Dnaprint Genomics (DNAG) - Description of business

                     

HISTORY

We initially incorporated under the laws of the State of Utah on January 3, 1983 as Lexington Energy, Inc. and subsequently changed our focus to human genome sciences. In connection with this change in focus, on July 15, 2000, we acquired DNAPrint Genomics, Inc. through the issuance of 9,600,000 shares of our common stock. After the acquisition, we focused on the discovery and development of our TruLine products - TruSeq, SNiPscan and TruSpin. We actively engaged in human identification analysis and used our proprietary TruLine products to reduce the cost of producing a genetic profile to less than 50% of the standard price. Our strategy was to sell our proprietary reagent to geneticists at universities, hospitals and commercial laboratories working on genotyping projects. The reagent kit was designed to save researchers money in reagent costs. Companies that sold the reagents, however, made advances in their own reagents, which lowered the cost and ultimately negated the benefit of using our products. The technology was thus abandoned.

In 2001, Dr. Tony Frudakis, our founder, teamed with other scientists to conduct research to develop new genomics products with consumer, forensic and pharmacogenomics applications. However, lack of funding limited the amount of research conducted. We implemented cost cutting measures to conserve cash. In spite of these hardships; we were able to continue our research and development efforts on a reduced and limited basis throughout most of 2002 and 2003. During 2002, our Board of Directors began a search for new leadership. After a search for a new Chief Executive Officer/President, Mr. Richard Gabriel agreed to accept the position without requiring immediate cash compensation. Because we did not have cash available to pay Mr. Gabriel's salary, he agreed to enter into an employment contract for one year that granted him 1,500,000 shares of our stock in lieu of immediate cash compensation.

As Chief Executive Officer and President, Mr. Gabriel agreed to seek additional executive management, particularly a Chief Financial Officer, a Chief Operating Officer and a Chief Medical Officer and to locate a firm to represent us in raising investment capital sufficient to build and sustain the business over the next 2-3 years. Mr. Gabriel and the new management team successfully completed these goals. Mr. Gabriel hired our former Chief Financial Officer and Chief Operating Officer, Monica Tamborini, and our Chief Medical Officer, Dr. Hector J. Gomez. In May of 2003, Mr. Gabriel also convinced Ms. Tamborini and Dr. Gomez to agree to work initially without requiring immediate cash compensation. They agreed to enter into employment contracts with us for one year in return for stock grants of 1,000,000 and 1,250,000 shares respectively.

With executive management in place, we next developed a strategic plan to achieve our short-term goal of securing

financing and our longer term goals of growth and stability. Where prior management saw partnering and licensing arrangements as the way to success, new management's view was that growth would occur with proven success. Management has emphasized demonstrating that our current products are viable, and management believes the shortest path to that goal is through concentrating our initial sales efforts on the consumer and forensic markets. While we expect pharmacogenomics products to outperform other market products in the long run, their introduction to market has a longer time horizon and requires larger investments of time, personnel and capital before they produce revenue and generate cash flow.

Management sought investment bankers to represent us in our search for financing. In April 2003, we engaged an investment banking firm to assist us in our efforts to raise debt and/or equity capital. In December 2003, we successfully agreed to place $8,000,000 of our securities over approximately a 20-month period. Prior to completing this transaction, we had received funds from earlier private offerings. Together, these transactions gave us the critically required capital to fund our ongoing operations until our new financing was in place. In addition to the previously raised capital, management sought additional capital to fund expansion and acquisitions. Along with our investment bankers, we secured a commitment from Dutchess Private Equity Partners, LLC for the sum of $35 Million over a 24-month period. We also negotiated to acquire a stake in Biofrontera, a privately held German Biotechnology company.  At the time of the transaction, Mr. Richard Gabriel and Ms. Monica Tamborini were common, non-voting shareholders of less than 1% combined ownership in Biofrontera AG. Mr. Gabriel was made aware of the opportunity to invest in Biofrontera AG and presented it to our Board of Directors and was given instructions to proceed with the investment opportunity.

Effective September 28, 2004, we agreed to acquire a majority interest in Biofrontera AG over a 24-month period for a purchase price of 20 million Euros. Prior to the closing of the transaction, however, we concluded that proceeding with the proposed acquisition was not in our best interest. Therefore, we terminated the Biofrontera agreement on February 18, 2005.

On July 8, 2005, we entered into an agreement to purchase, and simultaneously closed upon the purchase of, an equity interest in Biofrontera. We purchased the interest in Biofrontera from Technologie-Beteiligungs-Gesellschaft mbH, an instrumentality of the German government. The securities purchased were shares of Biofrontera's series A Preferred Stock, as well as certain debt instruments. On August 8, 2005, we converted the securities purchased into Biofrontera's common stock. We paid approximately 1.8 million Euros, or $2.1 million, for our interest in Biofrontera. On September 19, 2005, we paid an additional 98,245 Euros, or $121,000, for an additional 98,145 shares of Biofrontera common stock, increasing our ownership of Biofrontera to approximately 18% at that point in time. In connection with the transaction, two of the members of our Board of Directors, Richard Gabriel and Hector Gomez, were retained on the Biofrontera board. During September 2005, Biofrontera completed its debt securities offering. At that time, the board seat previously held by Hector Gomez was filled by a representative of the debt securities group. Beginning in October 2006, Biofrontera securities were traded on the German public exchange.  To fund our current operations and make loan payments, during December 2006 and January 2007, we sold 82,000 shares of Biofrontera stock.  During February 2007, we entered into an agreement to sell the remaining shares. The securities in Biofrontera AG that we held were under a lock-up agreement with the DZ Bank in Germany and the lock-up was assumed by the acquiring party. The lock-up period remains in effect until October 31, 2007, and the securities were not sold or intended to be sold as publicly traded shares.

We acquired Trace Genetics late in the second quarter of 2005. Trace Genetics brought two new complementary technologies to our autosomal testing for determining the percentage of a person's ancestry: Y-chromosome testing for tracing ancestry by following the direct paternal line and mitochondrial, or mtDNA, testing for the direct maternal line. Trace also maintains one of the largest Native American mtDNA databanks in North America. Other similarly large databases are controlled by groups such as the Sorensen foundation, various Native American foundations and tribes, and some Universities.

On October 12, 2005, we formed DNAPrint Pharmaceuticals, Inc., a wholly-owned pharmaceutical subsidiary focused on personalized medicine.

On October 25, 2005, we acquired all of the stock of Kenna Technologies, Inc. Kenna develops software and related technologies for building computational models that mimic complex biological systems. We expect that Kenna's computational models will become key components for our development of more effective therapies and diagnostic

products. In acquiring Kenna, we also gained access to Kenna's BoneFusion and CellCycleFusion models, which simulate bone remodeling processes and molecular pathways. These pathways are common targets of current cancer therapies. We exchanged 1,500,000 shares of our common stock for all the outstanding shares of Kenna. In addition, we hired certain key employees of Kenna, including Drs. Barbara Handelin and Tandy Herren, who support the clinical development of our pharmacogenomics products with simulations to help design optimal clinical trials.

On November 30, 2005, we acquired certain assets used in the drug and diagnostic discovery business of Toronto-based Ellipsis Biotherapeutics Corporation. We formed a wholly-owned Canadian company, also named Ellipsis Biotherapeutics Corporation, to operate these assets. Ellipsis performed contract SNP, or single nucleotide polymorphisms, genotyping for academic centers, hospitals, human health care corporations and biotech companies. Its diverse services include human, plant and animal analyses.

The acquired assets consisted of Ellipsis' operating assets, including genotyping equipment, automated sample preparation devices, DNA preparation, measurement and amplification technologies, laboratory equipment, computers and office supplies related to these activities, the corporate premises, name and logo and certain intellectual property and committed contracts. We anticipate that the Ellipsis assets will assist with clinical genomics and genotyping. In consideration for the Ellipsis assets, we issued 6,500,000 shares of our common stock and assumed certain liabilities in the approximate amount of $600,000. Dr. Laurence Rubin has agreed to continue managing the operations in Toronto.

RESEARCH AND DEVELOPMENT

The primary objective of our near term research and development efforts in pharmacogenomics will be to expand our library of predictive drug response tests to include multiple therapeutic areas including commonly used FDA approved drug therapies. Although our products are diverse and address different market areas and needs, the base technology is the same. We believe research in one area will often provide benefit to our other products.

