Balance Sheet Arrangements

We
have no off-balance sheet arrangements.

|                            
|----------------------------
|ITEM 7. FINANCIAL STATEMENTS

Our
consolidated financial statements, including the notes thereto, together with
the report of Deloitte & Touche LLP, independent registered public
accounting firm, thereon are presented as a separate section of this Form
10-KSB, beginning on Page F-1, which
follows page 63:

|                                                     
|-----------------------------------------------------
|ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

We
have had no disagreements with our independent registered public accounting
firm, nor any change in our independent registered public accounting firm
during the last three years.

|                                
|--------------------------------
|ITEM 8A. CONTROLS AND PROCEDURES

As
of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of the management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based upon the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period, our
disclosure controls and procedures were effective.

During
the period covered by this report, there were no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the internal controls over financial
reporting.

|                            
|----------------------------
|ITEM 8B.
  OTHER INFORMATION

None.

44

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PART
III

|        |                                                                                                                                         
|------- | ----------------------------------------------------------------------------------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS PROMOTERS,
  CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF
  THE EXCHANGE ACT

The
following table sets forth information as of February 28, 2007 with respect to
our directors and executive officers. Our Bylaws provide that our board of
directors shall consist of at least one director, with the number of directors
being determined by resolution of our board of directors or by stockholders at
an annual or special meeting of the stockholders. We currently have eight
directors, each serving for a one-year term or until his or her successor is
duly elected and qualified. In accordance with our Bylaws, executive officers
are elected annually by our board of directors to serve for one-year terms or
until their respective successors are duly elected and qualified.

|                                           |  |     |  |                                                                               
|------------------------------------------ |  | --- |  | ------------------------------------------------------------------------------
|Name of Individual                         |  | Age |  | Position with Our Company                                                     
|                                           |  |     |  |                                                                               
|Edwin C.
  Quattlebaum, Ph.D. (4) (9) (12) |  | 56  |  | Chief
  Executive Officer, President and Co-Chairman of the Board of Directors
|                                           |  |     |  |                                                                               
|Thomas P.
  Russo                          |  | 57  |  | Executive
  Vice President, Treasurer and Chief Financial Officer             
|                                           |  |     |  |                                                                               
|Dennis
  Fantin, Ph.D., M.B.A.             |  | 52  |  | Executive
  Vice President, Chief of Operations                               
|                                           |  |     |  |                                                                               
|Roni Sue K.
  DeNise, Ph.D                 |  | 51  |  | Vice
  President, Genomic Research and Development                            
|                                           |  |     |  |                                                                               
|Victoria
  Geis                            |  | 51  |  | Vice
  President, Human Resources                                             
|                                           |  |     |  |                                                                               
|Linda
  Yaswen-Corkery, Ph.D               |  | 46  |  | Chief
  Compliance Officer & Vice President, Strategic Planning               
|                                           |  |     |  |                                                                               
|Clifton
  Baile, Ph.D. (1)                 |  | 67  |  | Director                                                                      
|                                           |  |     |  |                                                                               
|John R.
  Block (2) (8)                    |  | 72  |  | Director                                                                      
|                                           |  |     |  |                                                                               
|Victor M.
  Casini, Esquire (3) (10)       |  | 44  |  | Director                                                                      
|                                           |  |     |  |                                                                               
|Peter Drake,
  Ph.D. (4)                   |  | 53  |  | Director                                                                      
|                                           |  |     |  |                                                                               
|Peter A.
  Meyer (1) (5) (12)              |  | 62  |  | Director and
  Co-Chairman of the Board of Directors                          
|                                           |  |     |  |                                                                               
|Howard L.
  Minigh (3) (5) (7)             |  | 58  |  | Director                                                                      
|                                           |  |     |  |                                                                               
|Edward T.
  Shonsey (2) (6) (11)           |  | 61  |  | Director                                                                      

|     |                                
|---- | -------------------------------
|    
|     |                                
|(1)  | Executive
  Committee member   
|    
|(2)  | Compensation
  Committee member
|    
|(3)  | Nominating
  Committee member  
|    
|(4)  | Finance
  Committee member     
|    
|(5)  | Audit
  Committee member       
|    
|(6)  | Audit
  Committee Chair        
|    
|(7)  | Finance
  Committee Chair      
|    
|(8)  | Nominating
  Committee Chair   
|    
|(9)  | Executive
  Committee Chair    
|    
|(10) | Compensation
  Committee Chair 

45

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(11) Mr.
Shonsey is our audit committee financial expert as defined in the regulations
of the Securities and Exchange Commission. (12) As Co-Chairmen of the Board,
Messrs. Quattlebaum and Meyer may participate in any Board Committee
proceeding.

The business
experience of each of our directors and executive officers is set forth below.

Edwin
C. Quattlebaum, Ph.D.joined us in January 1998 as Executive Vice
President-Agriculture. In February 1998, he became the President and in October
1998, he became a director and our Chief Executive Officer. From May 2000 until
December 2004, Dr. Quattlebaum served as the Chairman of the Board. Since
January 2005, he has served as Co-Chairman of the Board. Dr. Quattlebaum has
over 25 years of agricultural industry experience, much of it within the
biotechnology sector. Prior executive experience includes positions with
biosys, Inc. (President and Chief Executive Officer), at the time the second
largest producer of biological pesticides in the United States, subsequently
acquired by Thermo Trilogy Corp.; Rhone-Poulenc S.A. (Global Business Manager
of Foliar Insecticide Business); and Union Carbide Agricultural Products
Company (Global Director of Development). He received a B.A. in Biology from
Catawba College, Salisbury, N.C. and M.S. and Ph.D. degrees in Entomology, with
a specialization in Insect Pathology, from Clemson University. Dr. Quattlebaum
serves as a director of InsectiGen; an Athens, Georgia based agricultural
biotechnology company developing crop protection products. Dr. Quattlebaum
serves on the Biotechnology Industry Organization Food and Agricultural
Governing Board, the Maryland Governors Workforce Investment Board, Bioscience
Steering Committee, and the South Carolina BIO Advisory Board.

Thomas P. Russo, M.B.A.has served as our
Executive Vice President, Treasurer and Chief Financial Officer since June
2004. Mr. Russo has over 26 years of financial executive experience. From
February 2004 until joining us, Mr. Russo was Chief Financial Officer of
Chesapeake PERL, or C-PERL, a biotech company. From March 2003 to January 2004
he was the Chief Financial Officer for Stem Cell Preservation Technologies. From
January 2002 to March 2003, Mr. Russo was with AAI where he sourced funding for
biotech and other emerging growth companies. From November 2000 to January 2002, Mr.
Russo served as the Chief Financial Officer for EntreMed, Inc. From 1995 to
2000, he was a Principal with Ernst & Young where he served as the
Director, Infrastructure and Project Finance, for E&Ys Capital Market
Group, assisting CEOs and CFOs in securing capital. Concurrent with his tenure
at E&Y, Mr. Russo was the Chief Financial Officer of Global Plasma Systems,
Inc. (now Solena Group), which has technology for alternative waste treatment.
Prior to E&Y, Mr. Russo was with Bechtel Enterprises raising capital for
infrastructure projects. Prior thereto, Mr. Russo spent 17 years with the World
Bank and its private sector affiliate, The International Finance Corporation,
providing debt and equity funding for projects worldwide. Mr. Russo holds a
B.A. from Georgetown University and an M.B.A. from George Washington
University. Currently, he sits on the steering committees for both the Maryland
Tech Council Financial Executive Forum and the Washington/Baltimore chapter of
the Association of Biotech Financial Officers, or ABFO.

Dennis Fantin, Ph.D., M.B.A.has served as
our Executive Vice President, Chief of Operations for MMI Genomics since
November 2005, and previously was our Vice President of Business development
since 2004. From 2002 to 2004, Dr. Fantin served as our Director of Operations.
He manages all aspects of our production genotyping and diagnostic efforts.
Prior to joining MMI, he was Director of Business Development and World-Wide
Sales and Marketing for the Celera AgGen business group of the Applera
Corporation from October 1998 to March 2002. Dr. Fantin has more than 18 years
of experience in the biotechnology industry, much of it within the agricultural
sector. From 1984-1998 Dr. Fantin held various managerial positions of
increasing responsibility within Applied Biosystems, a leader in the
development and marketing of automated, state-of-the-art systems for life
science research.

46

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In
1995, he was part of the Applied Biosystems team that led to the creation of
the agricultural subsidiary, PE AgGen. Dr. Fantin led the development of
molecular-based programs in the areas of animal parentage and identity, animal
diagnostics and health, plant breeding, crop protection, and food processing
and in 1997 he started AgGens Genomic Programs. He successfully established a
number of genomic programs for agricultural gene discovery with leading
international agricultural companies. He received his Ph.D. in Biochemistry from
the University of Western Ontario and his M.B.A. from Wilfrid Laurier
University.

Roni
Sue K. DeNise, Ph.D. has served as our Vice President of Genomic Research and
Development since 2004. She joined us as Director of Research and Development in
2002 after serving 18 years on the faculty at the University of Arizona. Dr.
DeNise was a Professor in the Department of Animal Sciences and
Interdisciplinary Program on Genetics where her research focused on
understanding the genetic basis of quantitative traits using molecular markers,
primarily in dairy and beef cattle. In addition to her faculty
responsibilities, Dr. DeNise has held numerous service positions with
organizations such as the National Genetic Resources Advisory Council and the
American Genome Technical Committee. She served as Chair on the National Animal
Genome Project. Additionally, Dr. DeNise was appointed to the National Genetic
Resources Advisory Council by the Secretary of Agriculture, and served on the
Board of Directors for the American Society of Animal Science. Dr. DeNise holds
a Ph.D. in Animal Science from Colorado State University.

Victoria
Geis has served as our Vice President, Human Resources since she
joined us in 2004. From 2001 until joining us, Ms. Geis was Director of the Human Capital Advisory Services
practice for CBIZ Accounting, Tax & Advisory Services Mid-Atlantic region.
From 2000 to 2001, she served as a National Accounts and Business Development
Consultant with the human capital management firm Knowledge Workers, Inc.; and
from 1997 to 1999, she was a Human Resources Executive with Weinberg
Associates, an international scientific consulting firm. She was the Director
of Human Resources for biosys, Inc. from 1995 to 1997 where she created a best
practices human resources program. Ms. Geis spent several years in the retained
executive recruitment field conducting searches in the life sciences,
agribusiness, high tech and communications industries. Ms. Geis is a cum laude
graduate of Mary Washington College. Since 2004, Ms. Geis has served as the
Co-Chair of MDBio HR.

Linda
Yaswen-Corkery, Ph.D. has served as Chief Compliance Officer since 2004.
In this role she is responsible for developing and managing our compliance
program to insure that it is satisfying its fiduciary responsibilities related
to the required regulatory obligations. Dr. Yaswen-Corkery joined us in 1997,
directing our lead research program on Myostatin. She was promoted
to Director of Business Development in 1999 and to Vice President Business
Development in 2001 to manage all aspects of worldwide business development
efforts. Prior to joining us, Dr. Yaswen-Corkery was a Senior Staff Fellow at
the NIH National Institute of Mental Health, Molecular Genetics Section. From
1993 to 1994, she conducted postdoctoral studies at the NIH on Transforming
Growth Factor-beta-1. Dr. Yaswen-Corkery received a B.S. in biology from the
State University of New York at Stony Brook and a Ph.D. in molecular immunology
and pathology from the University of Florida, Department of Medicine.

Clifton Baile, Ph.D. has served as a
director since November 1998. Dr. Baile has served as an Eminent Scholar in
Agricultural Biology at the University of Georgia since 1995. Dr. Baile has served
on the faculties of Harvard University and the University of Pennsylvania. In
2003 Dr. Baile founded InsectiGen and is currently chairman and CEO of this
agricultural biotechnology company that develops crop protection products.

47

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John R. Block has served as a director
since July 2000. Mr. Block served as Secretary of Agriculture under President
Reagan from 1981 to 1986. Prior to that, he was Secretary of Agriculture for
the State of Illinois. Mr. Block served as President of Food Distributors
International from 1986 through January 2003 (then known as the
National-American Wholesaler Grocers Association), a trade association
representing food distributors that supply independent grocers and food service
operations in the U.S., Canada and abroad. When the association became the Food
Marketing Institute in 2003, Mr. Block became Executive Vice President and
President of its Wholesale division until 2005. Currently, Mr. Block is a
Senior Policy Advisor in the firm of Olsson, Frank and Weeda, P.C. where he
specializes in agriculture, food and drug, and health care. Mr. Block serves on
the boards of Blast Energy Services, Digital Angel Corporation, and Hormel
Foods Corp., as well as nonprofit organizations.

Victor M. Casini, Esquire has served as a
director since September 2005. Mr. Casini has served as Vice President and
General Counsel of Flynn Enterprises, a venture capital, hedging and consulting
firm, and since 1998 as Vice President and General Counsel of LKQ Corporation,
a public automotive replacements parts company. Mr. Casini is a graduate of the
University of Illinois with a B.S. in Finance and received his Juris Doctor in
1987 from Northwestern University.

Peter
Drake, Ph.D. has served as a director since October 2005.
Dr. Drake has served as the Managing General Partner of Mayflower Partners, a
healthcare investment fund since June 2002, and Vice President of Vector
Securities International, Inc. since January 1997. Prior roles include serving
as Managing Director in the Equity Research Department of Prudential
Securities, co-founder of Vector Fund Management and Deerfield Management and a
partner and biotechnology analyst with Kidder, Peabody. Mr. Drakes serves on
the board of Cortex Pharmaceuticals.

Peter
      A. Meyer has
    served as a director since November 1998 and became our Co-Chairman of the
      Board in January 2005. Mr. Meyer is the President of PMI Consultants, a
      firm he founded in 1982 to develop ventures, acquisition and divestiture
      opportunities, and investment strategies for companies involved in the
      domestic and international food, feed and fermentation industries.

Howard L. Minigh, Ph.D. has served as a
director since April 2004. Dr. Minigh has been a partner in Trishul Capital Group,
a private equity firm, since August 2003. From September 2000 through June
2003, he was employed by DuPont, where he served as Group Vice President of
Agriculture and Nutrition.

Edward T.
Shonsey has served as a director since December 2006. Since 2003,
Mr. Shonsey has been with Diversa Corporation, a publicly traded biotechnology
company where he is currently CEO and was previously CFO, implementing their
Sarbanes-Oxley compliance program. From 1996 through 2003, Mr. Shonsey was
President and CEO of Syngenta Seeds/Northrup King (formerly Sandoz Seeds and
Novartis Seeds). In prior roles, he held senior executive roles with Global
Trading Resources; was Senior Vice President, CFO, Senior Vice President,
International Operations, Administration and Human Resources and Business
Development for Pioneer Hi-Bred International (now subsidiary of DuPont
Corporation); and began his career with Proctor & Gamble as an Operations
Manager. Mr. Shonsey holds a BSEE from Marquette University, an MBA from Creighton
University, and conducted post graduate work in Finance at Stanford and
Biotechnology at The University of Washington.

48

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Section 16(a) Beneficial Ownership Reporting
Compliance

After
a review of the forms submitted during 2006, the following forms were not filed
in a timely manner:

| |         |  |                                                        
| | ------- |  | -------------------------------------------------------
| | Form 3s |  | Dennis Fantin                                          
| |         |  | Peter Drake                                            
| |         |  | Edward Shonsey                                         
| |         |  | Sue DeNise                                             
| |         |  | Victoria Geis                                          
| |         |  | Linda Yaswen-Corkery                                   
| |         |  |                                                        
| | Form 4s |  | Ed Quattlebaum (1 transaction was not reported timely) 
| |         |  | Tom Russo (1 transaction was not reported timely)      
| |         |  | Clifton Baile (1 transaction was not reported timely)  
| |         |  | John Block (1 transaction was not reported timely)     
| |         |  | Victor Casini (2 transactions were not reported timely)
| |         |  | Peter Meyer (2 transactions were not reported timely)  
| |         |  | Howard Minigh (1 transaction was not reported timely)  

We
are working with legal counsel to ensure that these forms will be filed in
April, 2007.

Code of Ethics

We
have adopted a Code of Business Conduct and Ethics, or the Code, which applies
to our directors, officers and employees, including our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and principal
financial and accounting officer, respectively). The Code is filed as Exhibit
14.1 to the Form 10-SB filed on May 2, 2005. A written copy of the Code will be
provided upon request at no charge by writing to our Chief Financial Officer,
Mr. Thomas Prescott Russo, at MetaMorphix, Inc., 8000 Virginia Manor Road,
Suite 140, Beltsville, Maryland 20705.

Board Composition

Our
business and affairs are managed under the direction of our board of directors.
The primary responsibilities of our board of directors are to provide
oversight, strategic guidance, counseling and direction to our management. Our
board of directors meets regularly on a quarterly basis and additionally as
required. Written board materials are distributed in advance of meetings as a
general rule, and our board of directors schedules meetings with and
presentations from members of our senior management on a regular basis.

Flynn Board Designee

Pursuant
to an investment in our Series G Convertible Preferred Stock by Kevin F. Flynn
and other investors, or the Investors, we appointed Victor Casini to our board
of directors, as approved by the Nominating Committee. The right of Mr. Flynn
to designate a member to our board terminates upon the earlier of (1) the date
on which the Investors no longer own 85% of our Series G Convertible Preferred
Stock or shares issuable upon the conversion of the Series G Convertible
Preferred Stock, or (2) the sale, conveyance, encumbrance, or other transfer of
all or substantially of our business or property or, under certain
circumstances, our merger with or into any other corporation.

49

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Board Committees

Our
board of directors has an Audit Committee, Compensation Committee, Executive
Committee, Finance Committee, and a Nominating Committee.

Our
Audit Committee oversees our financial reporting process on behalf of the board
of directors. Our Compensation Committee makes recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and serves as an advisor for our stock option plans, executive searches and
grants single employee stock options up to a preordained limit. Our Executive
Committee oversees the management of our affairs between meetings of the Board
of Directors. Our Finance Committee monitors all material financial
transactions, contracts, and activities with investment banks and advisors. The
Finance committee also oversees fundraising on behalf of the Board. Our
Nominating Committee is responsible for identifying potential candidates to
serve on our Board.

| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Audit Committee is responsible for the following functions:         
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | approve and
  retain the independent auditors to conduct the annual audit of our financial
  statements;                                                                                                                                                                                                                                                                                                                         
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review the
  proposed scope and results of the audit;                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review and
  pre-approve the independent auditors audit and non-audited services rendered;                                                                                                                                                                                                                                                                                                                                      
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | approve the
  audit fees to be paid;                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review
  accounting and financial controls with the independent auditors and our
  financial and accounting staff;                                                                                                                                                                                                                                                                                                               
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review and
  approve transactions between us and our directors, officers and affiliates;                                                                                                                                                                                                                                                                                                                                         
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | recognize
  and prevent prohibited non-audit services;                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review,
  prior to filing, all annual reports to be filed with the SEC;                                                                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | establish
  procedures for complaints received by us regarding accounting matters; and                                                                                                                                                                                                                                                                                                                                           
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Our Compensation
  Committee is responsible for the following functions:
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | reviewing
  and recommending policy relating to compensation and benefits of our officers
  and employees, including reviewing and approving corporate goals and
  objectives relevant to compensation of our chief executive officer and other
  senior officers, evaluating the performance of these officers in light of
  those goals and objectives, and setting compensation of these officers based
  on such evaluations;
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | reviewing
  and approving our benefit plans and the issuance of stock options and other
  awards under our stock plans;                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | reviewing
  and establishing appropriate insurance coverage for our directors and
  executive officers;                                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | advising
  with respect to searches for executive officers and assisting in interviews;                                                                                                                                                                                                                                                                                                                                          

50

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| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                       | recommending
  the type and amount of compensation to be paid or awarded to members of our
  board of directors, including consulting, retainer, meeting, committee and
  committee chair fees and stock option grants or awards; and                           
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | reviewing
  and approving the terms of any employment agreements, severance arrangements,
  change-of-control protections and any other compensatory arrangements for our
  executive officers.                                                                 
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| | Our
  Executive Committee is responsible for the following functions: 
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | exercising
  any and all of the powers of the Board of Directors (unless expressly
  prohibited by the Delaware General
  Corporation Law or otherwise delegated to another committee of the
  Board of Directors), except that the Executive Committee may not:
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                        |                                                                                                                                                                                                                                                                 | amend our
  charter;                                                                                                                                                                                                                                                                                         
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                        |                                                                                                                                                                                                                                                                 | amend our
  By-laws;                                                                                                                                                                                                                                                                                         
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                        |                                                                                                                                                                                                                                                                 | authorize
  any action that also requires approval by stockholders;                                                                                                                                                                                                                                          
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                        |                                                                                                                                                                                                                                                                 | authorize
  the payment of dividends; or                                                                                                                                                                                                                                                                     
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                        |                                                                                                                                                                                                                                                                 | approve the
  issuance of any common or preferred stock (although, in accordance with the
  stock option plans and prior resolutions of the Board of Directors, it may
  authorize the grant of stock options and determine the appropriate exercise
  price for incentive stock options then being awarded).
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| | Our Finance
  Committee is responsible for the following functions:   
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | interviewing,
  selecting and monitoring the selection of Investment advisors                                                                                                                                                                                   
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | managing
  offering processes                                                                                                                                                                                                                                   
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | overseeing
  capital raising on behalf of the Board of Directors.                                                                                                                                                                                               
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| | Our
  Nominating Committee is responsible for the following functions:
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | making
  recommendations to the Board of Directors regarding the size and composition
  of the Board of Directors;                                                                                                                                              
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | establishing
  procedures for the nomination process;                                                                                                                                                                                                           
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | screening
  and recommending candidates for election to the Board of Directors;                                                                                                                                                                                 
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | reviewing
  with the Board of Directors from time to time the appropriate skills and
  characteristics required of Board members; and                                                                                                                           
| |                                                                        |                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                              
| |                                                                       | establishing
  and administering a periodic assessment procedure relating to the performance
  of the Board of Directors as a whole and its individual members.                                                                                                 

Audit Committee

The
audit committee of our board of directors reviews and monitors our corporate
financial statements and reporting and our external audits, including, among
other things, our internal controls and audit functions, the results and scope
of the annual audit and other services provided by our independent

51

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registered
public accounting firm and our compliance with legal matters that have a
significant impact on our financial statements. Our audit committee also
consults with our management and our independent registered public accounting
firm prior to the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. Our
audit committee is responsible for establishing procedures for the receipt,
retention and treatment of complaints regarding accounting, internal accounting
controls or auditing matters, and for the confidential, anonymous submission by
our employees of concerns regarding questionable accounting and auditing
matters. In addition, our audit committee is directly responsible for the
appointment, retention, compensation and oversight of the work of our
independent auditors, including approving services and fee arrangements. All
related party transactions will be approved by our audit committee before we
enter into them. The current members of our audit committee are Peter Meyer,
Howard Minigh, and Edward Shonsey. Mr. Shonsey serves as the chairman of the
audit committee.

In
addition to qualifying as independent, each member of our audit committee has
an understanding of fundamental financial statements.

Our
audit committee includes at least one member who has been determined by our
board of directors to meet the qualifications of an audit committee financial
expert in accordance with SEC rules. Mr. Shonsey is the independent director
who has been determined to be an audit committee financial expert.

Compensation Committee Interlocks and Insider
Participation

Our
Compensation Committee is comprised of three members, John R. Block, Victor
Casini, and Edward Shonsey. Mr. Casini is the Chairman of the Compensation
Committee. No member of our Compensation Committee has at any time been an
officer or employee of ours, or our subsidiary. No interlocking relationship
exists between our board of directors or compensation committee and the board
of directors or Compensation Committee of any other company.

Indemnification of Directors and Executive
Officers and Limitation on Liability

Our
bylaws provide that we shall indemnify our directors and officers to the
fullest extent permitted by Delaware law, provided that, with respect to
proceedings initiated by our officers and directors, we are only required to
indemnify these persons if the proceeding was authorized by our board of
directors. Our bylaws permit us, by action of our board of directors, to
indemnify our other employees and agents to the same extent as we are required
to indemnify our officers and directors. We are also empowered under our bylaws
to enter into indemnification agreements with our directors, officers,
employees or agents and to purchase insurance on behalf of any of our
directors, officers, employees or agents whether or not we are required or
permitted to indemnify such persons under Delaware law.

In
addition, our bylaws provide that our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of fiduciary duty
as a director, except for liability:

| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | for any
  breach of the directors duty of loyalty to us or our stockholders;                                     
| |   |                                                                                                                   
| |  | for acts or
  omissions not in good faith or which involve intentional misconduct or a
  knowing violation of law;
| |   |                                                                                                                   
| |  | under
  Section 174 of the Delaware General Corporation Law; or                                                   

52

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | for any
  transaction from which the director derives an improper personal benefit.

There
is no pending litigation or proceeding involving any of our directors or
officers for which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

ITEM
10. EXECUTIVE COMPENSATION

The
following summary compensation table sets forth, for the last fiscal year, the
aggregate compensation awarded to, earned by, or paid to the Chief Executive
Officer and to our two other most highly compensated executive officers at
December 31, 2006 whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 2006 (collectively, the named executive officers):

|                                                                                         |  |      |      |              |   |                       |  |                                                  |         |                                |   |             |  |   |        |  |   |         | 
|---------------------------------------------------------------------------------------- |  | ---- | ---- | ------------ | - | --------------------- |  | ------------------------------------------------ | ------- | ------------------------------ | - | ----------- |  | - | ------ |  | - | ------- | 
|Name and Principal
  Position                                                            |  | Year |      | Salary
  ($) |   | Option
  Awards
  ($) |  | Non-Equity
  Incentive Plan
  Compensation
  ($) |         | All Other
  Compensation
  ($) |   | Total
  ($) | 
|                                                                                         |  |      |      |              |   |                       |  |                                                  |         |                                |   |             | 
|                                                                                        
|Edwin C. Quattlebaum
  Co-Chairman, President
  and Chief Executive
  Officer (1)        |  |      | 2006 |              | $ | 427,446               |  | $                                                | 408,585 |                                | $ |            |  | $ | 35,501 |  | $ | 871,532 | 
|                                                                                         |  |      |      |              |   |                       |  |                                                  |         |                                |   |             |  |   |        |  |   |         | 
|Thomas P. Russo
  Executive Vice President,
  Treasurer and Chief
  Financial Officer(2) |  |      | 2006 |              | $ | 275,980               |  | $                                                | 166,386 |                                | $ |            |  | $ | 3,870  |  | $ | 446,236 | 
|                                                                                         |  |      |      |              |   |                       |  |                                                  |         |                                |   |             |  |   |        |  |   |         | 
|Dennis Fantin
  Executive Vice President,
  Chief of Operations (3)                      |  |      | 2006 |              | $ | 242,664               |  | $                                                | 421,890 |                                | $ |            |  | $ | 1,167  |  | $ | 665,721 | 

|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dr.
  Quattlebaums option awards represent the fair value of options granted to
  purchase 343,791 shares of common stock. His other compensation includes
  group-term life insurance premiums of $3,870, executive life insurance
  premiums of $14,824, and an auto allowance of $16,807.
|    |                                                                                                                                                                                                                                                                                              
|(2) | Mr. Russos
  option awards represent the fair value of options granted to purchase 140,000
  shares of common stock. His other compensation consists of group-term life
  insurance premiums of $3,870.                                                                                     
|    |                                                                                                                                                                                                                                                                                              
|(3) | Dr. Fantins
  option awards represent the fair value of options granted to purchase 355,000
  shares of common stock. His other compensation consists of group-term life
  insurance premiums of $1,167.                                                                                    

We
are a party to an employment agreement on January 1, 1998, or the Employment
Agreement, with Edwin C. Quattlebaum. The Employment Agreement provided for an
annual base salary of $200,000, which has been reviewed and increased annually
by the Board of Directors and is currently $400,000. Dr. Quattlebaum is
currently entitled to a bonus of up to 60% of his annual base salary upon
achieving certain performance-based goals.

