IGNE IGENE Biotechnology Inc (CE)

Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

Igene Biotechnology, Inc. ("Igene") was incorporated under the laws of the State of Maryland on October 27, 1981 as "Industrial Genetics, Inc." Igene changed its name to "IGI Biotechnology, Inc." on August 17, 1983 and to "Igene Biotechnology, Inc." on April 14, 1986. Igene is located in Columbia, Maryland and is engaged in the business of industrial microbiology and related biotechnologies. Igene has an operational subsidiary in Chile and through February 2003 had a subsidiary in Norway. Igene is engaged in the business of developing, marketing, and manufacturing specialty ingredients for human and animal nutrition. Igene was formed to develop, produce and market value-added specialty biochemical products. Igene is a supplier of natural astaxanthin, an essential nutrient in different feed applications and a source of pigment for coloring farmed salmon species. Igene is also venturing to supply astaxanthin as a nutraceutical ingredient. Igene is focused on fermentation technology, pharmacology, nutrition and health in its marketing of products and applications worldwide.

Igene has devoted its resources to the development of proprietary processes to convert selected agricultural raw materials or feedstocks into commercially useful and cost effective products for the food, feed, flavor and agrochemical industries. In developing these processes and products, Igene has relied on the expertise and skills of its in-house scientific staff and, for special projects, various consultants.

In an effort to develop a dependable source of production, on March 18, 2003, Tate and Lyle and Igene announced a 50:50 joint venture to produce AstaXin(R) for the aquaculture industry. Production utilizes Tate & Lyle's fermentation capability together with the unique technology developed by Igene. Part of Tate & Lyle's existing Selby, England, citric acid facility was modified to include the production of 1,500 tons per annum of astaxanthin. Tate & Lyle's investment of approximately $25 million includes certain of its facility assets that were previously used in citric acid production.

The accounts of our other wholly-owned subsidiary, Igene Chile, are included in the consolidation of these financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

Igene considers cash equivalents to be short-term, highly liquid investments that have original maturities of less than 90 days. These include interest bearing money market accounts.

Accounts receivable are stated at the amount management expects to collect from the outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based upon its assessment of the current collection status of individual accounts. Delinquent amounts that are outstanding after management has conducted reasonable collection efforts, are written off through a charge to the valuation allowance and a credit to accounts receivable. During 2005 assets were sold for less then the initial agreed upon price with the distributor and the $50,000 balance remaining was written off.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

The investment in the Joint Venture is accounted for under the equity method whereby the Company's 50% ownership percentage in the Joint Venture is reflected as an asset in the consolidated balance sheet and the changes in the Joint Venture's equity as a result of its operations is reflected in the Company's consolidated statement of operations. The Company evaluates its investment in the Joint Venture for impairment, as it does for all long term assets. The Company can not recognize the loss of the Joint Venture beyond its investment in and advances to the Joint Venture or the amount of debt guaranteed by Igene, if any. This excess loss, and all future losses incurred as a result of the Joint Venture, that are in excess of the Company's investment and advances, are suspended until the point that the profits of the Joint Venture, if any, exceed the incurred losses. The accounting policies followed by the Joint Venture are in conformity with accounting principles generally accepted in the United States of America.

On June 15th 2005, the Company executed a limited guarantee for one of the debt obligations of the Joint Venture. Under the terms of the limited guarantee, the Company has agreed to guarantee up to 4,200,000 British Pounds sterling (approximately $8,237,000 at February 28, 2007). The Company subsequently entered into an agreement with Tate & Lyle (the other 50% partner in the Joint Venture) whereby Tate & Lyle has agreed to arrange funds for the Joint Venture, without recourse to Igene, until the Joint Venture produces a regular monthly cash flow, as defined, for four consecutive months. The Joint Venture has not met the cash flow requirements. The Company has subsequently received a full release from the guarantee.

For financial reporting purposes, research, development and pilot plant scale-up costs are charged to expense as incurred.

Property and equipment are stated at cost less accumulated depreciation and amortization computed using the straight- line method. Premises and equipment are depreciated over the useful lives of the assets, which generally range from three to ten years for furniture, fixtures and equipment, three to five years for computer software and hardware. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The cost of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred.

The preparation of financial statements in conformity with accounting principles generally acceptable in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Since the day-to-day operations of Igene's foreign subsidiary in Chile are dependent on the economic environment of the parent's currency, the financial position and results of operations of Igene's foreign subsidiary are determined using Igene's reporting currency (US dollars) as the functional currency. All exchange gains and losses from remeasurement of monetary assets and liabilities that are not denominated in US dollars are recognized currently in income.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value because of the relatively short maturity of these instruments. Management believes the carrying amount of long-term debt approximates fair value because of similar current rates at which Igene could borrow funds with consistent remaining maturities.

Prior to January 1, 2006, the Company accounted for its stock based compensation plans under the recognition and measurement principles of APB opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock option based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", to stock-based employee compensation for the year ended December 31, 2005:

 2005
 _____________
Net loss, as reported $ (2,037,707)

Pro forma stock-based employee compensation
 expense determined under fair value based
 method net of related tax effects (38,677)
 _____________
Pro forma net loss $ (2,076,384)
 =============
Net loss per Share:
 Basic - as reported $ (0.02)
 Basic - pro forma $ (0.02)

 Diluted - as reported $ (0.02)
 Diluted - pro forma $ (0.02)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the year ended December 31, 2005:

 2005
 _____________
Dividend yield ---
Expected volatility 136.00%
Risk-free interest rate 4.63%
Expected lives in years 10
Fair value of options granted $ 0.027

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"("SFAS 154"), which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 requires retrospective application to prior periods' financial statement of a voluntary change in accounting principal unless it is not practical. SFAS 154 is effective for accounting changes and corrections of errors made in

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

fiscal years beginning after December 15, 2005, and is required to be adopted by the Company in the first quarter of fiscal 2007. Although the Company will continually evaluate its accounting policies, management does not currently believe adoption will have a material impact on the Company's results of operations, cash flows or financial position.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number
157 - Fair Value Measurements ("SFAS157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements.

Prior to SFAS 157, there were different definitions of fair value and limited guidance for applying those definitions in GAAP. Moreover, that guidance was dispersed among the many accounting pronouncements that require fair value measurements. SFAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.

SFAS 157 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, if any, that SFAS 157 will have on its financial position, results of operations and cash flows.

In June 2006, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109." FIN No. 48 provides a comprehensive model for the recognition, measurement and disclosure in the financial statements of uncertain tax positions taken or expected to be taken on a tax return. The Company will adopt FIN No. 48 effective beginning on January 1, 2007. The Company is currently evaluating the impact this interpretation may have on its future financial position, results of operations, earnings per share, or cash flows.

In September 2006, the Securities and Exchange Commission issued SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 was issued to address diversity in practice in quantifying financial statement misstatements. Current practice allows for the evaluation of materiality on the basis of either (1) the error quantified as the amount by which the current year income statement was misstated ("rollover method") or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated ("iron curtain method"). The guidance provided in SAB 108 requires both methods to be used in evaluating materiality ("dual approach"). SAB No. 108 permits companies to initially apply its provisions either by (1) restating prior financial statements as if the dual approach had always been used or (2) recording the cumulative effect of initially applying the "dual approach" as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. There were no matters warranting the Company's consideration under the provisions of SAB No. 108 and, therefore, it did not have an impact on the Company's financial position, results of operations, earnings per share or cash flows.

During 2006, 7,375 shares of redeemable preferred stock, with a recorded aggregate value of $141,600, were converted into 14,750 shares of common stock. This included the 8% Cumulative Convertible Preferred Stock, Series B and has relieved the Company of this amount of long-term debt.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

During the course of 2006 and 2005, Fermic, Igene's manufacturing agent, earned 545,569 and 4,724,416 shares, respectively, of common stock as part of the manufacturing agreement. Fermic earned 2,250 shares of common stock for each kilogram pure astaxanthin produced and delivered as part of the agreement. The average price is based on the market value of the shares at the time the product was produced. Fermic has earned all 20,000,000 shares available under the contract. The 545,569 shares were earned at an average price of $.056 per share for 2006, and 4,724,416 shares were earned at an average price of $.068 per share for 2005.

