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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549





FORM 10-KSB/A(Amendment
No. 2)

|  |                                                                                    |                                                                
|- | ---------------------------------------------------------------------------------- | ---------------------------------------------------------------
|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 x
No o

Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. 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
|                               |  |                                                                                                                                         |    |     
|RESTATEMENT  EXPLANATORY NOTE |  | 1                                                                                                                                      
|                               |  |                                                                                                                                         |    |     
|PART I                         |  |                                                                                                                                         |    |     
|                               |  |                                                                                                                                         |    |     
|Item 1.                        |  | Description of Business                                                                                                                 |    | 3   
|Item 2.                        |  | Description of Properties                                                                                                               |    | 30  
|Item 3.                        |  | Legal Proceedings                                                                                                                       |    | 31  
|Item 4.                        |  | Submission of Matters to a Vote of
 Security Holders                                                                                    |    | 31  
|                               |  |                                                                                                                                         |    |     
|PART II                        |  |                                                                                                                                         |    |     
|                               |  |                                                                                                                                         |    |     
|Item 5.                        |  | Market for Common Equity, Related
 Stockholder Matters and Small Business Issuer Purchases of Equity Securities                         |    | 31  
|Item 6.                        |  | Managements Discussion and Analysis
 or Plan of Operation                                                                              |    | 33  
|Item 7.                        |  | Financial Statements                                                                                                                    |    | 48  
|Item 8.                        |  | Changes and Disagreements with
 Accountants on Accounting And Financial Disclosure                                                      |    | 48  
|Item 8A.                       |  | Controls and Procedures                                                                                                                 |    | 48  
|Item 8B.                       |  | Other Information                                                                                                                       |    | 49  
|                               |  |                                                                                                                                         |    |     
|PART III                       |  |                                                                                                                                         |    |     
|                               |  |                                                                                                                                         |    |     
|Item 9.                        |  | Directors, Executive Officers,
 Promoters, Control Persons and Corporate Governance; Compliance With Section
 16(a) of the Exchange Act |    | 49  
|Item 10.                       |  | Executive Compensation                                                                                                                  |    | 57  
|Item 11.                       |  | Security Ownership of Certain
 Beneficial Owners and Management and Related Stockholder Matters                                         |    | 63  
|Item 12.                       |  | Certain Relationships and Related
 Transactions, and Director Independence                                                              |    | 66  
|                               |  |                                                                                                                                         |    |     
|Item 13.                       |  | Exhibits                                                                                                                                |    | 68  
|Item 14.                       |  | Principal Accountant Fees and
 Services                                                                                                 |    | 71  
|                               |  |                                                                                                                                         |    |     
|SIGNATURES                     |  |                                                                                                                                         | 72

i

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RESTATEMENT
 EXPLANATORY NOTE

MetaMorphix,
Inc. is filing this Amendment No. 2 to its Annual Report on Form 10-KSB/A,
which was originally filed on Form 10-KSB on April 3, 2007, and subsequently
amended by Amendment No.1 on Form 10-KSB/A on June 8, 2007, to reflect a
restatement of its financial statements.

As
discussed in Note 20 subsequent to the issuance of its Annual Report on Form
10-KSB for the year ended December 31, 2006, MetaMorphix and its audit
committee concluded that MetaMorphix should restate its consolidated balance
sheets at December 31, 2006 and 2005, and its consolidated statements of
operations, cash flows, and stockholders equity (deficit) for each of the
three years ended December 31, 2006 to correct the following errors:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | We used the Black-Scholes
 option valuation model for the valuation of warrants issued to non-employees
 from January 1, 1999 through March 31, 2007. The expected life assigned to
 these transferable warrants, which is an input to the Black-Scholes option
 valuation model, was less than the contractual life of the warrants. We based
 the expected life of the warrants on the assumption that the warrants would
 be exercised prior to it expiration. Upon further reflection and review of
 accepted valuation techniques and practices and the relevant accounting
 guidance, it was determined that the contractual life should have been used
 as an input.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 2. | In 2004, holders of our 8%
 Secured Convertible Promissory Notes and our 10.9% Secured Convertible
 Promissory Notes converted principal and interest into shares of our Series F
 Convertible Preferred Stock and warrants to purchase shares of our common
 stock. This transaction was originally accounted for as an induced
 conversion. After further review of the appropriate guidance, it was
 determined that this conversion should have been accounted for as an extinguishment
 of the notes. This transaction generated a loss on extinguishment.                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 3. | In 2004, holders of our
 various Series C, D, & E Bridge Notes converted their notes into our
 12.5% Convertible Secured Promissory Notes. It was determined that this conversion
 should have been accounted for as an extinguishment of the old notes and the
 establishment of new notes. This transaction generated a loss on
 extinguishment.                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4. | In 2005, we made a
 material modification to the terms of its 12.5% Convertible Secured
 Promissory Notes, in connection with a warrant exchange to eliminate a
 penalty warrant clause. This modification should have been accounted for as
 an extinguishment of the old notes and the establishment of new notes. This
 transaction generated a loss on extinguishment.                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 5. | In 2005, holders of our 8%
 Secured Convertible Promissory Notes and our 10.9% Secured Convertible
 Promissory Notes converted principal and interest into shares of our Series G
 Convertible Preferred Stock and warrants to purchase our common stock. This
 transaction was originally accounted for as an induced conversion, but it was
 determined that it should have been accounted for as a debt extinguishment.
 This transaction generated a gain on extinguishment.                                                                                                                                                                                           

Amended Items of Form 10-KSB

We
are amending the following items in Part II of our fiscal 2006 Form 10-KSB:

1

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| |                                                                                                                                                                                                                           |   |                                                                                                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                           |  | Item 5. Market for Common
 Equity, Related Stockholder Matters and Small Business Issuer Purchases of
 Equity Securities.
| |                                                                                                                                                                                                                           |   |                                                                                                                          
| |                                                                                                                                                                                                                           |  | Item 6. Managements
 Discussion and Analysis or Plan of Operation                                                       
| |                                                                                                                                                                                                                           |   |                                                                                                                          
| |                                                                                                                                                                                                                           |  | Item 7. Financial
 Statements                                                                                            
| |                                                                                                                                                                                                                           |   |                                                                                                                          
| |                                                                                                                                                                                                                           |  | Item 8A. Controls and
 Procedures                                                                                        
| |                                                                                                                                                                                                                           |   |                                                                                                                          
| | We
 are also filing updated certifications by the Chief Executive Officer and
 Chief Financial Officer, as well as an updated Consent of our Independent
 Registered Public Accounting Firm as exhibits to this 10-KSB/A.

All information not affected by
amendment is unchanged

We
have not changed any information included in our fiscal 2006 10-KSB (Amendment
No.1) filed on June 8, 2007 that is not affected by this amendment.
Accordingly, the information included in our fiscal 2006 10-KSB (Amendment
No.1) and included in this amendment that is not affected by these items
describes conditions as they existed and were presented in our fiscal 2006
10-KSB (Amendment No.1 ) at the time we filed that report with the Securities
and Exchange Commission on June 8, 2007. We have not taken into account any
other events occurring after the June 8, 2007 filing of our fiscal 2006 10-KSB
(Amendment No.1) that might have affected those disclosures, nor have we
modified or updated those disclosures, including the exhibits to our fiscal
2006 10-KSB (Amendment No.1), to reflect any other subsequent events.
Accordingly, you should, in conjunction with reading this amendment to our
fiscal 2006 10KSB (Amendment No 1), also read our quarterly reports on Form
10-QSB and all other filings we have made with the Securities and Exchange
Commission since June 8, 2007.

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PART I

FORWARD-LOOKING
STATEMENTS

Statements
in this Form 10-KSB/A (Amendment No. 2) 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/A (Amendment No. 2). 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

3

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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, 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

6

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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 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 launched the canine heritage diagnostic tool in February 2007.

7

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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. This license agreement expires on December
22, 2015.

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. This
license agreement expires on April 21, 2009.

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

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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.

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.

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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 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.

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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
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 in perpetuity. 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.

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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 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.

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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. 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.

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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). On January 16, 2007 Johns Hopkins sent us a
60-day notice-and-cure letter, but after discussions between us and Johns
Hopkins, rescinded that letter in a letter dated March 30, 2007, in exchange
for our agreement to a specific repayment plan, to which we have complied. We
are presently current under the repayment plan and it is our intention to pay
all past-due amounts in accordance with the repayment plan. The Collaboration
Agreement had previously 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.

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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 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

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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
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;

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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

17

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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. 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.

18

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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.

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.

19

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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
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.

20

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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.

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/A (Amendment No. 2)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.

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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;                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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.                                                                                                                                                                   

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

22

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past due amounts may
seek to enforce their rights against us. In
addition, we have issued some of our promissory notes over time and some of
these notes do not contain cross default provisions. Therefore, earlier
investors in these notes may have greater rights as to payment and security
than later investors in the notes.

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.

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

23

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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 Melanie Schow and
Declan Jackson, 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 current 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

24

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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 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. These
amounts are accrued in accounts payable and accrued expenses at December 31,
2006. 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;

25

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|  |                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the inability to locate, recruit and qualify a sufficient number of
 patients for the trials;                                                                       
|  |                                                                                                                                                                     
| | regulatory delays or other regulatory actions; or                                                                                                                   
|  |                                                                                                                                                                     
| | 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

26

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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 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

27

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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.