In 2004, we conducted research for enhancements to DNAWitness. The research included much needed sample collection for our eye and hair color studies. In early June of 2004, we introduced a new tool to our forensic customers. We compiled a volunteer photo database that we can use to help investigators visualize the DNA donor. This new tool augments the effectiveness of our product, DNAWitness. During the third quarter of 2004, we completed work on our eye color service, RETINOME, and EuroDNA TM , a service that allows customers to determine their Northern European, Southeastern European, Middle Eastern and South Asian ancestry and introduced them to the market. We continue our research work on the STATINOME TM and ace inhibitor projects. We also, in conjunction with researchers at the Moffitt Cancer Center, continue work on OVANOME TM and other identified cancer projects. We continue to evaluate and analyze our preliminary results and to extend those results to other patients' samples for Taxol, Statins, and Ace inhibitor work. Our work in forensics is continuing to expand the physical descriptors that can be derived from crime scene DNA samples. Our research also continues in hair color, skin shade, and we continue to work to improve our recently introduced eye color predictor model. Additionally, we continue to collect volunteer photo database samples and will incorporate those new samples into our forensic photo database array in the near future.

During 2005, we began our work, which is continuing, on Erythropoietin, or EPO, with Beth Israel Deaconess Medical Center and Dr. Arthur Sytkowski, a director at Beth Israel. EPO is a glycoprotein naturally made by the body to stimulate red blood cell production; the currently marketed forms are manufactured using recombinant DNA technology and are used to treat anemia or low blood cell count.  During 2006, we began working with KBI BioPharma for the production development of our EPO product.

Also during 2005, we entered into an agreement with Dr. Mark Froimowitz to develop a series of methylphenidate analogs or Ritalin-like compounds targeting the clinical development of enhanced pharmaceuticals for the treatment of drug addiction, attention deficit hyperactivity disorder and depression.

During 2006, we began our work, which is continuing, on CD59 with Harvard College through the Laboratory for Translational Research at Harvard Medical School.  CD59 is a new antibody-based monitoring test to identify the diabetic population at increased risk of developing vascular complications such as kidney disease, blindness, amputations, loss of nerve function, and cardiovascular disease, before irreparable organ damage has occurred. Use of such tests by diabetic patients will decrease morbidity and mortality by increasing their compliance with therapy(ies) and encouraging beneficial lifestyle changes.  There is currently no such test on the market.

STRATEGIC ALLIANCES

Moffitt Cancer Center

During 2006, we continued to develop our OVANOME technology with researchers at the Moffitt Cancer Center in Tampa, Florida, and we are in the midst of completing an initial 80 person trial under an approved Internal Review Board, or IRB, which approves all clinical trial-related work at the center. We intend to enroll an additional 200 subjects to further validate and support the data we obtained in our earlier trial.

Beth Israel Deaconess Medical Center License Agreement

Effective April 4, 2005, we entered into a license agreement with Beth Israel Deaconess Medical Center, a Massachusetts nonprofit corporation, to develop a new, more potent and longer acting form of the anemia drug Erythropoietin, or EPO.

EPO is a glycoprotein naturally made by the body to stimulate red blood cell production. The currently marketed forms are manufactured using recombinant DNA technology and are used to treat anemia or low blood cell count. Under the agreement, Beth Israel has granted us an exclusive license to United States and foreign patents related to certain forms of EPO. We have the right to develop, use, market and sell products derived from the licensed patents.

In exchange for the license, we paid Beth Israel a $25,000 signing fee and agreed to make certain milestone payments linked to their progress in developing marketable products from the licensed technology. The total of payments, if all milestones are reached, is $2,150,000. The milestone payments are nonrefundable. Up to $200,000 of this amount is creditable against future royalties. In addition to the milestone payments, we must also pay Beth Israel an annual royalty of 4% of the net sales of all products developed from the licensed technology. A minimum royalty payment of $100,000 a year is due upon the commencement of commercial sales in any territory worldwide.

KBI BioPharma

During late March 2006, we entered into a services agreement with KBI BioPharma for the production development of our EPO product. The total estimated price is $2,840,000.  During the fourth quarter of 2006, these services were put on hold pending receiving additional funding.

Consulting Agreement with Dr. Arthur Sytkowski

Effective August 1, 2006, we entered into a consulting agreement with Dr. Arthur Sytkowski, a Director of Beth Israel, to consult on the development of a new, more potent and longer acting form of EPO. Under the consulting agreement, Dr. Sytkowski has agreed to perform certain consulting services, including advising on medical, regulatory and patent issues, training personnel and providing assistance with EPO research and development. In exchange for the services, we will pay Dr. Sytkowski $10,000 a month for twelve months, five annual incentive payments of $25,000 each, and certain milestone payments linked to our progress under the Beth Israel license in developing marketable products from the licensed EPO technology. The total of all payments to Dr. Sytkowski under the agreement, assuming all milestones are reached, is $370,000. The milestone payments will be reduced - dollar for dollar - to the extent Dr. Sytkowski receives payments from Beth Israel relating to the same milestone events under the Beth Israel license.  On March 1, 2007, we entered into a letter agreement with Dr. Sytkowski whereby he agreed to accept shares of our common stock in lieu of payments due under the consulting agreement. At December 31, 2006, we had recorded $73,872 for services owed to him.

Collaborative Research Agreement with Beth Israel

Effective July 1, 2006, we entered into a collaborative research agreement with Beth Israel Deaconess Medical Center. Under the terms of the agreement, Beth Israel is providing four researchers to us, for a period of one year to conduct certain research work related to our EPO research. The total cost per the amended agreement is $593,436.

Consultant Agreement with Member of Our Scientific Advisory Board

During May 2005, we entered into a one-year agreement with our Scientific Advisory Board member, to continue collaboration with us to develop commercial tests for genetic ancestry and particular physical phenotypes. We have agreed to compensate this consultant with quarterly payments of $4,000 and 2,500 shares of our common stock. The term of this agreement is one year with automatic renewals each year unless either party provides written notice of its

intent not to renew within thirty days prior to the annual anniversaries of this agreement. During May 2005, we also entered into a license agreement with this consultant. This license will remain in force in perpetuity as long as we are not in default of the agreement. We agreed to pay the consultant 2.5% of the net revenues derived from a product and any subsequent versions of the products developed with his help.

License Agreement with Dr. Mark Froimowitz

On October 25, 2005, we entered into an exclusive licensing agreement with Dr. Mark Froimowitz to develop a series of compounds targeting the clinical development of enhanced pharmaceuticals for the treatment of drug addiction, attention deficit hyperactivity disorder, or ADHD, and depression. The licensed compounds are analogs of Ritalin, a well-known drug used for treatment of ADHD. The analogs are designed specifically to have a slow onset and increased half-life in the bloodstream, thus reducing a patient's required daily dosage and the potential for drug abuse. We have the exclusive right to develop, use, market and sell products derived from the licensed compounds. We are obligated to pay the licensor a 2% quarterly royalty fee on the net sales of products covered by the license. Minimum annual maintenance fees of $25,000 are required for the license term, but will be deducted from royalties. Additionally, the license requires progress payments of up to $275,000 upon the successful development and approval of licensed products. The license's initial five year term is supplemented by options capable of extending the license term for up to twenty years.

Research Sponsorship Agreement with Massachusetts College of Pharmacy and Health Sciences

In January 2006, we entered into a research sponsorship agreement with the Massachusetts College of Pharmacy and Health Sciences, under which Dr. Mark Froimowitz will lead a research project that relates to the compounds that we license from him. The area of research is the synthesis and testing of monoamine transporter inhibitors as possible human medications for drug abuse, for attention deficit hyperactivity disorder, and for depression. The specific research covered by this agreement is the synthesis of quantities of compounds sufficient for animal testing, including developing methods for the resolution or chiral synthesis of compounds. We will pay a total of $300,000 to Massachusetts College of Pharmacy and Health Sciences for this research work which will be paid in monthly installments of $25,000 over one year. We will acquire all intellectual property associated with the research results.  We anticipate renewing the contract with the Massachusetts College of Pharmacy and Dr. Froimowitz for 2007.

License Agreement with Harvard Medical School

On January 24, 2006, we entered into an exclusive license agreement with Harvard College through the Laboratory for Translational Research at Harvard Medical School. The Harvard license agreement provides for sponsored research and the clinical development and commercialization of a diagnostic test targeting early identification of the population at risk of developing vascular diabetic complications. The research will be conducted under the supervision of Dr. Jose Halperin. The sponsored research payments total approximately $2.5 million and will be paid in quarterly installments of approximately $208,333 over approximately three years.

Under the Harvard license agreement, we have the exclusive right to develop, market and sell products and services derived from the research. We must pay the Licensor a 6% royalty on the net sales of products and services covered by the License and 30% of all non-royalty sublicense income. We are also required to pay escalating minimum annual license maintenance fees totaling $850,000 through January 1, 2012. We are obligated to make annual license maintenance fees of $250,000 through the Harvard license term, but, beginning January 1, 2013, the annual license fee of $250,000 is credited against royalty payments. Additionally, we paid the Licensor previously incurred patent costs of approximately $100,000 upon the execution of the License, and are responsible for paying the costs associated with patent application, maintenance and prosecution during the License term.