During 2006, 312,000 shares of common stock were issued as part of employee stock option exercises. The Company received $10,300 based on an average exercise price of $.033 per share.

During 2006, 7,884 warrants were exercised for $788. 7,884 new shares of common stock were issued pursuant to the exercise.

During 2006, 1,000,000 shares of common stock were issued to the Joint Venture's new Vice President of Manufacturing as part of his agreement in accepting the position. The cost was expensed at a cost of $.05 per share or $50,000.

During 2006 and 2005, Igene recorded dividends in arrears on its 8% Redeemable Preferred Stock, Series A at $.64 per share aggregating $8,306 and $11,846 respectively, on such preferred stock which has been removed from paid-in capital and included in the carrying value of the redeemable preferred stock. (see also note 9).

The Joint Venture is potentially subject to the effects of a concentration of credit risk in accounts receivable. Accounts receivable is substantially composed of receivables from customers in Chile, which is an important market for Igene's product, AstaXin(R). Chile has from time to time experienced political unrest and currency instability. Because of the volume of business transacted by the Joint Venture in Chile, recurrence of such unrest or instability could adversely affect the businesses of its customers in Chile or the Joint Venture's ability to collect its receivables from these customers. In order to minimize risk, the Joint Venture strictly evaluates the companies to which it extends credit and all prices are denominated in US dollars so as to minimize currency fluctuation risk. Losses due to credit risks in accounts receivable are expected to be immaterial.

Laboratory equipment and fixtures $ 181,042
Pilot plant equipment and fixtures 91,503
Office furniture and fixtures 36,990
 ___________
 309,535
Less accumulated depreciation (275,964)
 ___________
 $ 33,571
 ===========

On March 18 2003, the Company entered into a Joint Venture Agreement with Tate & Lyle Fermentation Products Ltd. ("Tate"). Pursuant to a Joint Venture Agreement, the Company and Tate agreed to form a joint venture (the "Joint Venture") to manufacture, market and sell Astaxanthin and derivative products throughout the world for all uses other than as a nutraceutical or otherwise for direct human

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

consumption. Tate contributed $24,600,000 in cash to the Joint Venture, while the Company transferred to the Joint Venture its technology relating to the production of astaxanthin and assets related thereto. These assets continue to be used by the Joint Venture in the same manner as historically used by the Company. The Company and Tate each have a 50% ownership interest in the Joint Venture and equal representation on the Board of Directors of the Joint Venture. The value of the Company's initial investment in the Joint Venture has been recorded at an amount equal to Igene's historical book value. As the cost of the Company's technology and intellectual property has been previously expensed and has a carrying amount of zero, the investment in the Joint Venture was originally recorded with a book value of $316,869, which represents the unamortized production costs contributed to the Joint Venture. The Company also contributed $6,000 to the capital of the Joint Venture.

Production utilizes Tate's fermentation capability together with the unique technology developed by Igene. Part of Tate's existing Selby, England, citric acid facility was modified to produce up to 1,500 tons per annum of this astaxanthin. Tate's investment of approximately $25 million includes certain of its facility assets previously used in citric acid production. Sales and cost of sales activity are now recorded as part of the earnings of the unconsolidated venture.

As a result of the Joint Venture, the production, sales and marketing of astaxanthin now take place in the unconsolidated Joint Venture. From inception on March 18, 2003 through December 31, 2006, the Joint Venture's results of operations included the following: Gross profit from inception was a negative $15,165,979 on sales of $27,772,879, less manufacturing cost of $42,938,858. Selling and general and administrative expenses were $13,090,287, and interest expense was $3,588,534. The resulting loss was $31,844,800. Igene's 50% portion of the Joint Venture loss was $15,922,400.

Because the Company accounts for its investment in the Joint Venture under the equity method of accounting, it would ordinarily recognize a loss representing its 50% equity interest in the loss of the Joint Venture or the amount that is guaranteed by the Company, if any. However, losses in the Joint Venture are recognized only to the extent of the investment in and advances to the Joint Venture. Losses in excess of this amount are suspended from recognition in the financial statements and are carried forward to offset Igene's share of the Joint Venture's future income, if any.

On June 15, 2005, the Company executed a limited guarantee for one of the debt obligations of the Joint Venture. Under the terms of the limited guarantee, the Company will guarantee up to 4,200,000 British Pounds sterling (approximately $8,237,000 at February 28, 2007). The Company subsequently entered into an agreement with Tate & Lyle (the other 50% partner in the Joint Venture) where Tate & Lyle has agreed to arrange funds for the Joint Venture, without recourse to Igene Biotechnology, Inc., until the Joint Venture produces a regular monthly cash flow, as defined, for four consecutive months. The Joint Venture has not met the cash flow requirements. The Company has subsequently received a full release from the guarantee.

At December 31, 2006, prior to the recognition of its portion of the Joint Venture loss, Igene's investment in the Joint Venture consisted of $322,869 and its net advances to the Joint Venture amounted to $1,169,112, for a total of $1,491,981. For the year ended December 31, 2005, Igene recognized $374,527 of its share of a $5,931,049 loss. For the year ended December 31, 2006, Igene recognized losses to the extent of the increase in advances of $109,147. The remainder of approximately 5 million, is suspended and will be carried forward to offset Igene's share of earnings from the Joint Venture, if any. The balance in the advances to and investment in Joint Venture account on the Company's financial statements is zero at December 31, 2006.

 December 31,
 2006
 _______________
 (Unaudited)
ASSETS
CURRENT ASSETS
 Cash $ 2,612,000
 Accounts Receivable 2,524,000
 Inventories 11,469,000
 _______________
 16,605,000

 Fixed Assets 20,519,000
 Intellectual Property 24,614,000
 _______________
 TOTAL ASSETS $ 61,738,000
 ===============

LIABILITIES AND EQUITY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 30,123,000
 Working capital loan 11,752,000
 _______________
 TOTAL LIABILITIES 41,875,000

Equity 19,863,000
 _______________
 TOTAL LIABILITIES AND EQUITY $ 61,738,000
 ===============

 Period from
 initial investment to
 December 31, 2006
 _____________________
 (Unaudited)

Net Sales $ 27,772,879
Less: manufacturing cost (42,938,858)
 _____________________
Gross Profit (Loss) (15,165,979)
Less: selling, general and administrative (13,090,287)
 _____________________
Operating Loss (28,256,266)
Interest Expense (3,588,534)
 _____________________
Net Loss $ (31,844,800)
 =====================
Igene's 50% equity interest in the net loss $ (15,922,400)
Igene's Investment in and Advances to the Joint Venture $ (1,491,981)
 _____________________
Igene's suspended loss $ (14,430,419)
 =====================

 Year Year
 Ended Ended
 December 31, 2006 December 31, 2005
 _________________ _________________
 (Unaudited) (Unaudited)
Net Sales $ 10,027,656 $ 10,961,223
Less: manufacturing cost (14,165,042) (17,633,816)
 _________________ _________________
Gross Profit (Loss) (4,137,386) (6,672,593)
Less: selling, general and admin (3,874,710) (3,947,577)
 _________________ _________________
Operating Loss (8,012,096) (10,620,170)
Interest Expense (2,195,607) (1,241,927)
 _________________ _________________
Loss before tax $ (10,207,703) $ (11,862,097)
 ================= =================
50% equity interest Igene $ (5,103,852) $ (5,931,049)
 ================= =================

Igene's additional Investment in
 and Advances to the Joint Venture $ (109,147) $ (374,527)
 _________________ _________________
 Igene's incremental suspended loss $ (4,994,705) $ (5,556,522)
 ================= =================

As a result of the Joint Venture, the production, sales and marketing of Astaxanthin now take place in the unconsolidated Joint Venture. For the years ended 2006 and 2005, Igene's portion of the Joint Venture loss was $5,103,852 and $5,931,049, respectively.