53

---



The
Employment Agreement provided for the issuance of incentive stock options to
purchase up to 233,100 shares of Common Stock pursuant to our 1996 Employees
Incentive Stock Option Plan with 166,500 shares granted outright with the
remainder conditional upon meeting milestones. As a result of successive re-examinations
of Dr. Quattlebaums compensation by the Board of Directors, additional awards
of options were made in 1998, 1999, 2000, 2001, 2002, 2004, 2005, and 2006,
bringing the total to 3,023,123. The options vest over a period of four years
from their respective grant dates. On August 3, 2001, the Board of Directors
granted Dr. Quattlebaum 247,112 shares of non-qualified stock options vesting
over a period of four years.

The
Employment Agreement provides that Dr. Quattlebaum may be terminated at any
time, with or without cause. In the event of the involuntary termination of Dr.
Quattlebaums employment other than for cause (as defined in the agreement)
we are obligated currently to pay severance equal to his annual base salary for
three months. Severance is also due upon our sale or merger of us unless the
successor entity assumes our obligations under the Employment Agreement. This
agreement has no expiration date.

We
have entered into an employment agreement with Mr. Russo providing for a base
annual salary in the amount of $250,000, subject to future increases. The
agreement contains severance provisions entitling the executive to receive the
equivalent of the executives annual base salary for one year in the event of
involuntary termination, other than for cause (as defined in the employment
agreements). This agreement has no expiration date.

Employees
Incentive Stock Option Plan

In
November 1996, our Board of Directors adopted our 1996 Employees Incentive Stock
Option Plan, or the Employees Plan, which was approved by security holders,
pursuant to which 8,000,000 shares of common stock are reserved for issuance
upon exercise of stock options or stock appreciation rights. The purpose of the
Employees Plan is to provide additional incentive to employees by facilitating
their purchase of common stock. The Employees Plan provides for a term of 10
years from the date of its adoption by the Board of Directors, after which no
awards may be made, unless the Plan is earlier terminated by our Board of
Directors. Options granted under the Employees Plan are either incentive stock
options (i.e. options that afford favorable tax treatment to recipients upon
compliance with certain restrictions pursuant to Section 422 of the Internal
Revenue Code and that do not result in tax deductions to us unless participants
fail to comply with Section 422 of the Internal Revenue Code) or options that
do not so qualify.

The
Employees Plan is administered by the Compensation Committee of the Board of
Directors, or the Compensation Committee. The Compensation Committee selects
the employees to whom awards are to be granted, the number of shares to be
subject to such awards, and the terms and conditions of such awards (provided that
any discretion exercised by the Compensation Committee must be consistent with
resolutions adopted by the Board of Directors and the terms of the Employees
Plan).

As
of December 31, 2006, options to purchase an aggregate of 7,312,155 shares were
outstanding under the Employees Plan.

In
November 2006, our 1996 Employees Incentive Stock Option Plan expired.

54

---



Non-Qualified
Plan

In
December 1995, our Board of Directors adopted the Amended and Restated 1995
Non-Qualified Officer, Director, Employee, and Consultant Stock Option Plan, or
the Non-Qualified Plan, pursuant to which 3,050,000 shares of Common Stock are
reserved for issuance upon exercise of stock options or stock appreciation
rights. Options granted under the Non-Qualified Plan are not incentive stock
options. The purpose of the Non-Qualified Plan is to provide additional
incentive to officers, directors, employees and consultants by facilitating
their purchase of Common Stock. The Non-Qualified Plan provides for a term of
10 years from the date of its adoption or amendment by the Board of Directors,
after which no awards may be made, unless the Non-Qualified Plan is earlier
terminated by the Board of Directors. The Non-Qualified Plan was amended by the
Board of Directors in April 1996, December 2000, May 2001, and July 2004. The
Non-Qualified Plan shall terminate in July 2014.

The
Non-Qualified Plan is administered by the Board of Directors. The Board of
Directors selects the participants to whom awards are to be granted, the number
of shares to be subject to such awards, and the terms and conditions of such
awards (provided that any discretion exercised by the Board of Directors is
consistent with the terms of the Non-Qualified Plan). The Non-Qualified Plan
requires that all grants of options under the Option Plan vest at a rate of 25%
per year beginning on the first anniversary of the date of grant (and thereafter
such options shall vest monthly at a rate of 2.08% of the balance). Options
granted to date under the Non-Qualified Plan, unless sooner terminated or
expired in accordance with the terms of the Non-Qualified Plan, expire ten
years after the date of grant.

During
2006, we reallocated 472,906 shares reserved for the Employees Plan to the
Non-Qualified Plan, raising the total amount reserved for issuance to
3,522,906. Since its inception through December 31, 2006, options to purchase
194,333 shares have been exercised.

As
of December 31, 2006, options to purchase an aggregate of 3,238,575 shares were
outstanding under the Non-Qualified Plan.

401(k) Plan

Effective
January 1, 1998, we adopted a defined contribution 401(k) savings plan covering
all of our eligible, full-time employees. Participants may elect to defer a
percentage of their annual pre-tax compensation to the 401(k) plan, subject to
defined limitations. Beginning in 2007, we have included a Safe Harbor Plan in
its 401(k) plan, whereby we will contribute 3% of each active employees gross
salary per pay period to the plan for inclusion in each employees retirement
account. This contribution will be immediately vested.

55

---



Outstanding Equity Awards at Fiscal Year End

The
following table contains information concerning unexercised options; stock that
has not vested; and equity incentive plan awards for each named executive
officer outstanding as of the end of the last completed fiscal year.

OUTSTANDING EQUITY
AWARDS AT DECEMBER 31, 2006

|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|----------------------- |  | ----------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | - | -------------------------- | - | --------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- | -------- | --------------------------------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------------- |  | - | - |  |  | - |  | - | - | 
|                        |  | Option
  Awards                                                               |         | Stock
  Awards                                                                  | 
|Name                    |  | Number of
  Securities
  Underlying
  Unexercised
  Options (#)
  Exercisable |         | Number of
  Securities
  Underlying
  Unexercised
  Options (#)
  Unexercisable |  | Equity
  Incentive Plan
  Awards:
  Number of
  Securities
  Underlying
  Unexercised
  Unearned
  Options (#) |  | Option
  Exercise
  Price ($) |   | Option
  Expiration
  Date |   | Number of
  Shares or
  Units of
  Stock
  That Have
  Not Vested ($) |  | Market
  Value of
  Shares or
  Units of
  Stock That
  Have Not
  Vested ($) |          | Equity Incentive
  Plan Awards:
  Number of
  Unearned
  Shares, Units or
  Other Rights
  That Have Not
  Vested (#) |   | Equity Incentive
  Plan Awards:
  Market or
  Payout Value of
  Unearned
  Shares, Units or
  Other Rights
  That Have Not
  Vested ($) | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         | 
|                       
|Edwin C. Quattlebaum    |  |                                                                               | 166,500 |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 0.25                                                                  |  |                                                                               | 1/1/08   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum    |  |                                                                               | 50,000  |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 0.25                                                                  |  |                                                                               | 10/12/08 |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum    |  |                                                                               | 150,000 |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 0.25                                                                  |  |                                                                               | 8/19/09  |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum    |  |                                                                               | 383,500 |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 0.35                                                                  |  |                                                                               | 2/16/10  |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum    |  |                                                                               | 52,888  |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 5.00                                                                  |  |                                                                               | 8/3/11   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum    |  |                                                                               | 200,000 |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 10.00                                                                 |  |                                                                               | 12/4/12  |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum(1) |  |                                                                               | 710,938 |                                                                                 |  | 264,063                                                                                                        |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 1/1/14   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum(1) |  |                                                                               | 81,662  |                                                                                 |  | 44,782                                                                                                         |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 5/26/14  |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum(1) |  |                                                                               | 275,521 |                                                                                 |  | 299,479                                                                                                        |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 1/1/15   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum(1) |  |                                                                               | 50,000  |                                                                                 |  | 293,791                                                                                                        |  |                               |  |                            | $ | 3.35                                                                  |  |                                                                               | 11/13/16 |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Edwin C. Quattlebaum    |  |                                                                               | 247,112 |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 5.00                                                                  |  |                                                                               | 8/2/11   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Thomas P. Russo(2)      |  |                                                                               | 250,781 |                                                                                 |  | 150,469                                                                                                        |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 6/1/14   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Thomas P. Russo(2)      |  |                                                                               | 22,500  |                                                                                 |  | 117,500                                                                                                        |  |                               |  |                            | $ | 3.35                                                                  |  |                                                                               | 11/13/16 |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Dennis Fantin           |  |                                                                               | 70,000  |                                                                                 |  |                                                                                                               |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 2/28/12  |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Dennis Fantin(3)        |  |                                                                               | 6,854   |                                                                                 |  | 146                                                                                                            |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 12/31/12 |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Dennis Fantin(3)        |  |                                                                               | 46,302  |                                                                                 |  | 17,198                                                                                                         |  |                               |  |                            | $ | 4.00                                                                  |  |                                                                               | 12/31/13 |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Dennis Fantin(3)        |  |                                                                               |        |                                                                                 |  | 80,000                                                                                                         |  |                               |  |                            | $ | 3.20                                                                  |  |                                                                               | 1/1/16   |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 
|                        |  |                                                                               |         |                                                                                 |  |                                                                                                                |  |                               |   |                            |   |                                                                       |  |                                                                               |          |                                                                                                                       |   |                                                                                                                                         |  |   |   |  |  |   |  |   |   | 
|Dennis Fantin(3)        |  |                                                                               | 43,750  |                                                                                 |  | 231,250                                                                                                        |  |                               |  |                            | $ | 3.35                                                                  |  |                                                                               | 11/13/16 |                                                                                                                       | $ |                                                                                                                                        |  | $ |  |  |  |  |  | $ |  | 

56

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|                                                               |                                                                                                       
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------
|(1) Dr. Quattlebaums unexercisable options vest as
  follows:
|                                                               |                                                                                                       
|                                                               | 264,063  vest 20,313 per month over the next 13
  months,                                            
|                                                               | 44,782  vest 2,634 per month over the next 17
  months,                                              
|                                                               | 299,479  vest 11,979 per month over the next 25
  months, and                                        
|                                                               | 293,791  73,448 vest on November 13, 2007, and then
  6,121 vest per month thereafter for 36 months. 
|                                                               |                                                                                                       
|(2) Mr. Russos unexercisable options vest as
  follows:      
|                                                               |                                                                                                       
|                                                               | 150,469  vest 8,359 per month over the next 18
  months, and                                         
|                                                               | 44,782  29,375 vest on November 13, 2007, and then
  2,448 vest per month thereafter for 36 months.  
|                                                               |                                                                                                       
|(3) Dr. Fantins unexercisable options vest as
  follows:     
|                                                               |                                                                                                       
|                                                               | 146  vest 146 per month over the next month,                                                         
|                                                               | 17,198  vest 1,323 per month over the next 13
  months,                                              
|                                                               | 80,000  20,000 vest on January 1, 2007, and then
  1,667 vest per month thereafter for 36 months, and
|                                                               | 231,250  57,813 vest on November 13, 2007, and then
  4,818 vest per month thereafter for 36 months. 

57

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Director
Compensation

Our
non-employee directors do not receive cash compensation for their service on
the Board of Directors. As compensation for their services, directors receive
options to purchase 10,000 shares of common stock per year, options to purchase
5,000 shares of common stock per year for each committee on which they serve,
and options to purchase 5,000 shares of common stock per year for being the
chairman of a committee. New directors are given an initial grant of options to
purchase 60,000 shares of common stock. In addition, the Compensation Committee
of the Board of Directors is able to grant additional options to Board members
for services performed at their discretion. Directors are reimbursed for
expenses incurred in attending meetings. Directors are not precluded from
serving us in any other capacity and receiving compensation therefor.

|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|------------------- |  | ------------------------------------- | - | -------------------- | - | --------------------- |  | ------------------------------------- | ------- | ------------------------------------------------ | ------- | ------------------------------------------------------------------------------------- | - | ------------------------------ |  | --------- | - |  | - | - |  | - | ------- | 
|Name                |  | Fees
  Earned or
  Paid in
  Cash ($) |   | Stock
  Awards
  ($) |   | Option
  Awards
  ($) |  | Securities
  Underlying
  options (#) |         | Non-Equity
  Incentive Plan
  Compensation
  ($) |         | Change in
  Pension Value
  and Nonqualified
  Deferred
  Compensation
  Earnings ($) |   | All Other
  Compensation
  ($) |  | Total ($) |  
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |  
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |  
|Clifton Baile       |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 17,824  |                                                  | 15,000  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 17,824  | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|John Block          |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 29,707  |                                                  | 25,000  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 29,707  | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|William Buckner (1) |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 17,824  |                                                  | 15,000  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 17,824  | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|Victor Casini       |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 17,732  |                                                  | 15,000  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 17,732  | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|Peter Drake         |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 23,765  |                                                  | 20,000  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 23,765  | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|Peter Meyer         |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 188,277 |                                                  | 160,000 |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 188,277 | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|Howard Minigh       |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 29,707  |                                                  | 25,000  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 29,707  | 
|                    |  |                                       |   |                      |   |                       |  |                                       |         |                                                  |         |                                                                                       |   |                                |  |           |   |  |   |   |  |   |         | 
|Edward Shonsey      |  | $                                     | 0 |                      | $ | 0                     |  | $                                     | 71,652  |                                                  | 61,251  |                                                                                       | $ |                               |  | $         |  |  | $ |  |  | $ | 71,652  | 

(1)
Mr. Buckner resigned from our Board of Directors on October 12, 2006.

58

---



|           |                                                                                                   
|---------- | --------------------------------------------------------------------------------------------------
|ITEM
  11. | SECURITY
  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
  MATTERS

The
table below sets forth, as of February 28, 2007, certain information with
respect to the beneficial ownership of our common stock by:

|  |                                                                                
|- | -------------------------------------------------------------------------------
| | each person known by us to
  beneficially own more than 5% of our common stock;
|  |                                                                                
| | each of our directors and
  named executive officers; and                      
|  |                                                                                
| | all directors and
  named executive officers as a group.                       

Unless otherwise indicated, the stockholders listed in
the table have sole voting and investment power with respect to the shares
indicated.

|                                                             |  |                                 |           |                                                   |  |                                    |   |  |      |  
|------------------------------------------------------------ |  | ------------------------------- | --------- | ------------------------------------------------- |  | ---------------------------------- | - |  | ---- | -
|Name and
  Address of Beneficial Owner(1)                    |  | Shares Beneficially
  Owned (2) |           | Percentage of
  Shares
  Beneficially
  Owned (3) |  | Percentage of
  Voting
  Power (4) |  
|                                                             |  |                                 |           |                                                   |  |                                    |  
|Edwin C. Quattlebaum, Ph.D. (5)                              |  |                                 | 2,512,928 |                                                   |  | 10.7                               | % |  | 6.4  | %
|Thomas P. Russo (6)                                          |  |                                 | 306,719   |                                                   |  | 1.4                                | % |  | *    |  
|Dennis Fantin(6)                                             |  |                                 | 197,344   |                                                   |  | *                                  |   |  | *    |  
|Clifton Baile, Ph.D. (7)                                     |  |                                 | 284,753   |                                                   |  | 1.3                                | % |  | *    |  
|John R. Block (8)                                            |  |                                 | 191,985   |                                                   |  | *                                  |   |  | *    |  
|Victor M. Casini (9)                                         |  |                                 | 47,554    |                                                   |  | *                                  |   |  | *    |  
|Peter F. Drake (10)                                          |  |                                 | 67,902    |                                                   |  | *                                  |   |  | *    |  
|Peter A. Meyer (11)                                          |  |                                 | 883,360   |                                                   |  | 4.1                                | % |  | 2.3  | %
|Howard Minigh (12)                                           |  |                                 | 136,137   |                                                   |  | *                                  |   |  | *    |  
|Edward Shonsey (6)                                           |  |                                 | 5,001     |                                                   |  | *                                  |   |  | *    |  
|All executive officers and directors as a group (10 persons) |  |                                 | 4,628,681 |                                                   |  | 18.2                               | % |  | 11.2 | %

59

---



|                                                                                               |  |  |           |  |  |      |   |  |      |  
|---------------------------------------------------------------------------------------------- |  |  | --------- |  |  | ---- | - |  | ---- | -
|Samuel R. Dunlap, Jr. (13)                                                                     |  |  | 1,314,770 |  |  | 5.9  | % |  | 3.4  | %
|Raynemark Investments LLC (14)
  3883 N. 57th Street
  Boulder, CO 80301                       |  |  | 1,653,434 |  |  | 7.7  | % |  | 4.4  | %
|Paul Moore (15)
  269 Market Square
  Lake Forest, IL 60045                                    |  |  | 1,606,928 |  |  | 7.6  | % |  | 4.3  | %
|Theodore Swindells (16)
  11400 S.E. 8th Street, Suite 420
  Bellevue, WA 98004                |  |  | 1,213,026 |  |  | 5.7  | % |  | 3.3  | %
|Biostar, Inc. (17)
  Suite 860 Saskatoon Square
  410 22nd Street East
  Saskatoon, SK S7K 5T6 |  |  | 1,359,733 |  |  | 6.5  | % |  | 3.7  | %
|New Frontiers Capital LLC (18)
  1111 S. Willis Ave.
  Wheeling, IL 60090                      |  |  | 8,006,266 |  |  | 27.5 | % |  | 21.0 | %
|Applera Corporation (19)
  301 Merritt 7
  Norwalk, CT 06856-5435                              |  |  | 2,000,001 |  |  | 8.7  | % |  | 5.4  | %
|Kevin F. Flynn (20)
  120 N. LaSalle Street, Suite 3300
  Chicago, IL 60602                    |  |  | 2,055,600 |  |  | 9.2  | % |  | 5.5  | %




* Less than 1%.


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise indicated, the address for each
  person or entity is MetaMorphix, Inc. 8000 Virginia Manor Road, Suite 140,
  Beltsville, Maryland, 20705.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(2) | In computing the number of shares beneficially owned
  by a person and the percentage ownership of a person, shares of our common
  stock underlying options, warrants, convertible preferred stock and
  convertible notes held by that person that are currently exercisable or
  exercisable within 60 days of February 28, 2007 are deemed outstanding. Such
  shares, however, are not deemed outstanding for purposes of computing the
  percentage ownership of each other person. Except as indicated in the
  footnotes to this table and pursuant to applicable community property laws,
  the persons named in the table have sole voting and investment power with
  respect to all shares of common stock.

60

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3)  | The percentage of shares outstanding of 21,075,141
  has been calculated based on the number of shares of our common stock
  outstanding.                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4)  | In computing the voting power held by a person, shares
  of our common stock underlying options, warrants, convertible preferred stock
  and convertible notes held by that person that are currently exercisable or
  exercisable within 60 days of February 28, 2007 are deemed outstanding. Since
  shares of our convertible preferred stock vote together with our common on an
  as converted basis, the total voting shares outstanding are 36,956,775.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5)  | Includes 2,507,824 shares underlying stock options
  and 5,104 shares underlying Series C Convertible Preferred Stock.                                                                                                                                                                                                                                                                                                                                        
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6)  | Represents shares underlying stock options only.                                                                                                                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7)  | Includes 29,040 actual shares of common stock held,
  238,027 shares underlying stock options and 17,686 shares underlying Series C
  Convertible Preferred Stock.                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(8)  | Includes 625 actual shares of common stock held and
  191,360 shares underlying stock options.                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(9)  | Includes 37,500 shares underlying stock options,
  3,709 shares underlying warrants, and 6,345 shares underlying the conversion
  of 2,931 shares of Series G Convertible Preferred Stock.                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(10) | Includes 2,523 actual shares of common stock held,
  40,000 shares underlying stock options and 25,379 shares underlying the
  conversion of 11,725 shares of Series G Convertible Preferred Stock.                                                                                                                                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(11) | Includes 243,250 actual shares of common stock held,
  399,277 shares underlying stock options and 240,833 shares underlying
  convertible debt.                                                                                                                                                                                                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(12) | Includes 87,916 shares underlying stock options,
  17,842 shares underlying warrants, 25,379 shares underlying the conversion of
  11,725 shares of Series G Convertible Preferred Stock, and 5,000 shares
  underlying convertible debt.                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(13) | Includes 780,000 shares underlying stock options and
  534,770 shares underlying warrants. Mr. Dunlap is one of our former
  directors.                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(14) | Includes 1,155,094 actual shares of common stock and
  498,340 shares underlying convertible debt. Mr. Mark Crossen is a principal
  of Raynemark Investments LLC.                                                                                                                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(15) | Includes 1,517,761 actual shares of common stock and
  35,596 shares underlying convertible debt.                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(16) | Includes 854,037 actual shares of common stock,
  245,000 shares underlying warrants, and 113,989 shares underlying convertible
  debt.                                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(17) | Represents actual shares of common stock. Mr. Todd
  Lahti represents Biostar, Inc. and has voting and dispositive control over
  shares held.                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(18) | Includes 477,500 shares underlying warrants, 778,767
  shares underlying convertible debt and 6,749,999 shares underlying the
  conversion of 1,542,857 shares of Series E Convertible Preferred Stock. Mr.
  Gerald R. Forsythe has voting and dispositive control over the shares held by
  New Frontiers Capital LLC.                                                                                                                                      

61

---



|     |                                                                                                                                                                                                                                                                                                            
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(19) | Represents shares issuable upon conversion of
  457,143 shares of Series E Convertible Preferred Stock. Applera Corporation
  is a publicly traded company, and the corporation itself has voting and
  depository control over the preferred shares held.                                                 
|     |                                                                                                                                                                                                                                                                                                            
|(20) | Includes 905,019 actual shares of common stock held,
  233,839 shares underlying warrants, 786,742 shares underlying the conversion
  of 363,475 shares of Series G Convertible Preferred Stock, and 130,000 shares
  underlying convertible debt. Represents shares held directly and by family
  members.

|         |                                                                            
|-------- | ---------------------------------------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Management
Loans

In
January, March and June, 2006, Peter Meyer, our Co-Chairman, made short-term
working capital loans to us in the amounts of $350,000, $400,000 and $200,000,
respectively, all at the rate of 10% per annum. The $350,000 note was repaid in
full in January 2006. At December 31, 2006, we had $600,000 due on these loans,
with $28,329 of accrued and unpaid interest.

In
February and March 2005, Peter Meyer, our Co-Chairman, made short-term working
capital loans to us in the aggregate principal amount of $300,000. These loans
are evidenced by a note which bears interest at the rate of 12% per annum and
is due on the earlier of (i) March 31, 2006 and, (ii) our receipt of a certain
milestone payment or proceeds of at least $1,000,000 from any debt or equity
financing. At December 31, 2006, we had $300,000 due on these loans, with
$66,033 of accrued and unpaid interest.

In
February and March 2005, Clifton Baile and Howard Minigh, members of our board
of directors, and Fergus Reid, a former member of our board of directors, made
short-term working capital loans to us in the aggregate principal amount of
$70,000. These loans are evidenced by notes which bear interest at the rate of
10% per annum and which were due on April 15, 2005. These notes were not repaid
on April 15, 2005 and now bear interest at 15% per annum. These notes are due
upon our receipt of proceeds of at least $1,000,000 from an equity financing or
any milestone payment. At December 31, 2006, we had $70,000 due on these loans,
with $19,124 of accrued and unpaid interest.

During
May and June 2003 we received working capital loans from Peter Meyer and
Clifton Baile, both members of our board of directors, totaling $560,000, which
loans bear interest at 12% per annum. We had outstanding amounts due on these
loans of $250,000 at December 31, 2006, and $145,808 of accrued and unpaid
interest. We repaid $280,000 plus accrued interest in November 2003 and $30,000
plus accrued interest in February 2004. In connection with these loans, we
issued warrants to purchase 224,000 shares of common stock. On April 21, 2005,
these warrants were converted into 123,200 shares of common stock. In 2004 and
2005, we issued additional warrants to purchase 296,000 and 40,000 shares of
common stock, respectively, to these lenders as a penalty provision and the
interest rate was increased to 18% per annum. On April 21, 2005, these penalty
warrants were converted into 147,840 shares of common stock.

During
the period of February through March 2002 we received working capital loans
from Peter Meyer and John Block, both members of our board of directors,
totaling $75,000, which loans bear interest at 20% per annum and are payable on
demand. We had outstanding amounts due on these loans of $75,000 at December
31, 2006, and $74,806 of accrued and unpaid interest.

62

---



During
the period August 2000 through March 2001, Dr. Quattlebaum, our Co-Chairman and
Chief Executive Officer, made working capital loans to us totaling $264,000. At
December 31, 2006 and 2005, we had $264,000 due on these loans. These loans are
evidenced by notes bearing interest at prime plus 1% and are due on demand.

407(a)
Director Independence

Pursuant
to the NASDAQ rules, the Board has determined that the following directors are
independent:

| |               
| | --------------
| | Clifton Baile 
| | John Block    
| | Victor Casini 
| | Peter Drake   
| | Howard Minigh 
| | Peter Meyer   
| | Edward Shonsey

63

---



CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

|                  | 
|----------------- | 
|TABLE OF CONTENTS | 
|                 

|                                                                                                                  |     
|----------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                  | Page
|                                                                                                                  |     
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                           | F-2 
|                                                                                                                  |     
|FINANCIAL STATEMENTS:                                                                                             |     
|                                                                                                                  |     
|Consolidated Balance Sheets at December 31, 2006 and 2005                                                         | F-3 
|                                                                                                                  |     
|Consolidated Statements of Operations for the Years Ended December
  31, 2006, 2005, and 2004                     | F-4 
|                                                                                                                  |     
|Consolidated Statements of Cash Flows for the Years Ended December
  31, 2006, 2005, and 2004                     | F-5 
|                                                                                                                  |     
|Consolidated Statements of Stockholders Equity (Deficit) for the
  Years Ended December 31, 2006, 2005, and 2004 | F-6 
|                                                                                                                  |     
|Notes to Consolidated Financial Statements                                                                        | F-8 

F-1

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and Shareholders of
MetaMorphix, Inc.
Beltsville, Maryland

We have
audited the accompanying consolidated balance sheets of MetaMorphix, Inc. and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2006.  These financial statements are the
responsibility of the Companys management.
Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.  Accordingly, we express no such opinion.  An audit
also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of MetaMorphix, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States
of America.