THE PHARMACOGENOMICS MARKET

A 1998 study of hospitalized patients published in the Journal of the American Medical Association reported that in 1994, adverse drug reactions accounted for more than 2.2 million serious cases and over 100,000 deaths, making adverse drug reactions, or ADRs, one of the leading causes of hospitalization and death in the United States. As noted by Ross and Ginsburg in the American Journal of Clinical Pathology, "As many as 20% to 40% of people receiving pharmaceutical agents may be receiving the wrong drug."

Currently, there is no simple way to determine whether people will respond well, badly, or not at all to a medication; therefore, pharmaceutical companies are limited to developing drugs using a "one size fits all" system. This system allows for the development of drugs to which the "average" patient will respond. However, as the statistics above show, one size does not fit all, sometimes with devastating results. As discussed at the March 11, 2006 American Society for Clinical Pharmacology and Therapeutics Conference by Janet Woodcock, M.D. Deputy Director of the FDA, the American medical system cannot afford to continue to ignore the obvious variability in how individuals respond to most drugs. There is increasing obligation for the pharmaceutical industry - and the regulatory oversight agencies - to use all available knowledge and technologies to accelerate the development of drugs that can be prescribed with better understanding of which patients can safely take which medicines that also will be effective treatment from them. Dr. Woodcock also said:

"At the FDA, we currently see only a trickle of applications containing pharmacogenomic information, but we expect this trickle to become a flood over the next five years. And this is only good news for patients and their families. For the first time, physicians will have a chance to treat people as individuals, not as members of a "population." We will also be able to treat patients based on the actual biology of the disease--not just according to their symptoms. People often have similar symptoms, but actually have very different underlying diseases that need different treatments. The pharmacogenomics revolution gives us a chance to sort this out and to treat people with the kind of therapy that's appropriate for them, personally. This gives all of us the chance to fulfill the promise of the entire discovery and all the investment in biological science that's been going on during the last 30 years. And it will really help and enhance the health of all Americans."

Testing individuals to predict their genetic pre-disposition to drug response is known as pharmacogenomics. The term comes from the words pharmacology and genomics and is thus the intersection of pharmaceuticals and genetics. Pharmacogenomics enables physicians to tailor drug therapies, including formulation and dosage, for individuals based on their genetic composition. By using predictive response genetic testing, rates of therapeutic success, known as treatment efficacy, are increased, and ADRs, are decreased. Pharmacogenomics combines traditional pharmaceutical sciences such as biochemistry with annotated knowledge of genes, proteins and single nucleotide polymorphisms, known as SNPs. According to Human Genome Project Information,

 (www.ornl.gov/sci/techresources.Human_Genome/medicine/pharma.shtml), Pharmacogenomics is anticipated to provide the following benefits:

- More powerful medicines that are targeted to specific diseases. This will maximize therapeutic effects and decrease damage to nearby healthy cells.

- Better, safer drugs the first time by analyzing a patient's genetic code or important segments of the patient's code versus trial and error prescribing based on reviewing the impact of a drug after a patient takes it.

- More accurate methods of determining appropriate drug doses not based only on a patient's weight or body mass but also based on the patient's metabolism. This will maximize the therapy's value and minimize the chance for overdose.

- Improvements in the drug discovery and approval process because trials are targeted for specific genetic population groups providing a higher chance of success. This can reduce costs of trials and risk of side effects. Previously failed drug candidates might be revived if they can be matched appropriately with a specific population.

- Decreases in overall cost of health care because of reduced ADRs, reduced failed drug trials, shortened FDA drug approval timeframes, limited treatment duration because the drug is more effective, linked to early detection and resulting in better preventative care.

The major barrier to pharmacogenomics progress is complexity of the research efforts that are still in early stages of finding gene variations that affect drug response. Millions of SNPs must be potentially identified and analyzed to see if they affect drug responsiveness. Additionally, many genes work in combination and thus, understanding the impact of combinations of SNPs will be critical. Unfortunately, this effort is also time consuming and expensive.

In November 2003, the FDA issued "Guidance for Industry Pharmacogenomic Data Submissions." We believe that, in this guidance, the FDA offers support for pharmaceutical companies developing drugs using genetic testing and genomic research for drug approvals. Under the guidelines, if a genetic test is new or is not widely accepted, then its use is `voluntary' to the drug's submission. If a test is `validated and accepted' then the guidelines suggest its inclusion in the submission. In both cases, our products and services can provide a valuable tool for drug development. We can help identify patients who might not respond favorably to a new medication, either by failure to gain the intended treatment objective or by expression of an adverse reaction, and thus eliminate those patients from the treatment or clinical trial. This testing could improve the drug's efficacy statistics because there may be fewer non-responders in the trial and reduce its toxicity profile because there would be fewer individuals who have an adverse drug reaction. This testing may increase the likelihood that the drug meets FDA requirements and gains market approval.

During 2005, the FDA issued a mandate to include pharmacogenomics as part of the New Drug Development Process. . This mandate has been most recently declared in two publications: the Guidelines for Pharmacogenomic Data Submission dated March 22, 2005, and the Concept Paper: Drug-Diagnostic Co-Development (Theranostics) dated April 11, 2005.

OUR PHARMACOGENOMICS PRODUCTS

At our annual shareholder meeting in June 2006, Dr. Hector J. Gomez, the Chairman of our Board of Directors, announced that we will focus on leveraging our expertise in DNA technology into the development of particular test/drug combinations, called theranostics. Theranostics is defined as the clinically-targeted integration of diagnostics and therapeutics according to Current Drug discovery September 2002. We believe theranostics adds value to the clinical trial process, improves the real-time treatment of disease, and makes treatment more cost-effective.

In October 2005, we created a new subsidiary, DNAPrint Pharmaceuticals, to focus on delivering diagnostic and theranostic products to the market in support of pharmacogenomic opportunities. We are developing several theranostics projects. The following table contains our diagnostic products that are in development as of March 2007:

THERANOSTICS INDICATION

PT-401                 Anemia  -  Renal  Failure
PT-501                 ADHD
PT-502                 Drug  Addiction
PT-503                 Depression


PT-401 Anemia - Renal Failure: As announced on March 14, 2006, tests of our Super EPO dimer in animal models of anemia showed that it was several times more effective and longer acting than the currently available erythropoietin. In vitro testing in cell cultures revealed significant positive biological activity. In addition, in vivo testing in mice demonstrated robust stimulation of red blood cell production. Further analytical testing showed unique biochemical properties that distinguish it from currently marketed red blood cell growth stimulating drugs.

PT-501 ADHD, PT-502 Drug Addiction, PT-501 Depression: In January 2006, we entered into a Research Sponsorship Agreement with the Massachusetts College of Pharmacy and Health Sciences for the potential development of compounds as possible medications for drug abuse, attention deficit hyperactivity disorder and depression.

OUR DIAGNOSTIC PROJECTS

We currently have the following diagnostic projects under development:

DIAGNOSTICS             INDICATION
OVANOME                  Ovarian  Cancer
STATINOME               Safety  of  Statins
DIABETES-CD59        Pre-diabetes  Diabetic  Complications
PONV                            Post-Operative  Nausea  and  Vomiting


Ovanome: We began a study with Genomics Collaborative Division of Seracare Life Sciences, Inc. Samples have been received from them and used to conduct a validation of the test. We believe this has advanced the development and improved the quality of the diagnostic test.

Statinome: During 2005, we began a study with Genomics Collaborative Division of Seracare Life Sciences, Inc. that also included the statinome program. Samples have been received from them and used to conduct a validation of the test. An abstract was presented at the last meeting of the American Society of Clinical Pharmacology and Therapeutics which was held on March 10, 2006 in Baltimore. Also, a paper has been prepared and submitted for publication.

Diabetes C59: On January 24, 2006, we entered into an exclusive license agreement with Harvard College through the Laboratory for Translational Research at Harvard Medical School. The Harvard license agreement provides for sponsored research and the clinical development and commercialization of a diagnostic test targeting early identification of the population at risk of developing vascular diabetic complications. The research is being conducted under the supervision of Dr. Jose Halperin.

PONV is a diagnostic test that will assist in selecting appropriate anesthesia and pain management treatments. There is increasing evidence that certain individuals may have a predilection to nausea and vomiting in response to routine anesthesia and certain post operative pain medications. On average, 50% of individuals undergoing routine, non-abdominal surgery under general anesthesia will experience post operative nausea, and 30% or more will have vomiting in recovery that requires drug therapy to prevent complications.

OUR GROWTH STRATEGIES IN THE PHARMACOGENOMIC MARKET

By leveraging our proprietary technologies, we believe we are positioned to serve the growing compliance and operational needs of pharmaceutical companies and institutional researchers. We will continue to seek product and market relationships that expand and enhance our ability to apply our technology to existing medications or new medications, improving drug efficacy and reducing patient side effects by better understanding the genetic makeup of individuals. We believe the future of drug development and drug approval as outlined by recent FDA writings will force the industry to recognize smaller market opportunities with higher efficacy profiles and significantly reduced or diminished side effects.

