UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

(Mark One)

|[X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|--- | ---------------------------------------------------------------------
|    | ACT OF 1934                                                          

For the quarterly period endedSeptember 30, 2006

|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|----- | -------------------------------------------------------------------
|      | EXCHANGE ACT OF 1934                                               

For the transition period from: ________________ to
_______________

Commission file number:000-51294

METAMORPHIX, INC.(Exact name of registrant as specified in its charter)

|Delaware                                                      |  | 52-1923417         
|------------------------------------------------------------- |  | -------------------
|(State or other jurisdiction of                               |  | (IRS Employer      
|incorporation or organization)                                |  | Identification No.)
|                                                             
|                                                             
|8000
    Virginia Manor Road, Suite 140, Beltsville, Maryland |  | 20705              
|(Address of principal executive offices)                      |  | (Zip Code)         
|                                                             
|Registrant's telephone number, including area code:           |  | 301-617-9080       

Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such reports),
 and (2) has been subject to such filing requirements for the past 90 days. Yes o  Nox

Check whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes o  Nox

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

|Class                         |  | Outstanding
      as of October 31, 2006
|----------------------------- |  | ----------------------------------------
|Common Stock, $.001 par value |  | 21,035,141 Shares                       

Transitional Small Business Disclosure Format (Check
one): Yes o  Nox

---



|                                                                     |                                                                                      |    | Page No.
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | -- | --------
|PART I. FINANCIAL INFORMATION                                        |                                                                                      |   
|                                                                     |                                                                                      |   
|ITEM 1. 
Consolidated Condensed Financial Statements (Unaudited)     |                                                                                      |   
|                                                                     |                                                                                      |   
|                                                                     | Consolidated Condensed Balance Sheets as of September 30, 2006 and December 31, 2005 |    | 5       
|                                                                     |                                                                                      |    |         
|                                                                     | Consolidated Condensed Statements of Operations for the Three and Nine Months        |    |         
|                                                                     | Ended September 30, 2006 and 2005                                                    |    | 6       
|                                                                     |                                                                                      |    |         
|                                                                     | Consolidated Condensed Statements of Cash Flows for the Nine Months Ended            |    |         
|                                                                     | September 30, 2006 and 2005                                                          |    | 7       
|                                                                     |                                                                                      |    |         
|                                                                     | Notes to Consolidated Condensed Financial Statements                                 |    | 8       
|                                                                     |                                                                                      |    |         
|ITEM 2. 
Management's Discussion and Analysis or Plan of Operation   |                                                                                      | 15
|                                                                     |                                                                                      |   
|ITEM 3. 
Controls and Procedures                                     |                                                                                      | 20
|                                                                     |                                                                                      |   
|PART II. OTHER INFORMATION                                           |                                                                                      |   
|                                                                     |                                                                                      |   
|ITEM 2. 
Unregistered Sales of Equity Securities and Use of Proceeds |                                                                                      | 21
|                                                                     |                                                                                      |   
|ITEM 3. 
Defaults Upon Senior Securities                             |                                                                                      | 22
|                                                                     |                                                                                      |   
|ITEM 6. 
Exhibits                                                    |                                                                                      | 22
|                                                                     |                                                                                      |   
|SIGNATURES                                                           |                                                                                      | 23

2

---



INTRODUCTION

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

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

We have established several relationships through which we expect to commercialize our animal genomics technology. We have exclusive development and marketing agreements with Cargill Incorporated, or Cargill, the
worlds second largest beef processor and a leading feedlot operator, and the Monsanto Company, or Monsanto, a leading swine breeder. We also have agreements to provide DNA testing services for the American Kennel Club, the worlds largest
canine registry, United Kennel Club, American Angus Association, the worlds largest beef cattle registry, Red Angus Association, American Limousin Association, and American Bucking Bull Association.

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

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

We were incorporated as a Delaware corporation in September 1994. Between incorporation and 1997, our activities consisted of research performed by Dr. Se-Jin Lee at his laboratory at The Johns Hopkins University School of
Medicine to focus on the discovery, characterization, development and commercialization of GDFs. Dr. Lees research was funded by Genetics Institute, Inc., or GI, a wholly-owned subsidiary of American Home Products Corporation (now Wyeth).
After Dr. Lee published a paper on Myostatin in 1997, we began to explore business opportunities to use the Myostatin technology for human and agricultural applications.  In 1999, we licensed to Wyeth human therapeutic applications of our GDF
technology in exchange for which we acquired Wyeths equity interest in us and the right to receive, milestone and royalty payments. Between 2000 and 2002, we granted options to license our Myostatin technology to the top two U.S. chicken
producers and entered into a

3

---



joint venture with a leading supplier of turkeys to commercialize Myostatin in the North American chicken and turkey markets.

Our business activities in the area of animal genomics commenced in February 2002, when we acquired some of the animal-related assets of the Celera Genomics Group of Applera Corporation, or Celera, and licensed
Celeras chicken, swine and cattle genome databases for agricultural use within specified fields. In May 2002, we entered into our joint development and marketing agreement with Cargill Incorporated and in June 2004, we entered into our Swine
Improvement Agreement with Monsanto.

Our principal executive office is located at 8000 Virginia Manor Road, Suite 140, Beltsville, Maryland 20705, and our telephone number at that address is (301) 617-9080. We have a corporate internet website athttp://www.metamorphixinc.com. The reference to this website address does not constitute incorporation by reference of the information contained therein.