The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed
in Note 1 to the financial statements, the Companys recurring losses and
negative cash flows from operations, working capital deficiency and significant
accumulated deficit raise substantial doubt about its ability to continue as a
going concern.  Managements plans
concerning these matters are also described in Note 1 to the financial
statements.  The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

DELOITTE &
TOUCHE LLP

McLean,
Virginia
April 2, 2007

F-2

---



METAMORPHIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------------ | --------------------- | - | ------------ | -
|                                                                                                                                                                                                         |  | December
  31,
  2006 |              | December
  31,
  2005 |  
|                                                                                                                                                                                                         |  |                       |              |                       |  
|ASSETS                                                                                                                                                                                                   |  |                       |              |                       |   |              |  
|CURRENT ASSETS:                                                                                                                                                                                          |  |                       |              |                       |   |              |  
|Cash and cash
equivalents                                                                                                                                                                                |  | $                     | 277,680      |                       | $ | 1,382,225    |  
|Accounts receivable                                                                                                                                                                                      |  |                       | 276,852      |                       |   | 253,827      |  
|Prepaid expenses and other
current assets                                                                                                                                                                |  |                       | 101,661      |                       |   | 131,028      |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|Total current assets                                                                                                                                                                                     |  |                       | 656,193      |                       |   | 1,767,080    |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|PROPERTY AND EQUIPMENTNet                                                                                                                                                                               |  |                       | 1,724,826    |                       |   | 2,076,656    |  
|GOODWILL                                                                                                                                                                                                 |  |                       | 3,739,870    |                       |   | 3,739,870    |  
|LEASE SECURITY DEPOSITS                                                                                                                                                                                  |  |                       | 204,494      |                       |   | 204,494      |  
|DEFERRED DEBT ISSUE COSTS                                                                                                                                                                                |  |                       | 3,923,570    |                       |   | 5,396,050    |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|                                                                                                                                                                                                         |  |                       | 9,592,760    |                       |   | 11,417,070   |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|TOTAL ASSETS                                                                                                                                                                                             |  | $                     | 10,248,953   |                       | $ | 13,184,150   |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                         |  |                       |              |                       |   |              |  
|CURRENT LIABILITIES:                                                                                                                                                                                     |  |                       |              |                       |   |              |  
|Accounts payable and accrued
expenses                                                                                                                                                                    |  | $                     | 7,542,233    |                       | $ | 9,042,468    |  
|Accrued compensation                                                                                                                                                                                     |  |                       | 4,697,961    |                       |   | 5,766,847    |  
|Accrued dividends                                                                                                                                                                                        |  |                       | 3,272,114    |                       |   | 1,877,160    |  
|Short-term notes
payable                                                                                                                                                                                 |  |                       | 2,254,891    |                       |   | 2,489,004    |  
|Notes payable to officers and
directors                                                                                                                                                                  |  |                       | 2,184,498    |                       |   | 1,584,498    |  
|Deferred revenue                                                                                                                                                                                         |  |                       | 1,071,635    |                       |   | 1,420,827    |  
|Celera purchase
obligation                                                                                                                                                                               |  |                       | 2,525,712    |                       |   | 2,026,442    |  
|Derivative liability                                                                                                                                                                                     |  |                       | 100,475      |                       |   | 43,214       |  
|Accrued interest                                                                                                                                                                                         |  |                       | 2,903,556    |                       |   | 2,284,145    |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|Total current
liabilities                                                                                                                                                                                |  |                       | 26,553,075   |                       |   | 26,534,605   |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|LONG-TERM NOTES PAYABLE, net of discount of
$4,162,067 and $5,610,299
  at December 31, 2006 and 2005, respectively                                                                                      |  |                       | 32,373,497   |                       |   | 19,766,221   |  
|CELERA PURCHASE OBLIGATION                                                                                                                                                                               |  |                       | 3,670,936    |                       |   | 3,933,767    |  
|ACCRUED INTEREST                                                                                                                                                                                         |  |                       | 2,472,743    |                       |   | 1,188,332    |  
|OTHER LONG-TERM LIABILITIES                                                                                                                                                                              |  |                       | 144,772      |                       |   | 177,575      |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|Total liabilities                                                                                                                                                                                        |  |                       | 65,215,023   |                       |   | 51,600,500   |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|COMMITMENTS AND CONTINGENCIES (Note
12)                                                                                                                                                                  |  |                       |              |                       |   |              |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|STOCKHOLDERS EQUITY (DEFICIT):                                                                                                                                                                          |  |                       |              |                       |   |              |  
|Convertible Preferred stock,
$0.001 par value22,000,000 shares
  authorized as of December 31, 2006 and 2005; 7,326,715 shares issued and
  outstanding as of December 31, 2006 and 2005                |  |                       | 59,918,772   |                       |   | 59,918,772   |  
|Common stock, $0.001 par
value75,000,000 shares authorized as of
  December 31, 2006 and 2005; 21,075,141 and 20,369,719 shares issued and
  outstanding as of December 31, 2006 and 2005, respectively |  |                       | 21,075       |                       |   | 20,370       |  
|Additional paid-in
capital                                                                                                                                                                               |  |                       | 79,976,295   |                       |   | 77,847,349   |  
|Accumulated other comprehensive
loss                                                                                                                                                                     |  |                       | (78,611      | )                     |   | (76,458      | )
|Accumulated deficit                                                                                                                                                                                      |  |                       | (194,803,601 | )                     |   | (176,126,383 | )
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|Total stockholders equity
(deficit)                                                                                                                                                                     |  |                       | (54,966,070  | )                     |   | (38,416,350  | )
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)                                                                                                                                                     |  | $                     | 10,248,953   |                       | $ | 13,184,150   |  
|                                                                                                                                                                                                         |  |                       |              |                       |   |              |  

See notes to consolidated financial
statements.

F-3

---



METAMORPHIX, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF OPERATIONS

|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|------------------------------------------------------------------------- |  | --------------------- | ----------- | --------------------- | - | --------------------- | - | - | ----------- | -
|                                                                          |  | Year Ended            |            
|                                                                          |  |                       |            
|                                                                          |  | December
  31,
  2006 |             | December
  31,
  2005 |   | December
  31,
  2004 |  
|                                                                          |  |                       |             |                       |   |                       |  
|REVENUE                                                                   |  | $                     | 3,355,585   |                       | $ | 2,516,064             |   | $ | 5,704,796   |  
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|OPERATING COSTS AND EXPENSES:                                             |  |                       |             |                       |   |                       |   |   |             |  
|Cost of revenue                                                           |  |                       | 2,177,672   |                       |   | 1,552,312             |   |   | 5,306,663   |  
|Research and development                                                  |  |                       | 2,599,724   |                       |   | 4,311,880             |   |   | 4,364,421   |  
|General and administrative                                                |  |                       | 8,314,841   |                       |   | 10,041,448            |   |   | 10,698,706  |  
|Depreciation and amortization                                             |  |                       | 343,003     |                       |   | 2,432,992             |   |   | 12,991,210  |  
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|Total operating costs and expenses                                        |  |                       | 13,435,240  |                       |   | 18,338,632            |   |   | 33,361,000  |  
|OTHER INCOME (EXPENSE):                                                   |  |                       |             |                       |   |                       |   |   |             |  
|Interest expense and accretion of debt
discount                           |  |                       | (6,643,336  | )                     |   | (5,384,033            | ) |   | (18,984,610 | )
|Debt issue costs                                                          |  |                       | (1,938,189  | )                     |   | (2,119,070            | ) |   | (2,297,702  | )
|Debt conversion expense                                                   |  |                       |            |                       |   | (93,696               | ) |   | (3,281,462  | )
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|Other (expense) income                                                    |  |                       | (16,038     | )                     |   | (192,457              | ) |   | 36,516      |  
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|NET LOSS                                                                  |  |                       | (18,677,218 | )                     |   | (23,611,824           | ) |   | (52,183,462 | )
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|Preferred stock dividends and accretion of
beneficial conversion features |  |                       | (1,394,954  | )                     |   | (1,386,939            | ) |   | (1,604,352  | )
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS                              |  | $                     | (20,072,172 | )                     | $ | (24,998,763           | ) | $ | (53,787,814 | )
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|Net loss per common share:                                                |  |                       |             |                       |   |                       |   |   |             |  
|Basic and diluted                                                         |  | $                     | (0.96       | )                     | $ | (1.48                 | ) | $ | (12.83      | )
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  
|Weighted average number of shares
outstanding:                            |  |                       |             |                       |   |                       |   |   |             |  
|Basic and diluted                                                         |  |                       | 20,808,534  |                       |   | 16,925,770            |   |   | 4,192,412   |  
|                                                                          |  |                       |             |                       |   |                       |   |   |             |  

See notes to consolidated financial statements.

F-4

---



METAMORPHIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|----------------------------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- | - | ------------------- | - | - | ----------- | -
|                                                                                    |  | Year Ended          |            
|                                                                                    |  |                     |            
|                                                                                    |  | December 31,
  2006 |             | December 31,
  2005 |   | December 31,
  2004 |  
|                                                                                    |  |                     |             |                     |   |                     |  
|CASH FLOWS FROM OPERATING
  ACTIVITIES:                                             |  |                     |             |                     |   |                     |   |   |             |  
|Net loss                                                                            |  | $                   | (18,677,218 | )                   | $ | (23,611,824         | ) | $ | (52,183,462 | )
|Adjustments to reconcile net loss to net cash flows
used in operating
  activities: |  |                     |             |                     |   |                     |   |   |             |  
|Depreciation and amortization                                                       |  |                     | 470,056     |                     |   | 2,591,092           |   |   | 13,131,841  |  
|Accretion of debt discount                                                          |  |                     | 2,140,388   |                     |   | 1,838,401           |   |   | 1,801,071   |  
|Amortization of deferred debt issue costs                                           |  |                     | 1,938,219   |                     |   | 1,678,825           |   |   | 1,576,856   |  
|Share-based payment expense                                                         |  |                     | 2,722,030   |                     |   | 3,805,124           |   |   | 18,215,132  |  
|Induced conversion expense                                                          |  |                     |            |                     |   | 93,696              |   |   | 3,281,462   |  
|Fair value change in embedded derivative                                            |  |                     | 26,337      |                     |   |                    |   |   |            |  
|(Gain) loss on disposal of fixed assets                                             |  |                     | 647         |                     |   | 197,023             |   |   | 4,990       |  
|Changes in assets and liabilities:                                                  |  |                     |             |                     |   |                     |   |   |             |  
|Accounts receivable                                                                 |  |                     | (23,026     | )                   |   | (10,969             | ) |   | (132,222    | )
|Prepaid expenses and other current
assets                                           |  |                     | 29,326      |                     |   | (27,906             | ) |   | 29,844      |  
|Lease security deposits                                                             |  |                     |            |                     |   | 2,770               |   |   | (79,652     | )
|Accounts payable and accrued expenses                                               |  |                     | (1,508,119  | )                   |   | 3,970,914           |   |   | (1,326,929  | )
|Accrued compensation                                                                |  |                     | (1,068,886  | )                   |   | 1,267,896           |   |   | 1,262,089   |  
|Deferred purchase obligation                                                        |  |                     | 236,439     |                     |   | 251,133             |   |   | (1,400,000  | )
|Deferred revenue                                                                    |  |                     | (349,192    | )                   |   | (60,004             | ) |   | 980,831     |  
|Accrued interest                                                                    |  |                     | 4,184,688   |                     |   | 2,764,091           |   |   | 2,388,579   |  
|Other, net                                                                          |  |                     | (32,755     | )                   |   | (31,146             | ) |   | 44,625      |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Net
  cash flows used in operating activities                                       |  |                     | (9,911,066  | )                   |   | (5,280,884          | ) |   | (12,404,945 | )
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|CASH FLOWS FROM INVESTING
  ACTIVITIES:                                             |  |                     |             |                     |   |                     |   |   |             |  
|Purchases of property and equipment                                                 |  |                     | (21,132     | )                   |   | (72,913             | ) |   | (281,039    | )
|Proceeds from sale of property and
equipment                                        |  |                     |            |                     |   | 23,863              |   |   | 5,000       |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Net cash flows used in investing
activities                                         |  |                     | (21,132     | )                   |   | (49,050             | ) |   | (276,039    | )
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|CASH FLOWS FROM FINANCING
  ACTIVITIES:                                             |  |                     |             |                     |   |                     |   |   |             |  
|Proceeds from debt issuances                                                        |  |                     | 9,828,177   |                     |   | 6,329,208           |   |   | 6,607,789   |  
|Payments of debt issue costs                                                        |  |                     | (444,524    | )                   |   | (548,903            | ) |   | (1,500,406  | )
|Principal payments on notes                                                         |  |                     | (596,500    | )                   |   | (119,528            | ) |   | (3,205,027  | )
|Principal payments under capital lease
obligations                                  |  |                     |            |                     |   |                    |   |   | (10,503     | )
|Proceeds from stock issuances                                                       |  |                     | 40,500      |                     |   | 564,618             |   |   | 11,230,897  |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Net cash flows provided by financing
activities                                     |  |                     | 8,827,653   |                     |   | 6,225,395           |   |   | 13,122,750  |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Effects of exchange rate
  differences on cash and cash equivalents                 |  |                     |            |                     |   | (21,209             | ) |   | (17,025     | )
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                |  |                     | (1,104,545  | )                   |   | 874,252             |   |   | 424,741     |  
|CASH AND CASH
  EQUIVALENTSBeginning of year                                       |  |                     | 1,382,225   |                     |   | 507,973             |   |   | 83,232      |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|CASH AND CASH
  EQUIVALENTSEnd of year                                             |  | $                   | 277,680     |                     | $ | 1,382,225           |   | $ | 507,973     |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:                                |  |                     |             |                     |   |                     |   |   |             |  
|Cash paid during the period for interest                                            |  | $                   | 84,392      |                     | $ | 108,509             |   | $ | 263,213     |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|NON-CASH INVESTING AND
  FINANCING ACTIVITIES:                                      |  |                     |             |                     |   |                     |   |   |             |  
|Debt converted into equity                                                          |  | $                   |            |                     | $ | 153,892             |   | $ | 3,762,693   |  
|Acquisition of fixed assets under capital
lease                                     |  |                     |            |                     |   |                    |   |   | 152,194     |  
|Conversion of notes and accrued interest into new
notes                             |  |                     | 2,280,867   |                     |   | 2,293,153           |   |   | 2,933,489   |  
|Additions of property included in accounts
payable                                  |  |                     | 97,741      |                     |   | 607,212             |   |   |            |  

See notes to consolidated financial
statements.

F-5

---



METAMORPHIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ------ | ---------- | ------ | ---------- | ------ | - | ---------- |  | --------- | - | - | ---------- | -
|                                                                                                              |  | 2006       |  | 2005   |            | 2004   |           
|                                                                                                              |  |            |  |        |            |        |           
|                                                                                                             
|                                                                                                              |  | Shares     |  | Amount |            | Shares |            | Amount |   | Shares     |  | Amount    |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |  
|Convertible Preferred Stock, Series A                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning and end of year                                                                            |  | 1,001,000  |  | $      | 5,850,001  |        | 1,001,000  |        | $ | 5,850,001  |  | 1,001,000 |   | $ | 5,850,001  |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Convertible Preferred Stock, Series B                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning and end of year                                                                            |  | 200,000    |  |        | 500,000    |        | 200,000    |        |   | 500,000    |  | 200,000   |   |   | 500,000    |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Convertible Preferred Stock, Series C                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning and end of year                                                                            |  | 714,661    |  |        | 1,753,503  |        | 714,661    |        |   | 1,753,503  |  | 714,661   |   |   | 1,753,503  |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Convertible Preferred Stock, Series D                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning and end of year                                                                            |  | 26,667     |  |        | 360,017    |        | 26,667     |        |   | 360,017    |  | 26,667    |   |   | 360,017    |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Convertible Preferred Stock, Series E                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning and end of year                                                                            |  | 2,000,000  |  |        | 35,000,000 |        | 2,000,000  |        |   | 35,000,000 |  | 2,000,000 |   |   | 35,000,000 |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Convertible Preferred Stock, Series F                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning of year                                                                                    |  | 1,834,440  |  |        | 7,710,078  |        | 1,834,440  |        |   | 7,699,890  |  |          |   |   |           |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Issuance of Series F offering                                                                                 |  |           |  |        |           |        |           |        |   |           |  | 352,156   |   |   | 1,472,367  |  
|Issuance of Series F shares upon debt                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|conversion transaction                                                                                        |  |           |  |        |           |        |           |        |   |           |  | 1,482,284 |   |   | 6,227,523  |  
|                                                                                                             
|Other                                                                                                         |  |           |  |        |           |        |           |        |   | 10,188     |  |          |   |   |           |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, end of year                                                                                          |  | 1,834,440  |  |        | 7,710,078  |        | 1,834,440  |        |   | 7,710,078  |  | 1,834,440 |   |   | 7,699,890  |  
|Convertible Preferred Stock, Series G                                                                         |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, beginning of year                                                                                    |  | 1,549,947  |  |        | 8,745,173  |        | 1,461,547  |        |   | 8,106,276  |  |          |   |   |           |  
|                                                                                                             
|Issuance of Series G shares upon debt conversion
transaction                                                  |  |           |  |        |           |        | 16,882     |        |   | 143,699    |  |          |   |   |           |  
|Issuance of Series G shares                                                                                   |  |           |  |        |           |        | 71,518     |        |   | 495,198    |  | 1,461,547 |   |   | 8,106,276  |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, end of year                                                                                          |  | 1,549,947  |  |        | 8,745,173  |        | 1,549,947  |        |   | 8,745,173  |  | 1,461,547 |   |   | 8,106,276  |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Total Convertible Preferred Stock                                                                             |  | 7,326,715  |  |        | 59,918,772 |        | 7,326,715  |        |   | 59,918,772 |  | 7,238,315 |   |   | 59,269,687 |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Common Stock                                                                                                  |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|                                                                                                             
|Balance, beginning of year                                                                                    |  | 20,369,719 |  |        | 20,370     |        | 9,488,878  |        |   | 9,489      |  | 4,454,770 |   |   | 4,455      |  
|                                                                                                             
|Exercise of stock options and warrants                                                                        |  | 134,604    |  |        | 134        |        | 18,678     |        |   | 19         |  | 12,516    |   |   | 13         |  
|                                                                                                             
|Cancellation of common shares in connection with
issuance of Series F
  Preferred shares upon debt conversion |  |           |  |        |           |        |           |        |   |           |  | (392,694  | ) |   | (393       | )
|                                                                                                             
|Issuance of common stock to satisfy accrued
expenses                                                          |  |           |  |        |           |        | 100,000    |        |   | 100        |  |           |   |   |            |  
|                                                                                                             
|Conversion of warrants to common stock                                                                        |  | 570,818    |  |        | 571        |        | 10,762,163 |        |   | 10,762     |  | 5,414,286 |   |   | 5,414      |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  
|Balance, end of year                                                                                          |  | 21,075,141 |  | $      | 21,075     |        | 20,369,719 |        | $ | 20,370     |  | 9,488,878 |   | $ | 9,489      |  
|                                                                                                              |  |            |  |        |            |        |            |        |   |            |  |           |   |   |            |  

(Continued)


See notes to consolidated financial
statements.

F-6

---



METAMORPHIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT), CONTINUED

|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------------ | ---- | - | ------------ | - | - | ------------ | -
|                                                                                                              |  | 2006 |              | 2005 |   | 2004         |  
|                                                                                                              |  |      |              |      |   |              |  
|                                                                                                             
|Additional Paid-In Capital                                                                                    |  |      |              |      |   |              |   |   |              |  
|Balance, beginning of year                                                                                    |  | $    | 77,847,349   |      | $ | 74,365,319   |   | $ | 46,465,366   |  
|Exercise of stock options and warrants                                                                        |  |      | 120,035      |      |   | 37,925       |   |   | 11,316       |  
|Issuance of common stock to satisfy accrued
expenses                                                          |  |      |             |      |   | 264,900      |   |   |             |  
|Debt conversion                                                                                               |  |      |             |      |   | 93,696       |   |   | 2,463,759    |  
|Forgiveness of bonus by officer                                                                               |  |      |             |      |   | 195,976      |   |   |             |  
|Cancellation of common shares in connection with
issuance of Series F
  Preferred shares upon debt conversion |  |      |             |      |   |             |   |   | (2,742,826   | )
|Conversion of warrants to common stock                                                                        |  |      | (571         | )    |   | (10,762      | ) |   | (5,414       | )
|Preferred stock beneficial conversion
feature                                                                 |  |      |             |      |   |             |   |   | 1,114,130    |  
|Preferred stock dividends and accretion of
beneficial conversion
  feature                                    |  |      | (1,394,954   | )    |   | (1,386,939   | ) |   | (1,604,352   | )
|Issuance of stock warrants                                                                                    |  |      | 682,406      |      |   | 899,869      |   |   | 25,303,025   |  
|Share-based payment expense                                                                                   |  |      | 2,722,030    |      |   | 3,387,365    |   |   | 3,360,315    |  
|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|                                                                                                             
|Balance, end of year                                                                                          |  |      | 79,976,295   |      |   | 77,847,349   |   |   | 74,365,319   |  
|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|Accumulated Other Comprehensive Loss                                                                          |  |      |              |      |   |              |   |   |              |  
|Balance, beginning of year                                                                                    |  |      | (76,458      | )    |   | (32,228      | ) |   | (3,662       | )
|Foreign currency translation adjustment
                                                                     |  |      | (2,153       | )    |   | (44,230      | ) |   | (28,566      | )
|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|                                                                                                             
|Balance, end of year                                                                                          |  |      | (78,611      | )    |   | (76,458      | ) |   | (32,228      | )
|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|Accumulated Deficit                                                                                           |  |      |              |      |   |              |   |   |              |  
|Balance, beginning of year                                                                                    |  |      | (176,126,383 | )    |   | (152,514,559 | ) |   | (100,331,097 | )
|Net loss                                                                                                     |  |      | (18,677,218  | )    |   | (23,611,824  | ) |   | (52,183,462  | )
|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|                                                                                                             
|Balance, end of year                                                                                          |  |      | (194,803,601 | )    |   | (176,126,383 | ) |   | (152,514,559 | )
|                                                                                                              |  |      |              |      |   |              |   |   |              |  
|                                                                                                             
|Total Shareholders Equity (Deficit)                                                                          |  | $    | (54,966,070  | )    | $ | (38,416,350  | ) | $ | (18,902,292  | )
|                                                                                                              |  |      |              |      |   |              |   |   |              |  

|  |                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Combined, these amounts
  represent total comprehensive loss of $18,679,371, $23,656,054 and
  $52,212,028 for the years ended December 31, 2006, 2005, and 2004,
  respectively.

See notes to consolidated
financial statements.

F-7

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | NATURE OF THE BUSINESS AND GOING CONCERN-MANAGEMENTS PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | MetaMorphix,
  Inc. (the Company) is a biopharmaceutical company focused on discovering,
  acquiring, developing, and commercializing products and technologies to
  improve animal health, livestock production, and human health. The Company
  was incorporated on September 1, 1994.                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company
  has two key technology platforms: a) livestock genomics and b) growth and
  differentiation factors. These technologies are commercially employed to both
  increase livestock meat quality and production efficiency and to potentially
  treat muscle-wasting diseases in humans, such as Muscular Dystrophy and
  Sarcopenia.                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | These
  consolidated financial statements include the accounts of MetaMorphix, Inc.
  and its wholly-owned subsidiaries: MMI Genomics, Inc., MMI Canada Inc.,
  MetaMorphix International, Inc., and MetaMorphix Holdings, Inc. All
  intercompany transactions and balances have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In the
  course of its operations, the Company has sustained operating losses and
  negative cash flows from operations and expects such losses to continue in
  the foreseeable future. As of December 31, 2006, the Company had a working
  capital deficiency of $25,896,882 and an accumulated deficit of $194,803,601.
  The Company intends and is currently working to finance its operations
  primarily through future debt and equity financings and future revenues.                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Management
  has been pursuing the applicable steps to undertake the initial public
  offering, or IPO, process. This process is currently proceeding, although no
  completion date can be estimated at this time. If we are unable to generate
  positive operating cash flow prior to an IPO, we anticipate that the proceeds
  from the IPO will be sufficient to become cash flow positive from operations.
  However, we may be unable to successfully complete the IPO process.                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | In addition,
  Management is pursuing additional financings through the issuance of a new
  private placement of convertible promissory notes. While we anticipate that
  the proceeds from additional financings will be sufficient to fund our
  operations until we can generate positive cash flow from operations, they may
  be insufficient.                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Although the
  Company recognizes the need to raise funds in the near future, we may be
  unsuccessful in consummating any such transaction, or, if we did consummate
  such a transaction, that the terms and conditions of such financing will be
  favorable to the Company. The Company believes that its current assets will
  not be sufficient to fund operations in 2007. This uncertainty raises
  substantial doubt about the Companys ability to continue as a going concern.
  The accompanying consolidated financial statements do not include any
  adjustments that might result from the outcome of this uncertainty.