We will continue work on Ovanome, a Taxol screening diagnostic test, and Statinome, a test for the cardiac drug market, which are both currently under development. Our Ovanome technology is under development with researchers at the Moffitt Cancer Center in Tampa, Florida, and we are in the midst of completing an initial 80-person trial under an approved Internal Review Board, or IRB, which approves all clinical trial related work at the center. We are also enrolling an additional 200 subjects to further validate and support the data we obtained in our earlier trial. We will continue to explore joint venture opportunities, particularly within the pharmacogenomic segment, in order to potentially expand our position within the pharmaceutical market. A major goal of our joint venture program is to seek opportunities for a drug pipeline acquisition. Our recent licensing of a 'Super' Erythropoietin, or ‘Super EPO,’ molecule from Beth Israel Deaconess Hospital is a step forward in that direction. We plan to combine our ability to screen patients and track patient response to the standard form of EPO when compared to our newer, 'Super EPO.' We believe this will improve our clinical efficacy and reduce the unwanted side-effects of standard EPO treatment for anemia.

In October 2005, we acquired Kenna Technologies. Kenna develops software and related technologies for building

computational models that mimic complex biological systems. By acquiring Kenna, we also gained access to Kenna's BoneFusion and CellCycleFusion models, which simulate bone remodeling processes and molecular pathways. These pathways are common targets of current cancer therapies. Utilizing these models may lead to shorter drug development timelines and thus reduced costs as they help in the design of optimal clinical trials. Computational models, developed with our proprietary methods, test multiple complex scenarios of dosing, patient factors, disease progression over time, genetic variation in drug response and can provide insight into the potential outcomes of long-term treatments which are too costly to test in human studies. We are currently using these models with respect to the PT-401 Super EPO project and will use these and other models in our research and development of our products. We also hired certain key employees of Kenna, including Drs. Barbara Handelin and Tandy Herrin, who will support the clinical development of our PT-401 with simulations to help design optimal clinical trials.

THE FORENSICS MARKET

Testing DNA from a crime scene to create a physical profile is a new market based on evolving technologies. Common hereditary traits such as skin pigmentation, eye color, hair color, earlobe attachment and height can theoretically be predicted through analysis of DNA sequences. We believe that we are the first to use DNA gathered as evidence from a crime scene to successfully predict the donor's continental genetic origin and linking that to our photo-database gallery, providing law enforcement officers with a general description of the donor.

There are approximately 1,200,000 reported incidents of violent crime, comprised of rape, robbery, and aggravated assault, in the U.S. each year. In the vast majority of violent crimes, DNA evidence is left at a crime scene or on a victim's body. Of these 1.2 million reported incidents, only about 600,000 cases result in arrests. Forensic DNA tests can enable a greater degree of success in prosecuting violent criminals.

OUR PRODUCTS FOR THE FORENSICS MARKET

We created DNAWitness 2.5 for the forensics market. Law enforcement officers use this testing service to determine genetic heritage from DNA samples obtained from crime scenes, saving time and money by narrowing the list of potential suspects. Current forensic DNA products in the market act like a fingerprint and can only be used to match DNA specimens. To our knowledge, DNAWitness is the first forensic product that provides predictive capability. DNAWitness provides the percentage of genetic make up amongst the four possible groups of Sub-Saharan African, Native American, East Asian, and Indo-European. When appropriate, DNAWitness allows for a breakdown of the European ancestry into four components: Northern European, Southeastern European, Middle Eastern and South Asian. The results of these tests can be very useful for inferring certain elements of physical appearance.

DNAWitness has been used in several law enforcement cases. The Louisiana Serial Killer Case was one case where the use of DNA Witness was considered a major contributor to identifying the killer who has since been convicted and sentenced. This case was featured at an educational workshop for law enforcement at the American Academy of Forensic Scientists in February 2006. Additionally, DNAWitness received national attention when police made an arrest in a case involving the double murder of two women in Napa, California, after narrowing down a list of potential suspects. The test eliminated an entire group of individuals who worked and lived in the Napa Valley area as potential suspects. Initial DNAWitness 2.5 customers include medical examiner's offices, special task forces, sheriffs' departments, and district attorney's offices from various cities. Initial response from preliminary application of this forensics version to various high profile criminal cases has been promising.

Our DNAWitness TM product suite now includes:

DNAWitness TM 2.5 -- Tests crime scene DNA to assist detectives, forensic scientists and medical examiners in corroborating eyewitness reports and confirming suspect identities. DNAWitness 2.5 provides a BioGeographical Ancestry report that includes a photo database for reference samples of individuals. Reported ancestral origins are Sub-Saharan African, Native American, East Asian and Indo-European.

EuroWitness TM 1.0 -- Tests crime scene DNA to determine more specific geographic origins if the test sample ancestry is 50% or more Indo-European. EuroWitness TM 1.0 provides a BioGeographical Ancestry report that includes relative percentages of Northern European, Southeastern European, Middle Eastern or South Asian.

Retinome TM -- A predictive test for individual eye color from DNA. RETINOME predicts eye color if the sample is 50% or greater European ancestry as to whether eye color is blue, mostly blue, brown or mostly brown. A representative eye photo database is also provided along with relevant photo database pictures of the individual references.

STR-Witness TM -- A genetic "matching" used as a bar code to track and report the samples. STR-Witness is the same test used for determining an individual's identity from an available DNA sample. Crime labs run this test to screen the Federal Bureau of Investigation's Combined DNA Index System, or CODIS, database for possible matches.

DNAWitness-Y TM -- A Y-chromosome test that determines the direct paternal ancestral lineage from the male sex chromosome. DNAWitness-Y TM can be used as an identification tool in cases where a mixture of male and female samples exists.

DNAWitness-Mito TM -- A mitochondrial DNA test that examines ancestral lineages along the maternal line. DNAWitness-Mito TM can be used as an identification tool when other DNA testing fails to yield results or the DNA sample is too deteriorated.

GROWTH STRATEGY IN FORENSICS

We are investigating avenues to encourage federal, state and local governments, crime laboratories and law enforcement agencies to use DNAWitness to help solve cold cases, current serial killer cases and other violent crimes. By using DNAWitness on a routine basis, witness information can be corroborated, and where no witness is present, DNAWitness can provide a "fuzzy sketch" of the persons who left evidence at a crime scene, possibly reducing the cost and delay inherent to unguided investigation of a large pool of potential suspects Our 2007 plans include seeking American Society of Crime Laboratory Directors or ASCLD accreditation of our laboratory for forensics work tied to court testimony. Once accredited, either through acquisition of another forensic operation or development of our own operation, we will also be able to offer conventional DNA testing to our clients. Accreditation would allow us to capture a greater portion of this market and to offer a full range of services to our clients. We continue to go to trade shows to increase the awareness of our products with the law enforcement community.

THE CONSUMER PRODUCTS MARKET

The consumer genealogy market is fueled by a natural desire to understand our family lineage and our genetic heritage. The total world market is currently estimated at $75 million and is expected to grow 5% annually. There is also a market for paternity and other tests related to family lineage. We serve both of these consumer markets through direct sales and independent distributors.

OUR PRODUCTS FOR THE CONSUMER PRODUCT MARKET


We were one of the first companies to offer DNA tests that predict genetic heritage. Additionally, to the best of our knowledge, we offer the only pan-chromosomal assay for genetic ancestry which provides information on a person's maternal and paternal lineages.

Our genealogy product, AncestryByDNA TM 2.5, provides an inference of an individual's genetic ancestry or heritage. AncestryByDNA TM 2.5 carefully selects and analyzes certain genetic markers from the human genome which are more prevalent in people from one continent versus another. Using complex statistical algorithms, AncestryByDNA TM 2.5 can determine which of the major bio-geographical ancestry groups, Sub-Saharan African, Indo-European, East Asian or Native American, a person belongs. The genetic test can also determine the relative percentages of these ancestry groups which are present in cases of people of mixed background. We market this product to individuals or groups interested in understanding their lineage or learning more about their genetic ancestry.

We introduced EuroDNA TM 1.0 in the marketplace in late 2004. The EuroDNA TM 1.0 product measures European sub-ancestry. "European" ancestry, as determined by AncestryByDNA TM 2.5, refers to a type of ancestry shared by people who derived from the Middle East some 50,000 years ago and spread to occupy Europe, the Middle East, parts of Eurasia and South Asia. EuroDNA TM 1.0 breaks the European ancestry into 4 groups, reporting individuals' ancestral percentages for each of the following: Northwestern European, Southeastern European, Middle Eastern and South

Asian.