FORWARD LOOKING STATEMENTS

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

4

---



PART I. FINANCIAL INFORMATION

ITEM 1. Consolidated Condensed Financial Statements (Unaudited)

METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS(Unaudited)

|                                                                           |  | September 30, |              |   | December 31, |  
|-------------------------------------------------------------------------- |  | ------------- | ------------ | - | ------------ | -
|                                                                           |  | 2006          |              |   | 2005         |  
|ASSETS                                                                     |  |               |              |   |              |  
|CURRENT ASSETS:                                                            |  |               |              |   |              |  
|Cash and cash equivalents                                                  |  | $             | 1,225,315    |   |              | $
|Accounts receivable                                                        |  |               | 227,505      |   |              |  
|Prepaid expenses and other current assets                                  |  |               | 143,774      |   |              |  
|Total current assets                                                       |  |               | 1,596,594    |   |              |  
|                                                                          
|PROPERTY AND EQUIPMENTNet                                                 |  |               | 1,840,682    |   |              |  
|GOODWILL                                                                   |  |               | 3,739,870    |   |              |  
|LEASE SECURITY DEPOSITS                                                    |  |               | 204,494      |   |              |  
|DEFERRED DEBT ISSUE COSTS                                                  |  |               | 4,352,609    |   |              |  
|                                                                           |  |               | 10,137,655   |   |              |  
|TOTAL ASSETS                                                               |  | $             | 11,734,249   |   |              | $
|                                                                          
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                             |  |               |              |   |              |  
|CURRENT LIABILITIES:                                                       |  |               |              |   |              |  
|Accounts payable and accrued expenses                                      |  | $             | 7,575,057    |   |              | $
|Accrued compensation                                                       |  |               | 4,751,394    |   |              |  
|Accrued dividends                                                          |  |               | 2,920,509    |   |              |  
|Short-term notes payable                                                   |  |               | 2,281,712    |   |              |  
|Notes payable to officers and directors                                    |  |               | 2,184,498    |   |              |  
|Deferred revenue                                                           |  |               | 1,235,420    |   |              |  
|Celera purchase obligation                                                 |  |               | 2,544,980    |   |              |  
|Derivative liability                                                       |  |               | 93,985       |   |              |  
|Accrued interest                                                           |  |               | 3,184,480    |   |              |  
|Total current liabilities                                                  |  |               | 26,772,035   |   |              |  
|                                                                          
|LONG-TERM NOTES PAYABLE, net of discount of $4,686,803 and                 |  |               |              |   |              |  
|$5,610,299 at September 30, 2006 and December 31, 2005, respectively       |  |               | 30,015,697   |   |              |  
|CELERA PURCHASE OBLIGATION                                                 |  |               | 3,593,176    |   |              |  
|ACCRUED INTEREST                                                           |  |               | 2,072,701    |   |              |  
|OTHER LONG-TERM LIABILITIES                                                |  |               | 153,413      |   |              |  
|Total liabilities                                                          |  |               | 62,607,022   |   |              |  
|                                                                          
|COMMITMENTS AND CONTINGENCIES (Note 8)                                     |  |               |              |   |              |  
|                                                                          
|STOCKHOLDERS EQUITY (DEFICIT):                                            |  |               |              |   |              |  
|Convertible Preferred stock, $0.001 par value22,000,000 shares            |  |               |              |   |              |  
|authorized and 7,326,715 shares issued and outstanding as of September 30, |  |               |              |   |              |  
|2006 and December 31, 2005                                                 |  |               | 59,918,772   |   |              |  
|Common stock, $0.001 par value75,000,000 shares authorized as of          |  |               |              |   |              |  
|September 30, 2006 and December 31, 2005, 21,035,141 and                   |  |               |              |   |              |  
|20,369,719 shares issued and outstanding as of September 30, 2006          |  |               |              |   |              |  
|and December 31, 2005, respectively                                        |  |               | 21,035       |   |              |  
|Additional paid-in capital                                                 |  |               | 79,404,922   |   |              |  
|Accumulated other comprehensive loss                                       |  |               | (132,990     | ) |              |  
|Accumulated deficit                                                        |  |               | (190,084,512 | ) |              |  
|Total stockholders equity (deficit)                                       |  |               | (50,872,773  | ) |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                       |  | $             | 11,734,249   |   |              | $

See notes to consolidated condensed financial statements.

5

---



METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

|                                       |  | Three Months Ended |            |   | Nine Months Ended |  
|-------------------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                                      
|                                       |  | September 30,      |            |   | September 30,     |  
|                                       |  | 2006               |            |   | 2005              |  
|                                      
|REVENUE                                |  | $                  | 765,019    |   |                   | $
|OPERATING COSTS AND                    |  |                    |            |   |                   |  
|EXPENSES:                              |  |                    |            |   |                   |  
|Cost of revenue                        |  |                    | 445,944    |   |                   |  
|Research and development               |  |                    | 914,045    |   |                   |  
|General and administrative             |  |                    | 2,121,737  |   |                   |  
|Depreciation and amortization          |  |                    | 90,122     |   |                   |  
|Total operating costs and expenses     |  |                    | 3,571,848  |   |                   |  
|OTHER INCOME (EXPENSE):                |  |                    |            |   |                   |  
|Interest expense and accretion of debt |  |                    |            |   |                   |  
|discount                               |  |                    | (1,707,270 | ) |                   |  
|Debt issue costs                       |  |                    | (487,831   | ) |                   |  
|Debt conversion expense                |  |                    | -          |   |                   |  
|Other (expense)                        |  |                    | 1,484      |   |                   |  
|NET LOSS                               |  |                    | (5,000,446 | ) |                   |  
|Preferred stock dividends and          |  |                    |            |   |                   |  
|accretion of beneficial conversion     |  |                    |            |   |                   |  
|features                               |  |                    | (351,605   | ) |                   |  
|NET LOSS ATTRIBUTABLE TO               |  |                    |            |   |                   |  
|COMMON STOCKHOLDERS                    |  | $                  | (5,352,051 | ) |                   | $
|Net loss per common share:             |  |                    |            |   |                   |  
|Basic and diluted                      |  | $                  | (0.26      | ) |                   | $
|Weighted average number of shares      |  |                    |            |   |                   |  
|outstanding:                           |  |                    |            |   |                   |  
|Basic and diluted                      |  |                    | 20,938,234 |   |                   |  

See notes to consolidated condensed financial statements.