On March 29, 2007 the Company was informed by their 50% partner in the Joint Venture, Tate and Lyle, that they determined to write down their portion of the investment in the Joint Venture. There has been no impairment charge reflected by the Joint Venture as of December 31, 2006.

On July 17, 2002, Igene issued and sold $300,000 in aggregate principal amount of 8% convertible debentures, 50% each to certain directors of Igene. These debentures are convertible into shares of Igene's common stock at $.03 per share based on the market price of Igene's shares at the time the debentures were agreed to. In consideration of the commitment to purchase the 8% convertible debenture, these directors also received an aggregate of 10,000,000 warrants to purchase common stock at $.03 per share. These debentures, if not converted earlier, become due on July 17, 2012.

On February 22, 2002, Igene issued and sold $1,000,000 in aggregate principal amount of 8% convertible debentures, 50% each to certain directors of Igene. These debentures are convertible into shares of Igene's common stock at $.04 per share based on the market price of Igene's shares at the time the debentures were agreed to. In consideration of the commitment to purchase the 8% convertible debenture, these directors also received an aggregate of 25,000,000 warrants to purchase common stock at $.04 per share. These debentures, if not converted earlier, become due on February 22, 2012.

In March 2001, Igene issued $1,014,211 of 8%, 10-year, convertible debentures to certain directors of Igene in exchange for the cancellation of $800,000 of demand notes payable (including accrued interest of $14,212) and $200,000 in cash. $600,000 of these demand notes were issued during 2000 and $200,000 were issued subsequently. These debentures are convertible into 10,142,110 shares of Igene's common stock at $.08 per share. These directors also received 10,142,110 warrants to purchase common stock at $.08 per share. Interest is payable at maturity.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

In March 2001, certain directors of Igene also committed to provide additional funding in the form of 8%, 10-year, convertible debentures in the amount of $1,500,000. In consideration of this commitment, these directors also received 18,750,000 warrants to purchase common stock at $.08 per share. These debentures are convertible into 18,750,000 shares of Igene's common stock at $.08 per share. Interest is payable at maturity.

In December 2001, Igene issued $1,000,000 of 6%, 3-year convertible debentures in connection with the purchase of ProBio, now known as Igene Norway AS. These convertible debentures are convertible into the Company's stock at a price of $.10 per share, 10,000,000 shares in total. Accrued interest on this note is due every six months. Of these $295,000 have been converted to common stock. These notes have been repaid in full as of February 23, 2007 (see note 17).

The warrants issued in connection with the above debt totaling 66,427,651 warrants have been valued at $1,896,094 utilizing the Black Scholes model. In addition, there was a beneficial conversion feature due to the resulting bond discount. The total discount resulting from the valuation of the warrants and the beneficial conversion feature was $3,792,188 which is being amortized over the life of the debt (ten years).

Convertible debentures are summarized as follows as of December 31, 2006:

 Accrued
 Principal Interest
 ____________ ____________
8%, 10-year, convertible debenture issued 7/17/02 $ 300,000 $ 106,718
8%, 10-year, convertible debenture issued 2/22/02 1,000,000 384,877
8%, 10-year, convertible debenture issued 3/1/01 1,014,212 473,137
8%, 10-year, convertible debenture issued 3/27/01 1,500,000 654,180
10%, 3-year, convertible debenture issued 11/30/01 705,000 46,570
 ____________ ____________
 $ 4,519,212 $ 1,665,482
Less current maturities (705,000) (46,570)
Less unamortized debt discount (1,710,768) ---
 ____________ ____________
 $ 2,103,444 $ 1,618,912
 ============ ============

This long term debt, approximately $5,800,000 which was scheduled to become payable in March 2003, had been extended to be due March 2006. It has been extended a second time to be due March 2009. Management felt any attempts to satisfy the debt on it's original due date would have had materially adverse effects on the Company.

As a part of the terms of the first extension of the debt, the exercise prices of the warrants and any conversion features were discounted by 25%, thus a $.10 warrant is now convertible at $.075 cents. As part of the terms of the second extension of the debt, the exercise prices of the warrants and any conversion features were discounted again by 25%, thus a $.075 warrant is now convertible at $.056 cents.

Beginning November 16, 1995 and continuing through May 8, 1997, Igene issued promissory notes to certain directors for aggregate consideration of $1,082,500. These notes specify that at any time prior to repayment the holder has the right to convert the notes to common stock of Igene at prices ranging from $0.05 per share to $0.135 per share, based on the market price of common shares at the respective issue dates. The notes were convertible in total into 13,174,478 shares of common stock. As a result of the extensions they are now convertible into 23,421,273 shares of common stock.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

Concurrently, with each of the $1,082,500 of promissory notes, the holders also received 13,174,478 warrants for an equivalent number of shares at the equivalent price per share. The warrants expire ten years from the date of issue of the notes. As a result of the extension of debt the warrant exercise prices were reduced by 25%. These notes were modified in conjunction with the 1998 rights offering to be due on March 31, 2003, and have been extended to March 31, 2009 as part of the extension. The notes bear interest at the prime rate.

As part of the rights offering in March 1998, Igene issued $5,000,000 of its 8% Notes due March 31, 2003 and 50,000,000 warrants to purchase one share of common stock at an exercise price of $0.10 per share expiring March 31, 2008. The maturity date of these notes had been extended to March 31, 2006, and the exercise price reduced to $.075 per share. The maturity date of these notes have again been extended to March 31, 2009, and the exercise price reduced to $.056 per share.

The warrants issued in connection with the above debt totaling 65,168,639 warrants have been valued at $731,127 utilizing the Black Scholes model at March 31, 2003. In addition, as a result of the repricing of the warrants in March 2006, the warrants were re-value at $2,663,310. The $1,082,500 of convertible debt has a beneficial conversion feature in addition to the valuation of the related warrants. The total discount resulting from the valuation of the warrants and the beneficial conversion was $3,082,676 which is being amortized over the life of the debt (three years).

Notes Payable are summarized as follows as of December 31, 2006:

 Accrued
 Principal Interest
 ____________ ____________
Long-term unsecured notes payable, bearing interest
 at prime, scheduled to mature
 March 31, 2003, extended to March 31,
 2009, convertible into common stock $ 1,082,500 $ 702,734
Long-term unsecured notes payable, bearing interest
 at 8%, scheduled to mature March 31, 2003,
 extended to March 31, 2009 4,759,767 3,334,184
 ____________ ____________
 $ 5,842,267 $ 4,036,918
Less unamortized debt discount (2,226,378) ---
 ____________ ____________
 $ 3,615,889 $ 4,036,918
 ============ ============

Combined aggregate amounts of maturities for all convertible debentures and notes payable are as follows:

 Year Amount
______ ____________
 2007 $ 705,000
 2008 ---
 2009 5,842,267
 2010 ---
 2011 2,514,212
 2012 1,300,000

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

Each share of redeemable preferred stock is entitled to vote on all matters requiring shareholder approval as one class together with holders of common stock. Each share of redeemable preferred stock is entitled to two votes and each share of common stock is entitled to one vote.

Redeemable preferred stock is convertible at the option of the holder at any time, unless previously redeemed, into shares of Igene's common stock at the rate of two shares of common stock for each share of preferred stock (equivalent to a conversion price of $4.00 per common share), subject to adjustment under certain conditions.

Shares of redeemable preferred stock are redeemable for cash in whole or in part at the option of Igene at any time at the stated value plus accrued and unpaid dividends to the redemption date. Dividends are cumulative and payable quarterly on January 1, April 1, July 1 and October 1, since January 1, 1988.

Mandatory redemption of Series A preferred stock was to be made in October 2002. As Igene is operating at a negative cash flow and negative earnings, Maryland law does not allow for the redemption of these shares. As such they will remain outstanding and continue to accrue dividends until such time as Igene is able to undertake redemption, though there can be no assurance this will develop. Igene does not expect to be able to redeem the Series A preferred stock unless, after giving effect to such redemption (a) the Company would be able to pay its indebtedness in the usual course of business and (b) the Company's total assets would be greater than the sum of its total liabilities plus the amount that would be needed if the Company were to be dissolved as of the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

In December 1988, as part of an overall effort to contain costs and conserve working capital, Igene suspended payment of the quarterly dividend on its preferred stock. Resumption of the dividend will require significant improvements in cash flow. Unpaid dividends cumulate for future payment or addition to the liquidation preference or redemption value of the preferred stock. As of December 31, 2006, total dividends in arrears on Igene's preferred stock equal $130,045 (or $11.68 per share) on Igene's Series A and are included in the carrying value of the redeemable preferred stock.