In June 2005, we acquired Trace Genetics, an identity genomics company located in Richmond, California. The company had three ancestry tests that were added to our family of tests. They include:

1. "Ancestry Mito" mtDNA Test which traces the origin of the customer's direct maternal line, or mother's mother's mother. There are 30 major maternal lineages, or haplogroups, that have been identified worldwide.

2. Native American mtDNA test which tests the customer's mtDNA sequence against the Native American mtDNA database to see if we can make any tribal matches when the customer is one of 5 haplogroups that are Native American in origin.

3. "Ancestry-Y" SNP which traces the origin of the customer's direct paternal line, or father's father's father. There are 18 major paternal lineages, or haplogroups, that have been identified worldwide. Two of the 18 haplogroups are found in Native American populations, Q and C. This test includes these two haplogroups.

GROWTH STRATEGY IN CONSUMER PRODUCTS

We currently have several distributors that sell our consumer products. We use our distributors as well as Internet and paper-based publication advertising, such as Google and Family Tree magazine, to grow sales of our consumer products. Our consumer sales volumes seem to increase when we are featured in articles and television programs. We have been featured in multiple local and national publications and television programs. We will continue to strive to get the article and television program coverage as well as pursue other avenues of marketing. Our consistent sales come through our distributors. We will also continue to pursue adding distributors to increase our sales volume of our consumer products.

THE CONTRACT SERVICE OUTSOURCING MARKET

Contract genotyping is the process of reading a genetic sequence and identifying differences in the sequence letters. This information helps researchers understand how human differences are expressed at the gene level. We provide universities and drug discovery companies the ability to outsource some or all of their research needs for genotyping. The pharmaceutical and drug discovery segments of the outsourcing market continue to grow.

OUR GENOTYPING SERVICES

We provide services that range from sequencing and genotyping to the entire process of SNP discovery to large industrial customers. Contract genotyping is the process of reading a genetic sequence and identifying differences in the sequence letters. For example, in comparing diseased tissue with normal tissue, we are able to see the differences in the sequence letters. This information helps researchers understand how human differences are expressed at the gene level. They can then search for and develop preventative treatment and effective therapeutic courses to alleviate disease symptoms.

A critical factor to the success of research and development of pharmacogenomics assays is the ability to do high through-put genotyping. To this end, we acquired certain assets from a Canadian company and formed our subsidiary Ellipsis. Ellipsis has a Beckman-Coulter SNPstream that is capable of using a new 48-plex system, which allows for greater capacity of SNP testing at less cost. We currently have a total of three SNPstream machines enabling us to offer testing services that can validate markers at high volumes, which is especially useful in the later stages of drug and diagnostics development during large clinical trials.

Ellipsis also has an Illumina Beadstation 500G system, which also runs very high capacity analysis. The Illumina system is 50 to 100 times higher capacity but is not as efficient from an expense perspective at lower numbers of SNPs making the Illumina a more ideal research tool in screening whole genomes across hundreds of thousands of SNPs.

These platforms enable us to do a variety of testing of DNA samples for pharmacogenomic efforts as well as generating revenue from projects for academic and business organizations. Ellipsis has extensive experience working with DNA samples from a variety of sources and projects, including agricultural to human disease applications.

GROWTH STRATEGY FOR CONTRACT GENOTYPING

We continue to pursue customers within the contract genotyping market. To date, our customers have come to us either through client referrals or our general website. In the future, we plan to concentrate our genotyping services on specific diseases, including cancer, neurological disorders, and heart disease. By concentrating on specific diseases, we hope to develop an expertise that will attract customers in those areas requiring external assistance and additional research capacity. Through this strategy, we will continue to build our reputation as a reliable and cost effective supplier of high quality data.  

INTELLECTUAL PROPERTY

Trademarks

We regard our trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we rely on trademark, and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, and others to protect our proprietary rights. We have licensed in the past, and expect that we may license in the future, certain proprietary rights, technologies or copyrighted materials, from third parties, and we rely on those third parties to defend their proprietary rights, copyrights and technologies.

We have registered the trademark for DNAPrint and claim common law trademark rights to the marks DNAWitness, EuroDNA and AncestryByDNA.

Patent Applications

We have filed claims for international and domestic patent protection. The patents, if issued, will help ensure protection of our bioinformatics platforms, analytical software, genome maps and genetic classifiers in forensic, consumer products, and pharmacogenomics applications. The most significant patent applications cover the bioinformatics platforms and genome maps. Other applications describe the mathematical process of finding complex genetic information and the actual processes that find the gene variants responsible for specific complex genetic traits. Five of our patent applications, Compositions of Pigmentation Traits, Single Nucleotide Polymorphisms Predictive of Paclitaxel Responsiveness in Cancer Patients, Compositions Inferring Ancestry, Compositions Inferring Statin Response, and Compositions Inferring Eye Color, have entered National Phases and are pending review and we believe, approval in the U.S. and designated countries. The pigmentation patent is important because it includes the methods and compositions for determining skin shade, eye color or any other pigmentation application. Our Statin patent application includes the use of method for determining a person's ability to respond favorably to a particular statin drug, not the class as a whole. We may also obtain data to support our claim for all statins and the use of our ancestry information markers (“AIMs”) in the development of the assay. As discoveries warrant, we will continue to apply for future additional patents. Listed below are our current patent pending and granted applications.

Efficient Methods and Apparatus for High-Throughput Processing of Gene Sequence Data.

US 7,110,885 (granted)

Methods fo the Identification of Genetic

US 7,107,155 (granted)

Features for Complex Genetics Classifiers

PCT/US02/38326

Methods for the Identification of Genetic.

US 7,107,155 (granted)

CA 2,468,961

EP 02794095.6

JP549497/2003

AU2002359549

Methods and Apparatus for use in Genetics Classification Including Classification Tree

US10/496,226

 Analysis

PCT/USO2/38309

CA2,498,570

EP02789948.3

JP550120/2003

AU2002352985

Methods and Apparatus for use in Complex Genetics Classification

US10/495,962

 Based on Correspondence Analysis and Linear-Quadratic Analysis

PCT/US02/41465

CA2,468,601

EP02789948.3

JP549549/2003

AU2002361871

Composition and Methods for the Inference

US11/397,454

 Of Pigmentation Traits

PCT/US02/16789

AU2002/312112

CA2,448,569

EP02739467.5

hk04109585.8

JP2003/500216

Compositions and Methods for Inferring

US10/188,359

    A Response to a Statin

PCT/US02/20847

AU2002/316485

CA2,486,789

EP02746794.3

JP2003/509083

Single Nucleotide Polymorphisms and Combinations Thereof Predictive of

PCT/US02/38345

    Paclitaxel Responsiveness in Cancer Patients

AU2002360452

CA2,468,312

EP02795709.1


HK05102575.4

JP2003-546736

US10/496,605

Compositions and Methods for Inferring  Ancestry

US10/644,594

PCT/US03/26229

AU2003265572

CA2,496,155

EP03788685.0

JP2005-502072

Methylphenidate Analogs and Methods of Use Thereof

US11/256063

PCT/US2005/038030

Methods, Products and Treatments for Diabetes

US 6,835,545 (Granted)

US 7,049,082 (Granted)

US10/870,342

Anti-Glycated CD59 Antibodies and Uses Thereof

US2004/019392

Multiplex Assays for Inferring Ancestry

331832-000045/WO

Compositions and Methods for Inferring an Adverse Effect in Response to a Drug . . . .  

US05/41326

Methods and Compositions for Inferring Eye Color

US10/589,291

PCTUS05/04513

EP05723003.9

Recombinant Human Erythopoietin with Altered Biological Activity

US 5,614,184 (Granted)

US 6,489,293 B1 (Granted)

Production and Use of Recombinant Protein Multimers with Increased Biological Activity

US 6,242,570 (Granted)

US 6,187,564 (Granted)


PCT/US98/13944

AU PCT 732857

CA PCT 2,296,071

JP PCT 2000-502204

EPO PCT 98 93 4269.6

Modified Polypeptides with Increased Biological Activity

US 5,580,853 (Granted)

US 5,747,445 (Granted)

PCT/US97/22503

JP PCT 10524930

US 5,919,758 (Granted)

US 6,107,272 (Granted)

PCT/US95/03242

EPO 0 751 959

Integrated disease information system

US 6,108,635 (granted)

Hierarchical Biological Modeling System and Method as

US 5,808,918 (granted)

Restricted to three of five original claims upon re-examination

At the USPTO in 2001

DNA polymorphism associated with Crohn’s Disease

PCT WO 01/042511

US 239403

IBD candidate gene

US 60/362,700

US 60/362,717

US 60/342,388

US 10/327,189

PCT/IB02/05560

JP 2003-554727

EU 02781695.8

AU 2002348745

PCT/IB2002/005560



COMPETITION

Numerous entities are attempting to identify genomic variation predictive of specific diseases and drug response and to develop products and services based on these discoveries. We face competition in these areas from pharmaceutical, biotechnology and diagnostic companies, academic and research institutions and government and other publicly-funded agencies, both in the United States and abroad, most of which have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than do we. Our key competitors include, but are not limited to, PPGx, Inc., a leading international developer and supplier of research-based pharmacogenomics services and products which recently announced the launch of its GeneTrials TM Bioinformatics Platform. Also, large pharmaceutical companies have their own internal research and development efforts that could surpass or eliminate our technology from the market.