6

---



METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                 |  | Nine Months Ended |            
|---------------------------------------------------------------- |  | ----------------- | -----------
|                                                                
|                                                                 |  | September 30,     |            
|                                                                 |  | 2006              |            
|                                                                
|CASH FLOWS FROM OPERATING ACTIVITIES:                            |  |                   |            
|Net loss                                                         |  | $                 | (13,958,129
|Adjustments to reconcile net loss to net cash flows              |  |                   |            
|used in operating activities:                                    |  |                   |            
|Depreciation and amortization                                    |  |                   | 352,512    
|Accretion of debt discount                                       |  |                   | 1,601,423  
|Amortization of deferred debt issue costs                        |  |                   | 1,437,690  
|Share-based payment expense                                      |  |                   | 1,817,463  
|Induced conversion expense                                       |  |                   |           
|Fair value changes in embedded derivative                        |  |                   | 25,624     
|Loss on disposal of fixed assets                                 |  |                   | 647        
|Changes in assets and liabilities:                               |  |                   |            
|Accounts receivable                                              |  |                   | 26,322     
|Prepaid expenses and other current assets                        |  |                   | (385,851   
|Lease security deposits                                          |  |                   |           
|Accounts payable and accrued expenses                            |  |                   | (1,604,639 
|Accrued compensation                                             |  |                   | (1,015,454 
|Deferred purchase obligation                                     |  |                   | 177,947    
|Deferred revenue                                                 |  |                   | (185,407   
|Accrued interest                                                 |  |                   | 3,026,508  
|Other, net                                                       |  |                   | (24,111    
|Net cash flows used in operating activities                      |  |                   | (8,707,455 
|CASH FLOWS FROM INVESTING ACTIVITIES:                            |  |                   |            
|Purchases of property and equipment                              |  |                   | (1,132     
|Net cash flows used in investing activities                      |  |                   | (1,132     
|CASH FLOWS FROM FINANCING ACTIVITIES:                            |  |                   |            
|Proceeds from debt issuances                                     |  |                   | 9,034,177  
|Principal payments on notes                                      |  |                   | (513,000   
|Proceeds from stock issuances                                    |  |                   | 30,500     
|Net cash flows provided by financing activities                  |  |                   | 8,551,677  
|Effect of exchange rate differences on cash and cash equivalents |  |                   |           
|NET DECREASE IN CASH AND CASH EQUIVALENTS                        |  |                   | (156,910   
|CASH AND CASH EQUIVALENTSBeginning of period                    |  |                   | 1,382,225  
|CASH AND CASH EQUIVALENTSEnd of period                          |  | $                 | 1,225,315  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW                            |  |                   |            
|INFORMATION:                                                     |  |                   |            
|Cash paid during the period for interest                         |  | $                 | 73,958     
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                     |  |                   |            
|Debt converted into equity                                       |  |                   |           
|Conversion of notes and accrued interest into new notes          |  |                   |           

7

See notes to consolidated condensed financial statements.

---



METAMORPHIX, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

|1. | NATURE OF THE BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | MetaMorphix, Inc. (the Company) is a life sciences company focused on discovering, acquiring, developing, and commercializing products and technologies to improve animal health, livestock
production, and human health. The Company was incorporated on September 1, 1994.                                                                                                                                                                                                                                                                                                                                                 
|  
|   | The Company has two key technology platforms: a) livestock genomics and b) growth and differentiation factors. These technologies are commercially employed to both increase livestock meat quality and
production efficiency and to potentially treat muscle-wasting diseases in humans, such as Muscular Dystrophy and Sarcopenia.                                                                                                                                                                                                                                                                                           
|  
|   | These consolidated condensed financial statements include the accounts of MetaMorphix, Inc. and its wholly-owned subsidiaries: MMI Genomics, Inc., MMI Canada Inc., MetaMorphix International, Inc., and
MetaMorphix Holdings, Inc. All intercompany transactions and balances have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                          
|  
|   | Going Concern  Managements Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   | In the course of its operations, the Company has sustained operating losses and negative cash flows from operations and expects such losses to continue in the foreseeable future. As of September 30, 2006,
the Company had a working capital deficiency of $25.2 million and an accumulated deficit of $190 million. The Company intends and is currently working to finance its operations primarily through future debt and equity financings and future
revenues.                                                                                                                                                         
|  
|   | On June 8, 2005, the Companys Board of Directors granted approval to Company management to pursue additional financings through the issuance of a new private placement of promissory notes. Through
September 30, 2006, $13.0 million of the $15 million financing under the three year 10% Secured Convertible Promissory Notes has been completed and finalized.                                                                                                                                                                                                                                                           
|  
|   | Currently, management is working to secure up to $15 million in additional funding under a separate round of two year 10% Secured Convertible Promissory Notes. While we anticipate that the proceeds
from additional financings will be sufficient to fund our operations until we can generate positive cash flow from operations, they may be insufficient.                                                                                                                                                                                                                                                                 
|  
|   | Although the Company recognizes the need to raise funds in the near future, we may be unsuccessful in consummating any such transaction, or, if it did consummate such a transaction, the terms and
conditions of such financing may not be favorable to the Company. The Company believes that its current assets will not be sufficient to fund operations in 2006. This uncertainty raises substantial doubt about the Companys ability to continue as
a going concern. The accompanying consolidated condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|  
|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   | Unaudited Interim Financial StatementsThe interim financial statements of the Company for the three and nine months ended September 30, 2006 and 2005
included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements                                                                                                                                                                                                                           
|  