In June of 2001, the stockholders approved the 2001 Stock Option Plan (the "2001 Plan"), which succeeds the 1997 Stock Option Plan (the "1997 Plan"), which succeeded Igene's 1986 Stock Option Plan (the "1986 Plan"), as amended. All outstanding, unexercised options granted under the 1997 and 1986 Plans remain outstanding with unchanged terms. The number of shares authorized for issuance under the 2001 Plan is 55,000,000. This is in addition to the 20,000,000 shares authorized for issuance under the 1997 Plan, and the 2,000,000 shares authorized for issuance under the 1986 Plan.

 2006 2005
 ______________________ _______________________
 Weighted Weighted
 Average Average
 Exercise Exercise
 Number Price Number Price
 __________ _________ __________ __________
Options outstanding
 and exercisable,
 beginning of year 48,427,750 $ .061 46,927,750 $ .061
Options granted --- --- 1,500,000 $ .027

Options exercised 312,000 $ .033 --- ---
Options forfeited,
 or withdrawn with
 consent of holders 1,600,000 $ .100 --- ---
Options expired 1,670,750 $ .050 --- ---
 __________ _________ __________ __________
Options outstanding
 and exercisable,
 end of year 44,845,000 $ .059 48,427,750 $ .061
 ========== ========= ========== ==========

 Options Outstanding

 Weighted Average
Exercise Price Shares Remaining Life (Years)
______________ ______________ ______________________
 $.025 16,333,000 5.6
 $.027 1,500,000 8.9
 $.050 1,500,000 2.8
 $.050 3,837,500 3.0
 $.050 2,500,000 4.9
 $.065 45,000 4.0
 $.080 5,500,000 4.8
 $.100 10,389,500 7.5
 $.100 3,240,000 1.3
 _______________
 $.059 44,845,000
 ===============

 As of December 31,
 ________________________________________________
 2006 2005
 ______________ ______________
Issued 205,261,073 205,261,073
Outstanding 205,261,073 205,261,073
Exercisable 205,261,073 205,261,073

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

At December 31, 2006, 205,261,073 shares of authorized but unissued common stock were reserved for issuance upon exercise of outstanding warrants, 44,845,000 shares of authorized but unissued common stock were reserved for exercise pursuant to the 1997 and 2001 Stock Option Plans, 22,268 shares of authorized but unissued common stock were reserved for issuance upon conversion of Igene's outstanding preferred stock, and 96,898,924 shares of authorized but unissued stock were reserved for issuance upon conversion of outstanding convertible notes.

As of December 31, 2006, total dividends in arrears on Igene's preferred stock equal $130,045 (or $11.68 per share) on Igene's Series A preferred stock and are included in the carrying value of the Series A preferred stock.

Net loss per common share for 2006 and 2005 is based on 108,387,454 and 103,384,377 weighted average shares, respectively. For purposes of computing net loss per common share, the amount of net loss has been increased by dividends declared and cumulative undeclared dividends in arrears on preferred stock.

Common stock equivalents, including: options, warrants, convertible debt, convertible preferred stock, and exercisable rights have not been included in the computation of earnings per share in 2006 and 2005 because to do so would have been anti-dilutive. However, these common stock equivalents could have potentially dilutive effects in the future.

Igene is obligated for office and laboratory facilities and other rentals under operating lease agreements, which expire in 2011. The base annual rentals are approximately $98,000, increasing to $106,000 by the end of the lease term, plus the Company's share of taxes, insurance and other costs. Annual rent expense relating to the leases for the years ended December 31, 2006 and 2005 approximated $118,600 and $113,400, respectively.

Future minimum rental payments, in the aggregate and for each of the next five years are as follows:

 Year Amount
 ____ ________
 2007 $ 98,000
 2008 101,000
 2009 103,000
 2010 106,000
 2011 9,000
 ________
Total $417,000
 ========

Effective May 20, 2000, Igene signed an exclusive manufacturing agreement with Fermic, S.A. de C.V. ("Fermic"), of Mexico City, Mexico, for the production of AstaXin(R). The Fermic contract provides that the manufacturer has a limited exclusive right to produce AstaXin(R) and is paid a monthly fee in cash, which is based on manufacturing capacity, plus shares of Igene common stock based on production quantities. Fermic provides equipment and facilities necessary to manufacture and store the product and is responsible for purchasing raw materials. The Joint Venture is responsible for sales efforts and for ensuring the quality of the pigment. The Joint Venture also has a role in ensuring that the manufacturing process works effectively. The term of the contract has expired.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

Based on production of AstaXin(R), Igene had committed to issue to Fermic up to a maximum of 20,000,000 shares of Igene common stock during the six year period which expired May 20, 2006 in accordance with the manufacturing agreement. Based on quantities of AstaXin(R) produced, all shares have been earned and issued to Fermic. Since the inception of the agreement stock has been recorded as a manufacturing expense and also as an increase in common stock and additional paid in capital of $1,356,520. The expense is now recorded on the books of the Joint Venture with the related receivable from the Joint Venture on the books of Igene. This amount has been computed based on the fair value of the stock as of the period in which the shares were earned.

No income tax benefit or deferred tax asset is reflected in the financial statements. Deferred tax assets are recognized for future deductible temporary difference and tax loss carry forwards if their realization is "more likely than not".

At December 31, 2006 Igene has federal and state net operating loss carry-forwards of approximately $22,400,000 that expire at various dates from 2006 through 2026. The recorded deferred tax asset, representing the expected benefit from the future realization of the net operating losses, net of the valuation allowance, was $-0- for 2006 and 2005.

The sources of the deferred tax asset are approximately as follows:

Net operating loss carry-forward benefit $ 8,850,000
Valuation allowance (8,850,000)
 ____________
Deferred tax asset, net $ ---
 ============

Igene has incurred net losses in each year of its existence, aggregating approximately $46,841,000 from inception to December 31, 2006 and its liabilities exceeded its assets by approximately $12,482,000 at that date. These factors indicate that Igene will not be able to continue in existence unless it is able to raise additional capital and attain profitable operations.

As discussed in Subsequent Event (Note 17) as of October 31, 2007 Igene has terminated its relationship with the Joint Venture with Tate & Lyle. Igene maintains the saleable inventory after the termination of the relationship and is currently reviewing alternatives for a future manufacturing alternative. In the interim Igene will sell the existing inventory in order to maintain its relationship with customers and use these funds to cover expenses.

Revenue of the Joint Venture during 2006 and 2005 were derived from sales of the product, AstaXin(R). The majority of the Joint Venture's 2006 and 2005 sales were to fish producers in the aquaculture industry in Chile.

IGENE Biotechnology, Inc. and Subsidiary Notes to Consolidated Financial Statements Years ended December 31, 2006 and 2005

The preceding concentrations subject Igene to certain risks. For example, it is considered at least reasonably possible that any particular customer, distributor, product line, or provider of services or facilities could be lost in the near term. It is also considered at least reasonably possible that operations located outside the United States could be disrupted in the near term. However, Igene has at present no information that would lead it to believe that it will lose its principal product, principal customers, or its contracted manufacturer; or that its operations in Mexico City or Chile will be disrupted, though this belief can not be assured.

Effective February 1, 1997 Igene adopted a Simple Retirement Plan under Internal Revenue Code Section 408(p). The plan was a defined contribution plan, which covered all of Igene's U.S. employees who receive at least $5,000 of compensation for the preceding year. The plan permits elective employee contributions. Effective January 1, 2003, Igene made an elective contribution of 3% of each eligible employee's compensation for each year. Igene's contributions to the plan for 2003 were $17,631.