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.

28

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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/A (Amendment No. 2). 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 March 31, 2007, we had outstanding convertible debt, preferred stock,
options and warrants which are exercisable for, or convertible into, an
aggregate of approximately 45,537,501 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. We are currently
undertaking a consent effort from our note holders and our preferred stock
holders which would modify the ratchet provisions of the conversion price of
certain securities. If the consent effort is successful, our 10% Notes
($15,727,763 outstanding at March 31, 2007) will be the only security which
will convert at a discount to an offering price. The 10% Notes conversion price
would be the lesser of $4.00 or 70% of an initial offering price. If the
consent is not successful, our 12.5% Notes ($21,924,829 outstanding at March
31, 2007) and our Series E Preferred Shares (2,000,000 shares outstanding at
March 31, 2007) may also convert at 70% of an initial offering price. The
issuance of additional shares of common stock upon the exercise or conversion
of these securities will reduce your percentage ownership in us.

29

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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
  Researchand Operations                                            |  | 12,104                 |  | $                                 | 268,339 |               | Lease
  expires May 31, 2012.  

30

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|        |                  
|------- | -----------------
|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 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 current 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 9,979,839 shares
of our common stock, options outstanding to purchase 10,550,730 shares of our
common stock, and convertible notes which may be converted into 9,154,765
shares of our common stock.

31

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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 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.                                         

32

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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
$165,954 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/A (Amendment No. 2). 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/A (Amendment No. 2), 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. As discussed in Note 20 to the Consolidated
Financial Statements, MetaMorphix and its audit committee concluded that
MetaMorphix would amend its Annual Report on Form 10-KSB for the year ended
December 31, 2006 to restate its consolidated financial statements. The
Managements Discussion and Analysis below has been revised to reflect the
effects of the restatement.

Overview

We
are a life science Company. We use our two fundamental proprietary
technologiesanimal genomics and GDFs 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.

33

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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 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
have faced the numerous challenges and risks that many emerging growth,
research-oriented companies face since our inception. We have had a consistent
history of net losses. Our decision to finance the Company through a
combination of convertible notes and preferred stock has left us with a large
debt obligation, the majority of which is long-term. The challenge is to
generate sufficient revenue to repay this long term debt obligation or to have
a liquidity event whereby this long term debt will be converted to equity. Now
that we are beginning to commercialize our various products, we face risks and
challenges relating to liquidity. We are dependent on future fund raising to
become solvent until our operations reach profitability. 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.

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.

34

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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
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

35

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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 use the
proportionate performance method to recognize revenue in these instances. This
treatment is in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, Selected Revenue Recognition
Issues  Section 3: Delivery and Performance.

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 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.

36

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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 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

37

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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.

38

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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.

Cost of Revenue

Cost
of revenue consists primarily of labor and reagent costs, as well as an
allocation of indirect costs such as rent and utilities. Costs associated with
providing the parentage and identification genotyping services are reported as
cost of revenue.

39

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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 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.

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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                |  |      | (4,985,774  | )    |   | (6,167,220  | ) |   | (29,378,816 | )
|Loss on debt extinguishment                                      |  |      |            |      |   | (11,540,233 | ) |   | (4,712,726  | )
|Debt issue costs                                                 |  |      | (3,009,026  | )    |   | (3,196,163  | ) |   | (4,277,408  | )
|Other income (loss)                                              |  |      | (16,038     | )    |   | (192,457    | ) |   | 36,516      |  
|                                                                 |  |      |             |      |   |             |   |   |             |  
|Net loss                                                         |  | $    | (18,090,493 | )    | $ | (36,918,641 | ) | $ | (65,988,638 | )
|                                                                 |  |      |             |      |   |             |   |   |             |  

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

41

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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 decreased $1,181,446 to
$4,985,774 for the year ended December 31, 2006 from $6,167,220 for 2005. This
19.2% decrease was primarily due to the decrease in the value of warrants
issued with convertible debt, and the amortization thereof. This change was
partially offset by an increase in the amount of promissory notes outstanding.
The Company generated proceeds from 10% note issuances of $9.8 million in 2006.
Additionally, interest expense increased due to the additional 12.5% notes
which were issued to satisfy accrued interest payable.

Loss on Debt Extinguishment.
There was no loss on debt extinguishment in 2006 as no debt was extinguished
during the year. In 2005, the Company made a material modification to the terms
of its 12.5% Convertible Secured Promissory Notes which was accounted for as an
extinguishment of the old notes and the establishment of new notes. This
transaction generated a loss on extinguishment of $11,553,017. Also 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. This transaction was also accounted for as a
debt extinguishment and generated a gain on extinguishment of $12,783.

42

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Debt Issue Costs.
Debt issue costs decreased $187,137, or 5.9%, to $3,009,026 for the year ended
December 31, 2006 from $3,196,163 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.

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 $18,828,148, or 51.0%, to $18,090,493 for the year ended December 31,
2006 from $36,918,641 for 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 $23,211,596 to
$6,167,220 for the year ended December 31, 2005 from $29,378,816 for 2004. This
79.0% decrease was

43

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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.

Loss on Debt Extinguishment.
Loss on debt extinguishment was $11,540,233 for the year ended December 31,
2005 compared to $4,712,726 for 2004. This $6,827,507, or 144.9%, increase
relates to the volume of extinguishments that took place during the periods. In
2005, the Company made a material modification to the terms of its 12.5%
Convertible Secured Promissory Notes which was accounted for as an
extinguishment of the old notes and the establishment of new notes. This
transaction generated a loss on extinguishment of $11,553,017. Also 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. This transaction was also accounted
for as a debt extinguishment and generated a gain on extinguishment of $12,783.
In 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. This transaction was accounted for as
an extinguishment of the notes and generated a loss on extinguishment of
$12,783. Also in 2004, holders of the Companys various Series C, D, & E
Bridge Notes converted their notes into our 12.5% Convertible Secured Promissory
Notes which was accounted for as an extinguishment of the old notes and the
establishment of new notes. This transaction generated a loss on extinguishment
of $2,719,967.

Debt Issue Costs.
Debt issue costs decreased $1,081,245, or 25.3%, to $3,196,163 for the year
ended December 31, 2005 from $4,277,408 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 $29,069,997, or 44.1%, to $36,918,641 for the year ended December 31,
2005 from $65,988,638 for 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 $411,512 for the Series F Convertible
Preferred Stock and $1,952,874 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 $4,591,914 and $3,544,158 relating to
the notes issued in 2004 and 2003,

44

---



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
Preferred stock dividends and accretion of beneficial conversion features on
the Consolidated Statement of Operations adjusts our net loss to derive a net
loss attributable to common stockholders. The dividends on our Series G
Preferred Stock which are being accrued in various accounting periods must be
added to the net loss because they are required to be paid before any
distribution to common stockholders. The value placed on the beneficial
conversion feature contained on our 12.5% Convertible Secured Promissory Notes
and Series G Preferred Stock was determined by taking the difference between
the conversion price and the fair value of our common stock into which the
notes and preferred shares are convertible, multiplied by the number of shares
into which the notes and preferred shares are convertible. Similar to the
preferred stock dividends, the accretion, or amortization, of this feature is
added to net loss to derive a net loss attributable to common stockholders.

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 $25,896,881 and $24,767,524, respectively, which deficit has since
increased. At December 31, 2006, we had $277,680 of cash and cash equivalents
on hand. With this 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.

We
have faced the numerous challenges and risks that many emerging growth,
research-oriented companies face since our inception. We have had a consistent
history of net losses. Our decision to finance the Company through a
combination of convertible notes and preferred stock has left us with a large
debt obligation, the majority of which is long-term. The challenge is to
generate sufficient revenue to repay this long term debt obligation or to have
a liquidity event whereby this long term debt will be converted to equity. Now
that we are beginning to commercialize our various products, we face risks and
challenges relating to liquidity. We are dependent on future fund raising to
become solvent until our operations reach profitability.

We
are currently past-due on certain debt obligations. Our efforts have been to
negotiate repayment plans in these matters with the best terms possible for
both parties. To date, we do not have any outstanding lawsuits related to this
indebtedness. While the debt instruments have no material covenants other than
the repayment of principal and accrued interest, we are making efforts to
maintain shareholder and note holder satisfaction.

45

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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, an $11.5 million decrease in loss from
debt extinguishment, and a $3.0 million decrease in share-based payment
expense. These items were partially offset by a $18.8 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 $29.0 million decrease in net loss,
a $6.8 million increase in loss on debt extinguishment, 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 $24.3 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

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.

46

---



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
$7,126,707 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 $1,053,604, which was recorded as
interest expense in 2004.

In
the year ended December 31, 2004, we issued additional 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 $687,912 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 $52,601, which was recorded as interest expense
in 2004. 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 $61,782 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 additional 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 $3,346,912 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 $1,931,946 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.