8

---



prepared in accordance with accounting
      principles generally accepted in the United States have been condensed
      or omitted pursuant to such rules and regulations relating to interim financial
      statements. In the opinion of management, the accompanying unaudited interim
      financial statements reflect all adjustments, consisting of normal recurring
      adjustments, necessary to present fairly the financial position of the
      Company as of September 30, 2006 and the results of its operations and
      its cash flows for the three and nine months ended September 30, 2006 and
      2005. The interim results of operations for the three and nine months ended
      September 30, 2006 and 2005, respectively, are not necessarily indicative
      of the results that may be achieved for the full year. Recent Accounting PronouncementsIn
      September 2006, the Financial Accounting Standard Board, or FASB, issued
      a Statement of Financial Accounting Standards (SFAS) No. 157,Fair
      Value Measurement. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures
      about fair value measurements. This Statement is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. The Company is currently evaluating
      the impact of adopting SFAS No. 157 on its financial statements. In September 2006, the FASB issued
      SFAS No. 158,Employers Accounting
      for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).SFAS No. 158
         requires recognition of the overfunded or underfunded status of defined
         benefit postretirement plans as an asset or liability in the statement
         of financial position and to recognize changes in that funded status in
         comprehensive income in the year in which the changes occur. SFAS No.
         158 also requires measurement of the funded status of a plan as of the
         date of the statement of financial position. SFAS No. 158 is effective
         for recognition of the funded status of the benefit plans for fiscal
         years ending after December 15, 2006 and is effective for the
         measurement date provisions for fiscal years ending after December 15,
         2008. The Company anticipates that the adoption of this standard will
         not have a material impact on its results of operations, financial
         position and cash flows, as the Company does not sponsor such plans. In July 2006, the FASB issued
      FASB Interpretation, or FIN, No. 48,Accounting
      for Uncertainty in Income Taxes, which
      is effective for fiscal years beginning after December 15, 2006. FIN No.
      48 clarifies the accounting for uncertainty in income taxes recognized
      in the financial statements in accordance with SFAS Statement No. 109,
      Accounting for Income Taxes. This FIN prescribes a comprehensive model
      for how a company should recognize, measure, present, and disclose in its
      financial statements uncertain tax positions that the company has taken
      or expects to take on a tax return. The Company is currently evaluating
      the impact of adopting FIN No. 48 on its results of operations, financial
      position and cash flows. In February 2006, the FASB issued
      SFAS No. 155,Accounting for Certain
      Hybrid Financial Instruments, and amendment of FASB Statements No. 133
      and 140. SFAS No. 155 clarifies certain
      issues relating to embedded derivatives and beneficial interests in securitized
      financial assets. The provisions of SFAS No. 155 are effective for all
      financial instruments acquired or issued after fiscal year beginning after
      September 15, 2006. The Company is currently assessing the impact that
      the adoption of SFAS No. 155 will have on its operations, financial position
      and cash flows.




9

---



3.          SHARE-BASED
PAYMENT EXPENSE

The consolidated condensed
      statements of operations include the following share-based payment expense
      as calculated pursuant to the provisions of SFAS No. 123(R) for the three
      and nine months ended September 30, 2006 and 2005:


|                 |  |                    |         |                   |   |              
|---------------- |  | ------------------ | ------- | ----------------- | - | -------------
|                 |  | Three months ended |         | Nine months ended
|                 |  | September 30,      |         | September 30,     |   | September 30,
|                 |  | 2006               |         | 2005              |   | 2006         
|                
|Research and     |  |                    |         |                   |   |              
|development      |  | $                  | 72,256  |                   | $ | 120,257      
|                 |  |                    |         |                   |   |              
|General and      |  |                    |         |                   |   |              
|administrative   |  |                    | 497,698 |                   |   | 696,924      
|                 |  |                    |         |                   |   |              
|Interest expense |  |                    |         |                   |   |              
|and accretion of |  |                    |         |                   |   |              
|debt discount    |  |                    | -       |                   |   | 81,224       
|                 |  |                    |         |                   |   |              
|Debt issue costs |  |                    | -       |                   |   | 10,767       
|                
|Total            |  | $                  | 569,954 |                   | $ | 909,172      

Share-based payments
      in the expense categories above include expense associated with stock options
      granted to employees and directors as compensation and to outsiders for services
      performed. In addition, share-based payment expense includes the expense
      recorded from the calculated value of warrants granted in connection with
      debt securities being issued and the expense recorded from the calculated
      value of penalty warrants granted, which is included in interest expense
      and accretion of debt discount. Penalty warrants are contractually granted
      when the Company fails to meet certain specified criteria, such as failure
      to repay the obligation when due, or failure to consummate an IPO within
      a certain time period. We have issued no penalty warrants during the nine
      months ended September 30, 2006.


4.          PREPAID
EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and
    other current assets consist of the following:


|                   |  |               |         |             
|------------------ |  | ------------- | ------- | ------------
|                   |  | September 30, |         | December 31,
|                   |  | 2006          |         | 2005        
|                  
|                  
|Prepaid expenses   |  |               | 86,417  |             
|Supplies inventory |  |               | 57,357  |             
|                  
|Total              |  | $             | 143,774 |             

10

---



5.          PROPERTY
AND EQUIPMENTNET

Property and equipment
    consists of the following:


|                               |  |               |            |   |              |   |            |  
|------------------------------ |  | ------------- | ---------- | - | ------------ | - | ---------- | -
|                               |  | September 30, |            |   | December 31, |  
|                               |  | 2006          |            |   | 2005         |  
|                              
|Office equipment               |  | $             | 1,199,596  |   |              | $ | 1,219,938  |  
|Production equipment           |  |               | 1,930,222  |   |              |   | 1,814,799  |  
|Office equipment under capital |  |               |            |   |              |   |            |  
|lease                          |  |               | 213,224    |   |              |   | 213,224    |  
|Leasehold improvements         |  |               | 129,062    |   |              |   | 129,062    |  
|                              
|                               |  |               | 3,472,104  |   |              |   | 3,377,023  |  
|Less: Accumulated depreciation |  |               | (1,631,422 | ) |              |   | (1,300,367 | )
|                              
|Total                          |  | $             | 1,840,682  |   |              | $ | 2,076,656  |  

The Company recorded
      depreciation expense of $117,737 and $112,404 for the three months
      ended September 30, 2006 and 2005, respectively, and $352,512 and $347,172
      for the nine months ended September 30, 2006 and 2005, respectively. Accumulated
      depreciation for equipment under capital leases was $65,580 and $47,380
      as of September 30, 2006 and December 31, 2005, respectively.


6.          INTELLECTUAL
PROPERTY RIGHTS

Acquired intangible
    assets subject to amortization as of September 30, 2006 and December 31,
    2005 are as follows:


|                      |  |               |             |   |              |   |             |  
|--------------------- |  | ------------- | ----------- | - | ------------ | - | ----------- | -
|                      |  | September 30, |             |   | December 31, |  
|                      |  | 2006          |             |   | 2005         |  
|                     
|Intellectual property |  |               |             |   |              |   |             |  
|rights                |  | $             | 38,268,051  |   |              | $ | 38,268,051  |  
|Less: Accumulated     |  |               |             |   |              |   |             |  
|amortization          |  |               | (38,268,051 | ) |              |   | (38,268,051 | )
|                     
|Total                 |  | $             | -           |   |              | $ | -           |  

Amortization expense
      related to intangible assets was $0 for the three months ended September
      30, 2006 and 2005, and $0 and $2,126,003 for the nine months ended
      September 30, 2006 and 2005, respectively.