Effective February 1, 2004 Igene discontinued use of the Simple Retirement Plan and began use of a 401K savings/retirement plan, or 401(k) Plan. The 401(k) Plan permits our eligible employees to defer annual compensation, subject to limitations imposed by the Internal Revenue Code. All employees that have been employed for three months are eligible for the plan. The plan permits elective contributions by the Company's eligible employees based under the Internal Revenue Code, which are immediately vested and non-forfeitable upon contribution to the 401(k) Plan. Effective January 1, 2004, Igene made an elective contribution, subject to limitations, of 4% of each eligible employee's compensation for each year. Igene's contributions to the plan for 2006 and 2005 were $25,996 and $23,052, respectively, which is expensed in the 2006 statement of operations.

During the year ended December 31, 2005, Igene sold equipment and wrote-off a receivable from the prior sale of equipment. The resulting loss of $106,150 has been reflected as a loss on disposal on the accompanying 2005 statement of operations.

On October 31, 2007, Igene Biotechnology, Inc. (the "Company") and Tate & Lyle Fermentation Products Ltd. ("T&L") entered into a Separation Agreement (the "Agreement") pursuant to which the Joint Venture Agreement dated March 19, 2003, as amended, between the parties (the "Joint Venture") was terminated. As part of the Agreement, the Company sold to T&L its 50% interest in the joint venture and the joint venture sold to the Company its intellectual property, inventory and certain assets and lab equipment utilized by the Joint Venture. The purchase price paid by T&L to the Company for its 50% interest was 50% of the Joint Venture's net working capital. The purchase price paid by the Company for the inventory was an amount equal to 50% of the joint venture's net working capital, the assumption of various liabilities and the current market price of the inventory, less specified amounts. The purchase price paid by the Company for the intellectual property was $1.00. The purchase price paid by the Company for the assets and lab equipment was $1,000,000. In addition, the Company agreed to pay to T&L an amount equal to 5% of the Company's gross revenues from the sale of astaxanthin up to a maximum of $5,000,000. T&L agreed for a period of five years not to engage in the astaxanthin business.

As previously stated in the Registrant's third quarter Form 10-QSB, on November 30, 2001, Igene entered Into Convertible Promissory Notes (the "Convertible Notes") with each of the following note holders for the following respective amounts
(a) NorInnova AS (formerly Forskningsparken I Tromso AS) for $106,500; (b) Knut Gjernes for $7,500; (c) Magne Russ Simenson for $378,000; and (d) Nord Invest AS for $313,000. Each of the Convertible Notes had a maturity date of November 1, 2004. On November 18, 2005, each of the Convertible Note Holders provided Igene with written notice of default under each of the Convertible Notes.

On November 29, 2006, the Convertible Note holders filed a complaint against the Company in the Circuit Court of Howard County, Maryland seeking payment of all outstanding amounts due under the Convertible Notes. On February 23, 2007, the Company, paid $762,638 to the Convertible Note holders as settlement of all claims related to the Convertible Notes. The complaint was dismissed with prejudice on March 6, 2007.

In an attempt to settle the matter, the Note holders were offered the ability to extend the notes they held for a period of ten years at an interest rate of 5%. The conversion would be changed from the original debenture rate of $.10 (ten cents) per share to the current market rate of $.02 (two cents) per share. They rejected the offer.

The funds to settle the litigation were provided by Igene's directors using the terms offered above to the debenture holders. On February 15, 2007, Igene issued and sold $762,000 in aggregate principal amount of 5% convertible debentures, 50% each to certain directors of Igene. These debentures are convertible into shares of Igene's common stock at $.02 per share based on the offer made to the original debenture holders as the market price of Igene's shares at the time the debentures were agreed to. These debentures, if not converted earlier, become due on February 15, 2007.

The Company has historically reported the warrants issued in connection with the Notes as having zero value and has not recognized any discount on the Notes but rather recorded the full face value of the Notes as Long Term Debt in its consolidated financial statements. The restatement is based on the Company's using a Black Scholes model and ignoring any discounts for illiquidity of shares or blockage discounts. The warrants are valued with a corresponding amount of discount on the Notes. The amortization of this discount over the term of the Notes has required the Registrant to revise its Consolidated Financial Statements and the accompanying notes thereto in order to, among other things, reflect an increase in Additional Paid in Capital, a decrease in Long Term Debt, an increase in Accumulated Deficit, an increase in Interest Expense and an increase in Net Loss and Net Loss per Common Share, for fiscal years 2005 and 2006, as shown in the Registrant's Consolidated Financial Statements and accompanying notes included in this amended form 10-KSB.

The following is the effect on the Stockholder's Deficiency at January 1, 2005.

 Additional Total
 Common Stock Paid-in Accumulated Stockholders'
 # Shares Amount Capital Deficit Deficiency
 ____________ ____________ _____________ _____________ _____________
BALANCE AT JANUARY 1, 2005
 (As originally reported) 101,732,453 $ 1,017,325 $ 25,138,748 $(40,601,360) $(14,445,287)

Restatement --- --- 4,523,315 (1,769,780) 2,753,535
 ____________ ____________ _____________ _____________ _____________

BALANCE AT JANUARY 1, 2005
 (As restated) 101,732,453 $ 1,017,325 $ 29,662,063 $(42,371,140) $(11,691,752)
 ============ ============ ============= ============= =============

 Previously reported Restated
 December 31, December 31,
 2005 Restatement 2005
 ___________________ _______________ _______________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 119,745 $ 119,745
 Accounts receivable 15,618 15,618
 Prepaid expenses and other current assets 20,520 20,520
 ___________________ _______________
 TOTAL CURRENT ASSETS 155,883 155,883

 Property and equipment, net 50,059 50,059
 Loans receivable from manufacturing agent 19,993 19,993
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ _______________
 TOTAL ASSETS $ 231,060 $ 231,060
 =================== ===============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 99,285 $ 99,285
 Convertible debenture 705,000 705,000
 Accrued interest 11,750 11,750
 ___________________ _______________
 TOTAL CURRENT LIABILITIES 816,035 816,035

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (40,619) 5,801,648
 Convertible debentures (Net of discount) 3,814,212 (2,089,988) 1,724,224
 Accrued interest 4,902,255 4,902,255

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $19.04. Authorized 1,312,500 shares,
 issued 18,509 352,411 --- 352,411
 ___________________ _______________ _______________
 TOTAL LIABILITIES 15,727,180 (2,130,607) 13,596,573
 ___________________ _______________ _______________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 107,456,869. 1,074,569 1,074,569
 Additional paid-in capital 25,445,450 4,523,315 29,968,765
 Accumulated Deficit (42,016,139) (2,392,708) (44,408,847)
 ___________________ _______________ _______________
 TOTAL STOCKHOLDERS' DEFICIENCY (15,496,120) 2,130,607 (13,365,513)
 ___________________ _______________ _______________
 TOTAL LIABILITIES AND DEFICIENCY $ 231,060 $ 231,060
 =================== ===============

 Previously Reported Restated
 Year Ended Year Ended
 December 31, December 31,
 2005 Restatement 2005
 ___________________ _______________ _______________
EQUITY IN LOSS OF JOINT VENTURE $ (374,527) $ (374,527)
 ___________________ _______________
OPERATING EXPENSES
__________________
 Marketing and selling 282,451 282,451
 Research, development and pilot plant 819,782 819,782
 General and administrative 805,054 805,054
 Operating expenses reimbursed by Joint Venture (1,830,198) (1,830,198)
 ___________________ _______________
 TOTAL OPERATING EXPENSES 77,089 77,089
 ___________________ _______________
 OPERATING LOSS (451,616) (451,616)
 ___________________ _______________
LOSS ON DISPOSAL (106,150) (106,150)

INTEREST EXPENSE
 (including amortization of debt discount of $622,928) (857,013) (622,928) (1,479,941)
 ___________________ _______________ _______________
 NET LOSS $ (1,414,779) $ (622,928) $ (2,037,707)
 =================== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.02)
 =================== =============== ===============