F-8

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Principles of
  ConsolidationThe consolidated financial statements include the accounts of the
  Company and its wholly owned subsidiaries. All intercompany balances and
  transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Use of EstimatesThe preparation of consolidated financial
  statements in conformity with accounting principles generally accepted in the
  United States 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 consolidated financial
  statements and the reported amounts of revenues and expenses during the
  reporting period. Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Risks and
  UncertaintiesThe Companys future results of operations involve a number of risks
  and uncertainties. Factors that could affect the Companys future operations include
  delays or unexpected results in current research projects; the Companys
  ability to effectively manage operating costs and increase operating
  efficiencies; impairment of certain intangible assets; rapid technological
  and market change and the transition to new methodologies; the need to
  protect intellectual property; the capability of the Company to obtain
  additional capital financing on terms acceptable to the Company; the
  uncertainty of customer acceptance of the results of research projects; the ability
  to attract and retain highly qualified employees; and other one-time events.                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Revenue
  Recognition and Deferred RevenueThe Companys revenue recognition policies
  are in accordance with the Securities and Exchange Commissions (SEC) Staff
  Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
  as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition. The
  Company has license and development agreements with several pharmaceutical,
  biotechnology, and food production companies. The agreements typically
  include nonrefundable license fees paid to the Company, funding of research
  and development by the counterparty, payments to the Company based upon
  achievement of certain milestones and royalties on net product sales. Revenues,
  including nonrefundable license fees, are recognized when the Company has a
  contractual right to receive such payments, provided a contractual
  arrangement exists, the contract price is fixed and determinable, the
  collection of the resulting receivable is reasonably assured, and the Company
  has no further performance obligations under the arrangement.                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | When the Company has performance obligations under an arrangement,
  revenue recognition is deferred until the obligations are fulfilled. Where the
  Companys level-of-effort is relatively constant over the performance period,
  the revenue is recognized on a straight-line basis. The determination of the
  performance period involves judgment by management. This judgment includes
  cost based estimates to establish level-of-effort progress. Research and
  development revenues and other revenues from milestone payments are deferred
  until achievement of the related milestone; provided the Company has no
  continuing performance obligations and the milestone payment is reasonable in
  relation to the effort expended or the risk associated with its achievement.
  If any of these conditions are not met, the milestone payments are deferred
  and recognized as revenue over the term of the arrangement as the Company
  completes its performance obligations. We allocate the
  consideration to each of the deliverables (i.e. milestones) on a contract
  through an analysis of costs incurred as they related to specific steps

F-9

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | with
  a Work Plan This treatment is in accordance with Staff Accounting Bulletin
  No. 104, Revenue
  Recognition, Selected Revenue Recognition Issues  Section 3: Delivery and
  Performance,as the costs incurred coincide with proportionate
  performance of the services.                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company currently provides parentage and identification
  genotyping services. The Company recognizes revenue for genotyping services
  at the time the services are provided and no additional performance is
  required by the Company. Amounts received prior to being earned are recorded
  as deferred revenue until earned.                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Research and
  DevelopmentResearch and development costs include amounts spent for product
  development, patent costs, and personnel/overhead costs related to the
  development or acquisition of the Companys technology. Research and development
  costs also include share-based compensation expense and collaborative
  agreements requiring the Company to pay periodic license fees, research
  payments, additional payments, royalty fees, and milestone payments. All
  research and development costs are expensed in the period incurred.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Cash and Cash
  EquivalentsCash and cash equivalents include cash on hand, demand deposits, and
  short-term investments with maturities of less than 90 days.                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Accounts
  Receivable and Allowance for Doubtful AccountsTrade accounts receivable are recorded at
  the invoiced amount and do not bear interest. The Company believes its
  customers are creditworthy based on its dealings and collection history, and
  currently has no allowance for doubtful accounts. Account balances are
  charged off against an allowance when the Company feels it is probable the
  receivable will not be recovered. The Company does not have any
  off-balance-sheet credit exposure related to its customers.         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Concentrations of
  Credit RiskFinancial instruments that potentially subject the Company to
  concentrations of credit risk are principally accounts receivable. The
  Company had $276,852 and $253,827 of accounts receivable outstanding at
  December 31, 2006 and December 31, 2005, respectively. Accounts receivable
  concentration by customer is as follows:                                                                                                                                                                                  

|           |  |                                                      |      |      |  |      |  
|---------- |  | ---------------------------------------------------- | ---- | ---- |  | ---- | -
|           |  | Percentage
  of Accounts Receivable at
  December 31 |     
|           |  | 2006                                                 |      | 2005 | 
|           |  |                                                      |      |      | 
|          
|Customer A |  |                                                      | 29.8 | %    |  | 7.4  | %
|Customer B |  |                                                      | 12.7 | %    |  | 31.5 | %
|Customer C |  |                                                      | 5.4  | %    |  | 11.8 | %
|Customer D |  |                                                      | 35.3 | %    |  | 0.0  | %
|           |  |                                                      |      |      |  |      |  
|           |  |                                                      |      |      |  |      |  
|Total      |  |                                                      | 83.2 | %    |  | 50.7 | %
|           |  |                                                      |      |      |  |      |  

F-10

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys customers are primarily associations which purchase the
  Companys parentage and identification genotyping services. The Company has
  not experienced any significant credit losses and does not require collateral
  on receivables. The Company has three customers within its Animal Genomics
  segment which comprise a significant percentage of total revenue. Revenue
  percentage by customer is as follows:

|           |  |                                                                 |      |      |  |      |   |  |      |  
|---------- |  | --------------------------------------------------------------- | ---- | ---- |  | ---- | - |  | ---- | -
|           |  | Percentage
  of Total Revenue for the year ended
  December 31, |     
|           |  | 2006                                                            |      | 2005 |  | 2004 |  
|           |  |                                                                 |      |      |  |      |  
|          
|Customer 1 |  |                                                                 | 12.4 | %    |  | 0.0  | % |  | 55.2 | %
|Customer 2 |  |                                                                 | 34.8 | %    |  | 38.1 | % |  | 16.8 | %
|Customer 3 |  |                                                                 | 9.6  | %    |  | 11.1 | % |  | 3.2  | %
|           |  |                                                                 |      |      |  |      |   |  |      |  
|           |  |                                                                 |      |      |  |      |   |  |      |  
|Total      |  |                                                                 | 56.8 | %    |  | 49.2 | % |  | 75.2 | %
|           |  |                                                                 |      |      |  |      |   |  |      |  

| |                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property and
  EquipmentProperty
  and equipment is recorded at cost. Improvements and replacements that extend
  the useful life of an asset are capitalized. Maintenance and repairs are
  expensed as incurred. Depreciation is computed on the straight-line basis
  over the estimated useful lives of the assets as follows:

Office
  equipment
3-15 yearsLaboratory
  equipment
5-10 yearsLeasehold
  improvements
Lesser of
  estimated useful life or remaining lease term


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  evaluates its long-lived assets for impairment whenever events or changes in
  circumstances indicate that the carrying amount of such assets may not be
  recoverable. Recoverability of an asset to be held and used is measured by a
  comparison of the carrying amount of the asset to future net cash flows
  expected to be generated by the asset. Any impairment to be recognized is
  measured by the amount by which the carrying amount of the asset exceeds its
  fair value. Based on the evaluations performed, the Company determined that the
  recorded property and equipment had not been impaired as of December 31, 2006
  or 2005. Assets to be disposed of are reported at the lower of the carrying
  amount or fair value less estimated costs to sell.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Patent CostsPatent
  application and maintenance costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Share-Based PaymentsIn
  2003, the Company elected to adopt the fair value based method of accounting
  for employee stock options as set forth in Statement of Financial Accounting
  Standard, or SFAS, No. 123,Accounting for Stock-Based Compensation,
  using the retroactive restatement method described in SFAS No. 148, Accounting
  for Stock-Based Compensation  Transition and Disclosure. Under
  the fair value based method of accounting, compensation cost is measured at
  the grant date based on the value of the award and is recognized as expense
  over the vesting period.                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Effective
  January 1, 2004, the Company adopted SFAS No. 123(R), Share-Based Payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-11

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The adoption of SFAS No. 123(R) did not have a material impact on the
  Companys results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Company
  utilizes the Black-Scholes option pricing valuation model to calculate the
  value of share-based payments in accordance with SFAS No. 123(R).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Goodwill
  Goodwill, which is not subject to amortization, has a balance of $3,739,870
  at December 31, 2006 and 2005. Goodwill was evaluated at December 31, 2006
  and 2005 for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
  The evaluation takes into account operating results, business plans,
  forecasts, and other relevant factors. To the extent impairments are
  identified, they would be charged to operations in such period. Based on the
  evaluations performed, the Company determined that the recorded goodwill had
  not been impaired as of December 31, 2006 or 2005.                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Intellectual Property RightsIntellectual
  property rights are acquisition-related intangible assets amortized over
  three years. The recoverability of these assets is reviewed annually, or when
  fact or circumstances indicate impairment may be present. Based on the
  evaluations performed, the Company determined that the recorded intellectual
  property rights had not been impaired as of December 31, 2004. As of December
  31, 2006 and 2005, the balance was fully amortized.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Deferred Debt Issue CostsDirect
  costs incurred in connection with financing activities are amortized over the
  estimated lives of the related obligations using the interest method. These
  costs include commissions, professional fees, and the calculated value of
  share-based payments made for financial advisory services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Income TaxesIncome
  taxes are accounted for under the asset and liability method. Deferred tax
  assets and liabilities are identified for the future tax consequences
  attributable to differences between the financial statement carrying amounts
  of existing assets and liabilities and their respective tax bases, as well as
  operating loss and tax credit carryforwards. 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. 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. Based on its history and consideration of other relevant
  factors, the Company establishes valuation allowances when it is more likely
  than not that the deferred tax assets will not be realized.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Value of Financial InstrumentsOther than
  described below, the Company considers the recorded value of its financial
  assets and liabilities, which consist primarily of cash, accounts receivable,
  accounts payable and other accrued liabilities to approximate the fair value
  of the respective assets and liabilities at December 31, 2006 and 2005.
  Management believes the principal balance of its long-term debt, which is
  $4,162,067 and $5,610,299 higher than the carrying value at December 31, 2006
  and 2005, respectively, is a better estimate of the fair value of that
  liability. The debt is carried net of unamortized discount.                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Comprehensive Income (Loss)Comprehensive
  income (loss) is defined to include all changes in equity except those
  resulting from investments by stockholders and distributions to stockholders
  and is reported in the Consolidated Statement of Stockholders Equity
  (Deficit). Included in the Companys comprehensive loss are net loss and
  foreign exchange translation adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-12

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Foreign Currency TranslationThe
  consolidated financial statements of the Companys Canadian operations are
  translated into United States dollars using period-end exchange rates for
  assets and liabilities and average exchange rates during the period for
  revenue, expenses, and cash flows. Foreign currency translation gains and
  losses are excluded from results of operations and recorded as a separate
  component of accumulated other comprehensive loss within stockholders equity
  (deficit). Foreign currency transaction gains and losses are included in the
  consolidated statements of operations.                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Recent Accounting PronouncementsIn February 2007, the FASB issued SFAS No.
  159, The
  Fair Value Option for Financial Assets and Financial Liabilities Including
  an amendment of FASB Statement No. 115. SFAS No. 159 permits
  entities to choose to measure many financial instruments and certain other
  items at fair value. Unrealized gains and losses on items for which the fair
  value option has been elected will be recognized in earnings at each
  subsequent reporting date. SFAS No. 159 is effective for the Company on
  January 1, 2008. The Company is evaluating the impact that the adoption of
  SFAS No. 159 will have on its future results of operations and financial
  position.                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In September
  2006, the Financial Accounting Standards Board issued a Statement of
  Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement.
  The Statement defines fair value, establishes a framework for measuring fair
  value in generally accepted accounting principles (GAAP), and expands
  disclosures about fair value measurements. This Statement is effective for
  financial statements issued for fiscal years beginning after November 15,
  2007, and interim periods within those fiscal years. The Company is currently
  evaluating the impact of adopting SFAS No. 157 on its financial statements.                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In June 2006, the Financial Accounting Standards Board, or FASB,
  issued FASB Interpretation, or FIN, No. 48, Accounting for Uncertainty in Income
  Taxes, which is effective for fiscal years beginning after
  December 15, 2006. FIN No. 48 clarifies the accounting for uncertainty in
  income taxes recognized in the financial statements in accordance with SFAS
  Statement No. 109, Accounting for Income Taxes. This Interpretation
  prescribes a comprehensive model for how a company should recognize, measure,
  present, and disclose in its financial statements uncertain tax positions
  that the company has taken or expects to take on a tax return. FIN 48 also
  provides guidance on derecognition, classification, interest and penalties,
  accounting in interim periods, disclosure and transition. FIN 48 is effective
  for fiscal years beginning after December 15, 2006. We have not yet
  determined the effects that FIN 48 will have on our financial statements.

F-13

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
  Financial Instruments, an amendment of FASB Statements No. 133 and 140.
  SFAS No. 155 clarifies certain issues relating to embedded derivatives and
  beneficial interests in securitized financial assets. The provisions of SFAS
  No. 155 are effective for all financial instruments acquired or issued after
  fiscal year beginning after September 15, 2006. The Company is currently
  assessing the impact that the adoption of SFAS No. 155 will have on its
  operations, financial position and cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|3. | NET EARNINGS (LOSS) PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company
  presents basic earnings (loss) per share and diluted earnings per share
  pursuant to the provisions of SFAS No. 128, Earnings Per Share. Basic
  earnings (loss) per share is calculated by dividing net income or loss
  applicable to common stock (which reflects a charge of $1,394,954 and
  $1,386,939 for preferred stock dividends in 2006 and 2005, respectively, and
  $1,604,352 for preferred stock dividends and accretion of beneficial
  conversion feature in 2004) by the weighted average number of common shares
  outstanding during each period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The
  calculation of diluted earnings per share would be similar to that of basic
  earnings per share, except that the denominator is increased to include the
  number of additional common shares that would have been outstanding if all
  potentially dilutive common shares, such as those issuable upon the exercise
  of stock options and warrants, and the conversion of convertible securities,
  were issued during the period and appropriate adjustments were made for the
  application of the treasury stock method and the elimination of interest and
  other charges related to convertible securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | As of
  December 31, 2006, 2005 and 2004, there were 29,685,333, 25,555,850 and
  26,967,372 shares of common stock potentially issuable upon the exercise of
  stock options and warrants and the conversion of convertible securities,
  respectively. However, diluted per share amounts have not been presented in
  the accompanying consolidated statement of operations because the Company had
  a net loss in 2006, 2005, and 2004 and the assumed effects of the exercise of
  all of the Companys outstanding stock options and warrants and the
  conversion of all of its convertible securities would have been
  anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4. | COLLABORATIVE AGREEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Monsanto AgreementIn
  2004, the Company entered into a Swine Improvement Agreement with Monsanto
  Company, which gives Monsanto an exclusive royalty-based license to use the
  Companys porcine genetic database, which consists of over 600,000 SNPs, and
  the associated intellectual property. The Company will provide consulting and
  support in the use of its database resource. Monsanto is obligated to pay
  royalties to the Company due to research performed using the database having
  created product enhancements which generate increased revenues. The Company
  received $1,000,000 from Monsanto in June 2004 as an access fee for the
  database. The Company recorded deferred revenue upon receipt of the payment,
  and is amortizing the fee on a straight-line basis over the license
  exclusivity period of five years. The Company recognized revenue of $200,004,
  $200,004 and $116,669 for the years ended December 31, 2006, 2005 and 2004,
  respectively. The unrecognized portion of the access fee remains as deferred
  revenue at December 31, 2006.

F-14

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2006,
  Monsanto began selling products which included enhancements generated as a
  result of research performed using the Companys porcine genetic database. As
  a result, the Company earned royalty revenues of $97,788 during 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Wyeth AgreementIn
  2002, the Company signed a Cross License Agreement with Wyeth, which further
  expanded the scope of research and development collaboration (as described in
  the 1999 Amended and Restated Collaboration Agreement noted below) and the
  sharing of discoveries and reagents with regard to Myostatin. This agreement
  increased the Companys royalty entitlement under the JHU/GI agreement by 2%
  for any of Wyeths net sales derived from the use of Myostatin for human
  therapeutic application if Wyeth utilizes MMI patented technology. In return,
  the Company shall pay to Wyeth a maximum royalty of 2% of net sales for the
  use of any Wyeth technology in commercializing Myostatin within the
  agricultural or veterinary fields. The first payment of $500,000 under the
  1999 Agreement was made by Wyeth to the Company in July 2004 and was
  recognized as revenue in 2004. No other royalties have been paid or received
  under this agreement. The Wyeth Agreement terminates upon the expiration of
  the last patent to be filed, which is currently November 10, 2025.                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Cargill AgreementIn
  2002, the Company signed a Joint Development and Joint Marketing Agreement
  with Excel Corporation (a subsidiary of Cargill, Inc.) and Cargill, Inc.
  through its Caprock Business unit, or Cargill. Under the agreement, the
  parties will jointly develop and commercialize SNP-based selection tools for
  the cattle industry to identify cattle that possess superior production
  traits or meat quality. As of December 31, 2004, all milestones had been
  completed under this agreement, and the Company has received an aggregate of
  $10,200,000, all of which has been recognized as revenue. The Company
  recognized revenue relating to these milestone payments of $0, $0 and
  $3,150,000 for the years ended December 31, 2006, 2005, and 2004,
  respectively. During 2006, the Company began testing samples in the pre-commercial
  phase of the selection tool developed under the Cargill collaborative
  agreement. During 2006, the Company generated $416,902 of revenue from the
  sample testing. The President of Excel Corporation, served on the Companys
  Board of Directors until his resignation on October 12, 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Myostatin Chicken Commercial LicensingDuring
  2000, the Company entered into Letters of Intent, Limited License and Option
  Agreements with two chicken producers in the United States, Tyson Poultry,
  Inc. and Pilgrims Pride Corporation. Additionally, the Company executed a
  similar agreement with Pilgrims Pride Corporation for the territory of
  Mexico. The agreements include an option to license Myostatin technology in
  chicken on predefined terms upon the successful completion of large-scale
  trials. The Company has received $500,000 in non-refundable fees from these
  agreements, which has been recorded as deferred revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | These
  agreements could provide significant license fees to be received in the
  future pending successful trial results. In addition, the Company would
  receive 30% of the value added, for example, average weight gain over a
  pre-determined average weight (including but not limited to the incremental
  cost savings), as a result of the use of Myostatin technology. License fees
  to cover development costs are to be paid once a product candidate has been
  developed and tested by the parties. Additionally, the Company is to receive
  a portion of the value added by the technology on a per treated bird basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Royalty Agreements On August 15, 2000, we acquired
  substantially all of the assets relating to the animal health
  immunopharmaceutical business (including certain patent and licenses relating
  to Myostatin technology) of Biostar Inc., a privately-held Canadian company.
  The purchase price consisted of up to $2,500,000 in cash and 1,359,733 shares
  of our common stock. Of the cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-15

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | amount, $500,000 has been
  paid to date, with payment of the remaining $2,000,000 being subject to
  attainment of the following two performance milestones: (1) if Biostar
  obtains a particular claim from the U.S. Patent and Trademark Office, it will
  be entitled to a $1,000,000 payment from us, and (2) if we had demonstrated
  proof of concept by August 2004, Biostar would have been entitled to a
  $1,000,000 payment by us. The proof of concept milestone payment was not
  demonstrated by August 2004, and thus, Biostar will not be paid the
  $1,000,000 milestone. The Company does not anticipate that Biostar will
  obtain the particular claim from the U.S. Patent and Trademark Office;
  however, the Company is committed to make this payment when and if this
  milestone is met. In conjunction with its acquisition of the animal
  health immunopharmaceutical business of Biostar, Inc. in 2000 (now known as
  MetaMorphix Canada, Inc., a wholly-owned subsidiary of the Company), the
  Company entered into an agreement with Vaccine & Infectious Disease
  Organization, or VIDO, in August 2000. This agreement gives the Company
  exclusive licenses for the substance which helps to increase the immune
  response to vaccines and related technology in the non-infectious disease
  animal field. VIDO is a division of The University of Saskatchewan. The term
  of the agreement is from August 2000 to the later of (a) the expiration or
  invalidation of the last remaining licensed patents or (b) ten years from the
  date of first marketing of a product developed from the licensed patents.
  This agreement requires that the Company pay VIDO minimum royalty payments on
  a quarterly basis. We are
  obligated to make quarterly payments of CAD $50,000 as a minimum royalty fee.
  The Company recorded license fee expense relating to these royalties of USD
  $175,295, $124,752 and $115,915 for the years ended December 31, 2006, 2005
  and 2004, respectively. The Company has recorded a liability for these
  royalties of USD $396,871 and $225,225 at December 31, 2006 and December 31,
  2005, respectively. The Company is currently in default of this agreement due
  to non-payment and is subject to a breach notification from the licensor. The
  breach notification would cause the license agreement to end if the default
  is not remedied in 90 days. No breach notification has been received.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Agreement with The Johns Hopkins University
  and Genetics Institute, Inc.In December 1994,
  the Company entered into a collaborative agreement with The Johns Hopkins
  University, or JHU, and Genetics Institute, Inc., or GI, a wholly owned
  subsidiary of American Home Products Corporation (now Wyeth). The agreement
  was amended and restated in January 1999. The Amended and Restated Agreement
  provides the Company with the right to develop and commercialize, for
  agricultural and veterinary uses, certain growth and differentiation factors,
  or GDFs, discovered by JHU while licensing human rights to Wyeth. Dr. Se-Jin
  Lee, a shareholder and scientific founder of the Company, has a laboratory at
  JHU.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  is entitled to certain milestone payments and royalties from Wyeth related to
  GDFs. Wyeth is currently developing one of these factors called GDF-8
  (Myostatin), a naturally occurring protein that regulates the development of
  skeletal muscle. The first payment of $500,000 under this agreement was made
  by Wyeth to the Company in July 2004, and was recorded as revenue by the
  Company in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  was required under the agreement to make certain payments to JHU to support
  collaborative research during the term of the collaborative research
  agreement. The Company agreed to fund JHU-sponsored research from January
  2001 to June 30, 2003. The collaborative research expenses were $0 for the
  years ended December 31, 2006, 2005, and 2004. A total of $750,000 of
  collaborative research expenses was unpaid and included in accrued expenses
  as of December 31, 2006 and 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  is obligated to make payments to cover the administration of patent costs in
  addition to license fee payments to JHU for the animal rights to certain
  GDFs, but currently has                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-16

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | $369,541 of these payments past-due. Johns Hopkins has the right under the
  Amended and Restated Collaboration Agreement to terminate our rights to the
  growth and differentiation technology. If we were to lose our rights
  to this technology, we would be unable to complete our product
  commercialization strategy, thereby reducing the amount of expected revenue
  and cash flows. Expenses incurred for patent administration and license fee
  costs were $0, $0 and $5,000 for the years ended December 31, 2006, 2005, and
  2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | United States
  Department of Agriculture (USDA) AgreementIn 1999, the
  Company signed a Co-operative Research and Development Agreement with the
  USDA in connection with the generation of Myostatin transgenic animals. Four
  transgenic pigs were born in 2002 as part of this program, to which further
  progeny have been born. Under this agreement, the Company made payments to
  the USDA of $94,000 for the year ended December 31, 2002. The Company had a
  payable of $127,000 as of December 31, 2006 and 2005 related to this program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Research and
  License Agreement with AviGenics, Inc.In 1998, the
  Company entered into a Research and License Agreement with AviGenics, Inc.
  The Research and License Agreement was terminated in August 2001. The Company
  recorded a liability of $250,000 in 2000, which remains unpaid as of December
  31, 2006, due to a dispute over the amounts due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. | CELERA AgGen ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In February 2002, the Company acquired (1) a canine
  and cattle genotyping business operating in Davis, California, and (2) a
  non-exclusive, perpetual world-wide license to certain cattle, swine and
  poultry database products; single nucleotide polymorphism, or SNP, maps; and
  software, in a business combination involving affiliates of Applera
  Corporation (the Celera AgGen Acquisition). The Company is using these
  license rights to create diagnostic and selection tools for the detection of
  desirable production traits and longer term discovery product candidates in a
  livestock population.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The cost of the Celera AgGen Acquisition was
  $43,530,847, consisting of 2,000,000 shares of the Companys Series E
  Convertible Preferred Stock having an estimated fair value of $35,000,000;
  fixed amounts payable to the seller having a present value of $8,268,051; and
  acquisition costs of $262,796. The present value of the fixed amounts payable
  to the seller were determined using an effective interest rate of 5.75%,
  which was the prime rate plus 1% at the date of acquisition. The fixed
  amounts include 12 quarterly $125,000 payments for 2002, 2003 and 2004 for a
  subscription-based access to Celeras human genome database and analysis
  software, $2,000,000 for the first years license rights in 2003, and 15
  annual $500,000 minimum royalty payments for 2003 through 2017. In total, the
  fixed amounts payable to the seller consist of $500,000 payable in 2002,
  $3,000,000 payable in 2003, $1,000,000 payable in 2004, and $500,000 payable
  each year thereafter through 2017. Such payments total $11,000,000. As of December
  31, 2006, $500,000 of the fixed amount payable in 2003, $600,000 of the fixed
  amount payable in 2004, and $500,000 of the fixed amount payable in each of
  2005 and 2006 remain unpaid and accrued. As of December 31, 2006, the
  liability recorded for the deferred fixed amounts payable was $6,196,648 with
  $2,525,712 payable within 12 months and the remaining $3,670,936 classified
  as long term. At
  December 31, 2006, we were past due in paying minimum royalties to Celera in
  the amount of $2,038,800. Celera has the right under the agreement to
  terminate our rights to the technology, which includes the world-wide
  license to certain cattle, swine and poultry database products; single
  nucleotide polymorphism, or SNP, maps, and software. An employee of Applera
  Corporation served on the Companys Board of Directors from the date of the
  Celera AgGen Acquisition until his resignation on April 27, 2005.

F-17

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company was required to make a payment of
  $1,000,000 to Celera following the receipt of $1,000,000 from Monsanto in
  conjunction with a swine improvement agreement entered into June 1, 2004.
  This amount was originally a contingent payment obligation and is separate
  from the fixed amounts payable described above. This payment of $1,000,000 to
  Celera was recorded as cost of revenue in 2004. This agreement gives Monsanto
  an exclusive royalty-based license to use the Companys porcine genetic
  database and the associated intellectual property. See Note 4 above for more
  information regarding this swine improvement agreement. The Company will
  provide consulting and support in the use of its database resource.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Also as part of the Celera AgGen Acquisition, the
  Company may be required to make contingent payments as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | A royalty equal to 20% of all economic consideration
  derived from agreements deploying certain of the license rights and made
  within four years of the date of acquisition.                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                          
| | (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | A royalty equal to 3% of all economic consideration
  derived for 15 years from the date of acquisition under agreements deploying
  bovine elements of the license rights to the extent such royalty exceeds a
  cumulative amount of $500,000 annually.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                          
| | The Company has made no contingent payments noted
  above, but will charge such contingent payments to operations when, and if,
  incurred. With the introduction of a swine product by Monsanto in 2006, the
  Company earned royalty revenues of $97,788 and has accrued a royalty payable
  to Celera of $19,558 at December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Amortization of the goodwill arising from the Celera
  AgGen acquisition meets federal criteria for income tax deductibility and is
  being treated as such on the Companys income tax returns. However, since the
  Company has accumulated net operating losses, a full valuation allowance has
  been provided against the benefit of such deductions for book purposes. See
  Note 11 for further tax information.                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The results of operations of Celera AgGen are
  included in the accompanying consolidated financial statements from the date
  of acquisition. The allocation of the purchase price is summarized below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                  |  |                |  |                |            | 
|--------------------------------- |  | -------------- |  | -------------- | ---------- | 
|                                  |  | Useful
  Life  |  | Celera
  AgGen |           
|                                  |  |                |  |                |           
|                                  |  |                |  |                |            | 
|Intellectual property rights      |  | 3 years        |  | $              | 38,268,051 | 
|                                  |  |                |  |                |            | 
|Goodwill                          |  | Not applicable |  |                | 3,739,870  | 
|                                  |  |                |  |                |            | 
|Fixed assets                      |  | 6-10 years     |  |                | 1,455,468  | 
|                                  |  |                |  |                |            | 
|Inventory                         |  | Not applicable |  |                | 67,458     | 
|                                  |  |                |  |                |            | 
|                                  |  |                |  |                |            | 
|Total purchase
  price allocation |  |                |  | $              | 43,530,847 | 
|                                  |  |                |  |                |            | 

Goodwill was a result of the purchase price exceeding
the value of assets acquired and is attributable to the technologies and products
of the animal genomics business unit.

F-18

---



|   |                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | SHARE-BASED PAYMENT EXPENSE                                                                                                                                                                                        
|   |                                                                                                                                                                                                                    
|   | The consolidated statements of operations include
  the following share-based payment expense as calculated pursuant to the
  provisions of SFAS No. 123(R) for the years ended December 31, 2006, 2005 and
  2004:

|                                                  |  |                |           |      |   |           |  |   |            | 
|------------------------------------------------- |  | -------------- | --------- | ---- | - | --------- |  | - | ---------- | 
|                                                  |  | December
  31, |          
|                                                  |  |                |          
|                                                  |  | 2006           |           | 2005 |   | 2004      | 
|                                                  |  |                |           |      |   |           | 
|                                                  |  |                |           |      |   |           |  |   |            | 
|Research and
  development                        |  | $              | 355,115   |      | $ | 482,197   |  | $ | 644,797    | 
|                                                  |  |                |           |      |   |           |  |   |            | 
|General and
  administrative                      |  |                | 2,366,915 |      |   | 2,905,168 |  |   | 2,715,518  | 
|                                                  |  |                |           |      |   |           |  |   |            | 
|Interest expense
  and accretion of debt discount |  |                |          |      |   | 417,759   |  |   | 14,301,157 | 
|                                                  |  |                |           |      |   |           |  |   |            | 
|Debt issue costs                                  |  |                |          |      |   |          |  |   | 553,660    | 
|                                                  |  |                |           |      |   |           |  |   |            | 
|Total                                             |  | $              | 2,722,030 |      | $ | 3,805,124 |  | $ | 18,215,132 | 
|                                                  |  |                |           |      |   |           |  |   |            | 

Included in debt conversion expense in 2005 and 2004
were warrants given as an inducement to convert from debt to preferred stock
with a calculated value of $6,147 and $817,703, respectively. No warrants were
given as an inducement to convert from debt to preferred stock in 2006.