11

---



7.          LONG-TERM
DEFERRED DEBT ISSUE COSTS

The long-term deferred debt issue
      cost activity during the nine months ended September 30, 2006 and 2005 is as follows: 2006
      
      
      
      2005Balance at January
          1
      
      $
      5,396,050
      
      
      $
      6,480,080Calculated value
          of warrants granted
      
      
      21,215
      
      
      
      Other debt issue
          costs
      
      
      373,034
      
      
      
      Amortization
          to debt issue costs
      
      
      (1,437,690
      )
      
      
      (1,246,403
      )Balance at September 30
      
      $
      4,352,609
      
      
      $
      5,233,677




8.          COMMITMENTS
AND CONTINGENCIES

Leases and Royalty AgreementsThe
      Company has office facilities and equipment under capital and operating
      leases. In addition, the Company has certain agreements that provide for
      minimum future royalty payments and sublease income. Future minimum payments
      for capital leases, noncancelable operating leases, and royalty agreements
      with terms in excess of one year at September 30, 2006, are as follows: Capital
      
      
      Operating
      
      RoyaltyLeases
      
      
      Leases
      
      Agreements
      
      TotalOctober 1, 2006
          throughDecember 31,
          2006
      
      $
      10,598
      
      
      $
      146,490
      
      $
      44,895
      
      $
      201,9832007
      
      
      42,390
      
      
      
      863,328
      
      
      179,580
      
      
      1,085,2982008
      
      
      42,390
      
      
      
      727,625
      
      
      179,580
      
      
      949,5952009
      
      
      29,155
      
      
      
      784,563
      
      
      179,580
      
      
      993,2982010
      
      
      17,480
      
      
      
      805,604
      
      
      179,580
      
      
      1,002,6642011
      
      
      17,480
      
      
      
      827,252
      
      
      
      
      
      844,732Thereafter
      
      
      7,283
      
      
      
      176,249
      
      
      
      
      
      183,532Total payments/(receipts)
      
      
      166,776
      
      
      
      4,331,111
      
      
      763,215
      
      
      5,261,102Less: Amounts
          representing interest
      
      
      (17,635
      )
      
      
      
      
      
      
      
      
      (17,635
      )Net payments/(receipts)
      
      $
      149,141
      
      
      $
      4,331,111
      
      $
      763,215
      
      $
      5,243,467


Rent expense under operating
      leases was $215,941 and $376,636 for the three months ended September
      30, 2006 and 2005, respectively, and $638,054 and $943,363 for
      the nine months ended September 30, 2006 and 2005, respectively. Sublease
      income was $0 and $26,148 for the three months ended September
      30, 2006 and 2005, respectively, and $0 and $135,708 for the nine
      months ended September 30, 2006 and 2005, respectively. The Company is currently leasing
      space in Savage, Maryland which it no longer occupies. This lease commenced
      on January 1, 2002 and will terminate on December 31, 2011. The Company
      currently subleases this space. This sublease commenced on December 1,
      2004 and will terminate on December 31, 2011. The sublease rent equals
      the primary lease obligation. In 2006, the sublessee no longer pays rent
      to the Company but instead pays directly to the lessor.


12

---



LitigationFrom
      time to time, the Company and its subsidiaries face lawsuits and claims
      related to commercial, employment and patent-related matters. Although
      the possible loss or range of loss for these matters cannot be estimated,
      management of the Company, after reviewing developments to date with legal
      counsel, is of the opinion that the outcome of such matters will not have
      a material adverse effect on the Companys consolidated financial
      position, results of operations, or cash flows. Director and Officer IndemnificationThe
      Companys certificate of incorporation provides that it will indemnify
      and hold harmless its officers, directors and others serving the corporation
      in various capacities to the fullest extent permitted by the Delaware General
      Corporation Law (DGCL). Section 145 of the DGCL provides that
      a Delaware corporation has the power to indemnify officers and directors
      in specified circumstances. As of September 30, 2006, there
      was one outstanding matter relating to director and officer indemnification.
      Samuel R. Dunlap, a former Company director, who is now in bankruptcy,
      pledged a $731,000 Promissory Note made by us to Mr. Dunlap as security
      for a $5.0 million loan from Regions Bank. Regions Bank has sued us for
      payment of this Note. The amount that is owed is in dispute (due to offsets
made at Mr. Dunlap's direction prior to the bankruptcy). We also contend that
the conditions precedent to the maturity of the loan has not occurred. We note
that our September 30, 2006 consolidated condensed financial statements reflect
principal of $625,498 being owed as of such date (reflecting the
offsets). Regions Bank asserts that we (in the operation of our securities
transfer function) and our legal counsel enabled Mr. Dunlap to pledge one of
      his several Warrants to another creditor in breach of an already existing
      Commercial Pledge Agreement between the Bank and Mr. Dunlap. We will indemnify
      and hold harmless our legal counsel, who is also the Secretary of the Company,
      in this matter. Management Compensation The
      Company has entered into agreements with four employees, including three
      executives and one scientist, which require payments by the Company totaling
      approximately $1,009,000 annually based on their current salaries.


9.DEBT

The Company issued promissory
      bridge loans for a total of $950,000 to Mr. Peter Meyer, a member of
      our board of directors, during the first nine months of 2006. The loans
      have a 10% interest rate and are payable in six months. The Company repaid $350,000
      of these bridge loans during the first quarter of 2006, with the remaining $600,000
      outstanding as of September 30, 2006. In the first nine months of 2006,
      the Company issued additional 12.5% Convertible Secured Promissory Notes,
      or 12.5% Notes, in the amount of $1,241,803 to satisfy accrued interest
      payable. Based on the terms of the 12.5% Notes, accrued interest is due
      and payable on the one year anniversary date of the notes. The interest
      is payable in cash or in the form of identical new notes, at the option
      of the Company. The Company issued additional
      10% Secured Convertible Promissory Notes, or 10% Notes, which totaled $8,084,177
      during the nine months ended September 30, 2006. These notes have a three
      year maturity. In connection with the issuance
      of the 10% Notes in 2006, the Company granted warrants to purchase 1,103,371
      shares of common stock. These warrants had an exercise price of $4.00
      per share, expire in 2011, and had an allocated value of $652,780 in
      2006. The value of these warrants was recorded as a debt discount to be
      amortized over the life of the debt. The Company also issued warrants
      to purchase 33,417 shares of common stock in the nine months ended September
      30, 2006 for advisory services in connection with obtaining the 10% Note
      financing. The warrants had an exercise price of $4.00 per share, expire
      in 2016, had a calculated value of $21,215 and were recorded as deferred
      financing costs in the nine months ended September 30, 2006, to be amortized
      over the life of the debt.