 Previously Reported Restated
 December 31, December 31,
 2006 Restatement 2006
 ___________________ _______________ _______________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 21,786 $ 21,786
 Prepaid expenses and other current assets 14,093 14,093
 ___________________ _______________
 TOTAL CURRENT ASSETS 35,879 35,879

 Property and equipment, net 33,571 33,571
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ _______________
 TOTAL ASSETS $ 74,575 $ 74,575
 =================== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 210,424 $ 210,424
 Convertible debenture 705,000 705,000
 Accrued interest 46,570 46,570
 ___________________ _______________
 TOTAL CURRENT LIABILITIES 961,994 961,994

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (2,226,378) 3,615,889
 Convertible debentures (Net of discount) 3,814,212 (1,710,768) 2,103,444
 Accrued interest 5,655,830 5,655,830

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $19.68. Authorized 1,312,500 shares,
 issued 11,134 219,117 --- 219,117
 ___________________ _______________ _______________
 TOTAL LIABILITIES 16,493,420 (3,937,146) 12,556,274
 ___________________ _______________ _______________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 109,337,072. 1,093,371 1,093,371
 Additional paid-in capital 25,659,696 7,605,991 33,265,687
 Accumulated Deficit (43,171,912) (3,668,845) (46,840,757)
 ___________________ _______________ _______________
 TOTAL STOCKHOLDERS' DEFICIENCY (16,418,845) 3,937,146 (12,481,699)
 ___________________ _______________ _______________
 TOTAL LIABILITIES AND DEFICIENCY $ 74,575 $ 74,575
 =================== ===============

 Previously Reported Restated
 Year Ended Year Ended
 December 31, December 31,
 2006 Restatement 2006
 ___________________ _______________ _______________

EQUITY IN LOSS OF JOINT VENTURE $ (109,147) $ (109,147)
 ___________________ _______________

OPERATING EXPENSES
__________________
 Marketing and selling 98,240 98,240
 Research, development and pilot plant 847,598 847,598
 General and administrative 1,022,051 1,022,051
 Operating expenses reimbursed by Joint Venture (1,660,519) (1,660,519)
 ___________________ _______________
 TOTAL OPERATING EXPENSES 307,370 307,370
 ___________________ _______________
 OPERATING LOSS (416,517) (416,517)
 ___________________ _______________

OTHER INCOME 14,535 14,535

INTEREST EXPENSE
 (including amortization of debt discount of $1,276,137) (753,791) (1,276,137) (2,029,928)
 ___________________ _______________ _______________

 NET LOSS $ (1,155,773) $ (1,276,137) $ (2,431,910)
 =================== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.02)
 =================== =============== ===============

The Company has historically reported the warrants issued in connection with the Notes as having zero value and has not recognized any discount on the Notes but rather recorded the full face value of the Notes as Long Term Debt in its consolidated financial statements. The restatement is based on the Company's using a Black Scholes model and ignoring any discounts for illiquidity of shares or blockage discounts. The warrants are valued with a corresponding amount of discount on the Notes. The amortization of this discount over the term of the Notes has required the Registrant to revise its Consolidated Financial Statements and the accompanying notes thereto in order to, among other things, reflect an increase in Additional Paid in Capital, a decrease in Long Term Debt, an increase in Accumulated Deficit, an increase in Interest Expense and an increase in Net Loss and Net Loss per Common Share, for fiscal years 2005 and 2006, as shown in the Registrant's Consolidated Financial Statements and accompanying notes included in this amended form 10-KSB. The following presents the effect of the restatement on the Consolidated Balance Sheet and Income Statements. There was no change to the cash flows from operations for any of the periods.

 Previously
 Reported Restated
 March 31, 2005 Restatement March 31, 2005
 ___________________ _______________ _______________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 86,377 $ 86,377
 Accounts receivable 80,075 80,075
 Prepaid expenses and other current assets 30,944 30,944
 ___________________ _______________
 TOTAL CURRENT ASSETS 197,396 197,396

 Property and equipment, net 120,092 120,092
 Loans receivable from manufacturing agent 70,982 70,982
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ _______________
 TOTAL ASSETS $ 393,595 $ 393,595
 =================== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 64,446 $ 64,446
 Convertible debenture 705,000 705,000
 Accrued interest 29,375 29,375
 ___________________ _______________
 TOTAL CURRENT LIABILITIES 798,821 798,821

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (223,400) 5,618,867
 Convertible debentures 3,814,212 (2,374,403) 1,439,809
 Accrued interest 4,319,955 4,319,955

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $18.56. Authorized 1,312,500 shares,
 issued 18,509 343,527 --- 343,527
 ___________________ _______________ _______________
 TOTAL LIABILITIES 15,118,782 (2,597,803) 12,520,979
 ___________________ _______________ _______________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 102,794,142. 1,027,942 1,027,942
 Additional paid-in capital 25,236,268 4,523,315 29,759,583
 Accumulated Deficit (40,989,397) (1,925,512) (42,914,909)
 ___________________ _______________ _______________
 TOTAL STOCKHOLDERS' DEFICIENCY (14,725,187) 2,597,803 (12,127,384)
 ___________________ _______________ _______________
 TOTAL LIABILITIES AND DEFICIENCY $ 393,595 $ 393,595
 =================== ===============

 Previously Reported Restated
 Quarter Ended Quarter Ended
 March 31, 2005 Restatement March 31, 2005
 ___________________ _______________ _______________

EQUITY IN LOSS OF JOINT VENTURE $ (183,093) $ (183,093)
 ___________________ _______________
OPERATING EXPENSES
__________________
 Marketing and selling 48,288 48,288
 Research, development and pilot plant 166,007 166,007
 General and administrative 188,908 188,908
 Operating expenses reimbursed by Joint Venture (411,339) (411,339)
 ___________________ _______________
 TOTAL OPERATING EXPENSES (8,136) (8,136)
 ___________________ _______________
 OPERATING LOSS (174,957) (174,957)
 ___________________ _______________
INTEREST EXPENSE
 (including amortization of debt discount of $155,732) (213,080) (155,732) (368,812)
 ___________________ _______________ _______________
 NET LOSS $ (388,037) $ (155,732) $ (543,769)
 =================== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.00) (0.01)
 =================== =============== ===============

 Previously Reported Restated
 June 30, 2005 Restatement June 30, 2005
 ___________________ _______________ _______________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 47,112 $ 47,112
 Accounts receivable 11,793 11,793
 Prepaid expenses and other current assets 9,081 9,081
 ___________________ _______________
 TOTAL CURRENT ASSETS 67,986 67,986

 Property and equipment, net 115,280 115,280
 Loans receivable from manufacturing agent 70,982 70,982
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ _______________
 TOTAL ASSETS $ 259,373 $ 259,373
 =================== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 181,265 $ 181,265
 Convertible debenture 705,000 705,000
 Accrued interest --- ---
 ___________________ _______________
 TOTAL CURRENT LIABILITIES 886,265 886,265

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (162,473) 5,679,794
 Convertible debentures (Net of discount) 3,814,212 (2,279,598) 1,534,614
 Accrued interest 4,539,066 4,539,066

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $18.72. Authorized 1,312,500 shares,
 issued 18,509 346,488 --- 346,488
 ___________________ _______________ _______________
 TOTAL LIABILITIES 15,428,298 (2,442,071) 12,986,227
 ___________________ _______________ _______________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 103,964,926
 shares. 1,039,650 1,039,650
 Additional paid-in capital 25,313,660 4,523,315 29,836,975
 Accumulated Deficit (41,522,235) (2,081,244) (43,603,479)
 ___________________ _______________ _______________
 TOTAL STOCKHOLDERS' DEFICIENCY (15,168,925) 2,442,071 (12,726,854)
 ___________________ _______________ _______________
 TOTAL LIABILITIES AND DEFICIENCY $ 259,373 $ 259,373
 =================== ===============