Share-based payments in the expense categories above
include expense associated with stock options granted to employees and
directors as compensation and to outsiders for services performed. In addition,
share-based payment expense includes the expense recorded from the calculated
value of warrants granted in connection with debt securities being issued and
the expense recorded from the calculated value of penalty warrants granted,
which is included in interest expense and accretion of debt discount. Penalty warrants
are contractually granted when the Company fails to meet certain specified
criteria, such as failure to repay the obligation when due, or failure to
consummate an IPO within one year of the debt being issued. There were no
penalty warrants issued in 2006.

F-19

---



|   |                                                                      
|-- | ---------------------------------------------------------------------
|7. | PREPAID EXPENSES AND OTHER CURRENT
  ASSETS                          
|   |                                                                      
|   | Prepaid expenses and other current assets consist of
  the following:

|                   |  |                |         |      |   |         | 
|------------------ |  | -------------- | ------- | ---- | - | ------- | 
|                   |  | December
  31, |        
|                   |  |                |        
|                   |  | 2006           |         | 2005 |  
|                   |  |                |         |      |  
|                   |  |                |         |      |   |         | 
|Prepaid expenses   |  | $              | 41,452  |      | $ | 35,171  | 
|Supplies inventory |  |                | 60,209  |      |   | 95,857  | 
|                   |  |                |         |      |   |         | 
|                   |  |                |         |      |   |         | 
|Total              |  | $              | 101,661 |      | $ | 131,028 | 
|                   |  |                |         |      |   |         | 

|   |                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Company capitalized deferred financing costs
  relating to short-term debt of $0 in the years ended December 31, 2006 and
  2005. Amortization expense related to deferred debt issue cost of short-term
  debt was $0, $0 and $98,565 for the years ended December 31, 2006, 2005 and
  2004, respectively.
|   |                                                                                                                                                                                                                                                                                                                 
|8. | PROPERTY AND EQUIPMENTNET                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                 
|   | Property and equipment consists of the following:                                                                                                                                                                                                                                                               

|                                       |  |                |            |      |   |            |  
|-------------------------------------- |  | -------------- | ---------- | ---- | - | ---------- | -
|                                       |  | December
  31, |           
|                                       |  |                |           
|                                       |  | 2006           |            | 2005 |  
|                                       |  |                |            |      |  
|                                       |  |                |            |      |   |            |  
|Office equipment                       |  | $              | 1,199,596  |      | $ | 1,219,938  |  
|Production
  equipment                 |  |                | 1,931,910  |      |   | 1,814,799  |  
|Office equipment
  under capital lease |  |                | 213,224    |      |   | 213,224    |  
|Leasehold
  improvements               |  |                | 129,062    |      |   | 129,062    |  
|                                       |  |                |            |      |   |            |  
|                                       |  |                |            |      |   |            |  
|                                       |  |                | 3,473,792  |      |   | 3,377,023  |  
|Less:
  Accumulated depreciation       |  |                | (1,748,966 | )    |   | (1,300,367 | )
|                                       |  |                |            |      |   |            |  
|                                       |  |                |            |      |   |            |  
|Total                                  |  | $              | 1,724,826  |      | $ | 2,076,656  |  
|                                       |  |                |            |      |   |            |  

The Company recorded depreciation expense of $470,056,
$465,089 and $375,826 for years ended December 31, 2006, 2005 and 2004,
respectively. Accumulated depreciation for equipment under capital leases was
$71,646 and $47,380 as of December 31, 2006 and 2005, respectively.

The Company acquired assets through capital leases in
a non-monetary transaction in the amount of $152,194 in 2004.

The Company disposed of fixed assets from MetaMorphix
Canada, Inc. with a net book value of $225,720 in the third quarter of 2005.

F-20

---



|   |                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------
|9. | INTELLECTUAL PROPERTY RIGHTS                                                                         
|   |                                                                                                      
|   | Acquired intangible assets subject to amortization
  as of December 31, 2006 and 2005 are as follows:

|                                 |  |              |             |      |   |             |  
|-------------------------------- |  | ------------ | ----------- | ---- | - | ----------- | -
|                                 |  | December 31, |            
|                                 |  |              |            
|                                 |  | 2006         |             | 2005 |  
|                                 |  |              |             |      |  
|                                 |  |              |             |      |   |             |  
|Intellectual
  property rights   |  | $            | 38,268,051  |      | $ | 38,268,051  |  
|Less:
  Accumulated amortization |  |              | (38,268,051 | )    |   | (38,268,051 | )
|                                 |  |              |             |      |   |             |  
|                                 |  |              |             |      |   |             |  
|Total                            |  | $            |            |      | $ |            |  
|                                 |  |              |             |      |   |             |  

|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Amortization expense related to intangible assets
  was $0, $2,126,003 and $12,756,015 for the years ended December 31, 2006,
  2005 and 2004, respectively.
|    |                                                                                                                                                             
|10. | LONG-TERM DEFERRED DEBT ISSUE COSTS                                                                                                                         
|    |                                                                                                                                                             
|    | The long-term deferred debt issue cost activity in
  2006, 2005 and 2004 is as follows:                                                                     

|                                      |  |   |            |  
|------------------------------------- |  | - | ---------- | -
|Balance at
  January 1, 2004          |  | $ | 3,691,983  |  
|                                      |  |   |            |  
|Allocated value
  of warrants granted |  |   | 2,765,531  |  
|Other debt issue
  costs              |  |   | 1,500,858  |  
|Amortization to
  debt issue costs    |  |   | (1,478,292 | )
|                                      |  |   |            |  
|Balance at
  December 31, 2004        |  |   | 6,480,080  |  
|                                      |  |   |            |  
|Allocated value
  of warrants granted |  |   | 62,562     |  
|Other debt issue
  costs              |  |   | 532,233    |  
|Amortization to
  debt issue costs    |  |   | (1,678,825 | )
|                                      |  |   |            |  
|Balance at
  December 31, 2005        |  |   | 5,396,050  |  
|                                      |  |   |            |  
|Allocated value
  of warrants granted |  |   | 21,215     |  
|Other debt issue
  costs              |  |   | 444,524    |  
|Amortization to
  debt issue costs    |  |   | (1,938,219 | )
|                                      |  |   |            |  
|                                      |  |   |            |  
|Balance at
  December 31, 2006        |  | $ | 3,923,570  |  
|                                      |  |   |            |  

Other debt issue costs were related to commissions and
other professional services. Warrants were granted for financial advisory
service fees. These deferred debt issue costs are being amortized over the term
of the notes.

F-21

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Company accounts for income taxes pursuant to
  SFAS No. 109, Accounting for Income Taxes, which provides for an asset
  and liability approach to accounting for income taxes. Deferred tax assets
  and liabilities represent the future tax consequences of the differences
  between the financial statement carrying amounts of assets and liabilities
  versus the tax bases of assets and liabilities. Under this method, deferred
  tax assets are recognized for deductible temporary differences, and operating
  loss and tax credit carryforwards. Deferred liabilities are recognized for
  taxable temporary differences. Deferred tax assets are reduced by a valuation
  allowance when, in the opinion of management, it is more likely than not that
  some portion or all of the deferred tax assets will not be realized. The
  impact of tax rate changes on deferred tax assets and liabilities is
  recognized in the year that the change is enacted.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The provision for income taxes consists of the
  following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                                                   |  |                           |            |      |   |             |   |   |             |  
|------------------------------------------------------------------ |  | ------------------------- | ---------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                   |  | Year ended
  December 31, |           
|                                                                   |  |                           |           
|                                                                   |  | 2006                      |            | 2005 |   | 2004        |  
|                                                                   |  |                           |            |      |   |             |  
|Current:                                                           |  |                           |            |      |   |             |   |   |             |  
|Federal                                                            |  | $                         |           |      | $ |            |   | $ |            |  
|State                                                              |  |                           |           |      |   |            |   |   |             |  
|                                                                   |  |                           |            |      |   |             |  
|Total current                                                      |  | $                         |           |      | $ |            |   | $ |            |  
|                                                                   |  |                           |            |      |   |             |  
|Deferred:                                                          |  |                           |            |      |   |             |   |   |             |  
|Federal                                                            |  |                           | (5,199,000 | )    |   | (9,217,000  | ) |   | (18,279,000 | )
|State                                                              |  |                           | (1,380,000 | )    |   | (1,027,000  | ) |   | (2,037,000  | )
|Foreign                                                            |  |                           |           |      |   |            |   |   | (195,000    | )
|                                                                   |  |                           |            |      |   |             |  
|Total deferred                                                     |  |                           | (6,579,000 | )    |   | (10,244,000 | ) |   | (20,511,000 | )
|                                                                   |  |                           |            |      |   |             |  
|Change in
  valuation allowance, net of the effect of acquisitions |  |                           | 6,579,000  |      |   | 10,244,000  |   |   | 20,511,000  |  
|                                                                   |  |                           |            |      |   |             |  
|Provision for
  income taxes                                       |  | $                         |           |      | $ |            |   | $ |            |  
|                                                                   |  |                           |            |      |   |             |  

F-22

---



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | The tax
  effects of the temporary differences that give rise to significant portions
  of deferred tax assets and liabilities are as follows;

|                                          |  |                |             |      |   |             |   |   |             |  
|----------------------------------------- |  | -------------- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                          |  | December
  31, |            
|                                          |  |                |            
|                                          |  | 2006           |             | 2005 |   | 2004        |  
|                                          |  |                |             |      |   |             |  
|Deferred tax assets:                      |  |                |             |      |   |             |   |   |             |  
|Stock compensation                        |  | $              | 7,954,000   |      | $ | 6,806,000   |   | $ | 5,475,000   |  
|Accrued liabilities                       |  |                | 1,762,000   |      |   | 1,501,000   |   |   | 1,568,000   |  
|Net operating loss                        |  |                | 53,290,000  |      |   | 46,584,000  |   |   | 37,033,000  |  
|Intangible assets                         |  |                | 8,284,000   |      |   | 9,662,000   |   |   | 10,181,000  |  
|Capital loss                              |  |                |            |      |   | 195,000     |   |   | 195,000     |  
|Foreign tax credit                        |  |                | 860,000     |      |   | 860,000     |   |   | 841,000     |  
|                                          |  |                |             |      |   |             |   |   |             |  
|                                          |  |                | 72,150,000  |      |   | 65,608,000  |   |   | 55,293,000  |  
|                                          |  |                |             |      |   |             |   |   |             |  
|Deferred tax
  liabilities:               |  |                |             |      |   |             |   |   |             |  
|Depreciation                              |  |                | (272,000    | )    |   | (309,000    | ) |   | (238,000    | )
|                                          |  |                |             |      |   |             |   |   |             |  
|                                          |  |                | (272,000    | )    |   | (309,000    | ) |   | (238,000    | )
|Net deferred
  tax asset before allowance |  |                | 71,878,000  |      |   | 65,299,000  |   |   | 55,055,000  |  
|                                          |  |                |             |      |   |             |   |   |             |  
|Valuation
  allowance                     |  |                | (71,878,000 | )    |   | (65,299,000 | ) |   | (55,055,000 | )
|                                          |  |                |             |      |   |             |   |   |             |  
|Net deferred tax assets                   |  | $              |            |      | $ |            |   | $ |            |  
|                                          |  |                |             |      |   |             |   |   |             |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Realization
  of deferred tax assets is primarily dependent on future taxable income, the
  amount and timing of which is uncertain given the Companys history of
  losses. Therefore a valuation allowance has been recorded for the entire
  deferred tax asset. The valuation allowance is adjusted on a periodic basis
  to reflect managements estimate of the realizable value of the net deferred
  assets.
| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The
  valuation allowance activity in 2006, 2005 and 2004 is as follows:                                                                                                                                                                                                                                                                                                                                            

|                                                   |  |   |             |   | 
|-------------------------------------------------- |  | - | ----------- | - | 
|Valuation allowance balance at January 1,
  2004   |  | $ | (34,544,000 | ) | 
|Charged to costs and expense
  during 2004         |  |   | (20,511,000 | ) | 
|Deductions                                         |  |   | —           |   | 
|                                                   |  |   |             |   | 
|Valuation allowance balance at December 31,
  2004 |  |   | (55,055,000 | ) | 
|Charged to costs and expense
  during 2005         |  |   | (10,244,000 | ) | 
|Deductions                                         |  |   | —           |   | 
|                                                   |  |   |             |   | 
|Valuation allowance balance at December 31,
  2005 |  |   | (65,299,000 | ) | 
|Charged to costs and expense
  during  2006        |  |   | (6,579,000  | ) | 
|Deductions                                         |  |   | —           |   | 
|                                                   |  |   |             |   | 
|Valuation allowance balance at December 31,
  2006 |  | $ | (71,878,000 | ) | 
|                                                   |  |   |             |   | 

F-23

---



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The
  reconciliation of the tax provision (benefit) computed at the statutory rate
  to the effective tax rate is as follows:

|                              |  |                           |  |        |    |      |  |        |    |  |  |        |   
|----------------------------- |  | ------------------------- |  | ------ | -- | ---- |  | ------ | -- |  |  | ------ | --
|                              |  | Year ended
  December 31, | 
|                              |  |                           | 
|                              |  | 2006                      |  | 2005   |    | 2004 | 
|                              |  |                           |  |        |    |      | 
|Federal income tax rate       |  |                           |  | (35.00 | %) |      |  | (35.00 | %) |  |  | (35.00 | %)
|State                         |  |                           |  | (4.34  | %) |      |  | (3.90  | %) |  |  | (3.90  | %)
|Foreign                       |  |                           |  |       |    |      |  |       |    |  |  | (0.95  | %)
|Permanent tax differences     |  |                           |  | .09    | %  |      |  | .04    | %  |  |  | .04    | % 
|Change in valuation allowance |  |                           |  | 39.25  | %  |      |  | 38.86  | %  |  |  | 39.81  | % 
|                              |  |                           |  |        |    |      |  |        |    |  |  |        |   
|Effective tax rate            |  |                           |  | 0.00   | %  |      |  | 0.00   | %  |  |  | 0.00   | % 
|                              |  |                           |  |        |    |      |  |        |    |  |  |        |   

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2006, the Company had federal net operating loss carryforwards
  of approximately $129,000,000 which will expire from 2010 through 2025.                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Tax
  Reform Act of 1986 contains provisions that may limit the amount of NOL
  carryforwards that may be used in any given year if certain events, including
  a significant change in ownership, occur. The provisions of these ownership
  change rules could limit the Companys ability to utilize its loss
  carryforwards.                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Company
  has filed the required federal and state tax returns for the calendar years
  2003, 2004 and 2005. These tax returns were filed late as a result of
  unavailable financing that caused a delay in us obtaining the necessary
  audits and tax compliance work to file such returns. Given the level of
  losses incurred for those periods, no taxes or interest will be due. The
  Company may incur late filing penalties which management expects to be
  minimal.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Leases and Royalty Agreements
  The Company has office facilities and equipment under capital and operating
  leases. In addition, the Company has certain agreements that provide for minimum
  future royalty payments and sublease income. Future minimum payments for
  capital leases, noncancelable operating leases, and royalty agreements with
  terms in excess of one year at December 31, 2006, are as follows:

|                                      |  |                  |         |                    |   |                      |  |   |         | 
|------------------------------------- |  | ---------------- | ------- | ------------------ | - | -------------------- |  | - | ------- | 
|                                      |  | Capital
  Leases |         | Operating
  Leases |   | Royalty
  Agreements | 
|                                      |  |                  |         |                    |   |                      | 
|                                     
|2007                                  |  | $                | 42,390  |                    | $ | 863,328              |  | $ | 171,620 | 
|2008                                  |  |                  | 42,390  |                    |   | 727,625              |  |   | 171,620 | 
|2009                                  |  |                  | 29,155  |                    |   | 784,563              |  |   | 171,620 | 
|2010                                  |  |                  | 17,480  |                    |   | 805,604              |  |   | 171,620 | 
|2011                                  |  |                  | 17,480  |                    |   | 827,252              |  |   |        | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 
|Thereafter                            |  |                  | 7,283   |                    |   | 176,249              |  |   |        | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 
|Total
  payments                      |  |                  | 156,178 |                    |   | 4,184,621            |  |   | 686,480 | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 
|Less:
  Amounts representing interest |  |                  | (12,499 | )                  |   |                     |  |   |        | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 
|Net payments                          |  | $                | 143,679 |                    | $ | 4,184,621            |  | $ | 686,480 | 
|                                      |  |                  |         |                    |   |                      |  |   |         | 

F-24

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense
  under operating leases was $856,592, $1,150,928 and $832,259 for the years
  ended December 31, 2006, 2005, and 2004, respectively. Sublease income was
  $0, $135,708 and $92,404 for the years ended December 31, 2006, 2005, and 2004,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company
  is currently leasing space in Savage, Maryland which it no longer occupies.
  This lease commenced on January 1, 2002 and will terminate on December 31,
  2011. The Company currently subleases this space. This sublease commenced on
  December 1, 2004 and will terminate on December 31, 2011. The sublease covers
  the primary lease obligation, and the sublessee pays rent directly to the
  original lessor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | LitigationFrom
  time to time, the Company and its subsidiaries face lawsuits and claims
  related to commercial, employment and patent-related matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | On June 20,
  2005, the Company became aware of a lawsuit and claim against us from Regions
  Bank for $731,000. Mr. Samuel R. Dunlap, a former Company director, who
  recently exited bankruptcy, pledged a $731,000 Promissory Note made by us to
  Mr. Dunlap as security for a $5.0 million loan from Regions Bank. Regions
  Bank has sued us for payment of this Note. The amount that is owed is in
  dispute (due to offsets made at Mr. Dunlaps direction prior to the
  bankruptcy). We also contend that the conditions precedent to the maturity
  of the loan have not occurred. We note that our December 31, 2006 consolidated
  financial statements reflect principal of $625,498 being owed as of such date
  (reflecting the offsets). Regions Bank asserts that we (in the operation of
  our securities transfer function) and our legal counsel enabled Mr. Dunlap
  to pledge one of his several Warrants to another creditor in breach of an
  already existing Commercial Pledge Agreement between the Bank and Mr. Dunlap.
  This litigation remains in the discovery phase at this time. We will indemnify
  and hold harmless our legal counsel, who is also the Secretary of the Company,
  in this matter.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | On March 15,
  2007, we became aware of a claim against us from holders of two 10% convertible
    promissory notes, for breaches of contract for non-repayment of principal
    and interest due on July 31, 2006. The original amounts of the notes was
    $150,000 and $50,000, and principal currently past due is $120,000 and $50,000.
    The amount of the claim, which includes principal and accrued interest through
    the date of the claim, is $200,074. We have the amounts recorded as liabilities
    on the financial statements at December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | In addition, during 2006, we settled and dismissed
      eight collection lawsuits for a total cost of $257,503. At present, the
      are no such cases pending.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Although the
  possible loss or range of loss for these matters cannot be estimated,
  management of the Company, after reviewing developments to date with legal
  counsel, is of the opinion that the outcome of such matters will not have a
  material adverse effect on the Companys consolidated financial position,
  results of operations, or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Director and Officer IndemnificationThe
  Companys certificate of incorporation provides that it will indemnify and
  hold harmless its officers, directors and others serving the corporation in
  various capacities to the fullest extent permitted by the Delaware General
  Corporation Law, or DGCL. Section 145 of the DGCL provides that a Delaware
  corporation has the power to indemnify officers and directors in specified
  circumstances. As of December 31, 2006, the only outstanding matter relating
  to director and officer indemnification is regarding the Regions Bank matter
  described above. We will indemnify
  and hold harmless our legal counsel, who is also the Secretary of the
  Company, in this matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-25

---



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management CompensationThe
  Company has entered into agreements with four employees, including three
  executives and one scientist, which require payments by the Company totaling
  approximately $1,009,000 annually based on their current salaries.

F-26

---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|13. | DEBT                                                                                                                                                     
|   
|    | The table
  below summarizes the short-term notes payable and notes payable to officers
  and directors activity and year-end balances for 2006 and 2005:

|                                                          |  |                                  |           |                                  |   |            |  
|--------------------------------------------------------- |  | -------------------------------- | --------- | -------------------------------- | - | ---------- | -
|                                                          |  | Year ended
  December 31,
  2006 |           | Year ended
  December 31,
  2005 |  
|                                                          |  |                                  |           |                                  |  
|SHORT-TERM NOTES PAYABLE                                  |  |                                  |           |                                  |   |            |  
|                                                         
|8% Secured Convertible Promissory Notes                   |  |                                  |           |                                  |   |            |  
|Face amount, beginning of
year                            |  | $                                | 142,015   |                                  | $ | 195,956    |  
|Issuance of new notes to
satisfy accrued interest payable |  |                                  |          |                                  |   | 11,140     |  
|Repayments                                                |  |                                  |          |                                  |   | (55,080    | )
|Conversion to preferred
stock                             |  |                                  |          |                                  |   | (10,001    | )
|                                                          |  |                                  |           |                                  |   |            |  
|Face amount, end of
year                                  |  |                                  | 142,015   |                                  |   | 142,015    |  
|                                                          |  |                                  |           |                                  |   |            |  
|10.9% Secured Convertible Promissory Notes                |  |                                  |           |                                  |   |            |  
|Face amount, beginning of
year                            |  |                                  | 937,844   |                                  |   | 979,402    |  
|Issuance of new notes to
satisfy accrued interest payable |  |                                  |          |                                  |   | 140,332    |  
|Repayments                                                |  |                                  | (53,500   | )                                |   | (64,448    | )
|Conversion to preferred
stock                             |  |                                  |          |                                  |   | (117,442   | )
|                                                          |  |                                  |           |                                  |   |            |  
|Face amount, end of
year                                  |  |                                  | 884,344   |                                  |   | 937,844    |  
|                                                          |  |                                  |           |                                  |   |            |  
|                                                          |  |                                  |           |                                  |   |            |  
|8% - 15% Bridge Loans                                     |  |                                  |           |                                  |   |            |  
|Face amount, beginning of
year                            |  |                                  | 1,378,000 |                                  |   | 170,000    |  
|Proceeds from debt
issuance                               |  |                                  |          |                                  |   | 3,292,958  |  
|Repayments                                                |  |                                  | (193,000  | )                                |   |           |  
|Conversion to long-term
debt                              |  |                                  |          |                                  |   | (2,084,958 | )
|                                                          |  |                                  |           |                                  |   |            |  
|Face amount, end of
year                                  |  |                                  | 1,185,000 |                                  |   | 1,378,000  |  
|                                                          |  |                                  |           |                                  |   |            |  
|                                                          |  |                                  |           |                                  |   |            |  
|Capital Lease Notes Payable                               |  |                                  | 43,532    |                                  |   | 31,145     |  
|                                                          |  |                                  |           |                                  |   |            |  
|                                                          |  |                                  |           |                                  |   |            |  
|SHORT-TERM NOTES PAYABLE                                  |  | $                                | 2,254,891 |                                  | $ | 2,489,004  |  
|                                                          |  |                                  |           |                                  |   |            |  
|                                                          |  |                                  |           |                                  |   |            |  
|NOTES PAYABLE TO OFFICERS AND DIRECTORS                   |  |                                  |           |                                  |   |            |  
|Face amount, beginning of
year                            |  | $                                | 1,584,498 |                                  | $ | 1,214,498  |  
|Proceeds from debt
issuance                               |  |                                  | 950,000   |                                  |   | 370,000    |  
|Repayments                                                |  |                                  | (350,000  | )                                |   |           |  
|                                                          |  |                                  |           |                                  |   |            |  
|                                                          |  |                                  |           |                                  |   |            |  
|Face amount, end of
year                                  |  | $                                | 2,184,498 |                                  | $ | 1,584,498  |  
|                                                          |  |                                  |           |                                  |   |            |  

F-27

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 8.0% Secured Convertible Promissory NotesThese
  notes (or 8% Notes) bear interest at 8.0%. Each holder has the right at
  maturity, or the closing of a firm commitment for an initial public offering,
  for the principal and interest to convert into common stock of the Company at
  the election of the holder at a discounted price determined by the level of
  participation in the offering. The discount ranges from 20% to 40%.                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | As of December 31, 2006,
  these notes are past due. The original due dates for these notes range from
  November 30, 2003 to April 2006. There are no amended terms or penalties to
  these past due notes as a result of the default. The Company intends to repay
  or roll-over these notes as soon as practicable.                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
  repaid $0 and $55,080 in the years ended December 31, 2006 and 2005,
  respectively. The Company converted $2,767,687 of 8% Notes as well as accrued
  interest of $239,610, into 683,477 shares of Series F Convertible Preferred
  Stock of the Company in the year ended December 31, 2004. In connection with
  the 8% Note conversion to Series F Convertible Preferred Stock, the Company
  issued warrants to purchase 819,757 shares of common stock with an exercise
  price of $6.00 during the year ended December 31, 2004. The warrants expire
  in 2014 and had a calculated value of $659,923.                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
  conversion of the 8.0% Notes into the Series F Convertible Preferred Stock in
  2004 described above qualified as an induced conversion of convertible debt.
  The Company recorded debt conversion expense in the amount of $2,613,102 in
  the year ended December 31, 2004, related to this induced conversion. This
  expense includes the calculated value of warrants granted. There were no
  conversions of our 8% Notes into equity during 2006 or 2005.                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 10.9% Secured Convertible Promissory NotesThese
  notes, or the 10.9% Notes, bear interest at 10.9%. Each holder has the right
  at maturity, or the closing of a firm commitment for an initial public
  offering, for the principal and interest to convert into common stock of the
  Company at the election of the holder at a discounted price determined by the
  level of participation in the offering. The discount ranges from 20% to 40%.                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | As of December 31, 2006,
  these notes are past due. The original due dates for these notes range from
  September 2001 to April 2006. There are no amended terms or penalties to
  these past due notes as a result of the default. The Company intends to repay
  or roll-over these notes as soon as practicable.                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
  repaid $53,500 and $64,448 in the years ended December 31, 2006 and 2005,
  respectively. The holders converted principal of $117,442 as well as accrued
  interest of $26,550 into 16,883 shares of Series G Convertible Preferred
  Stock of the Company in the year ended December 31, 2005. In connection with
  the 10.9% Note conversion to Series G Convertible Preferred Stock, the
  Company issued warrants to purchase 17,769 shares of common stock with an
  exercise price of $6.00, and warrants to purchase 3,599 shares of common
  stock with an exercise price of $4.00 during the year ended December 31,
  2005. The warrants expire in 2015 and had a calculated value of $6,147.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
  issued new rollover notes which included amounts to satisfy accrued interest
  of $0 and $140,332 for the year ended December 31, 2006 and 2005,
  respectively, at the election of the noteholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-28

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The holders
  converted principal of $739,409 as well as accrued interest of $67,018 into
  183,277 shares of Series F Preferred stock of the Company in the year ended
  December 31, 2004. In connection with the 10.9% Note conversion to Series F
  Convertible Preferred Stock, the Company issued warrants to purchase 195,995
  shares of common stock with an exercise price of $6.00 during the year ended
  December 31, 2004. The warrants expire in 2014 and had a calculated value of
  $157,780.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The
  conversion of the 10.9% Notes into shares of Series G Convertible Preferred
  Stock in 2005 and Series F Convertible Preferred Stock in 2004 described
  above qualified as induced conversions of convertible debt. The Company has
  recorded debt conversion expense in the amount of $0, $93,696 and $668,360 in
  the years ended December 31, 2006, 2005 and 2004, respectively, related to
  these induced conversions. This expense includes the calculated value of
  warrants granted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Bridge LoansThe
  Company issued bridge loans in 2005 which totaled $3,292,958. These loans
  bear interest at 10% and are repayable one year from the original issue date.
  The Company issued warrants in connection with these loans to purchase
  257,495 shares of common stock. These warrants have an exercise price of
  $4.00 and a calculated value of $157,395, which was recorded as interest
  expense in 2005. Holders of bridge notes totaling $2,084,958 converted their
  bridge loans, along with accrued interest into $2,180,336 of 10.0% Secured
  Convertible Promissory Notes on December 30, 2005. There was no gain or loss
  on the conversion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | During the
  year ended December 31, 2006, the Company repaid $193,000 of bridge loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company
  also issued warrants to purchase 50,248 shares of common stock in the year
  ended December 31, 2005 for advisory services in connection with obtaining
  the bridge loans. The warrants have an exercise price of $4.00 per share,
  expire in 2015, had a calculated value of $31,712 and were recorded as debt
  issue costs in the year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Series
  C, D, and E Bridge Loans were issued in May through July 2003 and totaled
  $5,975,000. The Company had no amounts due under these loans at either
  December 31, 2006 or December 31, 2005. The loans had a 12% interest rate and
  were due on December 31, 2003. The Company repaid $0 and $1,392,500 plus
  accrued interest during the years ended December 31, 2005 and 2004,
  respectively. The Company incurred penalty interest at a rate of 18% on
  past-due balances. During the year ended December 31, 2004, holders of the
  Series C, D, and E Bridge Notes converted $2,112,500 plus accrued interest
  into $2,203,730 of 12.5% Convertible Secured Promissory Notes. In connection
  with the Series C, D, and E Bridge Loans, the Company issued warrants to
  purchase 2,390,000 of common stock with an initial exercise price of $12.00.
  These warrants expire in 2013, have an allocated value of $917,761, and were
  recorded as interest expense during the year ended December 31, 2003. The
  exercise price of these warrants was subsequently adjusted down to $6.00 due
  to the triggering of a contingently adjustable exercise price clause in the
  warrant document. The calculated value of this adjustment was $1,241,704,
  which was recorded as interest expense in 2003. During the year ended
  December 31, 2004, the Company also issued penalty warrants to purchase
  3,325,000 shares of common stock with an initial exercise price of $6.00.
  Penalty warrants were granted because the Series C, D, and E Bridge Loans
  were not repaid in full by the due date. These warrants had a calculated
  value of $2,262,531 which was recorded as interest expense in 2004. The
  exercise price of the penalty warrants was adjusted to $4.00 in 2004 due to
  the triggering of a contingently adjustable exercise price clause in the
  warrant document. The calculated value of this adjustment was $1,777,950,
  which was recorded as interest expense in 2004.