13

---



The Company, with the assistance
      from a valuation specialist, recalculated the fair value of the embedded
      derivative associated with the 10% Notes for the each of the first three
      quarters of 2006. The value was determined to be $73,070, $69,588,
      and $93,985 at March 31, 2006, June 30, 2006, and September 30, 2006,
      respectively. The additional value which was attributable to additional
      notes was recorded as additional debt discount. The change in value which
      was attributable to the existing liability was recorded as other income
      or expense during the applicable quarter. Amortization expense relating
      to the 10% Notes and 12.5% Notes debt discount was $544,090 and $450,267
      for the three months ended September 30, 2006 and 2005, respectively, and $1,595,726
      and $1,350,803 for the nine months ended September 30, 2006 and 2005,
      respectively.


10.EQUITY

In the nine months ended
    September 30, 2006, the holders of warrants to purchase 1,141,607 shares
    of common stock exchanged their warrants for 570,818 actual shares of common
    stock. There was no expense associated with this exchange.




14

---



ITEM 2.           Management's Discussion and Analysis or Plan of Operation

Material Changes in Results of Operations - Comparison of the Three Months Ended September 30, 2006 and 2005

The following table quantifies the amount of revenue earned during the periods presented for each of our principal sources of revenues:

|                              | Three months ended
|----------------------------- | ------------------
|                              | September 30,     
|Type of Revenue               | 2006              
|Parentage and identification  |                   
|genotyping service revenue    | $     458,582     
|Feedlot sample testing        | 99,553            
|License fee revenue           | 50,001            
|Other genomic service revenue | $     156,883     
|                              |                   
|Total revenue                 | $     765,019     

Revenue.Our revenue for the three months ended September 30, 2006 was $765,019, which was an increase of $164,612, or 27.4%, from the $600,407 during the third quarter of
2005, primarily due to the introduction of various new product lines. The Company began its feedlot commercialization study in 2006 as the next step in commercializing the product developed in the Cargill collaborative research project.  That
testing generated $99,553 during the third quarter of 2006.  New products included in other genomic service revenue consisted primarily of canine data archiving, which generated $11,794 for the quarter, and Tru-Polled testing, which
generated $99,935 during the quarter. Tru-Polled testing determines the genetics of polled (hornless) cattle and assesses the probability that they will produce polled progeny. Polled cattle are more desirable due to decreased expense associated
with horn removal and increased value of the hide due to decreases in injury rates during transportation and in the feedlot.

Cost of Revenues.Cost of revenues for the three months ended September 30, 2006 were $445,944, a $49,964, or 12.6% increase from the $395,980 for the same period of 2005.
 This increase was primarily related to an increased level of revenue, as the gross margin percentage remained at a consistent level. The Company expects the gross margin from the new product lines to improve as volumes increase and labor costs
decrease.  The decrease in labor costs is expected to result from production efficiencies, as well as from personnel mix, as production moves from scientists to technicians.

Research and Development.Research and development costs were $914,045 for the three months ended September 30, 2006 compared to $1,210,509 for the same period in 2005. This
$296,464, or 24.5%, decrease was primarily due to a reduction in employment related costs of approximately $611,000, partially offset by higher professional fees. The lower employment related costs reflects the closure of our Canadian
facility in the third quarter of 2005, as well as a reduction in our Beltsville research team. The higher professional fees related to legal fees relating to the maintenance of intellectual property and patents.

General and Administrative.General and administrative costs were $2,121,737 for the three months ended September 30, 2006 compared to $2,549,823 for the same period of 2005.
This $428,086, or 16.8%, decrease was primarily due to the decrease in our employment related costs of approximately $693,000, partially offset by

15

---



higher professional fees of approximately $342,000. The decrease in employee related costs includes a $199,000 reduction in stock compensation expense, a $241,000 reduction in bonus expense, and a $253,000
reduction in salaries, taxes and benefits due to changes in staffing (including a consolidation of finance and administration staff in Beltsville and Davis, CA). Higher professional fees include audit, legal, and valuation fees relating to our
financial statements and SEC compliance.

Depreciation and Amortization.Depreciation and amortization increased $15,002, or 20.0%, to $90,122 for the three months ended September 30, 2006 from $75,120 for the
same period of 2005 primarily due to the incremental expense related to asset purchases in late 2005.

Interest Expense.Interest expense and accretion of debt discount increased $342,232 to $1,707,270 for the three months ended September 30, 2006 from $1,383,038 for the
same period in 2005.  This 23.4% increase was primarily due to a $12.6 million higher average debt balance and the higher accretion of debt discount relating to the 10% Notes.

Debt Issue Costs.Debt issue costs decreased $70,831 to $487,831 for the three months ended September 30, 2006 from $558,662 for the same period of 2005. This 12.7%
decrease is due to higher commissions associated with bridge loans obtained in the third quarter of 2005.

Other Income/Expense.Other income /expense was $1,484 of income for the three months ended September 30, 2006 compared to $194,162 of expense for the three months ended
September 30, 2005.  This change was primarily due to the loss recorded on the disposal of assets from MetaMorphix Canada, Inc. In September 2005, we made the decision to consolidate the research efforts of the Immunopharmaceutical business unit
into the Growth Differentiation business unit in order to improve efficiency, and our facility in Canada was closed. In connection with this closure, we accrued approximately $267,000 in severance benefits for the 11 employees which were
involuntarily terminated.

Net Loss.Net loss decreased $766,441, or 13.3%, for the three months ended September 30, 2006 from the three months ended September 30, 2005, due to a combination of the factors
described above, primarily due to the decrease in our research and development and general and administrative operating costs.