47

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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/A (Amendment No. 2), beginning on Page F-1, which follows page 67:

|        |                                              
|------- | ---------------------------------------------
|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

In
    the Companys original filing of Form 10-KSB for the period ended December
    31, 2006 filed on April 3, 2007 and the subsequent Amendment No. 1 on Form
    10-KSB/A filed on June 8, 2007, we reported that as of the end of the period
    covered by this report, we carried out an evaluation, under the supervision
    and with the participation of management, including the Chief Executive Officer
    and Chief Financial Officer, of the effectiveness of the design and operation
    of our 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 performed at that time, the Chief Executive Officer and Chief
    Financial Officer originally concluded that our disclosure controls and procedures
were effective.

Subsequent
    to such evaluation, in connection with preparation of the Companys
    Quarterly Report on Form 10-QSB for the quarter and six-month period ended
    June 30, 2007, we identified certain accounting errors that led us to conclude
    that our previously issued financial statements should be restated due to
    errors in our methodology for calculating and accounting for transferrable
    warrants and errors in our accounting for certain debt and equity exchange
    transactions, as described further in Note 20 to the consolidated financial
    statements of the Company. These errors resulted in the filing of this Amendment
    No. 2 to our 2006 Annual Report on Form 10-KSB/A. In connection with the
    filing of this restated Annual Report, our management, with the participation
    of our Chief Executive Officer and Chief Financial Officer, re-evaluated
    our disclosure controls and procedures. Based upon that evaluation, the CEO
    and CFO concluded that our disclosure controls and procedures were not effective
    as of December 31, 2006, as a result of a material weakness in our internal
    control over financial reporting. A material weakness is defined by Audit
    Standard No. 5 of the Public Company Accounting Oversight Board as, A
    deficiency, or combination of deficiencies, in internal control over financial
    reporting, such that there is a reasonable possibility that a material misstatement
    of the companys annual or interim financial statements will not be
    prevented or detected on a timely basis.

48

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The Company has plans to correct its material weakness through additional, qualified financial personnel and enhancements to the accounting system in 2008.

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

None.

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                                                                        

49

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|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|(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                                                                                                   
|                                                                                                                                     
|(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 28
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

50

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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. 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,

51

---



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.

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

52

---



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.

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

53

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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.

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;                                                                                                                                                                                                                                                                                                      

54

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| |                                                                      |                                                                                                                                                                                                                                                             
| | -------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                     | reviewing
 and establishing appropriate insurance coverage for our directors and
 executive officers;                                                                                                                                                       
| |                                                                      |                                                                                                                                                                                                                                                             
| |                                                                     | advising
 with respect to searches for executive officers and assisting in interviews;                                                                                                                                                                      
| |                                                                      |                                                                                                                                                                                                                                                             
| |                                                                     | 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.

55

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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 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;

56

---



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | 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                                                  
| |   |                                                                                                                 
| |  | 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 two fiscal years,
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 years ended December 31, 2006 and 2005(collectively, the named
executive officers):

|                                                                     |  |      |  |             |         |                     |   |            |  |                                               |   |                              |  |            |         |  |  |  |   |        |  |  |   |         | 
|-------------------------------------------------------------------- |  | ---- |  | ----------- | ------- | ------------------- | - | ---------- |  | --------------------------------------------- | - | ---------------------------- |  | ---------- | ------- |  |  |  | - | ------ |  |  | - | ------- | 
|Name and
 Principal
 Position                                        |  | Year |  | Salary
 ($) |         | Option
 Awards
 ($) |   | Bonus
 ($) |  | Non-Equity
 Incentive Plan
 Compensation
 ($) |   | All Other
 Compensation
 ($) |  | Total
 ($) |        
|                                                                     |  |      |  |             |         |                     |   |            |  |                                               |   |                              |  |            |        
|                                                                     |  |      |  |             |         |                     |   |            |  |                                               |   |                              |  |            |        
|Edwin C. Quattlebaum                                                 |  | 2006 |  | $           | 427,446 |                     | $ | 408,585    |  | $                                             |  |                              |  | $          |        |  |  |  | $ | 35,501 |  |  | $ | 871,532 | 
|Co-Chairman, President and
 Chief Executive Officer (1)              |  | 2005 |  | $           | 407,349 |                     | $ | 370,556    |  | $                                             |  |                              |  | $          | 180,703 |  |  |  | $ | 24,720 |  |  | $ | 983,328 | 
|                                                                     |  |      |  |             |         |                     |   |            |  |                                               |   |                              |  |            |         |  |  |  |   |        |  |  |   |         | 
|Thomas P. Russo                                                      |  | 2006 |  | $           | 275,980 |                     | $ | 166,386    |  | $                                             |  |                              |  | $          |        |  |  |  | $ | 3,870  |  |  | $ | 446,236 | 
|Executive Vice President,
 Treasurer and Chief Financial Officer (2) |  | 2005 |  | $           | 252,451 |                     | $ |           |  | $                                             |  |                              |  | $          |        |  |  |  | $ | 1,932  |  |  | $ | 254,383 | 
|                                                                    
|Dennis Fantin                                                        |  | 2006 |  | $           | 242,664 |                     | $ | 421,890    |  | $                                             |  |                              |  | $          |        |  |  |  | $ | 1,167  |  |  | $ | 665,721 | 
|Executive Vice President,
 Chief of Operations (3)                   |  | 2005 |  | $           | 189,323 |                     | $ |           |  | $                                             |  |                              |  | $          |        |  |  |  | $ | 1,029  |  |  | $ | 190,352 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dr.
 Quattlebaums option awards represent the fair value of options granted to
 purchase 575,000 and 343,791 shares of common stock in 2005 and 2006,
 respectively. His other compensation in 2006 includes group-term life
 insurance premiums of $3,870, executive life insurance premiums of $14,824,
 and an auto allowance of $16,807. Other compensation in 2005 includes group-term
 life insurance premiums of $1,932, executive life insurance premiums of
 $9,883, and an auto allowance of $12,905. $39,662 of Dr. Quattlebaums 2005
 salary remains accrued but unpaid at December 31, 2006. In 2005, Dr.
 Quattlebaum was awarded a bonus of $180,703 for the achievement of goals in
 2004. He declined this bonus,
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2) | Mr. Russos
 2006 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

57

---



|    |                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | premiums of
 $1,932 and $3,870 in 2005 and 2006, respectively. $14,423 of Mr. Russos 2005
 salary remains accrued but unpaid at December 31, 2006.                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                             
|(3) | Dr. Fantins
 2006 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 $1,029 and $1,167 in 2005 and 2006, respectively.
 $10,673 of Dr. Fantins 2005 salary remains accrued but unpaid at December
 31, 2006.

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.

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. The agreement describes his duties,
his at-will employment status, benefits, and 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.

58

---



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.

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.

59

---



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 |                                                                 |  | $                                                                       |  |                                                                                                                 | $ |                                                                                                                                 |  |  |  | $ |  | 

60

---



|    |                                                           |                                                                                                       
|--- | --------------------------------------------------------- | ------------------------------------------------------------------------------------------------------
|(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. 

61

---



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.

62

---



|         |                                                                                                
|-------- | -----------------------------------------------------------------------------------------------
|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.

63

---



|                                                                                             |  |                                |  |                                                |      |                                  |  |      |   | 
|-------------------------------------------------------------------------------------------- |  | ------------------------------ |  | ---------------------------------------------- | ---- | -------------------------------- |  | ---- | - | 
|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 | % | 
|                                                                                             |  |                                |  |                                                |      |                                  |  |      |   | 
|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.

64

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                      

65

---



|     |                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

66

---



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

67

---



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 (restated) and 2005 (restated)                                                                   | F-3 
|                                                                                                                                                  
|Consolidated Statements of
Operations for
 the Years Ended December 31, 2006 (restated), 2005 (restated), and 2004
 (restated)                     | F-4 
|                                                                                                                                                  
|Consolidated Statements of Cash
Flows for
 the Years Ended December 31, 2006 (restated), 2005 (restated), and 2004
 (restated)                     | F-5 
|                                                                                                                                                  
|Consolidated Statements of
Stockholders
 Equity (Deficit) for the Years Ended December 31, 2006 (restated), 2005
 (restated), and 2004 (restated) | 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.

As discussed in Note 20 to
the financial statements, the accompanying financial statements have been
restated.