F-29

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  issued a promissory bridge loan for $225,000 to an accredited investor in a
  private placement in December 2002. This loan bears interest at 8% with no
  stated maturity date. The Company converted $75,000 of this loan, plus
  accrued interest of $6,211 into 13,333 shares of common stock in January
  2003. The Company repaid $80,000 of the remaining loan during the year ended
  December 31, 2004. The outstanding balance on this loan was $70,000 at
  December 31, 2006 and 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The Company
  issued a promissory bridge loan for $100,000 to an unrelated investor in
  January 2003. This loan bears interest at 12% with no stated maturity date.
  The outstanding balance on this loan was $100,000 at December 31, 2006 and
  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Notes Payable to Officers and DirectorsThe
  Company had notes due to officers and directors of $2,184,498 and $1,584,498
  as of December 31, 2006 and December 31, 2005, respectively. These notes are
  promissory notes and bridge loans with members of management and directors,
  bearing interest at various rates, the lowest of which being prime plus 1%,
  and the highest being 12%, and are payable on demand. Proceeds from these
  borrowings were used to fund continuing operations. The Company repaid
  $350,000 and $0 in the years ended December 31, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The Company
  issued promissory bridge loans for a total of $950,000 to Mr. Peter Meyer, a
  member of our board of directors, during 2006. The loans have a 10% interest
  rate and are payable in six months. The Company repaid $350,000 of these
  bridge loans during the first quarter of 2006, with the remaining $600,000
  outstanding as of December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | In February and
  March 2005, Peter Meyer, our Co-Chairman, made unsecured, short-term working
  capital loans to us in the aggregate principal amount of $300,000. These
  loans are evidenced by a note which bears interest at the rate of 12% per
  annum and is due on the earlier of (i) March 31, 2006 and, (ii) our receipt
  of a certain milestone payment or proceeds of at least $1,000,000 from any
  debt or equity financing. We had outstanding amounts due on these loans of
  $300,000 at December 31, 2006 and 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | In February
  and March 2005, Clifton Baile and Howard Minigh, members of our board of
  directors, and Fergus Reid, a former member of our board of directors, made
  unsecured, short-term working capital loans to us in the aggregate principal
  amount of $70,000. These loans are evidenced by notes which bear interest at
  the rate of 10% per annum and which were due on April 15, 2005. These notes
  were not repaid on April 15, 2005 and now bear interest at 15% per annum.
  These notes are due upon our receipt of proceeds of at least $1,000,000 from
  an equity financing or any milestone payment. We had outstanding amounts due
  on these loans of $70,000 at December 31, 2006 and 2005.                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The Company
  obtained bridge loans in May and June 2003 from Mr. Peter Meyer, our
  Co-Chairman, of $500,000 and Mr. Clifton Baile, a member of our board of
  directors, of $60,000. The loans bear interest at 12%. The Company had
  outstanding amounts due on the loan from Mr. Meyer of $250,000 at December
  31, 2006 and 2005. The Company repaid $250,000 plus accrued interest to Mr.
  Meyer and $30,000 plus accrued interest to Mr. Baile in November 2003. The
  Company repaid $30,000 plus accrued interest to Mr. Baile in February 2004.
  In connection with these loans, the Company issued warrants to purchase
  224,000 shares of common stock in 2003 with an exercise price of $12.00. The
  warrants had an allocated value of $94,891 which was recorded as interest
  expense in 2003. The exercise price was subsequently adjusted down to $6.00
  due to a contingently adjustable exercise price clause in the warrant
  document. The calculated value of the exercise price adjustment was $116,377,
  which was recorded as interest

F-30

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | expense in
  2003. These warrants expire in 2013. In the year ended December 31, 2004, due
  to non-repayment of these bridge loans, the Company issued penalty warrants
  to purchase 296,000 shares of common stock with an initial exercise price of
  $4.00 and $6.00. The penalty warrants had a calculated value of $264,193
  which was recorded as interest expense in 2004. The exercise price of the
  $6.00 warrants was subsequently adjusted down to $4.00 due to a contingently
  adjustable exercise price clause in the warrant document. The calculated
  value of the exercise price adjustment was $88,764, which was recorded as
  interest expense in 2003. In 2005, the Company issued penalty warrants to
  purchase 40,000 shares of common stock with an exercise price of $4.00. The
  penalty warrants had a calculated value of $18,032 which was recorded as
  interest expense in 2005. These penalty warrants were issued due to the
  past-due balances on the loans and expire in 2014. Also due to the past-due
  balances, the loans bear a penalty interest rate of 18% for the years ended
  December 31, 2006 and 2005.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | During the
  period of February through March 2002 we received unsecured working capital
  loans from Peter Meyer and John Block, both members of our board of
  directors, totaling $75,000, which loans bear interest at 20% per annum and
  are payable on demand. We had outstanding amounts due on these loans of
  $75,000 at December 31, 2006 and 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In the
  connection with the issuance of the promissory notes from related parties,
  the Company granted warrants to purchase 374,028 shares of the Companys
  common stock, with an allocated value of $737,104 in 2002. The Company
  recorded the value of these warrants as interest expense for the year ended
  December 31, 2002. The warrants have exercise prices of $5.00 and expire in
  2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Mr. Sam
  Dunlap served as a financial advisor to the Company and secured financing for
  the Company during his term as a director between January 14, 2000 and August
  27, 2002. Various bridge loans made by Mr. Dunlap to the Company total
  $625,498 and remain unpaid as of December 31, 2006. During the period August
  2000 through March 2001, Dr. Quattlebaum, the Companys Co-Chairman and Chief
  Executive Officer, made working capital loans to the Company totaling
  $264,000. At December 31, 2006 and 2005, we had $264,000 due on these loans.
  These loans are evidenced by notes bearing interest at prime plus 1% and are
  due on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-31

---



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The table
  below summarizes the long-term debt activity and year-end balances for 2006
  and 2005:

|                                                                                  |  |                                  |            |                                  |   |            |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | -------------------------------- | - | ---------- | -
|                                                                                  |  | Year ended
  December 31,
  2006 |            | Year ended
  December 31,
  2005 |  
|                                                                                  |  |                                  |            |                                  |  
|LONG-TERM
NOTES PAYABLE                                                           |  |                                  |            |                                  |   |            |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|12.5% Convertible Secured Promissory Notes                                        |  |                                  |            |                                  |   |            |  
|Face amount, beginning of year                                                    |  | $                                | 18,246,934 |                                  | $ | 16,200,631 |  
|Issuance of new notes to satisfy accrued
interest payable                         |  |                                  | 2,280,867  |                                  |   | 2,046,303  |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|                                                                                 
|Face amount, end of year                                                          |  |                                  | 20,527,801 |                                  |   | 18,246,934 |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|Unaccreted debt discount, beginning of
year                                       |  |                                  | (5,199,674 | )                                |   | (7,000,745 | )
|Accretion of discount to interest expense                                         |  |                                  | 1,801,071  |                                  |   | 1,835,600  |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|Unaccreted debt discount, end of year                                             |  |                                  | (3,398,603 | )                                |   | (5,199,674 | )
|                                                                                  |  |                                  |            |                                  |   |            |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|12.5% Convertible Secured Promissory Notes
  net outstanding balance, end of year |  |                                  | 17,129,198 |                                  |   | 13,047,260 |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|                                                                                 
|10% Secured Convertible Promissory Notes                                          |  |                                  |            |                                  |   |            |  
|Face amount, beginning of year                                                    |  |                                  | 4,929,586  |                                  |   |           |  
|Proceeds from debt issuance                                                       |  |                                  | 8,878,177  |                                  |   | 2,749,250  |  
|Conversion from short-term notes including accrued
interest of
  $95,378          |  |                                  |           |                                  |   | 2,180,336  |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|                                                                                 
|Face amount, end of year                                                          |  |                                  | 13,807,763 |                                  |   | 4,929,586  |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|Unaccreted debt discount, beginning of
year                                       |  |                                  | (410,625   | )                                |   |           |  
|Debt discount from allocated value of warrants
granted                            |  |                                  | (661,233   | )                                |   | (404,741   | )
|Debt discount from allocated value of embedded
derivative                         |  |                                  | (30,925    | )                                |   | (43,214    | )
|Accretion of discount to interest expense                                         |  |                                  | 339,319    |                                  |   | 37,330     |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|Unaccreted debt discount, end of year                                             |  |                                  | (763,464   | )                                |   | (410,625   | )
|                                                                                  |  |                                  |            |                                  |   |            |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|10% Secured Convertible Promissory Notes net outstanding balance, end of year     |  |                                  | 13,044,299 |                                  |   | 4,518,961  |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|                                                                                 
|Note Payable to Wyeth                                                             |  |                                  |            |                                  |   |            |  
|Face amount, beginning and end of year                                            |  |                                  | 2,200,000  |                                  |   | 2,200,000  |  
|                                                                                  |  |                                  |            |                                  |   |            |  
|LONG-TERM NOTES PAYABLE, net of debt
discount                                     |  | $                                | 32,373,497 |                                  | $ | 19,766,221 |  
|                                                                                  |  |                                  |            |                                  |   |            |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 12.5% Convertible Secured NotesThese
  notes bear interest at 12.5%. As of December 31, 2006, each holder has the
  right to convert the principal and interest at a price of $4.00 per share.
  The notes will automatically convert into common stock at the conversion
  price upon the closing of an initial public offering of the Companys
  securities. These notes mature between November 2008 and December 2011.

F-32

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
  connection with the issuance of the 12.5% Convertible Secured Promissory
  Notes (or 12.5% Notes) in 2004 and 2003, the Company granted warrants to
  purchase 4,360,250 and 3,283,956 shares of common stock, respectively. These
  warrants had an exercise price of $6.00 per share, expire in 2014 and 2013,
  and had an allocated value of $2,797,723 and $2,240,641, in 2004 and 2003,
  respectively. The value of these warrants was recorded as a debt discount to
  be amortized over the life of the debt. In addition, these convertible notes
  with detachable warrants contained an embedded beneficial conversion feature.
  The Company calculated the value of this beneficial conversion feature to be
  $2,136,848 and $1,830,143 relating to the notes issued in 2004 and 2003,
  respectively. This value was recorded as additional discount and will be
  amortized over the life of the debt.                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | During the
  second quarter of 2004, a triggering event occurred which caused an
  adjustment in the terms of the warrants which were issued in connection with
  the 12.5% Notes. This adjustment caused the exercise price of the warrant
  issued to decrease from $6.00 to $4.00 per share. It also caused the number
  of warrants to increase by 50%, from 7,644,206 to 11,466,309. Additional
  interest expense of $9,208,160 was recorded in 2004 as a result of the
  adjustment. Future adjustments could occur due to the full-ratchet clause in
  the warrant agreements for those warrants issued in connection with the 12.5%
  Notes. No such triggering events occurred in 2006 or 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Amortization
  expense relating to the debt discounts, both the value of the warrants
  granted as well as the beneficial conversion feature, was $1,801,071 for each
  of the years ended December 31, 2006, 2005, and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Based on the
  terms of the 12.5% Notes, the Company was required to issue penalty warrants
  to the holders of the 12.5% Notes if an initial public offering was not
  completed within one year of the date of the notes. The Company issued
  penalty warrants, each with an exercise price of $8.00 per share, to purchase
  1,614,582 shares of common stock as of December 31, 2004. These warrants
  expire in 2014, were valued at $655,443 and were expensed as interest expense
  in 2004. In 2005, the Company issued additional penalty warrants, each with
  an exercise price of $8.00 per share, to purchase 1,461,346 shares of common
  stock. These warrants were valued at $205,692 and were expensed as interest
  expense in 2005. Based on the warrant exchange discussed in Note 14 to the
  consolidated financial statements, the warrant exchange completed by the
  Company in 2005 served to amend the terms of the original note agreement. The
  amendment was to eliminate the obligation to issue penalty warrants into the
  future.                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Company
  also issued warrants to purchase 700,000 and 3,600,000 shares of common stock
  in the years ended December 31, 2004 and 2003, respectively, for advisory
  services in connection with obtaining the 12.5% Note financing. The warrants
  had an exercise price of $6.00 per share, expire in 2014 and 2013, had a
  calculated value of $466,228 and $2,677,496 and were recorded as deferred
  financing costs in the years ended December 31, 2004 and 2003, respectively,
  to be amortized over the life of the debt. During the second quarter of 2004,
  a triggering event occurred which caused an adjustment in the terms of the
  warrants for advisory services in connection with the 12.5% Notes. This
  adjustment caused the exercise price of the warrant issued to decrease from
  $6.00 to $4.00 per share, and the Company recorded an additional $2,299,304
  in deferred financing costs associated with the adjustment in the year ended
  December 31, 2004. Amortization expense relating to the deferred financing
  cost from the warrants issued was $1,112,809, $1,112,809, and $991,793 for
  the years ended December 31, 2006, 2005, and 2004, respectively.

F-33

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based on the
  terms of the 12.5% Notes, accrued interest is due and payable on the one year
  anniversary date of the notes. The interest is payable in cash or in the form
  of identical new notes, at the option of the Company. The Company has
  satisfied the interest payment on those notes with an anniversary date before
  December 31, 2004 by issuing identical 12.5% Notes in the amount of $820,989.
  The Company has satisfied the interest payment on those notes with an
  anniversary date between January 1, 2005 and December 31, 2005 by issuing
  identical 12.5% Notes in the amount of $2,046,303. The Company has satisfied
  the interest payment on those notes with an anniversary date between January
  1, 2006 and December 31, 2006 by issuing identical 12.5% Notes in the amount
  of $2,280,867.                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10% Secured Convertible Promissory NotesThese
  notes bear interest at 10%. As of December 31, 2006, each holder has the
  right to convert the principal and interest at a price of $4.00 per share.
  The notes will automatically convert into common stock upon the closing of an
  initial public offering of the Companys securities. These notes mature
  between December 2008 and December 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In
  connection with the issuance of the 10% Notes in 2006, the Company granted
  warrants to purchase 1,123,221 shares of common stock. These warrants had an
  exercise price of $4.00 per share, expire in 2011, and had an allocated value
  of $661,231 in 2006. The value of these warrants was recorded as a debt
  discount to be amortized over the life of the debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In
  connection with the issuance of the 10% Notes in 2005, the Company granted
  warrants to purchase 809,379 shares of common stock. These warrants had an
  exercise price of $4.00 per share, expire in 2010, and had an allocated value
  of $404,741 in 2005. The value of these warrants was recorded as a debt
  discount to be amortized over the life of the debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Contained in
  the registration rights section of the subscription agreement for the 10%
  Notes is a liquidated damages clause which the Company has accounted for as
  an embedded derivative in accordance with Emerging Issues Task Force, or
  EITF, Issue No. 05-4,The Effects of
  Liquidated Damages Clause on a Freestanding Financial Instrument Subject to
  EITF Issue No. 00-19, Accounting for Derivative Financial Instruments
  Indexed to, and Potentially Settled in, a Companys Own Stock.
  Management, with the assistance from a valuation specialist, determined the
  fair value of this embedded derivative to be $43,214 at December 31, 2005.
  This value was recorded as a debt discount to be amortized over the life of
  the debt. Management revalued this embedded derivative each quarter of 2006,
  and determined that the value was $100,475 at December 31, 2006. Management
  will continue to re-value this embedded derivative each reporting period that
  it remains outstanding. Any changes to the fair value subsequent to the
  initial valuation will be recorded as expense per SFAS No. 133, Accounting for Derivative Instruments and Hedging
  Activities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Amortization
  expense relating to the debt discount was $339,319 and $37,330 for the years
  ended December 31, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
  also issued warrants to purchase 33,417 and 116,041 shares of common stock in
  the years ended December 31, 2006 and 2005, respectively, for advisory
  services in connection with obtaining the 10% Note financing. The warrants
  had an exercise price of $4.00 per share, expire in 2010 and 2001, had a
  calculated value of $21,215 and $62,562 in the years ended December 31, 2006
  and 2005, respectively, and were recorded as deferred financing costs to be
  amortized over the life of the debt. Amortization expense relating to these
  deferred financing costs was $26,292 and $1,738 for the years ended December
  31, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-34

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Note Payable to WyethIn
  February 1998, the Company entered into a $2,000,000 promissory note
  agreement with Wyeths predecessor, Genetics Institute, Inc. The note bore
  interest at the prime rate plus two percent, which was 8.25% at December 31,
  2006 and 7.25% at December 31, 2005. In August 1998, the Company obtained an
  additional $200,000 under this note. In January 1999, the due date of the
  note was extended to January 1, 2005. Wyeth received the right to have the
  note satisfied by receipt of shares at either (a) 125% of the IPO price if
  shares are publicly traded or (b) a price to be negotiated in good faith by
  the two parties before December 31, 2004. Wyeth has the option to convert to
  equity or call the note due to them upon the closing of an initial public
  offering of the Companys securities. The Company has recorded accrued
  interest of $1,442,131 and $1,188,332 as of December 31, 2006 and 2005,
  respectively, related to this debt. In April 2005, the Company obtained an
  extension on the due date of the $2,200,000 note which was originally due on
  January 1, 2005. The new due date is January 1, 2008, and as such, the
  Company has classified the debt and related accrued interest as long-term on
  the consolidated balance sheet as of December 31, 2006 and 2005.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | MaturitiesAggregate
  maturities of notes payable for each of the next five years are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                |  |                   |            |  
|------------------------------- |  | ----------------- | ---------- | -
|                                |  | December 31, 2006 |           
|                                |  |                   |           
|                                |  |                   |           
|2007                            |  | $                 | 4,439,389  |  
|2008                            |  |                   | 13,697,559 |  
|2009                            |  |                   | 18,510,835 |  
|2010                            |  |                   | 2,046,303  |  
|2011                            |  |                   | 2,280,867  |  
|Thereafter                      |  |                   |           |  
|                                |  |                   |            |  
|Total                           |  |                   | 40,974,953 |  
|Unaccreted discount             |  |                   | (4,162,067 | )
|                                |  |                   |            |  
|Total notes payable             |  |                   | 36,812,886 |  
|                                |  |                   |            |  
|Less: Current notes
  payable   |  |                   | 4,439,389  |  
|                                |  |                   |            |  
|Total long-term notes
  payable |  | $                 | 32,373,497 |  
|                                |  |                   |            |  

F-35

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. | STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Convertible
  Preferred StockPreferred Stock issued by the Company
  ranks senior to all other classes of stock as to liquidation, dissolution, or
  winding up of the Company. Each share of Preferred Stock is entitled to the
  number of votes per share on each action as is equal to the number of shares
  of common stock into which each share of Preferred Stock is convertible. The
  following table summarizes the terms of each class of stock:

|                  |  |                                   |       |                   |  |                                   |  |                                 |            |                         |  |                                 |  |                         |            |  |  |           |  |   |            | 
|----------------- |  | --------------------------------- | ----- | ----------------- |  | --------------------------------- |  | ------------------------------- | ---------- | ----------------------- |  | ------------------------------- |  | ----------------------- | ---------- |  |  | --------- |  | - | ---------- | 
|Preferred
  Stock |  | Liquidation
  preference
  amount |       | Conversion
  Rate |  | Liquidation
  value
  at 12/31/06 |  | 12/31/06
  Shares
  Outstanding |            | 12/31/06
  Book
  Value |  | 12/31/05
  Shares
  Outstanding |  | 12/31/05
  Book
  Value |           
|                  |  |                                   |       |                   |  |                                   |  |                                 |            |                         |  |                                 |  |                         |           
|Series A          |  | $                                 | 5.84  |                   |  | 1.000                             |  | $                               | 5,850,001  |                         |  | 1,001,000                       |  | $                       | 5,850,001  |  |  | 1,001,000 |  | $ | 5,850,001  | 
|Series B          |  | $                                 | 2.50  |                   |  | 1.000                             |  | $                               | 500,000    |                         |  | 200,000                         |  | $                       | 500,000    |  |  | 200,000   |  | $ | 500,000    | 
|Series C          |  | $                                 | 2.50  |                   |  | 1.000                             |  | $                               | 1,786,653  |                         |  | 714,661                         |  | $                       | 1,753,503  |  |  | 714,661   |  | $ | 1,753,503  | 
|Series D          |  | $                                 | 15.00 |                   |  | 1.000                             |  | $                               | 400,005    |                         |  | 26,667                          |  | $                       | 360,017    |  |  | 26,667    |  | $ | 360,017    | 
|Series E          |  | $                                 | 17.50 |                   |  | 4.375                             |  | $                               | 35,000,000 |                         |  | 2,000,000                       |  | $                       | 35,000,000 |  |  | 2,000,000 |  | $ | 35,000,000 | 
|Series F          |  | $                                 | 4.40  |                   |  | 1.000                             |  | $                               | 8,071,536  |                         |  | 1,834,440                       |  | $                       | 7,710,078  |  |  | 1,834,440 |  | $ | 7,710,078  | 
|Series G          |  | $                                 | 25.00 |                   |  | 2.165                             |  | $                               | 38,748,675 |                         |  | 1,549,947                       |  | $                       | 8,745,173  |  |  | 1,549,947 |  | $ | 8,745,173  | 
|                  |  |                                   |       |                   |  |                                   |  |                                 |            |                         |  |                                 |  |                         |            |  |  |           |  |   |            | 
|                  |  |                                   |       |                   |  |                                   |  | $                               | 90,356,870 |                         |  | 7,326,715                       |  | $                       | 59,918,772 |  |  | 7,326,715 |  | $ | 59,918,772 | 
|                  |  |                                   |       |                   |  |                                   |  |                                 |            |                         |  |                                 |  |                         |            |  |  |           |  |   |            | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With the exception of the holders of Series G Convertible
  Preferred Stock, Preferred Stock holders are entitled to receive dividends at
  the same rate as dividends are paid with respect to the common stock. Each
  share of preferred stock shall be treated as being equal to the number of
  shares of common stock into which each share of preferred stock is then
  convertible in determining the dividend for the preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | During the first quarter of 2005, the Company raised
  $610,000 through the sale of 71,517 shares of its Series G Convertible
  Preferred Stock. Series G Preferred Stock is convertible into shares of
  common stock at a rate determined by multiplying such shares by $10.00 and
  dividing the result by $4.75. In connection with this offering, the Company
  issued warrants to purchase 75,282 shares of common stock at an exercise
  price of $6.00 and warrants to purchase 15,253 shares of common stock at an
  exercise price of $4.00. These warrants expire in 2009. The amount allocated
  to such warrants was $26,800. The Company also issued warrants to purchase 22,593
  shares of common stock for advisory services performed in the offering. These
  warrants have an exercise price of $6.00 and expire in 2009. The calculated
  value of these warrants was $7,820.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In 2005, certain holders of our 10.9% Notes
  converted principal of $117,442 and accrued interest of $26,550 into 16,883
  shares of Series G Preferred Stock. In connection with the 10.9% Note
  conversion to Series G Preferred Stock, the Company issued warrants to
  purchase 17,769 shares of common stock with an exercise price of $6.00, and
  warrants to purchase 3,599 shares of common stock with and exercise price of
  $4.00 during the year ended December 31, 2005. The warrants expire in 2015
  and had a calculated value of $6,147. The conversion of notes to Series G Preferred
  Stock qualified as an induced conversion and $93,696 of debt conversion
  expense was recorded for the year ended December 31, 2005.                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In 2004, the Company raised $12,464,865 through the
  sale of 1,461,547 shares of its Series G Preferred Stock. Series G Preferred
  Stock is convertible into a number of shares of common stock determined by
  multiplying the Preferred G shares by $10.00 and dividing the result by
  $4.75. In connection with this offering, the Company issued warrants to
  purchase 1,538,440 shares of common stock at an exercise price of $6.00 and
  warrants to purchase 311,631 shares of                                                                                                                                                                                                                                                                                                                                                                                                        