16

---



Material Changes in Results of Operations - Comparison of the Nine Months Ended September 30, 2006 and 2005

The following table quantifies the amount of revenue earned during the periods presented for each of our principal sources of revenues:

|                              | Nine months ended
|----------------------------- | -----------------
|                              | September 30,    
|Type of Revenue               | 2006             
|Parentage and identification  |                  
|genotyping service revenue    | $  1,592,760     
|Feedlot sample testing        | 305,620          
|License fee revenue           | 150,003          
|Other genomic service revenue | 427,464          
|Total revenue                 | $  2,475,847     

Revenue.Our revenue for the nine months ended September 30, 2006 was $2,475,847, which was an increase of $523,678, or 26.8%, from the $1,952,169 during the same period
of 2005, primarily due to the introduction of various new product lines. The Company began its feedlot commercialization study in 2006 as the next step in commercializing the product developed in the Cargill collaborative research project.  That
testing generated $305,620 during the first nine months of 2006. New products included in other genomic service revenue were canine data archiving, which generated $102,922 for the nine months, and Tru-Polled testing, which generated
$216,130. Tru-Polled testing determines the genetics of polled (hornless) cattle and assesses the probability that they will produce polled progeny. Polled cattle are more desirable due to decreased expense associated with horn removal and
increased value of the hide due to decreases in injury rates during transportation and in the feedlot.

Cost of Revenues.Cost of revenues for the nine months ended September 30, 2006 were $1,702,997, a $383,849, or 29.1%, increase from the $1,319,148 for the same period of
2005. This increase was primarily related to the increased level of revenue, as the gross margin percentage declined slightly due to lower volume within the new product lines. The Company expects the gross margin from the new product lines to
improve as volumes increase and labor costs decrease. The decrease in labor costs is expected to result from production efficiencies, as well as from personnel mix, as production moves from scientists to technicians.

Research and Development.Research and development costs were $2,077,662 for the nine months ended September 30, 2006 compared to $3,638,012 for the same period in 2005. This
$1,560,350, or 42.9%, decrease was primarily due to a reduction in employment related costs of approximately $1,746,000, partially offset by an increase in legal expense of $423,000.  The reduction in employee related costs reflects the
closure of our Canadian facility in the third quarter of 2005, as well as a reduction in our Beltsville research team.

General and Administrative.General and administrative costs were $6,062,140 for the first nine months of 2006 compared to $8,991,773 for the same period of 2005. This
$2,929,633, or 32.6%, decrease was primarily due to the decrease in our employee related costs of approximately $2,454,000. The decrease in employee related costs includes a $743,000 reduction in stock compensation expense, a
$773,000 reduction in bonus expense, and a $939,000 reduction in salaries, taxes and benefits due to changes in staffing (including a consolidation of finance and administration staff in Beltsville and Davis, CA).

17

---



Depreciation and Amortization.Depreciation and amortization decreased $2,105,759, or 89.3%, to $253,084 for the nine months ended September 30, 2006 from $2,358,843 for
the same period of 2005 primarily due to the completion of the intangible asset amortization in February 2005. The intangible assets related to the intellectual property associated with the Celera genomics acquisition in February 2002 which was
being amortized at a rate of $3,189,000 per quarter.

Interest Expense.Interest expense and accretion of debt discount increased $808,980 to $4,874,867 for the nine months ended September 30, 2006 from $4,065,887 for the
same period in 2005.  This 19.9% increase was primarily due to the $11.3 million increase in the average outstanding debt balance, as well as the additional amortization relating to the debt discount associated with the 10% Notes.

Debt Conversion Expense.In 2005, holders of our 10.9% Secured Convertible Promissory Notes converted $143,992 into our Series G convertible preferred stock, with warrants
attached.  The $93,696 of expense represents the fair value of the securities and warrants issued in excess of the fair value of securities issuable pursuant to the original conversion terms. There were no debt conversions to equity during 2006.

Debt Issue Costs.Debt issue costs decreased $234,591, or 14.0%, to $1,437,690 for the nine months ended September 30, 2006 from $1,672,281 for the same period of 2005.
This decrease is due to commissions on and the calculated value of warrants issued with short-term bridge loans in 2005.

Other Expense.Other expense of $25,536 for the nine months ended September 30, 2006 primarily relates to the change in fair value of the embedded derivative associated with the
liquidated damages clause in the registration rights section of the subscription agreement for our 10% Secured Convertible Promissory Notes.  The other expense in 2005 was due to the loss recorded on the disposal of assets from MetaMorphix Canada,
Inc.  In September 2005, we made the decision to consolidate the research efforts of the Immunopharmaceutical business unit into the Growth and Differentiation business unit in order to improve efficiency, and our facility in Canada was closed. In
connection with this closure, we accrued approximately $267,000 in severance benefits for the 11 employees which were involuntarily terminated.

Net Loss.Net loss decreased $6,423,504, or 31.5%, for the nine months ended September 30, 2006 from the nine months ended September 30, 2005, due to a combination of the factors
described above, primarily the decrease in depreciation and amortization, and the decrease in our research and development and general and administrative operating costs.

Material Changes in Financial Position - Liquidity and Capital Resources

The Companys primary sources of liquidity are its revenues and the sale of debt and equity securities.  At September 30, 2006, the Company had cash and cash equivalents of $1,225,315 and a working capital
deficiency of $25,175,441.

In the first nine months of 2006, cash used in operations was $8.7 million compared to $4.2 million in the comparable period last year.  This increase was primarily due to a $2.1 million decrease in depreciation
and amortization expense, a $1.3 million decrease in share-based payment expense, and an $8.3 million decrease in the change in accounts payable and accrued compensation, partially offset by a $6.4 million decrease in net loss. Cash
provided by financing activities was $8.6 million in the current period compared to $3.9 million in the prior year period. This increase was due to higher proceeds from the sale of debt and equity securities of $5.1 million, partially
offset by the increase in principal payments of $0.4 million.

The Company does not have any other significant commitments or guarantees, except for rental commitments and employee related obligations.

On June 8, 2005, the Companys Board of Directors granted approval to Company management to pursue additional financings through the issuance of a new private placement of promissory notes. Through September

18

---



30, 2006, $13.0 million of the $15 million financing under the three year 10% Secured Convertible Promissory Notes has been completed and finalized.