/s/ DELOITTE & TOUCHE
LLP

McLean, Virginia
April 2, 2007 (February 29, 2008 as to the effects of the restatement discussed
in Note 20)

F-2

---



METAMORPHIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ------------ | ------------------- | - | ------------ | -
|                                                                                                                                                                                                       |  | December
 31,
 2006 |              | December
 31,
 2005 |  
|                                                                                                                                                                                                       |  |                     |              |                     |  
|                                                                                                                                                                                                       |  | (as
 Restated)      |              | (as
 Restated)      |  
|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                                                                                                                                                                              |  |                     | 5,814,349    |                     |   | 8,338,422    |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                       |  |                     | 11,483,539   |                     |   | 14,359,442   |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|TOTAL ASSETS                                                                                                                                                                                           |  | $                   | 12,139,732   |                     | $ | 16,126,522   |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)                                                                                                                                                         |  |                     |              |                     |   |              |  
|CURRENT LIABILITIES:                                                                                                                                                                                   |  |                     |              |                     |   |              |  
|Accounts payable and accrued expenses                                                                                                                                                                  |  | $                   | 7,542,232    |                     | $ | 9,042,467    |  
|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                                                                                                                                                                              |  |                     | 26,553,074   |                     |   | 26,534,604   |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|LONG-TERM NOTES PAYABLE, net of discount of $1,134,299 and $353,875 at
 December 31, 2006 and 2005, respectively                                                                                       |  |                     | 35,401,265   |                     |   | 25,022,645   |  
|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                                                                                                                                                                                      |  |                     | 68,242,790   |                     |   | 56,856,923   |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|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                |  |                     | 58,146,975   |                     |   | 58,146,975   |  
|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                                                                                                                                                                             |  |                     | 116,981,763  |                     |   | 114,262,479  |  
|Accumulated other comprehensive loss                                                                                                                                                                   |  |                     | (78,611      | )                   |   | (76,458      | )
|Accumulated deficit                                                                                                                                                                                    |  |                     | (231,174,260 | )                   |   | (213,083,767 | )
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|Total stockholders equity (deficit)                                                                                                                                                                   |  |                     | (56,103,058  | )                   |   | (40,730,401  | )
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                   |  | $                   | 12,139,732   |                     | $ | 16,126,522   |  
|                                                                                                                                                                                                       |  |                     |              |                     |   |              |  

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 |  
|                                                                           |  |                     |             |                     |   |                     |  
|                                                                           |  | (as
 Restated)      |             | (as
 Restated)      |   | (as
 Restated)      |  
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|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                           |  |                     | (4,985,774  | )                   |   | (6,167,220          | ) |   | (29,378,816 | )
|Debt issue costs                                                           |  |                     | (3,009,026  | )                   |   | (3,196,163          | ) |   | (4,277,408  | )
|Loss on debt extinguishment                                                |  |                     |            |                     |   | (11,540,233         | ) |   | (4,712,726  | )
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|Other (expense) income                                                     |  |                     | (16,038     | )                   |   | (192,457            | ) |   | 36,516      |  
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|NET LOSS                                                                   |  |                     | (18,090,493 | )                   |   | (36,918,641         | ) |   | (65,988,638 | )
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|Preferred stock dividends
 and accretion of beneficial conversion features |  |                     | (1,394,954  | )                   |   | (1,386,939          | ) |   | (2,854,607  | )
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|NET LOSS ATTRIBUTABLE TO
 COMMON STOCKHOLDERS                              |  | $                   | (19,485,447 | )                   | $ | (38,305,580         | ) | $ | (68,843,245 | )
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|Net loss per common share:                                                 |  |                     |             |                     |   |                     |   |   |             |  
|Basic and diluted                                                          |  | $                   | (0.94       | )                   | $ | (2.26               | ) | $ | (16.42      | )
|                                                                           |  |                     |             |                     |   |                     |   |   |             |  
|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 |  
|                                                                                   |  |                    |             |                    |   |                    |  
|                                                                                   |  | (as Restated)      |             | (as Restated)      |   | (as Restated)      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                    |             |                    |   |                    |   |   |             |  
|Net loss                                                                           |  | $                  | (18,090,493 | )                  | $ | (36,918,641        | ) | $ | (65,988,638 | )
|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                                                         |  |                    | 482,826     |                    |   | 732,991            |   |   | 3,055,775   |  
|Amortization of deferred debt issue costs                                          |  |                    | 3,009,026   |                    |   | 2,725,481          |   |   | 2,617,920   |  
|Share-based payment expense                                                        |  |                    | 2,722,030   |                    |   | 5,724,159          |   |   | 28,293,276  |  
|Loss on debt extinguishment                                                        |  |                    |            |                    |   | 11,540,233         |   |   | 4,712,726   |  
|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                                                                         |  |                    | (32,725     | )                  |   | (31,147            | ) |   | 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, as restated                                                                     |  |        | 1,834,440  |        |   | 7,370,499  |  |        | 1,834,440  |        |   | 7,360,311  |  |  |          |   |   |           |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Issuance of Series F offering                                                                                |  |        |           |        |   |           |  |        |           |        |   |           |  |  | 352,156   |   |   | 1,132,788  |  
|Issuance of Series F shares upon debt conversion
transaction                                                 |  |        |           |        |   |           |  |        |           |        |   |           |  |  | 1,482,284 |   |   | 6,227,523  |  
|Other                                                                                                        |  |        |           |        |   |           |  |        |           |        |   | 10,188     |  |  |          |   |   |           |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Balance, end of year, as restated                                                                            |  |        | 1,834,440  |        |   | 7,370,499  |  |        | 1,834,440  |        |   | 7,370,499  |  |  | 1,834,440 |   |   | 7,360,311  |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Convertible Preferred Stock, Series G                                                                        |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Balance,
 beginning of year, as restated                                                                     |  |        | 1,549,947  |        |   | 7,312,955  |  |        | 1,461,547  |        |   | 6,775,476  |  |  |          |   |   |           |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Issuance of Series G shares upon debt conversion
transaction                                                 |  |        |           |        |   |           |  |        | 16,882     |        |   | 143,992    |  |  |          |   |   |           |  
|Issuance of Series G shares, as restated                                                                     |  |        |           |        |   |           |  |        | 71,518     |        |   | 393,487    |  |  | 1,461,547 |   |   | 6,775,476  |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Balance, end of year, as restated                                                                            |  |        | 1,549,947  |        |   | 7,312,955  |  |        | 1,549,947  |        |   | 7,312,955  |  |  | 1,461,547 |   |   | 6,775,476  |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|Total Convertible Preferred Stock, as restated                                                               |  |        | 7,326,715  |        |   | 58,146,975 |  |        | 7,326,715  |        |   | 58,146,975 |  |  | 7,238,315 |   |   | 57,599,308 |  
|                                                                                                             |  |        |            |        |   |            |  |        |            |        |   |            |  |  |           |   |   |            |  
|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                                                                       |  |        | 134,605    |        |   | 134        |  |        | 18,678     |        |   | 19         |  |  | 12,521    |   |   | 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                                                                       |  |        | 570,817    |        |   | 571        |  |        | 10,762,163 |        |   | 10,762     |  |  | 5,414,281 |   |   | 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, as restated                                                                      |  | $    | 114,262,479  |      | $ | 108,459,775  |   | $ | 64,457,678   |  
| | Exercise of stock options and warrants                                                                       |  |      | 120,035      |      |   | 37,925       |   |   | 11,316       |  
| | Issuance of common stock to satisfy accrued expenses                                                         |  |      |             |      |   | 264,900      |   |   |             |  
| | 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, as restated                                                   |  |      |             |      |   |             |   |   | 2,364,385    |  
| | Preferred stock dividends and accretion of beneficial conversion
 feature, as restated                       |  |      | (1,394,954   | )    |   | (1,386,939   | ) |   | (2,854,607   | )
| | Issuance of stock warrants, as restated                                                                      |  |      | 1,272,744    |      |   | 3,314,239    |   |   | 43,868,928   |  
| | Share-based payment expense                                                                                  |  |      | 2,722,030    |      |   | 3,387,365    |   |   | 3,360,315    |  
| |                                                                                                              |  |      |              |      |   |              |   |   |              |  
| | Balance, end of year, as restated                                                                            |  |      | 116,981,763  |      |   | 114,262,479  |   |   | 108,459,775  |  
| |                                                                                                              |  |      |              |      |   |              |   |   |              |  
| |                                                                                                              |  |      |              |      |   |              |   |   |              |  
| | 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, as restated                                                                      |  |      | (213,083,767 | )    |   | (176,165,126 | ) |   | (110,176,488 | )
| | Net loss, as restated                                                                                       |  |      | (18,090,493  | )    |   | (36,918,641  | ) |   | (65,988,638  | )
| |                                                                                                              |  |      |              |      |   |              |   |   |              |  
| | Balance, end of year, as restated                                                                            |  |      | (231,174,260 | )    |   | (213,083,767 | ) |   | (176,165,126 | )
| |                                                                                                              |  |      |              |      |   |              |   |   |              |  
| | Total Shareholders Equity (Deficit), as
restated                                                            |  | $    | (56,103,058  | )    | $ | (40,730,401  | ) | $ | (10,128,782  | )
| |                                                                                                              |  |      |              |      |   |              |   |   |              |  

|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Combined, these amounts
 represent total comprehensive loss of $18,092,646, $36,962,871 and
 $66,017,204 for the years ended December 31, 2006, 2005, and 2004, as
 restated, 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 $25,896,881 and an accumulated deficit of $231,174,260.
 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 use the proportionate
 performance method to recognize revenue in                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-9

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | these instances. This treatment is in accordance with
 Staff Accounting Bulletin No. 104, Revenue Recognition, Selected Revenue Recognition
 Issues  Section 3: Delivery and Performance.                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 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 original 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 our top four customers 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 years                                              
|Laboratory
 equipment   |  | 5-10 years                                              
|Leasehold
 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.                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-11

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January
 1, 2004, the Company adopted SFAS No. 123(R), Share-Based Payment. 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 effective 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
 $1,134,299 and $353,875 higher than the carrying value at December 31, 2006
 and 2005, respectively, is a better estimate of the fair value of that
 liability, as face value approximates fair value. 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