F-36

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | common stock at an exercise price of $4.00. These
  warrants expire in 2009. The amount allocated to warrants was $1,226,887. The
  Company also issued warrants to purchase 561,579 shares of common stock for
  advisory services performed in the offering. These warrants have an exercise
  price of $6.00 and expire in 2009. The calculated value of these warrants was
  $414,345.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The Series G Preferred Stock accrues annual
  dividends at the rate of $0.90 per share, payable upon liquidation or
  conversion, either in cash or in common stock at the holders option. The
  Company has accrued $3,272,114 and $1,877,160 as dividends payable at
  December 31, 2006 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In April 2004, the Company completed a rights
  offering to all existing stockholders to purchase its Series F Convertible
  Preferred Stock at a price of $4.40 per unit. Series F Preferred Stock
  converts to common stock at a one-to-one basis upon an initial public
  offering. Rights to purchase units representing 352,156 shares of Series F
  Preferred Stock and warrants to purchase 387,364 shares of common stock were
  issued for $1,549,490, less commissions of $77,123. The warrants have an
  exercise price of $6.00, and an allocated value of $289,171.                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In May 2004, the Company entered into a Repayment,
  Option, and Consent Agreement with Applera Corporation where the Company paid
  $1,000,000 to Applera for the right and option to repurchase 500,000 of the
  Companys Series E Preferred Stock at the original price of $17.50 per share.
  Additionally, Applera, as holder of the then senior Series E Preferred Stock,
  gave its consent for the Company to issue the Series G Preferred Stock. The
  Company completed the Celera AgGen Acquisition (see note 5) from Applera in
  2002.                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Also in 2004, certain of the Companys 10.9% and 8%
  Secured Convertible Promissory Note holders accepted an offer to convert
  their remaining outstanding balance of $3,507,096 principal amount of notes
  plus accrued interest into 867,205 shares of Series F Preferred Stock and
  warrants to purchase 1,015,753 shares of common stock. The warrants have an
  exercise price of $6.00, expire in 2014, and had a calculated value of
  $817,703.                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In 2004, certain investors who converted debt to
  common stock in 2003 re-negotiated the original conversion and converted to
  Series F Preferred Stock. The Company issued 615,079 shares of Series F
  Preferred Stock relating to these re-conversions, and reversed the conversion
  of 392,694 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In addition, both the rights offering of the Series
  F and the 2004 offering of the Series G Preferred Stock contain a beneficial
  conversion feature as defined in Emerging Issues Task Force Abstract, or EITF,
  No. 98-5, Accounting
  for Convertible Securities with Beneficial Conversion Features or
  Contingently Adjustable Conversion Ratios. The calculated value
  associated with the beneficial conversion feature was $71,932 for the Series
  F Preferred Stock and $1,042,198 for the Series G Preferred Stock. The
  Company immediately recognized the beneficial conversion feature as a deemed
  dividend in 2004.                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Shares of preferred stock are convertible at any
  time prior to mandatory conversion at the option of the holder thereof into
  shares of common stock at the conversion rates shown above. The conversion
  rates are subject to adjustment upon the occurrence of certain dilutive
  events. Upon certain criteria being met, the preferred stock shall be
  automatically converted into common stock at the conversion rates in the
  event of the Companys initial public offering. Moreover, in the event of
  voluntary conversion by holders of a stated percentage of the originally
  issued shares of a particular series of preferred stock, other holders are
  automatically converted. The stated percentage for Series A through D
  Preferred Stock is 85%, the stated percentage for Series E

F-37

---



| |                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Preferred Stock is 75%, and the stated percentage
  for Series G Preferred Stock is 50%. The Series F Preferred Stock is not
  subject to automatic conversion in the event of a voluntary conversion by
  holders of a percentage of the originally issued shares.                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                  
| | In the event we liquidate,
  dissolve or wind-up, or in the event we are sold by way of merger, reorganization
  or asset sale, the holders of our Preferred Stock shall be entitled to be
  paid out of our assets and funds legally available for distribution, prior to
  the distribution of any of our assets or funds to our common stockholders, in
  the following order:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Holders of our Series G Preferred Stock will be
  entitled to an initial liquidation payment of $10.00 (inclusive of dividends
  actually paid) for each share of Series G Preferred Stock that a holder owns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Holders of our Series E Preferred Stock will then be
  entitled to receive as a liquidation payment the greater of (1) $17.50 (plus
  declared and unpaid dividends) for each share of Series E Preferred Stock
  that such holder owns, or (2) the amount that such holder would receive if the
  holder converted its shares of Series E Preferred Stock into common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Holders of our Series G Preferred Stock will then be
  entitled to receive the greater of (1) $15.00 per share (inclusive of
  dividends actually paid) or (2) the amount that such holder would receive if
  the holder converted its shares of Series G Preferred Stock into common
  stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Following the payments listed above, (before our
  holders of common stock receive any payment) holders of each of the remaining
  series of Preferred Stock will be entitled to receive their respective
  Liquidation Payments based on seniority as follows: (1) to our Series A
  Preferred Stock, which ranks senior to our Series B Preferred Stock, our
  Series C Preferred Stock, our Series D Preferred Stock, and our Series F
  Preferred Stock; (2) then to our Series B Preferred Stock, which ranks senior
  to our Series C Preferred Stock, our Series D Preferred Stock, and our Series
  F Preferred Stock; (3) next to our Series C Preferred Stock, which ranks
  senior to our Series D Preferred Stock and Series F Preferred Stock; (4) then
  to our Series D Preferred Stock, which ranks senior to our Series F Preferred
  Stock; (5) then to our Series F Preferred Stock, which ranks senior only to
  our common stock; (6) then to our holders of common stock.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A Liquidation Payment for a series of Preferred
  Stock is the amount which is equal to the greater of (1) the applicable
  liquidation preference for such series of Preferred Stock, plus any declared
  but unpaid dividends, or (2) the amount per share that would have been
  payable to holders of the series of Preferred Stock had the shares of such
  Preferred Stock been converted to our common stock immediately prior to our
  liquidation. The applicable per share liquidation payment price for our
  Preferred Stock is as follows: Series A Preferred Stock is $1.24, Series B
  Preferred Stock is $2.50, Series C Preferred Stock is $2.50, Series D
  Preferred Stock is $15.00, Series E Preferred Stock is $17.50, and Series F
  Preferred Stock is $4.40. Our Series G Preferred Stock does not have a per
  share price, rather its value is as described in the bullets immediately
  above.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Common StockThe
  holders of common stock are entitled to receive dividends when and as
  declared by the Board of Directors (the Board) out of funds legally
  available therefor. Upon dissolution of the Company, the holders of common
  stock are entitled to share, pro rata, in the Companys net assets after
  payment of, or provision for, all debts and liabilities of the Company and
  after provision for any class of preferred stock or other senior security
  which may be issued                                                                                                                                                                                                                                                                                                                                                                                                                     

F-38

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | by the Company. Each share of common stock is
  entitled to participate on a pro rata basis with each other share of such
  stock in dividends and other distributions declared on common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The holders of common stock are entitled to one vote
  per share on all matters submitted to a vote of the stockholders and may not
  cumulate their votes for the election of directors. The holders of common stock
  do not have preemptive rights to subscribe for additional shares of any class
  that may be issued by the Company, and no share of common stock is entitled
  in any manner to any preference over any other share of such stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On November 30, 2004, the Company signed a warrant
  exchange agreement with a financial advisor who facilitated various debt and
  equity offerings in 2003 and 2004. The exchange agreement called for warrants
  issued to purchase 6,700,000 shares of common stock to be exchanged for common
  stock at an exchange ratio of 1.4. This agreement was the first step in the
  investor warrant exchange program which was completed in 2005. In connection
  with consulting on this proposed investor warrant exchange, the Company
  granted additional warrants to purchase 1,000,000 shares of common stock to
  the financial advisor in 2004. These warrants had a calculated value of
  $457,422 and were recorded as consulting expense in 2004. On December 30,
  2004, the Companys financial advisor elected to exchange warrants to
  purchase 7,580,000 shares of common stock, out of its total warrants to
  purchase 7,700,000 shares of common stock, for 5,414,286 shares of the
  Companys common stock. There was no expense associated with this
  transaction.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In 2005, the Company completed an investor warrant
  exchange program with certain holders of its warrants to purchase common
  stock. This exchange offer was sent to all investors who had warrants to
  purchase common stock, whether from debt or preferred stock investments. Holders
  of warrants to purchase 21,544,726 shares of common stock exchanged their
  warrants for 10,762,163 actual shares of common stock. The warrants had
  exercise prices ranging from $0.35 to $15.00. The exchange ratio ranged from
  1.1 to 27.8 warrants for one share of common stock. The Company obtained a
  fairness opinion on the ratio to ensure an equitable exchange through the
  different warrant classes. There was no expense associated with this
  transaction.                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In 2006, the Company allowed investors in the 10% Secured
  Convertible Promissory Notes to exchange certain warrants for common stock.
  Holders of warrants to purchase 1,141,607 shares of common stock exchanged
  their warrants for 570,818 actual shares of common stock. There was no
  expense associated with this transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Board authorized two amendments to the Companys
  Certificate of Incorporation increasing the number of authorized shares of
  common stock to 50,000,000 in 2003, and 75,000,000 in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Management, with the assistance from a valuation
  specialist, determined the fair value of our common stock for each quarter
  during the period January 1, 2005 through September 30, 2006. The analyses
  were preformed retrospectively and not contemporaneously, because during this
  period, our efforts were focused on product development and filing our
  initial Form 10-SB filing. As a result, our financial and managerial
  resources were limited. The valuation analyses considered the guidance set
  forth in the AICPA Audit and Accounting Practice Aid Series, Valuation of
  Privately-Held-Company Equity Securities Issued as Compensation (the
  Guide). Accordingly, the valuation allocates the value of the business
  enterprise among our classes of stock with consideration given to the
  methodologies prescribed in the Guide.                                                                                                                                                                                                                     

F-39

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Determining the fair value of our stock requires
  making complex and subjective judgments. The valuation of the business
  enterprise is based on a discounted future cash flow approach that uses
  managements estimates of revenue, anticipated growth rates, and estimated
  costs. The estimates are consistent with the plans and estimates being used
  to manage the business. There is inherent uncertainty in making these
  estimates. The risks associated with achieving the forecasts were assessed in
  the selection of the appropriate discount rates, as well as probability
  weighting certain revenue based on the likelihood of achieving specific
  milestones. If different discount rates and probabilities had been used, the
  valuations would have been different.                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The enterprise value was then allocated to preferred
  and common shares. The allocation of value to the preferred stock was based
  on treating the preferred shares as if they were converted to common stock.
  Therefore, the value of the preferred stock was estimated as the fully
  diluted per share value of equity as if all preferred shares were converted
  to common shares. A discount for lack of marketability was applied to the
  portion of business enterprise allocated to the common stock. The discount
  was based on specific characteristics of the underlying stock. Had a
  different methodology been used to allocate the business enterprise value or
  a different discount for lack of marketability been used, the allocations
  between preferred and common shares and the resulting value of common stock
  would have been different.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The results of the analyses indicated the following
  fair values:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                   |  |                                            |      |  | 
|------------------ |  | ------------------------------------------ | ---- |  | 
|Date               |  | Fair Value
  per
  share of
  Common Stock |     
|                   |  |                                            |     
|                   |  |                                            |     
|March 31, 2005     |  | $                                          | 3.15 |  | 
|June 30, 2005      |  | $                                          | 3.00 |  | 
|September 30, 2005 |  | $                                          | 2.95 |  | 
|December 31, 2005  |  | $                                          | 3.20 |  | 
|March 31, 2006     |  | $                                          | 3.15 |  | 
|June 30, 2006      |  | $                                          | 3.25 |  | 
|September 30, 2006 |  | $                                          | 3.35 |  | 

| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | These fair value amounts were used in our
  Black-Scholes option pricing calculations in order to determine the proper stock
  option and warrant accounting.

F-40

---



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Share-Based
  PaymentsCollectively, warrants and stock options
  comprise share-based payments.                                                                   
| |                                                                                                                                                                    
| | WarrantsWarrants
  are granted to non-employees in connection with financings or services
  provided to the Company. Stock warrant information is set forth below:

|                              |  |          |             |                                        |   |      | 
|----------------------------- |  | -------- | ----------- | -------------------------------------- | - | ---- | 
|                              |  | Warrants |            
|                              |  |          |            
|                              |  | Shares   |             | Weighted
  Average
  Exercise
  Prices |  
|                              |  |          |             |                                        |  
|                             
|Outstanding January 1, 2004   |  |          | 17,063,251  |                                        | $ | 5.13 | 
|Granted                       |  |          | 19,211,355  |                                        |   | 4.75 | 
|Exercised                     |  |          | (3,625      | )                                      |   | 0.35 | 
|Canceled                      |  |          | (7,580,000  | )                                      |   | 4.60 | 
|                              |  |          |             |                                        |   |      | 
|                              |  |          |             |                                        |   |      | 
|Outstanding December 31, 2004 |  |          | 28,690,981  |                                        | $ | 5.01 | 
|Granted                       |  |          | 2,869,555   |                                        |   | 6.12 | 
|Canceled                      |  |          | (21,544,726 | )                                      |   | 5.10 | 
|                              |  |          |             |                                        |   |      | 
|                              |  |          |             |                                        |   |      | 
|Outstanding December 31, 2005 |  |          | 10,015,810  |                                        | $ | 5.16 | 
|Granted                       |  |          | 1,156,636   |                                        |   | 4.00 | 
|Exercised                     |  |          | (15,000     | )                                      |   | 2.00 | 
|Expired                       |  |          | (36,000     | )                                      |   | 7.14 | 
|Canceled                      |  |          | (1,141,607  | )                                      |   | 4.80 | 
|                              |  |          |             |                                        |   |      | 
|                              |  |          |             |                                        |   |      | 
|Outstanding December 31, 2006 |  |          | 9,979,839   |                                        | $ | 5.06 | 
|                              |  |          |             |                                        |   |      | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock
  OptionsThe Company has a nonqualified stock option plan
  and an incentive stock option plan that were established in December 1995 and
  November 1996, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The plans permit the grant of share options to its
  officers, employees, directors, and consultants for up to a combined
  11,050,000 shares of stock. Option awards are generally granted with an
  exercise price equal to the market value of the Companys stock at the date
  of grant and generally vest based on four years of continuous service and
  have 10-year contractual terms. The plans are combined for disclosure purposes
  due to the similar characteristics. The compensation cost that has been
  charged against income for those plans was $2,722,030, $3,387,365, and
  $3,360,315 for the years ended December 31, 2006, 2005, and 2004,
  respectively.

F-41

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of each option award is estimated on
  the date of grant using the Black-Scholes option valuation model that uses
  the weighted average assumptions noted in the following table. Expected
  volatility is based on the average historical volatilities on the stock of 15
  similar companies in the agricultural and biotech industries that are
  publicly traded. The average historical volatilities were calculated using
  the time period corresponding to the vesting period. The Company uses
  historical data to estimate a weighted-average percentage of forfeitures
  within the valuation model. The expected term of options granted represents
  the period of time the options granted are expected to be outstanding. The
  risk free rate for periods within the contractual life of the option is based
  on the U.S. Treasury constant maturities in effect at the time of the grant
  and for instruments with a life equal to the vesting period of the grant.

|                         |  |      |      |      |  |      |   |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                         |  | 2006 |      | 2005 |  | 2004 |  
|                         |  |      |      |      |  |      |  
|                        
|Expected volatility      |  |      | 37   | %    |  | 42   | % |  | 49   | %
|Expected dividends       |  |      | 0    | %    |  | 0    | % |  | 0    | %
|Expected term (in years) |  |      | 4    |      |  | 4    |   |  | 4    |  
|Risk-free rate           |  |      | 4.76 | %    |  | 3.99 | % |  | 3.11 | %
|Forfeiture rate          |  |      | 11   | %    |  | 12   | % |  | 4    | %

| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | A summary of option activity under the plans for the
  three years ended December 31, 2006 is presented below:

|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|------------------------------------- |  | ------ | ---------- | -------------------------------------- | - | ----------------------------------------------------------------- |  | --------------------------------- | ---- |  | - | --------- | -
|Options                               |  | Shares |            | Weighted-
  Average
  Exercise
  Price |   | Weighted-
  Average
  Remaining
  Contractual
  Term
  (In years) |  | Aggregate
  Intrinsic
  Value ($) |     
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |     
|Outstanding at January 1, 2004        |  |        | 5,306,926  |                                        | $ | 3.97                                                              |  |                                   | 7.60 |  | $ | 1,689,519 |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Granted                               |  |        | 3,833,319  |                                        |   | 4.00                                                              |  |                                   |      |  |   |           |  
|Exercised                             |  |        | (8,896     | )                                      |   | 1.13                                                              |  |                                   |      |  |   |           |  
|Forfeited or expired                  |  |        | (175,947   | )                                      |   | 3.94                                                              |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Outstanding at December 31, 2004      |  |        | 8,955,402  |                                        | $ | 3.70                                                              |  |                                   | 7.65 |  | $ | 3,589,433 |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Granted                               |  |        | 1,174,216  |                                        |   | 4.00                                                              |  |                                   |      |  |   |           |  
|Exercised                             |  |        | (18,678    | )                                      |   | 2.05                                                              |  |                                   |      |  |   |           |  
|Forfeited or expired                  |  |        | (762,507   | )                                      |   | 4.38                                                              |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Outstanding at December 31, 2005      |  |        | 9,348,433  |                                        | $ | 3.68                                                              |  |                                   | 6.89 |  | $ | 2,081,304 |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Granted                               |  |        | 1,893,493  |                                        |   | 3.32                                                              |  |                                   |      |  |   |           |  
|Exercised                             |  |        | (119,605   | )                                      |   | 0.75                                                              |  |                                   |      |  |   |           |  
|Forfeited or expired                  |  |        | (571,591   | )                                      |   | 3.54                                                              |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Outstanding at December 31, 2006      |  |        | 10,550,730 |                                        | $ | 3.66                                                              |  |                                   | 6.65 |  | $ | 1,588,388 |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Exercisable at December 31, 2006      |  |        | 7,929,786  |                                        | $ | 3.67                                                              |  |                                   | 5.95 |  | $ | 2,212,076 |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  
|Expected to vest at December 31, 2006 |  |        | 2,328,280  |                                        | $ | 3.63                                                              |  |                                   | 8.76 |  | $ | (554,044  | )
|                                      |  |        |            |                                        |   |                                                                   |  |                                   |      |  |   |           |  

| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted-average grant-date fair value of
  options granted during the years 2006, 2005 and 2004 was $1.18, $0.67, and
  $1.54, respectively. The total grant-date intrinsic value of options
  exercised during the years ended December 31, 2006, 2005, and 2004 was
  $(4,382), $(12,219), and $15,422, respectively.

F-42

---



| | .                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A summary of
  the status of the Companys nonvested shares as of December 31, 2006, 2005,
  and 2004, and changes during the years then ended are presented below:

|                                 |  |        |            |                                               |   |      | 
|-------------------------------- |  | ------ | ---------- | --------------------------------------------- | - | ---- | 
|Nonvested
  Shares               |  | Shares |            | Weighted-
  Average
  Grant-Date
  Fair Value |  
|                                 |  |        |            |                                               |  
|                                
|Nonvested at January 1,
  2004   |  |        | 1,747,687  |                                               | $ | 2.95 | 
|Granted                          |  |        | 3,833,319  |                                               |   | 1.54 | 
|Vested                           |  |        | (937,019   | )                                             |   | 2.73 | 
|Forfeited                        |  |        | (162,697   | )                                             |   | 2.17 | 
|                                 |  |        |            |                                               |   |      | 
|Nonvested at December 31,
  2004 |  |        | 4,481,290  |                                               |   | 1.82 | 
|                                 |  |        |            |                                               |   |      | 
|Granted                          |  |        | 1,174,216  |                                               |   | 0.67 | 
|Vested                           |  |        | (2,519,933 | )                                             |   | 3.91 | 
|Forfeited                        |  |        | (633,925   | )                                             |   | 1.59 | 
|                                 |  |        |            |                                               |   |      | 
|Nonvested at December 31,
  2005 |  |        | 2,501,648  |                                               |   | 1.39 | 
|                                
|Granted                          |  |        | 1,893,494  |                                               |   | 1.18 | 
|Vested                           |  |        | (1,624,895 | )                                             |   | 1.40 | 
|Forfeited                        |  |        | (149,303   | )                                             |   | 1.58 | 
|                                 |  |        |            |                                               |   |      | 
|Nonvested at December 31,
  2006 |  |        | 2,620,944  |                                               | $ | 1.22 | 
|                                 |  |        |            |                                               |   |      | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2006, 2005 and 2004 there was $3,348,925, $4,081,773, and
  $7,090,272 of total unrecognized compensation cost, respectively, related to
  nonvested share-based compensation arrangements granted under the plans. That
  cost is expected to be recognized over a period of four years. The total fair
  value of shares vested during the years ended December 31, 2006, 2005 and
  2004 was $2,278,239, $4,440,049, and $2,561,528, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | In November
  2006, the Companys 1996 Employees Incentive Stock Option Plan expired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | During the
  years ended December 31, 2004 and 2003, the Company repriced 688,000 options
  held by employees. These options had originally been granted during 2002 and
  2003 at a price of $7.50 and $10.00, respectively. On December 15, 2003,
  these options were repriced to $7.00. As a result of that modification, the
  Company recognized additional compensation expense of $27,842 for the year
  ended December 31, 2003. On June 28, 2004, these same options were again repriced
  to the estimated fair value of the Companys common stock at that date of
  $4.00. As a result of that modification, the Company recognized additional
  compensation expense of $125,480 for the year ended December 31, 2004.                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | During 2004,
  the Company offered an election for option modification to all Maryland and
  Canada employees to be made effective as of May 26, 2004. These employees
  were given the choice to modify their options, in the form of receiving
  additional options at a lower exercise price, or to reprice their existing
  options. Under this modification, certain employees elected to receive
  397,469 total additional options at an exercise price of $4.00, the estimated
  fair value of the Companys common stock at that date. As a result of that modification,
  the Company recognized additional compensation expense of $94,793 for the
  year ended December 31, 2004. Under this same election, other employees chose
  to reprice 101,000 total options to $4.00. As a result of that modification,
  the Company recognized additional compensation expense of $21,426 for the
  year ended December 31, 2004.

F-43

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15. | 401(k)
BENEFIT PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company
  has a 401(k) retirement plan for the benefit of qualified employees. All
  full-time employees are eligible to participate and may contribute a portion
  of their compensation to the plan. The Company does not match contributions
  and the only costs to the Company for the plan are administration fees.
  Beginning in 2007, the Company has included a Safe Harbor Plan in its 401(k)
  plan, whereby the Company will contribute 3% of each active employees gross
  salary per pay period to the plan for inclusion in each employees retirement
  account. This contribution will be immediately vested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|16. | BUSINESS
SEGMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company
  operates in two industry segments: Growth and Differentiation Factors and
  Animal Genomics. All segments are dedicated to discovering and
  commercializing multiple technology platforms to improve the food supply and
  human health. The Growth and Differentiation Factors business unit operates
  in Maryland with revenue generated in Maryland through the development and
  commercialization of companion animal health and livestock production for
  Growth and Differentiation Factor discoveries. The corporate headquarters is
  also located at the Maryland facility, and since no discrete financial
  information exists to separate the corporate activities from that of the
  Growth and Differentiation Factors segment, they are presented together in
  the table below. The Animal Genomics business unit operates in California
  with revenue generated in California through the pioneering of the use of
  genome information companion animal health and livestock production. The
  Company previously had a segment called Immunopharmaceuticals, which was
  operated in Canada. In September 2005, the Company made the decision to consolidate the
  research efforts of the Immunopharmaceutical business unit into the Growth
  and Differentiation Factors business unit in order to maximize efficiency,
  and our facility in Canada was closed. In connection with this
  closure, we accrued approximately $267,000 at September 30, 2005 in severance
  benefits for the 11 employees who were involuntarily terminated. Of the
  original severance accrual, $198,000 remains accrued and unpaid at December
  31, 2006. Because liabilities still exist in the Canadian company, the
  limited activity ia still disclosed.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | MetaMorphix,
  Inc.s President is the chief operating decision maker. The segment structure
  corresponds to the Companys subsidiary structure. The three segments relate
  to the Companys technology platforms and its three distinct business
  opportunities: livestock genomics in the Genomics segment, and human
  biopharmaceuticals and livestock biopharmaceuticals in the Growth and
  Differentiation Factors segment. The Immunopharmaceuticals segment is
  primarily a research and development segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-44

---



|                                              |  |                                                           |             |                                 |   |                                       |   |       |         |   |   |             |  
|--------------------------------------------- |  | --------------------------------------------------------- | ----------- | ------------------------------- | - | ------------------------------------- | - | ----- | ------- | - | - | ----------- | -
|                                              |  | Segment
  Information                                     |            
|                                              |  |                                                           |            
|                                              |  | 2006                                                      |            
|                                              |  |                                                           |            
|                                              |  | Corporate/Growth
  and Differentiation Factors - Maryland |             | Animal 
  Genomics  California |   | Immunopharm
  aceuticals  Canada (1) |   | Total |        
|                                              |  |                                                           |             |                                 |   |                                       |   |       |        
|Revenues from external customers              |  | $                                                         |            |                                 | $ | 3,355,585                             |   | $     |        |   | $ | 3,355,585   |  
|                                             
|Interest revenue (2)                          |  |                                                           | 21,878      |                                 |   | 100                                   |   |       |        |   |   | 21,978      |  
|                                             
|Interest expense (2)                          |  |                                                           | 6,384,070   |                                 |   | 269,855                               |   |       | 11,389  |   |   | 6,665,314   |  
|                                             
|Depreciation and amortization                 |  |                                                           | 105,903     |                                 |   | 237,100                               |   |       |        |   |   | 343,003     |  
|                                             
|Segment profit (loss)                         |  |                                                           | (16,301,930 | )                               |   | (2,359,394                            | ) |       | (15,894 | ) |   | (18,677,218 | )
|                                             
|Segment assets                                |  |                                                           | 8,299,983   |                                 |   | 1,948,970                             |   |       |        |   |   | 10,248,953  |  
|                                             
|Expenditures for segment assets:              |  |                                                           |             |                                 |   |                                       |   |       |         |   |   |             |  
|Cash payments for property, plant & equipment |  |                                                           | 1,132       |                                 |   | 20,000                                |   |       |        |   |   | 21,132      |  
|                                             
|Total (loss) profit for reportable segments   |  |                                                           | (16,301,930 | )                               |   | (2,359,394                            | ) |       | (15,894 | ) |   | (18,677,218 | )
|Elimination of intersegment profits           |  |                                                           |            |                                 |   |                                      |   |       |        |   |   |            |  
|                                              |  |                                                           |             |                                 |   |                                       |   |       |         |   |   |             |  
|Net (loss) profit                             |  | $                                                         | (16,301,930 | )                               | $ | (2,359,394                            | ) | $     | (15,894 | ) | $ | (18,677,218 | )
|                                              |  |                                                           |             |                                 |   |                                       |   |       |         |   |   |             |  

(1) The
Immunopharmaceuticals business unit was operated in Canada and, in September
2005, the Company made
the decision to consolidate the research efforts of the Immunopharmaceutical
business unit into the Growth and Differentiation Factors business unit in
order to maximize efficiency, and our facility in Canada was closed. The
business unit has remaining unpaid liabilities, which generate interest and
fees, thus creating a current period segment loss.

(2) These
amounts are combined as shown in the consolidated statement of operations.