Currently, management is working to secure additional funding of up to $15 million under a separate round of two year 10% Secured Convertible Promissory Notes.  While we anticipate that the proceeds from additional
financings will be sufficient to fund our operations until we can generate positive cash flow from operations, they may be insufficient.

Although the Company recognizes the need to raise funds in the near future, we may be unsuccessful in consummating any such transaction, or, if it did consummate such a transaction, that the terms and conditions of such
financing will be favorable to the Company.  The Company believes that its current assets will not be sufficient to fund operations in 2006. This uncertainty raises substantial doubt about the Companys ability to continue as a going concern.
The accompanying consolidated condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have no off-balance sheet arrangements.

Continuing Operations

Our priorities for the next twelve months of operations are to continue to develop and subsequently market our products and services to establish our business in the genomics and growth factors technology industry. We are
focused on our organizational commercialization activities, raising capital and establishing a business presence with vendors, business owners and referral sources.

We may be unable to compete successfully, and the competitive pressures we face might have an adverse effect on our business, results of operations and financial condition. We require additional capital, which we intend to
raise through one or more public or private offerings of equity and/or debt.  There are no preliminary loan agreements or understandings between us, our officers, director affiliates or lending institutions. We are unsure if any such financing can
be obtained or, if obtained, that it will be on adequate or reasonable terms.

Critical Accounting Policies

See Managements Discussion and Analysis or Plan of Operations in our
Form 10-KSB for the year ended December 31, 2005 for a detailed discussion of our critical
accounting policies.  These policies include revenue recognition, impairment of long-lived assets,
and stock-based compensation.  No significant changes in our critical accounting policies have
occurred since December 31, 2005.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standard Board, or FASB,
issued a Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement.
This Statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements.
This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.  The Company is currently
evaluating the impact of adopting SFAS No. 157 on its financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R).  SFAS No. 158 requires recognition of the
overfunded or underfunded status of defined benefit postretirement plans as an asset or
liability in the statement of financial position and to recognize changes in that funded
status in comprehensive income in the year in which the changes occur.
SFAS No. 158 also requires measurement of the funded status of a plan as of the date of the
statement of financial position.  SFAS No. 158 is effective for recognition of the funded status
of the benefit plans for fiscal years ending after December 15, 2006 and is effective for the
measurement date provisions for fiscal years ending after December 15, 2008.
The Company anticipates that the

19

---



adoption of this standard will not have a material impact
on its results of operations, financial position and cash flows,
as the Company does not sponsor such plans.

In July 2006, the FASB issued FASB Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income Taxes, which is effective for
fiscal years beginning after December 15, 2006.  FIN No. 48 clarifies the accounting for uncertainty
in income taxes recognized in the financial statements in accordance with SFAS Statement No.
109, Accounting for Income Taxes.  This FIN prescribes a comprehensive model for how a company
should recognize, measure, present, and disclose in its financial statements uncertain tax positions
that the company has taken or expects to take on a tax return.
The Company is currently evaluating the impact of adopting FIN No. 48 on its results of
operations, financial position and cash flows.

In February 2006, the FASB issued SFAS No.
155, Accounting for Certain Hybrid Financial Instruments, and amendment of
FASB Statements No. 133 and 140.  SFAS No. 155 clarifies certain issues relating to
embedded derivatives and beneficial interests in securitized financial assets.
The provisions of SFAS No. 155 are effective for all financial instruments acquired
or issued after fiscal year beginning after September 15, 2006.
The Company is currently assessing the impact that the adoption of SFAS No. 155
will have on its operations, financial position and cash flows.

ITEM 3.           Controls and Procedures

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

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

20

---



PART II - OTHER INFORMATION

ITEM 2.           Unregistered Sales of Equity Securities and Use of Proceeds

The Company issued additional 10% Notes which totaled $3,482,000 to various accredited investors in private placements during the three months ended September 30, 2006. These notes have a three year maturity and have
the option to convert to common stock at $4.00 per share prior to an initial public offering, or IPO. Following an IPO, the 10% Notes will automatically convert at a conversion price equal to the lower of $4.00 or 70% of the IPO price.

In connection with the issuance of the 10% Notes during the three months ended September 30, 2006, the Company granted warrants to purchase 87,050 shares of common stock. These warrants had an exercise price of $4.00
per share, expire in 2011, and had an allocated value of $71,578 in 2006. The value of these warrants was recorded as a debt discount to be amortized over the life of the debt.

The above-described issuances were exempt from registration pursuant to Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions not involving a public offering.  With respect to each
transaction listed above, no general solicitation was made by either us or any person acting on our behalf; the securities sold are subject to transfer restrictions; and the certificates for the shares contained an appropriate legend stating such
securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. No underwriters were involved in connection with the sales of securities referred to in this Part
II, Item 2.

The Company, with the assistance from a valuation specialist, recalculated the fair value of the embedded derivative associated with the 10% Notes for the each of the first three quarters of 2006.  The value was determined
to be $73,070, $69,588, and $93,985 at March 31, 2006, June 30, 2006, and September 30, 2006, respectively.  The additional value which was attributable to additional notes was recorded as additional debt discount. The change in value
which was attributable to the existing liability was recorded as other income or expense during the applicable quarter.

21

---



ITEM 3.           Defaults Upon Senior Securities

At September 30, 2006, $142,166 of outstanding principal under our 8% Secured Convertible Promissory Notes and $884,343 of outstanding principal under our 10.9% Secured Convertible Promissory Notes were past due.
The original due dates for these notes range from September 2001 to April 2006. There are no amended terms to these past due notes as a result of the default.

ITEM 6.          Exhibits

| | 31.1 | Section 302 Certifications of Principal Executive Officer
| | ---- | ---------------------------------------------------------
| | 31.2 | Section 302 Certifications of Principal Financial Officer
| | 32.1 | Section 906 Certification of Chief Executive Officer     
| | 32.2 | Section 906 Certification of Chief Financial Officer     
|

22

---



SIGNATURES

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

| |                   | METAMORPHIX, INC.
| | ----------------- | -----------------
| |                   |                  
|
|
| | November 14, 2006 |                  
| | Date              |                  
| |                   |                  
| |                   |                  
| |                   |                  
|
|
| | November 14, 2006 |                  
| | Date              |                  
| |                   |                  
| |                   |                  
| |                   |                  
| |                   |                  

23

---