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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, 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. The Company has not yet
 determined the effects that FIN 48 will have on our financial statements.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-13

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | $2,854,607
 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 29,685,334, 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.                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | 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 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) 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
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-14

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-15

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. These
 license fee expenses are a component of research and development expense. 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 $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.On January 16, 2007 Johns Hopkins sent us a
 60-day notice-and-cure letter, but after discussions between us and Johns
 Hopkins, rescinded that letter in a letter dated March 30, 2007, in exchange
 for our agreement to a specific repayment plan, to which we have complied. We
 are presently current under the repayment plan and it is our intention to pay
 all past-due amounts in accordance with the repayment plan. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-16

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | License Agreement with Genetic Technologies LimitedThe Company 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. This license
 agreement expires on August 22, 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | 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

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 |      |   | 2,905,167 |  |   | 2,715,518  | 
|                                                 |  |              |           |      |   |           |  |   |            | 
|Interest expense and accretion of debt
 discount |  |              |          |      |   | 2,306,357 |  |   | 24,225,069 | 
|                                                 |  |              |           |      |   |           |  |   |            | 
|Debt issue
 costs                                |  |              |          |      |   | 30,438    |  |   | 707,892    | 
|                                                 |  |              |           |      |   |           |  |   |            | 
|Total                                            |  | $            | 2,722,030 |      | $ | 5,724,159 |  | $ | 28,293,276 | 
|                                                 |  |              |           |      |   |           |  |   |            | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in
 loss on extinguishment of debt in 2005 and 2004 were warrants given as an inducement
 to convert from debt to preferred stock with a calculated value of $18,430
 and $2,434,262, 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          |  | $ | 8,582,275  |  
|                                     |  |   |            |  
|Allocated
 value of warrants granted |  |   | 2,996,631  |  
|Other debt
 issue costs              |  |   | 1,500,858  |  
|Amortization
 to debt issue costs    |  |   | (2,673,589 | )
|                                     |  |   |            |  
|Balance at
 December 31, 2004        |  |   | 10,406,175 |  
|                                     |  |   |            |  
|Allocated
 value of warrants granted |  |   | 125,495    |  
|Other debt
 issue costs              |  |   | 532,233    |  
|Amortization
 to debt issue costs    |  |   | (2,725,481 | )
|                                     |  |   |            |  
|Balance at
 December 31, 2005        |  |   | 8,338,422  |  
|                                     |  |   |            |  
|Allocated
 value of warrants granted |  |   | 40,429     |  
|Other debt
 issue costs              |  |   | 444,524    |  
|Amortization
 to debt issue costs    |  |   | (3,009,026 | )
|                                     |  |   |            |  
|                                     |  |   |            |  
|Balance at
 December 31, 2006        |  | $ | 5,814,349  |  
|                                     |  |   |            |  

| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
 Companys provision for income taxes was $0 for each of the years ended
 December 31, 2006, 2005, and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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                      |  |               | 52,294,000  |      |   | 45,968,000  |   |   | 36,386,000  |  
|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     |  
|                                        |  |               |             |      |   |             |   |   |             |  
|                                        |  |               | 71,154,000  |      |   | 64,992,000  |   |   | 54,646,000  |  
|                                        |  |               |             |      |   |             |   |   |             |  
|Deferred tax liabilities:               |  |               |             |      |   |             |   |   |             |  
|Depreciation                            |  |               | (272,000    | )    |   | (309,000    | ) |   | (238,000    | )
|                                        |  |               |             |      |   |             |   |   |             |  
|                                        |  |               | (272,000    | )    |   | (309,000    | ) |   | (238,000    | )
|                                        |  |               |             |      |   |             |   |   |             |  
|                                        |  |               |             |      |   |             |   |   |             |  
|Net deferred tax asset before allowance |  |               | 70,882,000  |      |   | 64,683,000  |   |   | 54,408,000  |  
|Valuation allowance                     |  |               | (70,882,000 | )    |   | (64,683,000 | ) |   | (54,408,000 | )
|                                        |  |               |             |      |   |             |   |   |             |  
|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 | )
|                                                  |  |   |             |  
|Net increase to valuation during 2004             |  |   | (19,864,000 | )
|                                                  |  |   |             |  
|Valuation
 allowance balance at December 31, 2004 |  |   | (54,408,000 | )
|                                                  |  |   |             |  
|Net increase to valuation during 2005             |  |   | (10,275,000 | )
|                                                  |  |   |             |  
|Valuation
 allowance balance at December 31, 2005 |  |   | (64,683,000 | )
|                                                  |  |   |             |  
|Net increase to valuation during 2006             |  |   | (6,199,000  | )
|                                                  |  |   |             |  
|                                                  |  |   |             |  
|Valuation
 allowance balance at December 31, 2006 |  | $ | (70,882,000 | )
|                                                  |  |   |             |  

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     |  |                          | (3.84  | %)   |  | (1.51  | %) |  | (0.90  | %)
|Change in
 valuation allowance |  |                          | (35.50 | %)   |  | (37.39 | %) |  | (38.95 | %)
|                               |  |                          |        |      |  |        |    |  |        |   
|Effective tax
 rate            |  |                          | 0.00   | %    |  | 0.00   | %  |  | 0.00   | % 
|                               |  |                          |        |      |  |        |    |  |        |   

As of December 31, 2006, the Company had federal net
operating loss carryforwards of approximately $133,000,000 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 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. We
have the amounts recorded as current 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.

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.

|    |     
|--- | ----
|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-26

---



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 $1,964,558.

The conversion of the 8.0% Notes into the Series F
Convertible Preferred Stock in 2004 described above qualified as an
extinguishment of debt. The Company recorded a loss on debt extinguishment of
$1,571,385 in 2004 relating to these conversions.

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 16,882 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 $18,430.

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.

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

F-27

---



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 $469,704.

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 an extinguishments of debt. The
Company recorded a gain on debt extinguishment of $12,783 in 2005 and a loss on
debt extinguishment of $421,373 in 2004 relating to these conversions.

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 an allocated value of
$264,245, 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
$95,634 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 $2,472,392, 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 $1,320,123, 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 $7,126,707 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 $1,053,604, which was recorded as interest expense in
2004. The conversion of the Series C, D, and E Bridge Notes into the 12.5%
Convertible Secured Promissory Notes qualified as an extinguishment of debt,
and the Company recorded a loss on debt extinguishment of $2,719,967 in 2004.

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

F-28

---



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 $235,531 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 $123,727,
which was recorded as interest 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

F-29

---



had a calculated value of $687,912 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 $52,601, which was recorded as interest expense in 2004.
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 $61,782 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-30

---



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) premium, beginning of year                           |  |                                | 371,870    |                                |   | (11,848,161 | )
|Accretion of
 discount to interest expense                                       |  |                                |           |                                |   | 763,944     |  
|Reduction in discount
 from debt extinguishment                                  |  |                                |           |                                |   | 11,084,217  |  
|Debt premium
 from debt extinguishment                                           |  |                                |           |                                |   | 468,800     |  
|Accretion of
 premium to interest expense                                        |  |                                | (129,242   | )                              |   | (96,930     | )
|                                                                                 |  |                                |            |                                |   |             |  
|Unaccreted debt
 premium, end of year                                            |  |                                | 242,628    |                                |   | 371,870     |  
|                                                                                 |  |                                |            |                                |   |             |  
|12.5% Convertible Secured
 Promissory Notes net outstanding balance, end of year |  |                                | 20,770,429 |                                |   | 18,618,804  |  
|                                                                                 |  |                                |            |                                |   |             |  
|                                                                                
|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                                     |  |                                | (725,745   | )                              |   |            |  
|Debt discount
 from allocated value of warrants granted                          |  |                                | (1,232,327 | )                              |   | (748,508    | )
|Debt discount
 from allocated value of embedded derivative                       |  |                                | (30,925    | )                              |   | (43,214     | )
|Accretion of
 discount to interest expense                                       |  |                                | 612,070    |                                |   | 65,977      |  
|                                                                                 |  |                                |            |                                |   |             |  
|Unaccreted debt
 discount, end of year                                           |  |                                | (1,376,927 | )                              |   | (725,745    | )
|                                                                                 |  |                                |            |                                |   |             |  
|                                                                                
|10% Secured Convertible Promissory
 Notes net outstanding balance, end of year   |  |                                | 12,430,836 |                                |   | 4,203,841   |  
|                                                                                 |  |                                |            |                                |   |             |  
|                                                                                
|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                                   |  | $                              | 35,401,265 |                                | $ | 25,022,645  |  
|                                                                                 |  |                                |            |                                |   |             |  

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.

F-31

---



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.

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 $5,252,789 and
$3,954,657, 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 $4,591,914 and $3,544,158 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 $12,793,075 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 discount for
the 12.5% Notes, both the value of the warrants granted as well as the
beneficial conversion feature, was $763,944 and $3,055,775 for each of the
years ended December 31, 2005 and 2004, respectively. The Company recorded a
reduction in amortization expense of $129,242 and $96,930 for each of the years
ended December 31, 2006 and 2005, respectively, to record the accretion of the
debt premium established as a result of the debt extinguishment, discussed in
more detail below.

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 $3,346,912 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 $1,931,946 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.