 Previously Restated
 Reported Quarter Quarter
 June 30, 2005 Restatement June 30, 2005
 ___________________ _______________ _______________
EQUITY IN LOSS OF JOINT VENTURE $ (282,977) $ (282,977)
 ___________________ _______________
OPERATING EXPENSES
__________________
 Marketing and selling 70,876 70,876
 Research, development and pilot plant 217,082 217,082
 General and administrative 246,592 246,592
 Operating expenses reimbursed by Joint Venture (527,398) (527,398)
 ___________________ _______________
 TOTAL OPERATING EXPENSES 7,152 7,152
 ___________________ _______________
 OPERATING LOSS (290,129) (290,129)
 ___________________ _______________
LOSS ON DISPOSAL (50,000) (50,000)

INTEREST EXPENSE
 (including amortization of debt discount of $155,732) (192,709) (155,732) (348,441)
 ___________________ _______________ _______________
 NET LOSS $ (532,838) $ (155,732) $ (688,570)
 =================== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.00) (0.01)
 =================== =============== ===============

 Previously Reported Restated
 Six months ended Six months ended
 June 30, 2005 Restatement June 30, 2005
 ___________________ _______________ ________________
EQUITY IN LOSS OF JOINT VENTURE $ (466,070) $ (466,070)
 ___________________ ________________
OPERATING EXPENSES
__________________
 Marketing and selling 119,164 119,164
 Research, development and pilot plant 383,089 383,089
 General and administrative 435,500 435,500
 Operating expenses reimbursed by Joint Venture (938,737) (938,737)
 ___________________ ________________
 TOTAL OPERATING EXPENSES (984) (984)
 ___________________ ________________
 OPERATING LOSS (465,086) (465,086)
 ___________________ ________________
LOSS ON DISPOSAL (50,000) (50,000)

INTEREST EXPENSE
 (including amortization of debt discount of $311,464) (405,789) (311,464) (717,253)
 ___________________ _______________ ________________
 NET LOSS $ (920,875) $ (311,464) $ (1,232,339)
 =================== =============== ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.00) $ (0.01)
 =================== =============== ================

 Previously Reported Restated
 September 30, September 30,
 2005 Restated 2005
 ___________________ _______________ ________________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 30,819 $ 30,819
 Accounts receivable 15,227 15,227
 Prepaid expenses and other current assets 9,361 9,361
 ___________________ ________________
 TOTAL CURRENT ASSETS 55,407 55,407

 Property and equipment, net 110,468 110,468
 Loans receivable from manufacturing agent 70,982 70,982
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ ________________
 TOTAL ASSETS $ 241,982 $ 241,982
 =================== ================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 94,184 $ 94,184
 Convertible debenture 705,000 705,000
 Accrued interest 29,375 29,375
 ___________________ ________________
 TOTAL CURRENT LIABILITIES 828,559 828,559

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (101,546) 5,740,721
 Convertible debentures (Net of discount) 3,814,212 (2,184,793) 1,629,419
 Accrued interest 4,700,261 4,700,261

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $18.88. Authorized 1,312,500 shares,
 issued 18,509 349,450 --- 349,450
 ___________________ _______________ ________________
 TOTAL LIABILITIES 15,534,749 (2,286,339) 13,248,410
 ___________________ _______________ ________________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 105,003,661
 shares. 1,050,037 1,050,037
 Additional paid-in capital 25,360,926 4,523,315 29,884,241
 Accumulated Deficit (41,703,730) (2,236,976) (43,940,706)
 ___________________ _______________ ________________
 TOTAL STOCKHOLDERS' DEFICIENCY (15,292,767) 2,286,339 (13,006,428)
 ___________________ _______________ ________________
 TOTAL LIABILITIES AND DEFICIENCY $ 241,982 $ 241,982
 =================== ================

 Reported Quarter Restated Quarter
 September 30, September 30,
 2005 Restatement 2005
 ___________________ _______________ ________________
EQUITY IN LOSS OF JOINT VENTURE $ 52,886 $ 52,886
 ___________________ ________________
OPERATING EXPENSES
__________________
 Marketing and selling 44,934 44,934
 Research, development and pilot plant 196,072 196,072
 General and administrative 186,104 186,104
 Operating expenses reimbursed by Joint Venture (418,657) (418,657)
 ___________________ ________________
 TOTAL OPERATING EXPENSES 7,453 7,453
 ___________________ ________________
 OPERATING PROFIT 44,433 44,433
 ___________________ ________________
GAIN ON DISPOSAL 3,006 3,006

INTEREST EXPENSE
 (including amortization of debt discount of $155,732) (228,934) (155,732) (384,666)
 ___________________ _______________ ________________
 NET LOSS $ (181,495) $ (155,732) $ (337,227)
 =================== =============== ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.00) $ (0.00)
 =================== =============== ================

 Reported Restated
 Nine months ended Nine month ended
 September 30, September 30,
 2005 Restatement 2005
 ___________________ _______________ ________________
EQUITY IN LOSS OF JOINT VENTURE $ (413,184) $ (413,184)
 ___________________ ________________

OPERATING EXPENSES
__________________
 Marketing and selling 164,098 164,098
 Research, development and pilot plant 579,161 579,161
 General and administrative 621,604 621,604
 Operating expenses reimbursed by Joint Venture (1,357,394) (1,357,394)
 ___________________ ________________
 TOTAL OPERATING EXPENSES 7,469 7,469
 ___________________ ________________
 OPERATING LOSS (420,653) (420,653)
 ___________________ ________________
LOSS ON DISPOSAL (46,994) (46,994)

INTEREST EXPENSE
 (including amortization of debt discount of $467,196) (634,723) (467,196) (1,101,919)
 ___________________ _______________ ________________
 NET LOSS $ (1,102,370) $ (467,196) $ (1,569,566)
 =================== =============== ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.00) $ (0.02)
 =================== =============== ================

 Previously Reported Restated
 March 31, 2006 Restatement March 31, 2006
 ___________________ _______________ ________________

ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ --- $ ---
 Accounts receivable 5,306 5,306
 Prepaid expenses and other current assets 8,437 8,437
 ___________________ _______________
 TOTAL CURRENT ASSETS 13,743 13,743

 Property and equipment, net 45,386 45,386
 Loans receivable from manufacturing agent 19,993 19,993
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ _______________
 TOTAL ASSETS $ 84,247 $ 84,247
 =================== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Bank Overdraft $ 61,715 $ 61,715
 Accounts payable and accrued expenses 120,510 120,510
 Convertible debenture 705,000 705,000
 Accrued interest 29,375 29,375
 ___________________ _______________
 TOTAL CURRENT LIABILITIES 916,600 916,600

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (2,997,046) 2,845,221
 Convertible debentures 3,814,212 (1,995,183) 1,819,029
 Accrued interest 5,088,068 5,088,068

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $19.20. Authorized 1,312,500 shares,
 issued 18,509. 355,373 --- 355,373
 ___________________ _______________ _______________
 TOTAL LIABILITIES 16,016,520 (4,992,229) 11,024,291
 ___________________ _______________ _______________

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 108,222,324. 1,082,223 1,082,223
 Additional paid-in capital 25,474,244 7,605,991 33,080,235
 ___________________ _______________ _______________
 Accumulated Deficit (42,488,740) (2,613,762) (45,102,502)
 ___________________ _______________ _______________
 TOTAL STOCKHOLDERS' DEFICIENCY (15,932,273) 4,992,229 (10,940,044)
 ___________________ _______________ _______________
 TOTAL LIABILITIES AND DEFICIENCY $ 84,247 $ 84,247
 =================== ===============

 Reported Restated
 Quarter Ended, Quarter Ended
 March 31, 2006 Restatement March 31, 2006
 ___________________ _______________ _______________
EQUITY IN LOSS OF JOINT VENTURE $ (189,902) $ (189,902)
 ___________________ _______________
OPERATING EXPENSES
__________________
 Marketing and selling 42,811 42,811
 Research, development and pilot plant 208,649 208,649
 General and administrative 224,783 224,783
 Operating expenses reimbursed by Joint Venture (399,943) (399,943)
 ___________________ _______________
 TOTAL OPERATING EXPENSES 76,300 76,300
 ___________________ _______________
 OPERATING LOSS (266,202) (266,202)
 ___________________ _______________
INTEREST EXPENSE
 (including amortization of debt discount of $221,054) (206,399) (221,054) (427,453)
 ___________________ _______________ _______________
 NET LOSS $ (472,601) $ (221,054) $ (693,655)
 =================== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.00) (0.01)
 =================== =============== ===============