These competitors may discover, characterize or develop important technologies applying genomics before us or may develop proprietary products and services that are more effective than those technologies that we develop. Additionally, these competitors may obtain regulatory approvals for their drugs and diagnostics more rapidly than we or our customers do, any of which could limit our ability to market effectively our products and services. If our patent applications are not awarded or if our competitors in the field of genetic research develop and receive approval of patents that supersede our applications, we could be forced to cease the development of our products, services and technologies. Some companies and governments are marketing or developing databases and informatics tools to assist participants in the healthcare industry and academic researchers in the management and analysis of genomic data. "Informatics tools" is a term used by scientists to describe software, computer programs or mathematical programs that analyze data sets or collected information that is stored in data files. Such computer programs can take an apparently meaningless block of numbers from a laboratory experiment and evaluate trends, look for statistical relationships and group or segregate the numbers according to their levels of importance to the scientist. They are tools to evaluate information. Our competitors have developed or plan to develop databases containing gene sequence, genomic variation or other genomic information and are marketing or plan to market their data to pharmaceutical and biotechnology companies or plan to make freely available their databases. These entities include, but are not limited to:

- Genaissance Pharmaceuticals: a provider of pharmacogenomic support services, including high-throughput sequencing, this company was recently acquired by another company called Clinical Data, Inc.

- Evolutionary Bioinformatics: Bioinformatics and genomics consulting, specializing in comparative genomics, functional genomics and model organisms.

- deCODE Genetics: Advanced bioinformatics and high-throughput genotyping facility.

- Celera Genomics: Drug discovery systems and services.

- Cellular Genomics: A biotechnology company focused on the discovery and validation of novel drug targets.

- Correlogic Systems: Developing tools and processes for proteomic and genomic-based clinical diagnostic systems and new drug discovery.

- Epoch Biosciences: Technologies useful in genetic research, diagnostics, drug development, infectious disease detection, prenatal testing and population screening to assess risk of disease or to predict response to drugs.

- Eragen Biosciences: Designs, develops, and markets functional genomic and drug/diagnostic discovery platform products, and technologies to the pharmaceutical, biotechnology and agro-biology industries.

In addition, numerous pharmaceutical and biotechnology companies, either alone or in collaboration with our competitors, are developing genomic research programs that involve the use of information that can be found in these databases.

Genomic technologies have undergone, and are expected to continue to undergo, rapid and significant change. Our future success will depend in large part on maintaining a competitive position in the genomics field. Others may rapidly develop new technologies that may result in our tests or technologies becoming obsolete before we recover the expenses that we incur in connection with the development of these products. Our developed proprietary products and services could become obsolete if our competitors offer less expensive or more effective drug discovery and development technologies, including technologies that may be unrelated to genomics.

We also compete in the forensic DNA testing market, consumer DNA products market and contract services outsourcing market. We have introduced new products and improved our flagship product, AncestryByDNA TM , part of the consumer DNA market, by upgrading it from 76 marker sets to 175 marker sets. Additionally, we have increased our ability to include DNA sampling from Northern European, Middle Eastern, Southeastern European and South Asian by introducing EuroDNA TM 1.0.

In the consumer market, which is mainly supported by genealogy enthusiasts, we remain concerned that our potential reward from developing products will be limited by a sudden lack of interest. Our competitors include companies like:

- Sorenson Genetics: One of the larger suppliers of paternity and ancestry testing.

- DNA Testing Center, Inc.: A testing service for mitochondrial, paternity and y chromosome testing for the consumer market and forensics market as well. Either of these firms or other companies could create a product that is competitive to our products, and reduce our current sales volumes.

Similarly, we have competitors in the field of forensics that includes the following companies and agencies:

- Orchid: The original inventor of Single Nucleotide Polymorphismanalysis machines and SNP technologies through its Orchid Cellmark division is considered one of the premier independent DNA testing laboratories in forensics. This competitor not only has the scientific background but the financial means and expertise to create a product that directly competes with ours in the forensics market.

- FSS: A United Kingdom-based firm that processes nearly 85% of the UK's criminal DNA samples also has the ability to create a product that is competitive to our products and is exploring entering the U.S. market.

- Bode Systems, A division of Choicepoint: A significant competitor that, like FSS and Orchid has the ability to create and market a similar product to ours and eliminate us from the forensics market.

- FBI, Quantico Laboratories: The Federal Bureau of Investigation, or FBI, has significant development resources, and we believe they are contracting with Orchid and others to develop identity tests that will help them identify potential DNA donors from crime scene DNA. The bureau also invests federal research money on its own research to develop testing processes and procedures that it would approve for law enforcement.

- The National Institutes of Justice regularly provides grants to local and state police crime laboratories and University researchers that are competitive to our technology. We have applied for two grants and will continue to apply but have been rejected. In each application, despite the rejection, we have developed the proposed technology and brought it to the forensics market.

Forensic DNA and consumer DNA technologies have undergone, and are expected to continue to undergo, rapid and significant change. Our future success will depend in large part on maintaining a competitive position in these fields. Others may rapidly develop new technologies that may result in our tests or technologies becoming obsolete before we recover the expenses that we incur in connection with the development of these products. Our products and services could become obsolete if our competitors offer less expensive or more effective discovery and development technologies, including technologies that may be unrelated to genomics.

EMPLOYEES

As of February 15, 2007, we had twenty-four full-time employees and one part-time employee. None of our employees are represented by a labor union. We consider our relations with our employees to be good. We plan to add additional staff as needed to handle all phases of our business.

RISK FACTORS

There are many factors that affect our business and the results of its operations, some of which are beyond our control.  The following is a description of some of the important factors that may cause the actual results of our operations in future periods to differ materially from those expected or desired.

RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS

REGULATORY OVERSIGHT OF OUR PRODUCTS AND SERVICES MAY INCREASE OUR COSTS TO MARKET OUR PRODUCTS AND SERVICES AND ADVERSELY AFFECT OUR ABILITY TO MARKET OUR PRODUCTS AND SERVICES.

Currently, there is limited Food and Drug Administration, or FDA, regulation of genetic tests. Within the field of personalized health and medicine, governmental and other entities may enact patient privacy and healthcare laws and regulations that may limit the generation and use of genomic variation data. "Genomic variation data" is the information obtained when scientists search the gene for differences across the entire human genome for changes and variations. To the extent that FDA laws and regulations limit the use of our products and services or impose additional costs on our customers, we may be unable to market effectively our products and services, and we may not generate sufficient revenue to sustain our operations. Furthermore, we may be directly subject to regulations as a provider of

diagnostic information. A diagnosis is the evaluation of a patient or a sample to determine what the status of the patient might be. The information that results from this evaluation is called "diagnostic information" and would include such information as height, weight, sex, age, blood pressure, sugar levels and many other pieces of data. The Secretary's Advisory Committee on Genetic Testing, an advisory panel to the Secretary of the U.S. Department of Health and Human Services, has recommended that the FDA expand its regulation of genetic testing to require FDA approval for all new genetic tests and labeling of genetic tests. If the FDA adopts this recommendation, it may require us, or our customers, to apply for FDA approval as a prerequisite to marketing genetic tests that incorporate our intellectual property. If the FDA were to deny any application of this kind, it could adversely affect our business, and we may be unable to generate sufficient revenue to sustain our operations.

To the extent that government regulations restrict the sale of our products and services or impose other costs, we may be unable to provide our products and services to our customers on terms sufficient to recover our expenses.

OUR SUCCESS WILL DEPEND, IN PART, ON HOW RAPIDLY THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRY IMPLEMENTS GUIDANCE FROM THE U.S. DEPARTMENT OF HEALTH AND THE FDA REGARDING A POTENTIAL EXPANSION OF REGULATION OF OUR INDUSTRY. WITHOUT THIS IMPLEMENTATION BY THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRY, WE MAY BE UNABLE TO MARKET EFFECTIVELY OUR TESTS AND SERVICES, AND WE MAY NOT GENERATE SUFFICIENT REVENUE TO SUSTAIN OUR OPERATIONS.