In connection with the warrant exchange in 2005, the
Company obtained the consent from the holders of the 12.5% Notes to modify the
terms. The modification included the removal of the penalty warrant provisions.
This modification was deemed to be material, and it qualified as an
extinguishment of debt. The result of the accounting for the extinguishment was
to eliminate the previously recorded debt discount, establish a debt premium to
be amortized over the remaining life of the debt, and to record a loss on debt
extinguishment of $11,553,017 in 2005.

F-32

---



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 $1,479,845 and $7,825,167
and were recorded as deferred debt issue 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 $1,362,556 in deferred financing costs associated with the
adjustment in the year ended December 31, 2004. Amortization expense relating
to the deferred debt issue cost from the warrants issued was $2,157,717,
$2,157,717, and $2,032,857 for the years ended December 31, 2006, 2005, and
2004, respectively.

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 $1,108,251 in 2006. 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 $124,076 relating to the notes issued in
2006. This value was recorded as additional discount and will 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 $748,508 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 SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. 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,

F-33

---



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.

Amortization
expense relating to the debt discount was $612,070 and $65,977 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 2011 and 2010, had a calculated
value of $40,459 and $125,495 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
$52,221 and $3,486 for the years ended December 31, 2006 and 2005,
respectively.

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             |  |                     |   | (1,134,299 | ) | 
|                                |  |                     |   |            |   | 
|Total notes payable             |  |                     |   | 39,840,654 |   | 
|                                |  |                     |   |            |   | 
|Less: Current notes
  payable   |  |                     |   | 4,439,389  |   | 
|                                |  |                     |   |            |   | 
|Total long-term notes
  payable |  |                     | $ | 35,401,265 |   | 
|                                |  |                     |   |            |   | 

F-34

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                       |  | $                       | 7,370,499  |  |  | 1,834,440 |  | $ | 7,370,499  | 
|Series G          |  | $                                 | 25.00 |                   |  | 2.165                             |  | $                               | 38,748,675 |                         |  | 1,549,947                       |  | $                       | 7,312,955  |  |  | 1,549,947 |  | $ | 7,312,955  | 
|                  |  |                                   |       |                   |  |                                   |  |                                 |            |                         |  |                                 |  |                         |            |  |  |           |  |   |            | 
|                  |  |                                   |       |                   |  |                                   |  | $                               | 90,356,870 |                         |  | 7,326,715                       |  | $                       | 58,146,975 |  |  | 7,326,715 |  | $ | 58,146,975 | 
|                  |  |                                   |       |                   |  |                                   |  |                                 |            |                         |  |                                 |  |                         |            |  |  |           |  |   |            | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | 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 71,518
  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 $79,482. 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
  $23,073.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
| | In 2005,
  certain holders of our 10.9% Notes converted principal of $117,442 and
  accrued interest of $26,550 into 16,882 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 $18,430. The
  conversion of notes to Series G Preferred Stock qualified as a debt
  extinguishment and a $12,783 gain on debt extinguishment 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-35

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | common stock
  at an exercise price of $4.00. These warrants expire in 2009. The amount
  allocated to warrants was $2,137,562. 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 $834,468.                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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 $628,750.                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 
| | 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 866,754
  shares of Series F Preferred Stock and warrants to purchase 1,015,752 shares
  of common stock. The warrants have an exercise price of $6.00, expire in
  2014, and had a calculated value of $2,434,262. The conversion of notes to
  Series F Preferred Stock qualified as a debt extinguishment and a $1,992,758
  loss on debt extinguishment was recorded for the year ended December 31,
  2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 
| | 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 $411,512 for the Series F Preferred Stock and
  $1,952,874 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                                        

F-36

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | 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 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-37

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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 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 $1,074,625 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-38

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| | of common
  stock exchanged their warrants for 570,817 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.       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 
| | 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 |  | 

F-39

---



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | These fair value amounts were used in our
 Black-Scholes option pricing calculations in order to determine the proper
 stock option and warrant accounting.      
| |                                                                                                                                                                  
| | 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 (1)                   |  |          | (7,580,000  | )                                   |  |   | 4.60 |  | 
| |                                |  |          |             |                                     |  |   |      |  | 
| |                                |  |          |             |                                     |  |   |      |  | 
| | Outstanding
 December 31, 2004 |  |          | 28,690,981  |                                     |  | $ | 5.01 |  | 
| | Granted                        |  |          | 2,869,555   |                                     |  |   | 6.12 |  | 
| | Canceled (1)                   |  |          | (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 |  | 
| |                                |  |          |             |                                     |  |   |      |  | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)  these warrants were cancelled as part of the
 warrant exchange which resulted in the issuance of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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-40

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 |            | 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

F-41

---



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | exercised during the years ended December 31, 2006,
 2005, and 2004 was $(4,382), $(12,219), and $15,422, respectively.                                                 
| |                                                                                                                                                                         
| | A summary of the status of the Companys nonvested
 stock options as of December 31, 2006, 2005, and 2004, and changes during the
 years then ended are presented below:

| |                                 |  |         |            |                                            |  |   |      |  | 
| | ------------------------------- |  | ------- | ---------- | ------------------------------------------ |  | - | ---- |  | 
| |                                 |  |         |            |                                            |  |   |      |  | 
| |                                 |  | Options |            | 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                         |  |         | 1,893,493  |                                            |  |   | 1.18 |  | 
| | Vested                          |  |         | (1,624,895 | )                                          |  |   | 1.40 |  | 
| | Forfeited                       |  |         | (149,302   | )                                          |  |   | 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 intrinsic 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

F-42

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | result of that modification, the Company recognized
 additional compensation expense of $21,426 for the year ended December 31,
 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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 is 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-43

---



|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|--------------------------------------------- |  | --------------------------------------------------------- | - | ------------------------------ | - | ------------------------------------- |  | ----- | ---------- | - |  |  | - | ------- | - |  | - | ----------- | -
|                                              |  | 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)                          |  |                                                           |   | 4,726,508                      |   |                                       |  |       | 269,855    |   |  |  |   | 11,389  |   |  |   | 5,007,752   |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|Depreciation and amortization                 |  |                                                           |   | 105,903                        |   |                                       |  |       | 237,100    |   |  |  |   |        |   |  |   | 343,003     |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|Segment profit (loss)                         |  |                                                           |   | (15,715,205                    | ) |                                       |  |       | (2,359,394 | ) |  |  |   | (15,894 | ) |  |   | (18,090,493 | )
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|Segment assets                                |  |                                                           |   | 10,190,762                     |   |                                       |  |       | 1,948,970  |   |  |  |   |        |   |  |   | 12,139,732  |  
|                                             
|Expenditures for segment assets:              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|Cash payments for property, plant & equipment |  |                                                           |   | 1,132                          |   |                                       |  |       | 20,000     |   |  |  |   |        |   |  |   | 21,132      |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|Total (loss) profit for reportable segments   |  |                                                           |   | (15,715,205                    | ) |                                       |  |       | (2,359,394 | ) |  |  |   | (15,894 | ) |  |   | (18,090,493 | )
|Elimination of intersegment profits           |  |                                                           |   |                               |   |                                       |  |       |           |   |  |  |   |        |   |  |   |            |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  
|Net (loss) profit                             |  |                                                           | $ | (15,715,205                    | ) |                                       |  | $     | (2,359,394 | ) |  |  | $ | (15,894 | ) |  | $ | (18,090,493 | )
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |         |   |  |   |             |  

(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-44

---



|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|--------------------------------------------- |  | --------------------------------------------------------- | - | ------------------------------ | - | ------------------------------------- |  | ----- | ---------- | - |  |  | - | ---------- | - |  | - | ----------- | -
|                                              |  | 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)                          |  |                                                           |   | 5,908,052                      |   |                                       |  |       | 268,108    |   |  |  |   | 7,660      |   |  |   | 6,183,820   |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Depreciation and amortization                 |  |                                                           |   | 111,293                        |   |                                       |  |       | 2,290,265  |   |  |  |   | 31,434     |   |  |   | 2,432,992   |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Segment profit (loss)                         |  |                                                           |   | (32,202,163                    | ) |                                       |  |       | (4,820,140 | ) |  |  |   | 103,662    |   |  |   | (36,918,641 | )
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Other significant non-cash items:             |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Debt converted into equity                    |  |                                                           |   | 153,892                        |   |                                       |  |       |           |   |  |  |   |           |   |  |   | 153,892     |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Loss on debt extinguishment                   |  |                                                           |   | 11,540,233                     |   |                                       |  |       |           |   |  |  |   |           |   |  |   | 11,540,233  |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Segment assets                                |  |                                                           |   | 14,017,473                     |   |                                       |  |       | 2,109,049  |   |  |  |   |           |   |  |   | 16,126,522  |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Expenditures for segment assets:              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Cash payments for property, plant & equipment |  |                                                           |   | 23,784                         |   |                                       |  |       | 48,689     |   |  |  |   | 440        |   |  |   | 72,913      |  
|Total (loss) profit for reportable segments   |  |                                                           |   | (32,202,163                    | ) |                                       |  |       | (4,820,140 | ) |  |  |   | 103,662    |   |  |   | (36,918,641 | )
|Elimination of intersegment profits           |  |                                                           |   | 1,288,610                      |   |                                       |  |       |           |   |  |  |   | (1,288,610 | ) |  |   |            |  
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  
|Net (loss) profit                             |  |                                                           | $ | (30,913,553                    | ) |                                       |  | $     | (4,820,140 | ) |  |  | $ | (1,184,948 | ) |  | $ | (36,918,641 | )
|                                              |  |                                                           |   |                                |   |                                       |  |       |            |   |  |  |   |            |   |  |   |             |  