F-45

---



|                                               |  |                                                                 |             |                                    |   |                                         |   |       |            |   |   |             |  
|---------------------------------------------- |  | --------------------------------------------------------------- | ----------- | ---------------------------------- | - | --------------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                               |  | Segment
  Information                                           |            
|                                               |  |                                                                 |            
|                                               |  |                                                                 |            
|                                               |  | 2005                                                            |            
|                                               |  |                                                                 |            
|                                               |  | Corporate/Growth
  
  and Differentiation 
  Factors - Maryland |             | Animal 
  Genomics  
  California |   | Immunopharm
  aceuticals 
  Canada (1) |   | Total |           
|                                               |  |                                                                 |             |                                    |   |                                         |   |       |           
|                                               |  |                                                                 |             |                                    |   |                                         |   |       |            |   |   |             |  
|Revenues from external customers               |  | $                                                               |            |                                    | $ | 2,516,064                               |   | $     |           |   | $ | 2,516,064   |  
|                                              
|Interest revenue (2)                           |  |                                                                 | 16,600      |                                    |   |                                        |   |       |           |   |   | 16,600      |  
|                                              
|Interest expense (2)                           |  |                                                                 | 5,121,264   |                                    |   | 268,108                                 |   |       | 7,660      |   |   | 5,397,032   |  
|                                              
|Depreciation and amortization                  |  |                                                                 | 111,293     |                                    |   | 2,290,265                               |   |       | 31,434     |   |   | 2,432,992   |  
|                                              
|Segment profit (loss)                          |  |                                                                 | (18,895,346 | )                                  |   | (4,820,140                              | ) |       | 103,662    |   |   | (23,611,824 | )
|                                              
|Other significant non-cash items:              |  |                                                                 |             |                                    |   |                                         |   |       |            |   |   |             |  
|                                              
|Debt converted into equity                     |  |                                                                 | 153,892     |                                    |   |                                        |   |       |           |   |   | 153,892     |  
|                                              
|Value of warrants issued for advisory services |  |                                                                 | 60,080      |                                    |   |                                        |   |       |           |   |   | 60,080      |  
|                                              
|Segment assets                                 |  |                                                                 | 11,075,101  |                                    |   | 2,109,049                               |   |       |           |   |   | 13,184,150  |  
|                                              
|Expenditures for segment assets:               |  |                                                                 |             |                                    |   |                                         |   |       |            |   |   |             |  
|Cash payments for property, plant & equipment  |  |                                                                 | 23,784      |                                    |   | 48,689                                  |   |       | 440        |   |   | 72,913      |  
|Total (loss) profit for reportable segments    |  |                                                                 | (18,895,346 | )                                  |   | (4,820,140                              | ) |       | 103,662    |   |   | (23,611,824 | )
|Elimination of intersegment profits            |  |                                                                 |            |                                    |   |                                        |   |       |           |   |   |            |  
|                                               |  |                                                                 |             |                                    |   |                                         |   |       |            |   |   |             |  
|Net (loss) profit                              |  | $                                                               | (17,606,736 | )                                  | $ | (4,820,140                              | ) | $     | (1,184,948 | ) | $ | (23,611,824 | )
|                                               |  |                                                                 |             |                                    |   |                                         |   |       |            |   |   |             |  

(1) The
Immunopharmaceuticals business unit was operated in Canada and, in September
2005, the Company made
the decision to consolidate the research efforts of the Immunopharmaceutical
business unit into the Growth and Differentiation Factors business unit in
order to maximize efficiency, and our facility in Canada was closed.

(2) These
amounts are combined as shown in the consolidated statement of operations.

F-46

---



|                                                       |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|------------------------------------------------------ |  | ------------------------------------------------------------ | ----------- | ---------------------------------- | - | ----------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                                       |  | Segment
  Information                                        |            
|                                                       |  |                                                              |            
|                                                       |  |                                                              |            
|                                                       |  | 2004                                                         |            
|                                                       |  |                                                              |            
|                                                       |  | Corporate/Growth
  and Differentiation 
  Factors - Maryland |             | Animal 
  Genomics  
  California |   | Immunopharma
  ceuticals -
  Canada |   | Total |           
|                                                       |  |                                                              |             |                                    |   |                                     |   |       |           
|                                                       |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Revenues from external customers                       |  | $                                                            | 500,000     |                                    | $ | 5,204,796                           |   | $     |           |   | $ | 5,704,796   |  
|                                                      
|Interest revenue (1)                                   |  |                                                              | 14,101      |                                    |   |                                    |   |       |           |   |   | 14,101      |  
|                                                      
|Interest expense (1)                                   |  |                                                              | 18,707,999  |                                    |   | 286,929                             |   |       | 3,783      |   |   | 18,998,711  |  
|                                                      
|Depreciation and amortization                          |  |                                                              | 45,365      |                                    |   | 12,904,923                          |   |       | 40,922     |   |   | 12,991,210  |  
|                                                      
|Segment profit (loss)                                  |  |                                                              | (35,792,816 | )                                  |   | (16,491,959                         | ) |       | 101,313    |   |   | (52,183,462 | )
|                                                      
|Other significant non-cash items:                      |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|                                                      
|Debt converted into equity                             |  |                                                              | 3,762,692   |                                    |   |                                    |   |       |           |   |   | 3,762,692   |  
|                                                      
|Purchase of fixed assets under capital lease           |  |                                                              | 152,194     |                                    |   |                                    |   |       |           |   |   | 152,194     |  
|                                                      
|Value of warrants issued for advisory services         |  |                                                              | 3,179,876   |                                    |   |                                    |   |       |           |   |   | 3,179,876   |  
|                                                      
|Segment assets                                         |  |                                                              | 11,364,668  |                                    |   | 3,855,390                           |   |       | 268,779    |   |   | 15,488,837  |  
|                                                      
|Expenditures for segment assets:                       |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Cash payments for property, plant & equipment          |  |                                                              | 184,076     |                                    |   | 82,031                              |   |       | 14,932     |   |   | 281,039     |  
|Capital lease additions to property, plant & equipment |  |                                                              | 152,194     |                                    |   |                                    |   |       |           |   |   | 152,194     |  
|Total (loss) profit for reportable segments            |  |                                                              | (35,792,816 | )                                  |   | (16,491,959                         | ) |       | 101,313    |   |   | (52,183,462 | )
|Elimination of intersegment profits                    |  |                                                              | 1,219,585   |                                    |   |                                    |   |       | (1,219,585 | ) |   |            |  
|                                                       |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Net (loss) profit                                      |  | $                                                            | (34,573,231 | )                                  | $ | (16,491,959                         | ) | $     | (1,118,272 | ) | $ | (52,183,462 | )
|                                                       |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  

(1) These
amounts are combined as shown in the consolidated statement of operations.

F-47

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|17. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In the opinion of management, all transactions with related parties
  have been conducted on terms which are fair and equitable; however, the
  transactions are not necessarily on the same terms as those which would have
  been made between wholly unrelated parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Directors and Employees
  In February 2004, Mr. Fergus Reid, a former member of our board of directors,
  purchased $100,000 principal amount of our 12.5% Notes. In February 2005, Mr.
  Reid was issued an additional note with a principal amount of $12,500 to
  satisfy the first years interest. In February 2006, Mr. Reid was issued two
  additional notes with principal amounts of $12,500 and $1,563 to satisfy
  interest due. At December 31, 2006, accrued but unpaid interest on these four
  notes was $13,696.                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Mr. Howard
  Minigh is a current member of the Companys board of directors and a holder
  of 11,725 shares of the Companys Series G preferred stock. Mr. Minigh
  received warrants to purchase 12,342 shares of common stock at an exercise
  price of $6.00, and warrants to purchase 2,500 shares of common stock at an
  exercise price of $4.00. These warrant grants were in accordance with the
  Series G terms.                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Mr. Sam
  Dunlap served as a financial advisor to the Company and secured financing for
  the Company during his term as a director between January 14, 2000 and August
  27, 2002. A retainer fee of $10,000 per month was payable to him from
  November 1999 to June 2003 for services as a financial advisor. Unpaid
  retainer fees and various bridge loans made by Mr. Dunlap to the Company
  together total $625,498 and remain unpaid as of December 31, 2005. During
  2002, Mr. Dunlap also received a grant of 275,000 nonqualified stock options
  at an exercise price of $8.00 for financial advisory services provided, which
  had a calculated value of $771,967. Mr. Dunlap was also granted 265,616
  warrants in 2002 at an exercise price of $5.00 for financial advisory
  services, which had a calculated value of $523,454.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company
  had amounts due to related parties of $2,184,498 and $1,584,498 as of
  December 31, 2006 and December 31, 2005, respectively. These notes are
  promissory notes and bridge loans with members of management and directors,
  bearing interest at rates ranging from prime plus 1% to 12%, and are payable
  on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company
  had a liability accrued for bonuses payable to employees of $3,411,988 and
  $3,526,183 at December 31, 2006 and 2005, respectively. Management is
  currently working with the Board of Directors to formally grant and pay
  bonuses for the years 2004 and 2005. Bonuses earned prior to 2004 have
  formally been granted. No bonuses were earned after 2005. The Company intends
  to satisfy all employee bonus obligations.                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In 2005, the
  Companys President declined the bonus which was awarded to him by the Board
  of Directors. This bonus was for $180,703 ($195,976 including accrued
  employer payroll taxes payable). The declination was accounted for as
  forgiveness of debt by a related party, and recorded as a capital
  contribution in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-48

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18. | QUARTERLY DATA (unaudited)                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The
  following tables summarize our quarterly results of operations for each of
  the quarters in 2006 and 2005. These quarterly results are unaudited, but in
  the opinion of management have been prepared on the same basis as our audited
  financial information and include all adjustments (consisting only of normal
  recurring adjustments) necessary for a fair presentation of our results of
  operations.

|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | --------------------------- | - | -------------------------------- | - | ------------------------------- | ---------- | - | - | ---------- | -
|                                                                                               |  | 2006                         |           
|                                                                                               |  |                              |           
|                                                                                               |  | Quarter
  ended 
  March 31, |            | Quarter
  ended 
  June 30, |   | Quarter
  ended 
  September 30, |   | Quarter
  ended 
  December 31, |           
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |           
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Revenue                                                                                        |  | $                            | 846,017    |                             | $ | 864,810                          |   | $                               | 765,019    |   | $ | 879,739    |  
|                                                                                              
|Operating costs and expenses                                                                   |  |                              | (2,894,077 | )                           |   | (3,629,958                       | ) |                                 | (3,571,848 | ) |   | (3,339,357 | )
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                              
|Operating loss                                                                                 |  |                              | (2,048,060 | )                           |   | (2,765,148                       | ) |                                 | (2,806,829 | ) |   | (2,459,618 | )
|                                                                                              
|Other costs                                                                                    |  |                              | (2,037,683 | )                           |   | (2,106,793                       | ) |                                 | (2,193,616 | ) |   | (2,259,470 | )
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                              
|Net loss                                                                                       |  | $                            | (4,085,743 | )                           | $ | (4,871,941                       | ) | $                               | (5,000,446 | ) | $ | (4,719,088 | )
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                              
|Preferred stock dividends and accretion of beneficial conversion
  features                    |  |                              | (343,961   | )                           |   | (347,783                         | ) |                                 | (351,605   | ) |   | (351,605   | )
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                              
|Net loss attributable to common stockholders                                                   |  | $                            | (4,429,704 | )                           | $ | (5,219,724                       | ) | $                               | (5,352,051 | ) | $ | (5,070,693 | )
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                              
|Basic and diluted net loss per share                                                           |  | $                            | (0.22      | )                           | $ | (0.25                            | ) | $                               | (0.26      | ) | $ | (0.24      | )
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                              
|Weighted-average shares outstanding used in computing basic and
  diluted net loss per share * |  |                              | 20,375,146 |                             |   | 20,875,183                       |   |                                 | 20,938,234 |   |   | 21,036,881 |  
|                                                                                               |  |                              |            |                             |   |                                  |   |                                 |            |   |   |            |  

F-49

---



|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ------------------------ | - | ------------------------------ | - | ----------------------------- | ---------- | - | - | ---------- | -
|                                                                                               |  | 2005                       |           
|                                                                                               |  |                            |           
|                                                                                               |  | Quarter ended 
  March 31, |            | Quarter ended
  June 30, |   | Quarter ended 
  September 30, |   | Quarter ended 
  December 31, |           
|                                                                                               |  |                            |            |                          |   |                                |   |                               |           
|                                                                                              
|Revenue                                                                                        |  | $                          | 729,811    |                          | $ | 621,951                        |   | $                             | 600,407    |   | $ | 563,895    |  
|                                                                                              
|Operating costs and expenses                                                                   |  |                            | (7,126,499 | )                        |   | (4,949,844                     | ) |                               | (4,231,432 | ) |   | (2,030,857 | )
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|                                                                                              
|Operating loss                                                                                 |  |                            | (6,396,688 | )                        |   | (4,327,893                     | ) |                               | (3,631,025 | ) |   | (1,466,962 | )
|                                                                                              
|Other costs                                                                                    |  |                            | (2,199,377 | )                        |   | (1,690,787                     | ) |                               | (2,135,862 | ) |   | (1,763,230 | )
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|                                                                                              
|Net loss                                                                                       |  | $                          | (8,596,065 | )                        | $ | (6,018,680                     | ) | $                             | (5,766,887 | ) | $ | (3,230,192 | )
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|                                                                                              
|Preferred stock dividends and accretion of
beneficial conversion
  features                    |  |                            | (336,393   | )                        |   | (347,336                       | ) |                               | (351,604   | ) |   | (351,606   | )
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|                                                                                              
|Net loss attributable to common
stockholders                                                   |  | $                          | (8,932,458 | )                        | $ | (6,366,016                     | ) | $                             | (6,118,491 | ) | $ | (3,581,798 | )
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|                                                                                              
|Basic and diluted net loss per share                                                           |  | $                          | (0.94      | )                        | $ | (0.37                          | ) | $                             | (0.30      | ) | $ | (0.18      | )
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  
|                                                                                              
|Weighted-average shares outstanding used in
computing basic and diluted
  net loss per share * |  |                            | 9,500,531  |                          |   | 17,310,003                     |   |                               | 20,365,586 |   |   | 20,369,719 |  
|                                                                                               |  |                            |            |                          |   |                                |   |                               |            |   |   |            |  

|                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* - The net
  loss per share in each quarter is computed using the weighted-average number
  of shares outstanding during the quarter. The net loss per share for the full
  year, however, is computed using the weighted-average number of shares
  outstanding during the year. Thus, the sum of the quarterly net loss per
  share amounts does not equal the full-year net loss per share.

F-50

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | 10% Secured Convertible Promissory Note
  Offering The Company obtained additional
  financing under the 10% Secured Convertible Promissory Note offering through
  the issuance of $1,905,000 of promissory notes in 2007, each with a three
  year term. In connection with this offering, the Company issued warrants to
  purchase 47,625 shares of common stock. These warrants have an exercise price
  of $4.00 per share and expire in 2012. The Company paid a commission of
  $133,200 in connection with these investments.

F-51

---



ITEM 13. EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Section |  | Document Name                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                
|3.1*    |  | Certificate
   of Incorporation of MetaMorphix, Inc., as amended.                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                
|3.2*    |  | Amended and
   Restated By-laws of MetaMorphix, Inc.                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                
|4.1*    |  | Form of
   12.5% Convertible Promissory Note, as amended.; Form of Convertible Secured
   Promissory Note; Form of Warrant to Purchase Common Stock of MetaMorphix,
   Inc.                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.1*   |  | Employment
   Agreement dated January 1, 1998 by and between Edwin C. Quattlebaum and
   MetaMorphix, Inc.                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.2*   |  | Employment
   Agreement dated as of May 31, 2004 by and between Thomas P. Russo and
   MetaMorphix, Inc.                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.3*   |  | Employment
   Agreement dated as of September 5, 2000 by and between Ronald Stotish and
   MetaMorphix, Inc.                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.4*   |  | Fourth
   Amended Consulting Agreement dated as of April 1, 2000 by and between Se-Jin
   Lee and MetaMorphix, Inc.                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.5*   |  | Amended and
   Restated 1996 Employees Incentive Stock Option Plan of MetaMorphix, Inc.                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.6*   |  | Amended and
   Restated 1995 Non-Qualified Officer, Director, Employee, and Consultant
   Stock Option Plan of MetaMorphix, Inc.                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.7*   |  | Sublease by
   and between Baxter Healthcare Corporation and MetaMorphix, Inc. dated as of
   October 18, 2004                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.8*   |  | Lease
   Agreement by and between Columbia Acquisition, LLC and MetaMorphix, Inc.
   dated December 17, 2001                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.9*   |  | Consent to
   Sublease by and between Columbia Acquisition, LLC and MetaMorphix, Inc.
   dated as of November 23, 2004;                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.10*  |  | Sublease by
   and between MetaMorphix and Chesapeake PERL, Inc. dated as of November 23,
   2004.                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.11*  |  | First Amendment
   of Lease and Extension of Term Agreement by and between MMI Genomics, Inc.
   and Haussler Office Park, L.P. dated as of July 31, 2002                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.13*  |  | Livestock
   Database License Agreement entered into as of February 28, 2002 (the
   Livestock Database License Agreement) by and between PE Corporation (NY)
   through the Celera Genomics Group and MetaMorphix, Inc. (Confidential
   treatment has been requested with respect to certain portions of this
   agreement)
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.14*  |  | Amendment
   No. 1 to the Livestock Database License Agreement and Subscription Agreement
   made as of June 17, 2003 by and between Applera Corporation (successor to
   its wholly-owned subsidiary PE Corporation (NY) through the Celera Genomics
   Group) and MetaMorphix, Inc.                                          
|        |  |                                                                                                                                                                                                                                                                                                                                
|10.15*  |  | Amendment
   No. 2 to the Livestock Database License Agreement dated as of August 29,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                                                                  

64

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|         |  |                                                                                                                                                                                                                                                                               
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Section  |  | Document Name                                                                                                                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                               
|10.16*   |  | Amendment
   No. 3 to the Livestock Database License Agreement dated as of September 8,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.               
|         |  |                                                                                                                                                                                                                                                                               
|10.17*   |  | Amendment
   No. 4 to the Livestock Database License Agreement dated as of October 1,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                 
|         |  |                                                                                                                                                                                                                                                                               
|10.18*   |  | Amendment
   No. 5 to the Livestock Database License Agreement dated as of October 1,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                 
|         |  |                                                                                                                                                                                                                                                                               
|10.19*   |  | Shareholders
   Agreement dated as of February 29, 2002 by and among MetaMorphix, Inc. and
   the shareholders listed therein.                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                               
|10.20**  |  | Swine
   Improvement Agreement effective June 1, 2004 by and between Monsanto Company
   and MetaMorphix, Inc. (Confidential treatment has been requested with
   respect to certain portions of this agreement)                                                              
|         |  |                                                                                                                                                                                                                                                                               
|10.21*** |  | Joint
   Development and Joint Marketing Agreement entered into as of May 6, 2002 by
   and between MetaMorphix, Inc., Excel Corporation and Cargill Inc.
   (Confidential treatment has been requested with respect to certain portions
   of this agreement)                
|         |  |                                                                                                                                                                                                                                                                               
|10.22**  |  | Cross-License
   Agreement entered into as of October 14, 2002 by and between Wyeth by and
   through Genetics Institute, L.L.C. and MetaMorphix, Inc. (Confidential
   treatment has been requested with respect to certain portions of this
   agreement)                   
|         |  |                                                                                                                                                                                                                                                                               
|10.23*** |  | Amended and
   Restated Collaboration Agreement dated as of January 26, 1999 by and among
   Genetics Institute, Inc., The Johns Hopkins University and MetaMorphix, Inc.
   (Confidential treatment has been requested with respect to certain portions
   of this agreement)
|         |  |                                                                                                                                                                                                                                                                               
|10.24*   |  | Promissory
   Note of February 9, 1998 of MetaMorphix, Inc., as Maker, payable to Genetics
   Institute, Inc. (the Promissory Note).                                                                                                                                        
|         |  |                                                                                                                                                                                                                                                                               
|10.25*   |  | First
   Allonge to the Promissory Note of August 18, 1998 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                               
|10.26*   |  | Second
   Allonge to the Promissory Note of October 30, 1998 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                               
|10.27*   |  | Third
   Allonge to the Promissory Note of January 26, 1999 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                               
|10.28*   |  | Fourth
   Allonge to the Promissory Note of April 28, 2005 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                               
|10.29*   |  | Security
   Agreement dated as of April 28, 2005 by and between Genetics Institute, LLC
   and MetaMorphix, Inc.                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                               
|10.30**  |  | Limited
   Liability Company Agreement of Willmar/MetaMorphix Turkey Joint Venture, LLC
   dated as of September 4, 2002 (Confidential treatment has been requested
   with respect to certain portions of this agreement)                                                    

65

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|         |  |                                                                                                                                                                                                                                                                                          
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Section  |  | Document Name                                                                                                                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                          
|10.31**  |  | Agreement
   dated as of August 2000, between The University of Saskatchewan as
   represented by the Veterinary Infectious Disease Organization and
   MetaMorphix International, Inc. (Confidential treatment has been requested
   with respect to certain portions of this agreement)
|         |  |                                                                                                                                                                                                                                                                                          
|10.32*   |  | License
   Agreement, effective as of September 17, 2004 between Genetic Technologies
   Limited and MetaMorphix, Inc. (Confidential treatment has been requested
   with respect to certain portions of this agreement)                                                                 
|         |  |                                                                                                                                                                                                                                                                                          
|10.33*** |  | Form of
   Promissory Note issued in 2005 under the 10% Secured Convertible Promissory
   Notes.                                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                                          
|10.34*** |  | Letter of
   Intent and Limited License Agreement by and between Tyson Poultry, Inc. and
   MetaMorphix, Inc., dated July 28, 2000 (Confidential treatment has been
   requested with respect to certain portions of this agreement)                                                     
|         |  |                                                                                                                                                                                                                                                                                          
|10.35*** |  | Letter of
   Intent, Limited License and Option Agreement by and between Pilgrims Pride
   Corporation and MetaMorphix, Inc., dated November 10, 2000 (Confidential
   treatment has been requested with respect to certain portions of this
   agreement)                              
|         |  |                                                                                                                                                                                                                                                                                          
|10.36*** |  | Letter of
   Intent Regarding Grant of Limited License in the Republic of Mexico by and
   between Pilgrims Pride Corporation and MetaMorphix, Inc., dated October 10,
   2000                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                          
|10.37*** |  | Marshfield
   Clinic/Linkage Genetics Inc. License Agreement by and between Marshfield
   Clinic and Linkage Genetics Inc., Effective Date of January 1, 1996
   (Confidential treatment has been requested with respect to certain portions
   of this agreement)                       
|         |  |                                                                                                                                                                                                                                                                                          
|10.38    |  | Joint
   Research and Marker Development Agreement between MetaMorphix, Inc. and
   Hubbard S.A.S., dated January 25, 2007. (Confidential treatment has been
   requested with respect to certain portions of this agreement)                                                            
|         |  |                                                                                                                                                                                                                                                                                          
|14.1*    |  | Code of
   Ethics                                                                                                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                                                                          
|21.1*    |  | Subsidiaries
   of MetaMorphix, Inc.                                                                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                          
|31.1     |  | Section 302
   Certifications of Principal Executive Officer                                                                                                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                                          
|31.2     |  | Section 302
   Certifications of Principal Financial Officer                                                                                                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                                          
|32.1     |  | Section 906
   Certification of Chief Executive Officer                                                                                                                                                                                                                                  
|         |  |                                                                                                                                                                                                                                                                                          
|32.2     |  | Section 906
   Certification of Chief Financial Officer                                                                                                                                                                                                                                  

* - These
exhibits were filed with the Form 10-SB on May 2, 2005.

** - These
exhibits were filed with the Form 10-SB Amendment No. 1 on October 3, 2006.

*** - These exhibits were filed
with the Form 10-SB/A (Amendment No. 2) on December 15, 2006.

66

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|         |                                         
|-------- | ----------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
  SERVICES

The following table presents
the aggregate fees billed for the audit services performed by Deloitte &
Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective
affiliates (collectively, the Deloitte entities) during the 2006 and 2005
fiscal years.

|           |  |      |         |      |   |        
|---------- |  | ---- | ------- | ---- | - | -------
|           |  | 2006 |         | 2005
|           |  |      |         |     
|Audit Fees |  | $    | 250,000 |      | $ | 275,000
|Tax Fees   |  |      | 91,000  |      |   | 7,500  

Audit
Fees. Audit Fees
relate to professional services rendered in connection with the audit of our annual
financial statements, quarterly review of financial statements included in our
10-QSB, and audit services provided in connection with other statutory and
regulatory filings.

Tax
Fees.Tax Fees
include professional services related to tax compliance, tax advice and tax
planning, including the preparation of federal and state tax returns.

The
Audit Committee pre-approved all of the services provided by the Deloitte
entities for fiscal years 2006 and 2005. Pursuant to the Audit Committee
Charter, the Audit Committee must pre-approve audit and non-audit services to
be provided to us by the independent auditor, or subsequently approve non-audit
services in those circumstances where a subsequent approval is necessary and
permissible.

67

---



SIGNATURES

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

|                    |                                      
|------------------- | -------------------------------------
|                    | METAMORPHIX, INC.                    
|                    |                                      
|Date: April 3, 2007 | /s/ Edwin Quattlebaum                
|                    |                                      
|                    | Edwin Quattlebaum                    
|                    | Chief Executive Officer and President

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

|                                                                                                               |  |              
|-------------------------------------------------------------------------------------------------------------- |  | -------------
|/s/ Edwin Quattlebaum                                                                                          |  | April 3, 2007
|                                                                                                               |  |              
|Edwin Quattlebaum                                                                                              |  |              
|Director, Co-Chairman of the Board, Chief Executive
  Officer and President (Principal Executive Officer)      |  |              
|                                                                                                               |  |              
|/s/ Thomas P. Russo                                                                                            |  | April 3, 2007
|                                                                                                               |  |              
|Thomas P. Russo                                                                                                |  |              
|Executive Vice President, Treasurer and Chief
  Financial Officer (Principal Financial and Accounting Officer) |  |              
|                                                                                                               |  |              
|/s/ Clifton Baile                                                                                              |  | April 3, 2007
|                                                                                                               |  |              
|Clifton Baile                                                                                                  |  |              
|Director                                                                                                       |  |              
|                                                                                                               |  |              
|                                                                                                               |  |              
|                                                                                                               |  |              
|John R. Block                                                                                                  |  |              
|Director                                                                                                       |  |              
|                                                                                                               |  |              
|/s/ Victor M. Casini                                                                                           |  | April 3, 2007
|                                                                                                               |  |              
|Victor M. Casini                                                                                               |  |              
|Director                                                                                                       |  |              
|                                                                                                               |  |              
|/s/ Peter Drake                                                                                                |  | April 3, 2007
|                                                                                                               |  |              
|Peter Drake                                                                                                    |  |              
|Director                                                                                                       |  |              
|                                                                                                               |  |              
|/s/ Peter A. Meyer                                                                                             |  | April 3, 2007
|                                                                                                               |  |              
|Peter A. Meyer                                                                                                 |  |              
|Director and Co-Chairman of the Board                                                                          |  |              
|                                                                                                               |  |              
|/s/ Howard L. Minigh                                                                                           |  | April 3, 2007
|                                                                                                               |  |              
|Howard L. Minigh                                                                                               |  |              
|Director                                                                                                       |  |              
|                                                                                                               |  |              
|/s/ Edward Shonsey                                                                                             |  | April 3, 2007
|                                                                                                               |  |              
|Edward Shonsey                                                                                                 |  |              
|Director                                                                                                       |  |              

68

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