On November 3, 2003, the FDA issued draft guidance that encouraged drug and biologic developers to conduct pharmacogenomic tests during drug development and clarified how the FDA will evaluate the resulting data. "Pharmacogenomic tests" are clinical laboratory tests of all kinds to determine whether a drug is working or not working on a patient that is experiencing a particular illness or expressing a disease. It has only been recently that genetic scientists have been able to link genetic testing to the performance of a drug. The term is often used within the pharmaceutical industry to describe the testing of individuals for their genetic influences on the effectiveness of a drug, or more precisely, whether there is something in a person's genes that would either enhance or prevent the treatment of that individual's disease with a particular drug.

The FDA guidance provides specific criteria and recommendations on the submission of pharmacogenomic data in connection with Investigational New Drug Applications, New Drug Applications and Biological License Applications. Before any company or individual can treat a single human patient with a new chemical entity, often referred to as a NCE, or a new biological entity, referred to as a NBE, scientists must first prove that the potential drug is safe within existing treatment regimes. For example, new chemical entities used to treat cancer might be allowed to be much more toxic to other cells in the body than would a treatment for other less lethal diseases. Scientists file for permission to the FDA to treat human patients and package all the information into an application with the FDA called the `Investigational New Drug Application' or IND. The draft FDA guidance includes information on the type of data needed and how the FDA will or will not use such data in regulatory decisions. The FDA asked for voluntary submissions of research information in order to gain experience as the field of pharmacogenomics evolves. In addition, the FDA held a workshop in November 2003 to discuss its draft guidance and stated that the agency plans in the near future to issue final guidance on the co-development of a pharmacogenomic test and drug. Our success will depend, in part, on how rapidly the pharmaceutical and biotechnology industry implements the guidance and, accordingly, the validity of our test and services as a basis for identifying genomic variation and for correlating drug response with genomic variation. Without this implementation by the pharmaceutical and biotechnology industry, we may be unable to market effectively any test we may have as well as any of our services, and we may not generate sufficient revenue to sustain our operations.

PUBLIC OPINION ON ETHICAL ISSUES RELATED TO THE CONFIDENTIALITY AND APPROPRIATE USE OF GENETIC TESTING COULD REDUCE THE POTENTIAL MARKETS FOR OUR PRODUCTS AND SERVICES, WHICH COULD PREVENT US FROM GENERATING SUFFICIENT REVENUE TO SUSTAIN OUR OPERATIONS.

Public opinion on ethical issues related to the confidentiality and appropriate use of genetic testing results may influence governmental authorities to call for limits on, or regulation of the use of, genetic testing. In addition, governmental authorities or other entities may call for limits on, or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. The occurrence of any of these events could reduce the potential markets for our products and services, which could prevent us from generating sufficient revenue to sustain our operations.

For example, the FDA has approved a medication for use in African Americans called BilDil that was developed by a pharmaceutical company called NitroMed. Recently, articles have appeared accusing the FDA and NitroMed of `racial discrimination' and claiming that no drugs should be developed using genetic testing that might separate out individuals by `race, color or creed' without regard to the benefit which might be caused for the African American patient. According to such critics, the potential harm in the form of increased discrimination far outweighs the benefits. Several noteworthy genetic scientists have also voiced their opinions that our technology and technologies similar to those developed by NitroMed and others are discriminating and should not be developed or approved by the Federal, State or local governments.

IF WE DO NOT SUCCESSFULLY DISTINGUISH AND COMMERCIALIZE OUR PRODUCTS AND SERVICES, WE WILL NOT ATTRACT A SUFFICIENT NUMBER OF CUSTOMERS. ACCORDINGLY, WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS OR GENERATE REVENUE SIGNIFICANT ENOUGH TO SUSTAIN OUR OPERATIONS.

Numerous entities are attempting to identify genomic variation predictive of specific diseases and drug response and to develop products and services based on these discoveries. We face competition in these areas from pharmaceutical, biotechnology and diagnostic companies, academic and research institutions and government and other publicly-funded agencies, both in the United States and abroad, most of which have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than do we. Also, large pharmaceutical companies have their own internal research and development efforts that could surpass or eliminate our technology from the market. One of our key competitors is PPGx, Inc., a leading international developer and supplier of research-based pharmacogenomics services and products which launched its GeneTrials TM Bioinformatics Platform.

Our competitors may discover, characterize or develop important technologies applying genomics that are more effective than those technologies which we develop. Additionally, these competitors may obtain regulatory approvals for their drugs and diagnostics more rapidly than we do, which could limit our ability to market effectively our products and services. If our patent applications are not awarded or if our competitors in the field of genetic research develop and receive approval of patents that supersede our applications, we could be forced to cease the development of our products, services and technologies.

Some companies and governments are marketing or developing a number of databases and informatics tools to assist participants in the healthcare industry and academic researchers in the management and analysis of genomic data. "Informatics tools" is a term used by scientists to describe software, computer programs or mathematical programs that analyze data sets or collected information that is stored in data files. Such computer programs can take an apparently meaningless block of numbers that are recorded from a laboratory experiment and evaluate trends, look for statistical relationships and group or segregate the numbers according to their levels of importance to the scientist. We believe our competitors have developed or plan to develop databases containing gene sequence, genomic variation or other genomic information and are marketing or plan to market their data to pharmaceutical and biotechnology companies or plan to make freely available their databases.

WE ALSO FACE SERIOUS COMPETITION FROM COMPETITORS IN THE FORENSIC DNA TESTING MARKET, CONSUMER DNA PRODUCTS MARKET AND THE CONTRACT SERVICES OUTSOURCING MARKET AND IF WE ARE UNABLE TO COMPETE IN THESE MARKETS, WE WILL NOT GENERATE REVENUES SIGNIFICANT ENOUGH TO SUSTAIN OUR OPERATIONS.

We remain skeptical that the consumer market for our products, which is mainly supported by genealogy enthusiasts, will remain strong enough to justify significant expenditures to develop new products. It is possible that the application of genetic testing to genealogy is a passing fad and that public interest in genetic genealogy testing will substantially decrease. If public interest decreases, our revenues generated from our products sold to the consumer market will likely decrease.

ALTHOUGH MANY OF OUR COMPETITORS USE SIMILAR TECHNOLOGIES, THEIR APPROACH TO DATA ANALYSIS MIGHT BE COMPLETELY DIFFERENT AND MORE EFFICIENT THAN OURS. THIS MAY CAUSE CONSUMERS TO CHOOSE OUR COMPETITOR'S PRODUCTS AND SERVICES OVER OURS AND FORCE US TO CHANGE OUR PRODUCTS AND SERVICES TO THE MORE EFFICIENT FORM OF DATA ANALYSIS OF OUR COMPETITORS.

We evaluate the mixture of genetic inheritance within individuals and relate that information to biological information. Another approach to finding similar information is to evaluate large groups of individuals in `pools' of DNA and look

for differences or similarities amongst the data. Our approach may prove to be too cumbersome for the industry to adopt, and the industry may not want to accept it because it is `too personal', meaning that overall `generic' descriptors might be more immediately valuable to the industry than knowing whether or not a single individual will respond favorably to a medication treatment. The `pooled' approach is more often the approach that many pharmaceutical companies and our competitors practice. Additionally, our technology depends upon looking at individuals within a population pool and therefore projecting the results of many individual samples upon a general population that may not be clearly identified. Our competitors rely upon self-reporting descriptors such as `African American', `Caucasian' or `Hispanic' to pool their DNA samples. We do not presuppose the reported identity of an individual but rather look at their inherited genetic markers that tell us what group to associate them with. This approach may not be accepted by the industry, and a pooled method, although not as accurate, may become the standard. This would significantly impact our ability to promote, sell, license or further develop our products, services or technologies within any of our current markets.

WE HAVE HAD LOSSES SINCE OUR INCEPTION WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES. WE MAY NEVER BE ABLE TO REDUCE THESE LOSSES, WHICH WILL REQUIRE US TO SEEK ADDITIONAL DEBT OR EQUITY FINANCING THAT MAY NOT BE AVAILABLE TO US.

We incorporated under the laws of the State of Utah on January 3, 1983 as Lexington Energy, Inc. We have incurred losses and experienced negative operating cash flow since our formation. For the year ended December 31, 2006, we had a net loss of $12,348,364 and a working capital deficit of $4,991,305. We expect to continue to incur significant expenses. Our operating expenses have been and are expected to continue to outpace revenues and result in significant losses in the near term. We may never be able to reduce these losses, which will require us to seek additional debt or equity financing. If such financing is available, you may experience significant dilution.

WE CONTINUE TO BE A DEVELOPMENTAL STAGE ENTERPRISE COMPANY AND WE DO NOT KNOW WHEN OUR PHARMACOGENOMICS PRODUCTS WILL FINISH THEIR DEVELOPMENT.

We continue to devote substantially all of our efforts to establishing our business products, and our principal operations have not commenced yet. We are still in the research and development phase of our pharmacogenomics product and services and have a few years prior to any of these products being developed.