(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-45

---



|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|------------------------------------------------------ |  | --------------------------------------------------------- | - | ------------------------------ | - | --------------------------------- |  | ----- | ----------- | - |  |  | - | ---------- | - |  | - | ----------- | -
|                                                       |  | 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)                                   |  |                                                           |   | 29,102,205                     |   |                                   |  |       | 286,929     |   |  |  |   | 3,783      |   |  |   | 29,392,917  |  
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|Depreciation and amortization                          |  |                                                           |   | 45,365                         |   |                                   |  |       | 12,904,923  |   |  |  |   | 40,922     |   |  |   | 12,991,210  |  
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|Segment profit (loss)                                  |  |                                                           |   | (49,597,992                    | ) |                                   |  |       | (16,491,959 | ) |  |  |   | 101,313    |   |  |   | (65,988,938 | )
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|Other significant non-cash
 items:                     |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|Debt converted into equity                             |  |                                                           |   | 3,762,693                      |   |                                   |  |       |            |   |  |  |   |           |   |  |   | 3,762,693   |  
|Purchase of fixed assets under capital lease           |  |                                                           |   | 152,194                        |   |                                   |  |       |            |   |  |  |   |           |   |  |   | 152,194     |  
|Loss on debt extinguishment                            |  |                                                           |   | 4,712,726                      |   |                                   |  |       |            |   |  |  |   |           |   |  |   | 4,712,726   |  
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|Segment assets                                         |  |                                                           |   | 15,290,763                     |   |                                   |  |       | 3,855,390   |   |  |  |   | 268,779    |   |  |   | 19,414,932  |  
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|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            |  |                                                           |   | (49,597,992                    | ) |                                   |  |       | (16,491,959 | ) |  |  |   | 101,313    |   |  |   | (65,988,638 | )
|Elimination of intersegment profits                    |  |                                                           |   | 1,219,585                      |   |                                   |  |       |            |   |  |  |   | (1,219,585 | ) |  |   |            |  
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  
|Net (loss) profit                                      |  |                                                           | $ | (48,378,407                    | ) |                                   |  | $     | (16,491,959 | ) |  |  | $ | (1,118,272 | ) |  | $ | (65,988,638 | )
|                                                       |  |                                                           |   |                                |   |                                   |  |       |             |   |  |  |   |            |   |  |   |             |  

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

F-46

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 $857,416.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | 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-47

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18. | QUARTERLY DATA  RESTATED AND UNAUDITED                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The
  following tables summarize our quarterly restated results of operations for
  each of the quarters in 2006 and 2005 with a comparison to the results as
  previously reported. The restatement was due to the factors described in
  Footnote 20 to the Consolidated Financial Statements. These quarterly
  restated 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, |           
|                                                                                               |  |                           |            |                          |   |                               |   |                              |           
|As
  Previously Reported                                                                       |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|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 |  
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|As
  Restated                                                                                  |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|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                                                                                    |  |                           | (1,871,270 | )                        |   | (1,963,833                    | ) |                              | (2,054,530 | ) |   | (2,121,204 | )
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|Net loss                                                                                       |  | $                         | (3,919,330 | )                        | $ | (4,728,981                    | ) | $                            | (4,861,359 | ) | $ | (4,580,822 | )
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|Preferred stock dividends and accretion of beneficial conversion
  features                    |  |                           | (343,961   | )                        |   | (347,783                      | ) |                              | (351,605   | ) |   | (351,605   | )
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|Net loss attributable to common stockholders                                                   |  | $                         | (4,263,291 | )                        | $ | (5,076,764                    | ) | $                            | (5,212,964 | ) | $ | (4,932,427 | )
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|Basic and diluted net loss per share                                                           |  | $                         | (0.21      | )                        | $ | (0.24                         | ) | $                            | (0.25      | ) | $ | (0.23      | )
|                                                                                               |  |                           |            |                          |   |                               |   |                              |            |   |   |            |  
|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-48

---



|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|---------------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | ------------------------ | - | ----------------------------- | - | ---------------------------- | ---------- | - | - | ---------- | -
|                                                                                               |  | 2005                      |            
|                                                                                               |  |                          
|                                                                                               |  | Quarter ended
  March 31, |             | Quarter ended
  June 30, |   | Quarter ended
  September 30, |   | Quarter ended
  December 31, |           
|                                                                                               |  |                           |             |                          |   |                               |   |                              |           
|As
  Previously Reported                                                                       |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|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 |  
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|As
  Restated                                                                                  |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|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                                                                                    |  |                           | (16,022,156 | )                        |   | (1,481,451                    | ) |                              | (2,005,759 | ) |   | (1,586,707 | )
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|Net loss                                                                                       |  | $                         | (22,418,844 | )                        | $ | (5,809,344                    | ) | $                            | (5,636,784 | ) | $ | (3,053,669 | )
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|Preferred stock dividends and accretion of beneficial conversion
  features                    |  |                           | (336,393    | )                        |   | (347,336                      | ) |                              | (351,604   | ) |   | (351,606   | )
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|Net loss attributable to common stockholders                                                   |  | $                         | (22,755,237 | )                        | $ | (6,156,680                    | ) | $                            | (5,988,388 | ) | $ | (3,405,275 | )
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|Basic and diluted net loss per share                                                           |  | $                         | (2.40       | )                        | $ | (0.36                         | ) | $                            | (0.29      | ) | $ | (0.17      | )
|                                                                                               |  |                           |             |                          |   |                               |   |                              |            |   |   |            |  
|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-49

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|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.                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|20. | RESTATEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Subsequent
  to the issuance of the Companys Annual Report on Form 10-KSB for the year
  ended December 31, 2006, the Company and its audit committee concluded that
  it should restate its consolidated balance sheets at December 31, 2006 and
  2005, and its consolidated statements of operations, cash flows, and
  stockholders equity (deficit) for each of the three years ended December 31,
  2006 to correct the following errors:                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |           The
  Company used the Black-Scholes option valuation model for the valuation of
  warrants issued to non-employees from January 1, 1999 through March 31, 2007.
  The expected life assigned to these transferable warrants, which is an input
  to the Black-Scholes option valuation model, was less than the contractual
  life of the warrant. The Company based the expected life of the warrants on
  the assumption that the warrants would be exercised prior to it expiration.
  Upon further reflection and review of accepted valuation techniques and
  practices and the relevant accounting guidance, it was determined that the
  contractual life should have been used as an input. In addition, as a result
  of the change in the fair value of the warrants the Company recorded
  adjustments related to debt and preferred stock issued in conjunction with
  the warrants.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |           In
  2004, holders of the Companys 8% Secured Convertible Promissory Notes and
  10.9% Secured Convertible Promissory Notes converted principal and interest
  into shares of Series F Convertible Preferred Stock and warrants to purchase
  shares of the Companys common stock. This transaction was originally
  accounted for as an induced conversion. After further review of the
  appropriate guidance, it was determined that this conversion should have been
  accounted for as an extinguishment of the notes. The transaction generated a
  loss on extinguishment of $1,992,758.                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |           In
  2004, holders of the Companys various Series C, D, & E Bridge Notes
  converted their notes into 12.5% Convertible Secured Promissory Notes. It was
  determined that this conversion should have been accounted for as an
  extinguishment of the old notes and the establishment of new notes. This
  transaction generated a loss on extinguishment of $2,719,967.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |           In
  2005, the Company made a material modification to the terms of its 12.5%
  Convertible Secured Promissory Notes, eliminating the penalty warrant clause.
  This modification should have been accounted for as an extinguishment of the
  old notes and the establishment of new notes. This transaction generated a
  loss on extinguishment of $11,553,017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |           In
  2005, holders of the Companys 8% Secured Convertible Promissory Notes and
  10.9% Secured Convertible Promissory Notes converted principal and interest
  into shares of its Series G Convertible Preferred Stock and warrants to
  purchase shares of the Companys common stock. This transaction was
  originally accounted for as an induced conversion, but it was determined                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-50

---



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | that it
  should have been accounted for as a debt extinguishment and generated a gain
  on extinguishment of $12,783.
| |                                                                                                                       
| | The
  following tables summarize the effect of the restatement by major financial
  statement line item:              