 Previously Reported Restated
 June 30, 2006 Restatement June 30, 2006
 ___________________ _______________ _______________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 9,527 $ 9,527
 Accounts receivable 8,526 8,526
 Prepaid expenses and other current assets 8,294 8,294
 ___________________ _______________
 TOTAL CURRENT ASSETS 26,347 26,347

 Property and equipment, net 40,713 50,059
 Loans receivable from manufacturing agent 19,993 19,993
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ _______________
 TOTAL ASSETS $ 92,178 $ 92,178
 =================== ===============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 165,476 $ 165,476
 Convertible debenture 705,000 705,000
 Accrued interest 11,750 11,750
 __________________ _______________
 TOTAL CURRENT LIABILITIES 882,226 882,226

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (2,740,157) 3,102,110
 Convertible debentures (Net of discount) 3,814,212 (1,900,378) 1,913,834
 Accrued interest 5,275,946 5,275,946

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $19.04. Authorized 1,312,500 shares,
 issued 11,134 215,554 --- 215,554
 __________________ ________________ _______________
 TOTAL LIABILITIES 16,030,205 (4,640,535) 11,389,670
 __________________ ________________ _______________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 108,337,072
 shares. 1,083,371 1,083,371
 Additional paid-in capital 25,619,696 7,605,991 33,225,687
 Accumulated Deficit (42,641,094) (2,965,456) (45,606,550)
 __________________ ________________ _______________
 TOTAL STOCKHOLDERS' DEFICIENCY (15,938,027) 4,640,535 (11,297,492)
 __________________ ________________ _______________
 TOTAL LIABILITIES AND DEFICIENCY $ 92,178 $ 92,178
 ================== ===============

 Reported Restated
 Quarter Ended Quarter Ended
 June 30, 2006 Restatement June 30, 2006
 ___________________ _______________ _______________
EQUITY IN REPAID ADVANCES OF JOINT VENTURE $ 171,639 $ 171,639
 ___________________ _______________
OPERATING EXPENSES
__________________
 Marketing and selling 47,399 47,399
 Research, development and pilot plant 237,088 237,088
 General and administrative 292,231 292,231
 Operating expenses reimbursed by Joint Venture (459,917) (459,917)
 ___________________ _______________
 TOTAL OPERATING EXPENSES 116,801 116,801
 ___________________ _______________
 OPERATING PROFIT 54,838 54,838
 ___________________ _______________
INTEREST EXPENSE
 (including amortization of debt discount of $351,694) (207,192) (351,694) (558,886)
 ___________________ _______________ _______________
 NET LOSS $ (152,354) $ (351,694) $ (504,048)
 =================== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.00) $ (0.00)
 =================== =============== ===============

 Restated
 Reported Six Months Six Months ended
 ended June 30, 2006 Restatement June 30, 2006
 ___________________ _______________ ________________
EQUITY IN LOSS OF JOINT VENTURE $ (18,263) $ (18,263)
 ___________________ ________________
OPERATING EXPENSES
__________________
 Marketing and selling 90,210 90,210
 Research, development and pilot plant 445,737 445,737
 General and administrative 517,014 517,014
 Operating expenses reimbursed by Joint Venture (859,860) (859,860)
 ___________________ ________________
 TOTAL OPERATING EXPENSES 193,101 193,101
 ___________________ ________________
 OPERATING LOSS (211,364) (211,364)
 ___________________ ________________
INTEREST EXPENSE
 (including amortization of debt discount of $572,748) (413,591) (572,748) (986,339)
 ___________________ _______________ ________________
NET LOSS $ (624,955) $ (572,748) $ (1,197,703)
 =================== =============== ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.01)
 =================== =============== ================

 Previously Reported Restated
 September 30, 2006 Restatement September 30, 2006
 ___________________ _______________ __________________
ASSETS
CURRENT ASSETS
 Cash and cash equivalents $ 25,279 $ 25,279
 Accounts receivable 4,926 4,926
 Prepaid expenses and other current assets 9,963 9,963
 ___________________ __________________
 TOTAL CURRENT ASSETS 40,168 40,168

 Property and equipment, net 36,039 36,039
 Loans receivable from manufacturing agent 19,993 19,993
 Investment in and advances to unconsolidated joint venture --- ---
 Other assets 5,125 5,125
 ___________________ __________________
 TOTAL ASSETS $ 101,325 $ 101,325
 =================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
 Accounts payable and accrued expenses $ 140,646 $ 140,646
 Convertible debenture 705,000 705,000
 Accrued interest 29,375 29,375
 ___________________ __________________
 TOTAL CURRENT LIABILITIES 875,021 875,021

LONG-TERM DEBT
 Notes payable (Net of discount) 5,842,267 (2,483,267) 3,359,000
 Convertible debentures (Net of discount) 3,814,212 (1,805,573) 2,008,639
 Accrued interest 5,465,888 5,465,888

REDEEMABLE PREFERRED STOCK
 Carrying amount of redeemable preferred stock, 8% cumulative,
 Convertible, voting, series A, $.01 par value per share.
 Stated value was $19.52. Authorized 1,312,500 shares,
 issued 11,134 217,336 --- 217,336
 ___________________ _______________ __________________
 TOTAL LIABILITIES 16,214,724 (4,288,840) 11,925,884
 ___________________ _______________ __________________
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIENCY
 Common stock --- $.01 par value per share. Authorized
 750,000,000 shares; issued and outstanding 109,337,072
 shares. 1,093,371 1,093,371
 Additional paid-in capital 25,659,696 7,605,991 33,265,687
 Accumulated Deficit (42,866,466) (3,317,151) (46,183,617)
 ___________________ _______________ __________________
 TOTAL STOCKHOLDERS' DEFICIENCY (16,113,399) 4,288,840 (11,824,559)
 ___________________ _______________ __________________
 TOTAL LIABILITIES AND DEFICIENCY $ 101,325 $ 101,325
 =================== ==================

 Reported Quarter, Restated Quarter
 September 30, 2006 Restatement September 30, 2006
 __________________ _______________ __________________
EQUITY IN REPAID ADVANCES OF JOINT VENTURE $ 11,299 $ 11,299
 __________________ __________________
OPERATING EXPENSES
__________________
 Marketing and selling 5,328 5,328
 Research, development and pilot plant 173,526 173,526
 General and administrative 247,241 247,241
 Operating expenses reimbursed by Joint Venture (388,421) (388,421)
 __________________ __________________
 TOTAL OPERATING EXPENSES 37,674 37,674
 __________________ __________________
 OPERATING LOSS (26,375) (26,375)
 __________________ __________________
OTHER INCOME 10,305 10,305

INTEREST EXPENSE
 (including amortization of debt discount of $351,694) (209,302) (351,694) (560,996)
 __________________ __________________
 NET LOSS $ (225,372) $ (351,694) $ (577,066)
 ================== =============== ==================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.00) $ (0.01)
 ================== =============== ==================

 Reported Restated
 Nine Months Ended Nine Months Ended
 September 30, 2006 Restatement September 30, 2006
 __________________ _______________ __________________
EQUITY IN LOSS OF JOINT VENTURE $ (6,964) $ (6,964)
 ___________________ __________________
OPERATING EXPENSES
__________________
 Marketing and selling 95,538 95,538
 Research, development and pilot plant 619,263 619,263
 General and administrative 764,255 764,255
 Operating expenses reimbursed by Joint Venture (1,248,281) (1,248,281)
 ___________________ __________________
 TOTAL OPERATING EXPENSES 230,775 230,775
 ___________________ __________________
 OPERATING LOSS (237,739) (237,739)
 ___________________ __________________
OTHER INCOME 10,305 10,305

INTEREST EXPENSE
 (including amortization of debt discount of $924,442) (622,893) (924,442) (1,547,335)
 __________________ _______________ __________________
 NET LOSS $ (850,327) $ (924,442) $ (1,774,769)
 ================== =============== ==================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.02)
 ================== =============== ==================