OUR INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE FINANCING.

In their report dated March 8, 2007, our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern in our financial statements for the years ended December 31, 2006 and 2005. The auditors raised concerns about our ability to continue as a going concern as a result of recurring losses from operations, a working capital deficit, and our need for a significant amount of capital financing to proceed with our business plan. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible.

WE NEED IMMEDIATE FUNDS AND MAY NOT BE ABLE TO OBTAIN ANY ADDITIONAL FINANCING IN THE AMOUNTS OR AT THE TIMES THAT WE MAY REQUIRE THE FINANCING. ADDITIONALLY IF WE OBTAIN FINANCING, IT MAY NOT BE ON ACCEPTABLE TERMS. WE WILL HAVE TO CURTAIL OUR BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING.

We may need immediate funds and may not be able to obtain any additional financing in the amounts or at the times that we may require the financing or, if we do obtain any financing, that it would be on acceptable terms because of the following:

-

we have limited assets to pledge as security for the loan;

-

we are in poor financial condition; and

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we may be viewed as a high market risk.

In addition, we have entered into an Investment Agreement with Dutchess Private Equities Fund, II, L.P. Dutchess has committed to purchase our common stock on a monthly basis up to an aggregate purchase price of $35 million over a two-year period, which expires during May 2007. The Dutchess Agreement requires us to put stock to Dutchess each time we raise funds. If Dutchess were to sell the stock we put to them, it will likely have a depressive effect on the market price of our common stock. This decrease in our market price may hinder our ability to obtain necessary funding from certain sources, including obtaining additional funding from the sale of our securities or obtaining loans

and grants from various financial institutions where possible. Our failure to obtain sufficient additional financing could result in the delay or abandonment of some or all of our development, expansion and expenditures, which could harm our business and the value of our common stock.

WE MAY NOT HAVE ADEQUATE PATENT PROTECTION AND CONFIDENTIALITY AGREEMENTS FOR OUR PROPRIETARY TECHNOLOGY. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THERE IS A RISK THAT THEY WILL BE INFRINGED UPON OR THAT OUR TECHNOLOGY INFRINGES UPON ONE OF OUR COMPETITOR'S PATENTS. AS A RESULT, WE MAY EXPERIENCE A LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY HARMED.

To the extent possible, we anticipate filing patent applications for protection on future products that we develop. It is possible that patents we apply for may not be issued and that any current or future patents will not afford us commercially significant protection of our products, or that we will not have adequate resources to enforce our patents. Inasmuch as we intend to sell our products in foreign markets, we also intend to seek foreign patent protection for our products and technologies. The patent laws of other countries may differ from those of the United States as to patentability of our products and technologies, and the degree of protection afforded. Our products may infringe on the patents of others, and we may not have the financial or other resources necessary to successfully defend a claim of violation of proprietary rights. We also rely on confidentiality and nondisclosure arrangements with our employees and entities we do business with. These agreements may not provide us with meaningful protection.

IF WE ARE UNABLE TO RETAIN THE SERVICES OF MESSRS. RICHARD GABRIEL, TONY FRUDAKIS AND HECTOR GOMEZ, WE MAY NOT BE ABLE TO CONTINUE OPERATIONS.

Our success depends to a significant extent upon the continued service of Mr. Richard Gabriel, our President and Chief Executive Officer, Dr. Tony Frudakis, our Founder and Chief Scientific Officer, and Dr. Hector Gomez, our Chairman of the Board and Chief Medical Officer. We do not maintain key-man insurance on the lives of Messrs. Gabriel, Frudakis, and Gomez. If Messrs. Gabriel, Frudakis, and Gomez were to resign, the loss could result in loss of sales, delays in new product development and diversion of management resources, and we could face high costs and substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successor obtains the necessary training and experience. In addition, in order to successfully implement and manage our business plan, we are dependent upon, among other things, successfully recruiting qualified personnel who are familiar with the specific issues facing the deciphering of complex genetic traits. In particular, we must hire and retain experienced management personnel to help us continue to grow and manage our business, and skilled genetic technicians to further our research and development efforts. Competition for qualified personnel is intense. If we do not succeed in attracting new personnel or in retaining and motivating our current personnel, our business could be harmed.

WE HAVE NOT PAID OUR DUTCHESS NOTE PRINCIPAL PAYMENTS IN ACCORDANCE WITH THE TERMS OF THE NOTES AND WE MAY INCUR PENALTIES AND FEES RELATED TO THESE LATE PAYMENTS.

We have issued to Dutchess Convertible Notes and Convertible Debentures.  We have made payments on the Convertible Notes, however our payments have not been sufficient to meet all payment requirements for all of the Notes and we are in default.  As a result, Dutchess has the right to convert the residual amount of the Notes to a convertible debenture which can convert into our common stock at the lesser of (i) 50% of the lowest closing bid price during the fifteen trading days immediately preceding the maturity date or (ii) 100% of the lowest bid price for the twenty trading days immediately preceding the conversion date.  At December 31, 2006, the Dutchess December Note was not paid when due.  Dutchess had the right to switch the residual amount of $581,158 on the Dutchess December Note to a three-year convertible debenture; however, they had not exercised this right at December 31, 2006 nor at the time this report was issued.

We are in default of each of the Dutchess Notes due to not making the minimum principal payments.  Dutchess has the right to charge us liquidated damages of up to 30% of the face amount of these notes.  Dutchess has not exercised this right at December 31, 2006 nor at the time this report was issued.  We have accrued $2.1 million at December 31, 2006 for any such penalties and fees.

RISKS RELATED TO OUR COMMON STOCK

"PENNY STOCK" RULES MAY MAKE BUYING AND SELLING OUR SECURITIES DIFFICULT.

Trading in our securities is subject to the Securities and Exchange Commission’s “penny stock” rules and it is

anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.

WE MAY NOT HAVE SUFFICIENT SHARES AVAILABLE TO FULLY ACCESS THE EQUITY LINE WITH DUTCHESS AND MAY NEED TO SEEK ADDITIONAL CAPITAL TO MEET OUR WORKING CAPITAL NEEDS.

We may only issue a put to Dutchess if we have registered the shares of common stock. We have registered  962,500,000 shares that we may issue pursuant to the equity line and as of February 15, 2007 we have already issued 291,438,008 shares pursuant to prior registration statements. We have assumed that we will not issue more than the 962,500,000 shares we already registered pursuant to the exercise of our put right under the Investment Agreement, although the number of shares that we will actually issue pursuant to that put right may be more than or less than 962,500,000 shares depending on the trading price of our common stock. On February 15, 2007, the closing price of our common stock was $0.016. Assuming we issue puts only at $0.016, we would be able to access approximately $10.7 million of our equity line pursuant to the Investment Agreement based upon the shares we have registered and are unissued. We currently have no intent to exercise the put right in a manner that would require us to register more shares than the 962,500,000 shares we have registered, but if we were to exercise the put right in that manner, we would be required to file a subsequent registration statement with the Securities and Exchange Commission and for that registration statement to be deemed effective prior to the issuance of any such additional shares.

If we can not raise sufficient funds pursuant to our Investment Agreement with Dutchess, for our capital requirements, we will need to seek additional funding which may not be available on terms acceptable to us or at all.

DUTCHESS MAY SHORT SELL OUR STOCK DURING THE PERIODS WE ISSUE A PUT WHICH MAY CAUSE OUR STOCK PRICE TO DECREASE.

Pursuant to the Investment Agreement, Dutchess has the right to short sell the amount of stock we expect to issue to them during the period we issue a put. If Dutchess actually sells our stock short, our stock price may decrease. If our stock price decreases, you may lose some or all of your investment.

EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF SECURITIES PURSUANT TO OUR INVESTMENT AGREEMENT WITH DUTCHESS.

The sale of shares pursuant to our Investment Agreement with Dutchess will have a dilutive impact on our stockholders. As a result, our net income per share, if any, could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price at the time we exercise our put option, the more shares we will have to issue to Dutchess to draw down on the full equity line with Dutchess. If our stock price decreases, then our existing stockholders would experience greater dilution.

DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.

The common stock to be issued under our agreement with Dutchess will be purchased at a 4% discount to the average of the two lowest closing bid prices of our common stock during the five trading days after our notice to Dutchess of our election to exercise our put right. These discounted sales could cause the price of our common stock to decline, and you may not be able to sell our stock for more than you paid for it.

OUR STOCK PRICES HAVE BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.

The public market for our common stock has historically been very volatile. Any future market price for our shares is likely to continue to be very volatile. This price volatility may make it more difficult for you to sell shares when you want at prices you find attractive. We do not know of any one particular factor that has caused volatility in our stock price. However, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. Broad market factors and the investing public's negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the market for our common stock is limited and a larger market may never develop or be maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, this may make it difficult or impossible for you to sell our common stock.