CONSOLIDATED BALANCE SHEETS

|                                                     |  |                          |              |                   |   |                          |   |             |              |   |   |              |  
|---------------------------------------------------- |  | ------------------------ | ------------ | ----------------- | - | ------------------------ | - | ----------- | ------------ | - | - | ------------ | -
|                                                     |  | December 31, 2006        |              | December 31, 2005 |  
|                                                     |  |                          |              |                   |  
|                                                     |  | As Previously
  Reported |              | As Restated       |   | As Previously
  Reported |   | As Restated |             
|                                                     |  |                          |              |                   |   |                          |   |             |             
|                                                    
|DEFERRED DEBT ISSUE COSTS                            |  | $                        | 3,923,570    |                   | $ | 5,814,349                |   | $           | 5,396,050    |   | $ | 8,338,422    |  
|TOTAL ASSETS                                         |  |                          | 10,248,953   |                   |   | 12,139,732               |   |             | 13,184,150   |   |   | 16,126,522   |  
|LONG-TERM NOTES PAYABLE, net of discount             |  |                          | 32,373,497   |                   |   | 35,401,265               |   |             | 19,766,221   |   |   | 25,022,645   |  
|DEBT DISCOUNT (parenthetically)                      |  |                          | 4,162,067    |                   |   | 1,134,299                |   |             | 5,610,299    |   |   | 353,875      |  
|TOTAL LIABILITIES                                    |  |                          | 65,215,023   |                   |   | 68,242,790               |   |             | 51,600,500   |   |   | 56,856,923   |  
|Convertible Preferred Stock                          |  |                          | 59,918,772   |                   |   | 58,146,975               |   |             | 59,918,772   |   |   | 58,146,975   |  
|Additional paid-in capital                           |  |                          | 79,976,295   |                   |   | 116,981,763              |   |             | 77,847,349   |   |   | 114,262,479  |  
|Accumulated deficit                                  |  |                          | (194,803,601 | )                 |   | (231,174,260             | ) |             | (176,126,383 | ) |   | (213,083,767 | )
|Total Stockholders equity (deficit)                 |  |                          | (54,966,070  | )                 |   | (56,103,058              | ) |             | (38,416,350  | ) |   | (40,730,401  | )
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |  | $                        | 10,248,953   |                   | $ | 12,139,732               |   | $           | 13,184,150   |   | $ | 16,126,522   |  

F-51

---



CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ----------- | ------------------------------ | - | ------------------------------ | - | ----------- | ----------- | -------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                                                            |  | Year Ended December 31, 
  2006 |             | Year Ended December 31,
  2005 |   | Year Ended December 31,
  2004 |  
|                                                                            |  |                                 |             |                                |   |                                |  
|                                                                            |  | As 
  Previously 
  Reported    |             | As Restated                    |   | As 
  Previously
  Reported    |   | As Restated |             | As
  Previously
  Reported |   | As Restated |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |  
|Interest expense and accretion of debt discount                             |  | $                               | (6,643,336  | )                              | $ | (4,985,774                     | ) | $           | (5,384,033  | )                          | $ | (6,167,220  | ) | $ | (18,984,610 | ) | $ | (29,378,816 | )
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Debt issue costs                                                            |  |                                 | (1,938,189  | )                              |   | (3,009,026                     | ) |             | (2,119,070  | )                          |   | (3,196,163  | ) |   | (2,297,702  | ) |   | (4,277,408  | )
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Loss on debt extinguishment                                                 |  |                                 |            |                                |   |                               |   |             |            |                            |   | (11,540,233 | ) |   |            |   |   | (4,712,726  | )
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Debt conversion expense                                                     |  |                                 |            |                                |   |                               |   |             | (93,696     | )                          |   |            |   |   | (3,281,462  | ) |   |            |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|NET LOSS                                                                    |  |                                 | (18,677,218 | )                              |   | (18,090,493                    | ) |             | (23,611,824 | )                          |   | (36,918,641 | ) |   | (52,183,462 | ) |   | (65,988,638 | )
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Preferred stock dividends and accretion of beneficial conversion
  features |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   | (1,604,352  | ) |   | (2,854,607  | )
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                |  | $                               | (20,072,172 | )                              | $ | (19,485,447                    | ) | $           | (24,998,763 | )                          | $ | (38,305,580 | ) | $ | (53,787,814 | ) | $ | (68,843,245 | )
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|                                                                            |  |                                 |             |                                |   |                                |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Net loss per common share: Basic and diluted                                |  | $                               | (0.96       | )                              | $ | (0.94                          | ) | $           | (1.48       | )                          | $ | (2.26       | ) | $ | (12.83      | ) | $ | (16.42      | )

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  
|----------------------------------------- |  | ------------------------------- | ----------- | ------------------------------- | - | ------------------------------- | - | ----------- | ----------- | -------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                          |  | Year Ended December 31, 
  2006 |             | Year Ended December 31, 
  2005 |   | Year Ended December 31, 
  2004 |  
|                                          |  |                                 |             |                                 |   |                                 |  
|                                          |  | As 
  Previously 
  Reported    |             | As Restated                     |   | As
  Previously
  Reported      |   | As Restated |             | As
  Previously
  Reported |   | As Restated |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |  
|Net loss                                  |  | $                               | (18,677,218 | )                               | $ | (18,090,493                     | ) | $           | (23,611,824 | )                          | $ | (36,918,641 | ) | $ | (52,183,462 | ) | $ | (65,988,638 | )
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Accretion of debt discount                |  |                                 | 2,140,388   |                                 |   | 482,826                         |   |             | 1,838,401   |                            |   | 732,991     |   |   | 1,801,071   |   |   | 3,055,775   |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Amortization of deferred debt issue costs |  |                                 | 1,938,219   |                                 |   | 3,009,026                       |   |             | 1,678,825   |                            |   | 2,725,481   |   |   | 1,576,856   |   |   | 2,617,920   |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Share-based payment expense               |  |                                 | 2,772,030   |                                 |   | 2,772,030                       |   |             | 3,805,124   |                            |   | 5,724,159   |   |   | 18,215,132  |   |   | 28,293,276  |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Loss on debt extinguishment               |  |                                 |            |                                 |   |                                |   |             |            |                            |   | 11,540,233  |   |   |            |   |   | 4,712,726   |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  
|Induced conversion expense                |  |                                 |            |                                 |   |                                |   |             | 93,696      |                            |   |            |   |   | 3,281,462   |   |   |            |  
|                                          |  |                                 |             |                                 |   |                                 |   |             |             |                            |   |             |   |   |             |   |   |             |  

F-52

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The following
table summarizes the effect of the restatement in prior years on additional
paid in capital and accumulated deficit:

|                                                                      |  |   |              |  
|--------------------------------------------------------------------- |  | - | ------------ | -
|Additional paid in capital at January 1, 2004, as previously
reported |  | $ | 46,465,366   |  
|Cumulative effect of restatement in prior years                       |  |   | 17,992,312   |  
|                                                                      |  |   |              |  
|Additional paid in capital at January 1, 2004, as restated            |  | $ | 64,457,678   |  
|                                                                      |  |   |              |  
|                                                                      |  |   |              |  
|Accumulated deficit at January 1, 2004, as previously
reported        |  | $ | (100,331,097 | )
|                                                                      |  |   |              |  
|Cumulative effect of restatement in prior years                       |  |   | (9,845,392   | )
|                                                                      |  |   |              |  
|Accumulated deficit at January 1, 2004, as
  restated                 |  | $ | (110,176,488 | )
|                                                                      |  |   |              |  

F-53

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|         |         
|-------- | --------
|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.                                                                 | 

68

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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)                                                  | 

69

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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). This exhibit was filed with the Form 10-KSB on April 3,
 2007. | 
|         |  |                                                                                                                                                                                                                                                                                         | 
|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.

70

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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.

71

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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: February 29, 2008 | /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                                                                                          |  | February 29, 2008
|                                                                                                               |  |                  
|Edwin Quattlebaum                                                                                              |  |                  
|Director, Co-Chairman of the Board, Chief Executive
  Officer and President (Principal Executive Officer)     
|                                                                                                              
|/s/ Thomas P. Russo                                                                                            |  | February 29, 2008
|                                                                                                               |  |                  
|Thomas P. Russo                                                                                                |  |                  
|Executive Vice President, Treasurer and Chief
  Financial Officer (Principal Financial and Accounting Officer)
|                                                                                                               |  |                  
|/s/ Clifton Baile                                                                                              |  | February 29, 2008
|                                                                                                               |  |                  
|Clifton Baile                                                                                                  |  |                  
|Director                                                                                                       |  |                  
|                                                                                                               |  |                  
|/s/ John R. Block                                                                                              |  | February 29, 2008
|                                                                                                               |  |                  
|John R. Block                                                                                                  |  |                  
|Director                                                                                                       |  |                  
|                                                                                                               |  |                  
|/s/ Peter Drake                                                                                                |  | February 29, 2008
|                                                                                                               |  |                  
|Peter Drake                                                                                                    |  |                  
|Director                                                                                                       |  |                  
|                                                                                                               |  |                  
|/s/ Peter A. Meyer                                                                                             |  | February 29, 2008
|                                                                                                               |  |                  
|Peter A. Meyer                                                                                                 |  |                  
|Director and Co-Chairman of the Board                                                                          | 
|                                                                                                               | 
|/s/ Howard L. Minigh                                                                                           |  | February 29, 2008
|                                                                                                               |  |                  
|Howard L. Minigh                                                                                               |  |                  
|Director                                                                                                       |  |                  
|                                                                                                               |  |                  
|/s/ Edward Shonsey                                                                                             |  | February 29, 2008
|                                                                                                               |  |                  
|Edward Shonsey                                                                                                 |  |                  
|Director                                                                                                       |  |                  

72

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